Management Accounting Systems and its Applications

This document provides an overview of management accounting and its crucial requirements, methods of management accounting reporting, computation of costs for preparation of income statement through marginal and absorption costs, and more. It also includes examples and calculations for better understanding. The subject is Management Accounting and the course code is not mentioned. The document type is an essay and the assignment type is not mentioned. The content is relevant for students studying management accounting in any college or university.

Management Accounting
Systems and its Applications

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1 Define management accounting and their crucial requirements of their types.................1
P2 Elaborate methods of management accounting reporting.................................................3
TASK 2............................................................................................................................................4
P3 Computation of costs for preparation of income statement through marginal and absorption
costs........................................................................................................................................4
TASK 3..........................................................................................................................................10
P4 Assets and detriment of various kinds of planning tools................................................10
TASK 4..........................................................................................................................................13
P5 Analogy among firms for adoption of management accounting system for responding to
financial................................................................................................................................13
Conclusion.....................................................................................................................................14
References......................................................................................................................................15

INTRODUCTION
Management or managerial accounting refers to process of furnishing financial resources
as well as information to the managers for formulation of decisions. Management accounting
aims at usage of statistical data for building up accurate and efficacious decision, management of
enterprise, development and business activities. Basically, this denotes application of knowledge
and professional skills for preparation of information related with accounting and finance
(Harrison and Lock, 2017). In addition to this, it aids firm within development of planning,
control of operations and planning for them accordingly. To understand the concept of
management accounting, Berkeley Partnership was brought in 1990. They render diverse to their
client firms in the form of independent management consultants. Essentra packaging is one of
their client who is a manufacturing organisation and deals within tear tapes. This deals with
management accounting their types and methods for their reporting. In addition to this, different
costs have been calculated and merits and demerits of planning tools have been illustrated.
Furthermore, comparison has been shown among accounting systems to financial issues.
TASK 1
P1 Define management accounting and their crucial requirements of their types.
The process of preparation of accounts and reports which render precise, timely statistical
and financial information needed by managers for taking short term decisions with respect to day
to day decisions is referred to management accounting. This will assist Essentra packaging to
build up policies and plans according to activities they have to carry out. It will aid them for
carrying out performance analysis by creating hypothesis of strategies, budgeting, forecasting
and many others. Generally, it comprises of presenting information related with accounting.
There are wide range of assets that are being offered by management accounting and can be
utilised by Essentra packaging to attain their goals in an appropriate manner (Chiarini and
Vagnoni, 2015).
Management accounting system refers to internal systems which are used by organisation
for evaluation and measurement of performance. Essentra packaging can make use of these
systems to formulate policies for each department depending upon their performance so that
affirmative results can can be attained. This will enable management to have precise information
and decisions can build up accordingly. Thus, it is necessary for Essentra packaging to make use
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of this tool as it deals with both financial and non-financial data that will assist them within
carrying out their business operations.
Firms can make use of management accounting systems as per their requirements and
demand of the situation. For an instance Essentra packaging can make use costing accounting
system with respect to management of their inventory. Price optimisation system can be applied
by them for furnishing framework for determining prices of their commodities. Similarly
different systems serves diverse purposes and can be utilised accordingly.
Management accounting system was brought in England during industrial revolution.
This involves various operations through which issues related with financial problems can be
sorted out (Armitage, Webb and Glynn, 2016). Principle of management accounting deals with
creating an influence as well as build up trust so that operations of organisation can be oriented
and synchronised.
Difference between management and financial accounting
Management accounting Financial accounting
It is utilised by Essentra Packaging for carrying
out their internal operations. Figures and facts
are confidential and are being utilised for
formulating decisions.
Reporting is carried out for public view, all
facts, figures and amounts are are publicly
disclosed.
In this case there are not specified format or
pattern for reporting. Figures are illustrated as
per target audiences and may not comprise
information according to requirements.
With respect to this universal reporting
standards associated with accounting are being
used such as GAAP, IFRS, etc. that can be
understood by individuals easily.
Essentra packaging can have financial and
non-financial data by its usage in their reports
according to requirements.
They aims at firms financial data (Financial
accounting vs Management Accounting, 2019).
No formal audit structure is needed in such
kind of reporting.
In this case reports are initially audited and
then they are being reported or published.
Types of management accounting system
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Job costing system: In this case firm is liable for evaluation of entire expenditure that
will take place while carrying out any specified task. Organisation can conduct their activities
through complete data that has been incurred with respect to cost associated with peculiar
accounting time frame. Through this Essentra packaging can gather information related with
assigned job in terms of cost associated with each. This will lead firm to estimate overall cost
associated so that profits can be anticipated.
Price optimisation system: Within competitive market, it is crucial for firm to set prices
for their services or products within a defined format as this will aid them within improvisation
of overall profits. Organisation needs to identify market prices as well as demands of customers
within effectual way (Otley, 2016). This will assist them to evaluate attitude of customers,
preferences and tastes for product. It will have affirmative impact on overall sales of Essentra
packaging that will lead them to have enhanced profit for their services or products.
Inventory management system: Within firm there exists two crucial functions they are
production along with manufacturing that manages stock, inventory and also track structure of
organisation. This will assist Essentra packaging to check their inventory in a precise manner
along with this wastage will also be minimised and will lead them to have enhanced profit
margin. To improvise productivity organisation can build up strategies for this to ensure
optimum usage resources in suitable manner.
Cost accounting system: This denotes a framework that is being utilised by organisation
for estimation of cost associated with their products for inventory valuation, cost control and
profitability analysis. It is one of essential aspect as estimation of exact cost of products is
difficult for profitable activities. Essentra packaging must address products that can lead them to
have improvised profits but it is only possible when cost of services is accurately anticipated. It
denotes that it will enable firm to track their inventory flow with respect to various stages that
are associated with production (Appelbaum and et. al., 2017). Firm can make its usage for
recognition, allocation, classification, aggregation and reporting their costs so that comparison
can be carried out among costs.
P2 Elaborate methods of management accounting reporting
The process that gives guidelines to higher executives for building up decisions with
respect to their operations is referred to as management accounting reporting. Essentra packaging
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can opt for these reports for analysing performance of their employees. Few reports are
explained beneath:
Inventory management report: This is one of the most crucial activity which is related
with building up reports so that they can have entire information about inventory. Essentra
packaging needs to identify various perspectives that are related to storage cost, closing of stocks
and many others. In addition to this, these reports deliver details about stocks and methods that
can be utilised by them for this. This aims at maintaining balance in between services that are
delivered to customers and management of inventory.
Budget Report: Essentra packaging have to furnish reports related with production in
context of future as this will assist them to carry out their operations in standardised manner.
Basically, it renders information about incentives that are being to their amount as this will boost
up their morale to perform their operations in an amplified manner (Alsharari, Dixon and
Youssef, 2015). It will aid firm to ensure that overall performance can be improvised in terms of
ways operations are being carried out.
Performance report: They are being carried out to measure performance of employees.
It involves detailed statements about incentives that are given to employees. This will help
Essentra packaging to inspire employees as it will lead them to identify overall profits they have
gained and also build up strategies by which they can amplify their growth. It will also assist
management to identify what improvisation do they need to make so that performance of
employees can be enhanced.
Accounts receivable ageing report: It will render important data in context of invoices
that are given to customers related with credits. This leads Essentra packaging to determine
amount that is to be paid along with credit memos. It is a tool that leads organisation to yield
favourable outcome in context of effectiveness of credits along with their gatherings & payments
overdue (Azudin and Mansor, 2018).
TASK 2
P3 Computation of costs for preparation of income statement through marginal and absorption
costs.
Cost denotes overall expenses that occurred while performing operations and activities
within premises of organisation. It is divided into various sections, they can be either variable,
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fixed, indirect or direct. Essentra packaging have different kinds of cost that occurs while they
are carrying out their operations. For an instance cost of raw materials, labour, suppliers and
many others. This denotes complete processes that are being associated with computation of
entire cost. It will enable the management to identify cost of individual operations.
Cost volume profit analysis: It is a analysis technique which deals with determination of
divergence among cost and profits that are furnished by carrying out specified operations. Its
objective is to analyse financial situations of firms in context of divergence in between assorted
factors.
Flexible budgeting: This is defined as budgeting techniques in which values related with
overall budget can be altered with respect to volumes that have been produced and sales that
incurred (Spraakman and et. al., 2015). Essentra packaging can make use of these methods for
analysing overall impact of sales that took over a certain frame of time.
Cost variance: This is referred to method that exemplify alterations that took place
within cost in comparison of existent cost that is occurring. Essentra packaging need to
determine divergence in between calculated as well as existing cost with respect to
manufacturing.
Absorption & marginal costing:
Absorption costing: This method involves expenses related with costs in terms of
production of relevant services or products by taking into consideration Generally Accepted
Accounting Principles (GAAP) for external reporting. This involves both fixed as well as
variable cost of products or services that are delivered by Essentra packaging to their customers.
This costing is utilised for costing strategies with respect to administration and bookkeeping that
works in an effective manner that will leads business towards growth. Furthermore, variable &
fixed cost, materials cost and compensation will lead to increase within costing (Sledgianowski,
Gomaa and Tan, 2017). It will assist management of firm to formulate effectual strategies for
overcoming situations that took place while firm carry out their operations. In this emphasis will
be on cost that has been absorbed along with technical tools that can be taken into account by
management of organisation.
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Marginal costing: This denotes enhancement or decline in overall production cost for
developing additive unit of services is called marginal cost. This illustrates cost that is charged as
per units cost. It involves fixed & selling cost, administration and overhead expenses. Marginal
costing will assist Essentra packaging to have a reflection of profit margins and their efficacy
must be taken into account by managers in an effective way. This will lead them to have
enhanced net benefits that will identify its period in bookkeeping.
Calculation of profit and loss by applying costing techniques
Marginal costing
i) Calculation of production cost per unit
£/unit
Direct Material cost 15
Direct labor cost 25
Variable Production Overhead cost 10
Production cost per unit 50
ii) Total production cost
Amount (£)
Direct Material cost (19000*15) 285000
Direct labor cost (19000*25) 475000
Variable Production Overhead cost (19000*10) 190000
Total production cost 950000
iii) Total cost of sales for June
Particulars Amount (£)
Total production cost 950000
less: cost of closing inventory (50*1000) -50000
Cost of sales for June 900000
iv) Calculation of budgeted profit and loss for June
Particulars Amount (£)
Sales revenue (18000*70) 1260000
Less: Variable cost
Direct material (19000*15) 285000
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Direct labour (19000*25) 475000
Variable cost (19000*10) 190000
Less : Closing stock (1000*50) -50000 -900000
Contribution 360000
Fixed production overhead -130000
Profit 230000
Calculation of profit after actual production unit of 22000 units with closing inventories 2000
units
Particulars No. of units £/unit (£) (£)
Sales revenue 20000 70 1400000
Less: Prime cost
Opening inventory 0 50 0
add: producing 22000 50 1100000
1100000
Less : Closing inventory 2000 50 -100000 -1000000
Contribution 400000
Fixed production overhead -130000
Profit 270000
b) Absorption costing method
Calculation of budgeted profit and loss for June
Particulars No. of units £/unit (£) (£)
Sales 18000 70 1260000
Cost of
opening inventory 0 56.5 0
add: production 19000 56.5 1073500
1073500
Less : Closing inventory 1000 56.5 -56500 -1017000
Contribution 243000
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Under: absorption -13000
Reconciled profit with the marginal
costing 230000
Calculation of profit after actual production unit of 22000 units with closing inventories 2000
units
Particulars No. of units £/unit (£) (£)
Sales 20000 70 1400000
Cost of
opening inventory 0 56.5 0
add: production 22000 56.5 1243000
1243000
Less : Closing inventory 2000 56.5 -113000 -1130000
Contribution 270000
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Cost allocation: It is referred to process of allocation of overheads according to activities that
have been performed. An example can be taken, Essentra packaging allot expenditure according
to various activities that are being related with process of manufacturing.
Fixed cost: The cost which do not modify with decrease or increase in amount related
services or products that are being offered is referred to as fixed cost (Aldehayyat and Maan,
2013). Generally, it denotes overall expenditure or cost that are given by Essentra packaging for
carrying out their operations.
Variable cost: The corporate expenses which are altered with respect production output
proportion is referred to as variable cost. It inclines or declines in context of production within
firm's volume, as it increases with improvisation in production and declines if production rate
falls down. With respect to Essentra packaging cost of materials along with variable overheads
will be included in this.
Normal costing: This comprises of cost of products in context of material cost, labour
cost and various others that takes place in organisation while they (Essentra packaging) are
delivering their services.
Standard costing: It refers to standardised cost which is anticipated in context of future
perspectives for furnishing various operations. This takes place in comparison to actual
performances that are being rendered by firm (Anandarajan, Anandarajan and Srinivasan, 2012).
For example, Essentra packaging makes use of costing to measure direct costs related with this.
Activity based costing: This refers to accounting method that can be utilised by firms for
determination of cost with respect to overhead operations along with their products. They
completely depends on activities or operations and costing systems are defined as per that.
Inventory cost: This comprises of cost related with ordering, delivering, storage and
various other activities to which firm is liable to carry out. Essentra packaging can identify costs
associated with inventory for management of overall expenses that took place and are occurring.
Valuation methods:
LIFO: This illustrates cash flow assumptions and is abbreviation of last in first out. This
method can be used by Essentra packaging to take inventory which is amendable for making a
record of items that are initially sold by them. The costs associated with latest products that were
produced outgo first according to costs of goods sold (COGS). For example, manufacturing team
of Essentra packaging opts for usage of raw materials that came at last.
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FIFO: It stands for first in first out and is associated with costs of goods which are being
sold out along with values associated with inventory. In this case, older cost will be taken into
consideration as initial costs (Christ and Burritt, 2013). This cost will be eliminated from balance
sheet and will take place as a initial cost which will be present as first cost in the income
statements. For an example, Essentra Ltd make use of raw materials which were brought at
initial stage so that their quality is not compromised with passage of time.
Overhead: This denotes expense that is associated with labour and material cost. They
are fixed for an instance salary.
TASK 3
P4 Assets and detriment of various kinds of planning tools.
Budget is defined as the financial plan for specified periods. This involves quantities of
the resources, cost and expenditure, liabilities, cash flows and many others. Moreover, this is
utilised for forecasting financial outcomes as well as position of company for upcoming duration.
The manager of the organisation prepare budget as per the long term objectives in order to
achieve success. Essentra packaging managers formulates several types budget for analysing that
whole sections are using financial resources effective and efficiently or not. For controlling
excess expenditure of funds, it concentrate upon budgetary control. This is considered as the
procedures to set financial as well as performance targets for particular time duration for
attaining growth and success (Cohen and Karatzimas, 2013).
For preparing the budgets manager of Essentra packaging explain objectives and
accumulate relevant information in respect of firm's needs. Then gathered data are examined
through them for measuring its accuracy. After analysis, it prepare budgets consequently as well
as represent that in front of senior executives for taking its approval. So, when it get approved
thereafter managers execute that on company. These steps are obeyed in respective organisation
for preparing the budget in efficacious way.
Zero based budgeting:
This is considered as the budget that initiate from scratch. This guides managers of the
company to justify all the expenditure that take place at the time of performing activities of the
enterprises. Within Essentra packaging, this is prepared through management for analysing the
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requirements as well as cost of all activities which are performed through organisations. So, the
advantages and disadvantages are discussed below:
Advantages:
 With the assistance of this, manager can able to justify their overall expenditure that take
place while performing production expenses in order to estimate the upcoming expenses
as well as revenues. This aids to find out such operation that are not results into profitability for reducing the
chances of losses (Cooper, 2017).
Disadvantages:
 It is very difficult tool for preparing budgets as whole previous year transactions are
ignored.
 For preparing this budget more time period is needed as well as this is not possible for
whole firms to invest more time in this procedures.
Operating budget:
This is refers as the annual budget of an activity that is explained in respect of budget
classification code, cost accounts and functional categories. This includes estimation of gross
value of resources needed for operation performance involving reimbursable task or services for
others (Daoud and Triki, 2013). Manager of Essentra packaging can prepare this particular
budget for recording expenses that are incurring in non- financial terms. One of them is
depreciation that is a non- cash items but recorded into respective budget. Some of its advantage
and disadvantage are given below:
Advantages:
 This guides their managers to examine the expenditures that are directly related to
operative activities as well as identify the way where for controlling all of them. Also, this aids them to ascertain operational activities cost thus this is advantageous for
respective firm manager to allocates the funds for overall activities as per its needs.
Disadvantages:
 For formulating operating budget, there is needs of long term planning with high quality
which take longer period.
 Also, operating budget is tough to understand because this is te accumulation of overall
revenues and expenditures.
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Capital budget:
This is refers as the budget that is prepared through company for the aim to keep records
of large investment. Within Essentra packaging, their manager formulate this particular budget
for developing plans for future so that organisational performance can get maximised. Therefore,
the advantages and disadvantages of it in respect of Essentra packaging are explained below:
Advantages:
 It aids company to data in detail of long term investment that is already prepared or
planning to be develop in future (Dillard and Yuthas, 2013). With the assistance of this, they make long term decision in respect of investment
through examining the detailed information.
Disadvantages:
 For preparing this budget estimation of upcoming cash flow is needed as well as future
can not be certain so this is not good to depend upon approximation.
 In case small mistake is performed by respective managers then this may outcomes in
more risk like losses.
Cash budget:
This budget is mostly prepared though firm's manager for planning the upcoming sources
as well as usages of liquid financial resources of enterprises. With the assistance of cash budget,
they can approximate their total needs of cash for performing various business activities and
expected amount which is gained by organisation at specified time duration (DRURY, 2013).
Within Essentra packaging this particular budget is formulated in order to categorised as well as
improve the weaker area and minimise the chances of negative results in cash flow. Some of its
advantages and disadvantages are discussed below:
Advantages:
 This help respective company to record the movement of whole cash that comes and goes
which maintain appropriate cash management. Also, this supports firm as it gathers funds for future in order to control as well as manage
their operation effectively and moreover, this assists them to prevent from the lack of
liquidity.
Disadvantages:
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 Only limited transactions are considered while preparing cash budget and it is more time
consuming.
 Also, this restrict the consumers spending power and respective firm.
TASK 4
P5 Analogy among firms for adoption of management accounting system for responding to
financial.
There are different types of accounting systems that are used in management accountancy
for identification of solutions in context of financial barriers which they may possess. Along with
this, various techniques exists which will aid Essentra packaging to determine solution for
conditions which prevails in organisation with respect to finances. They are mentioned below:
Benchmarking: It illustrates procedures that are liable for making comparison in
between processes and performance as well as other essential benefits in context of quality, time
and cost (Hall, 2012). Along with this, it is liable for measurement of performance via the usage
of specified indicators that elaborates cost per unit that are being measured with respect to rate of
productivity and other key factors.
Key Performance Indicator: It denotes set of quantifiable that are being utilised by
organisation for standardising their performance before the stipulated time period. Essentra
packaging can make use of key performance indicators as this will lead them to have growth by
attaining their objectives in a timely manner through creation of difference among performance
delivered by them as compared to others.
Essentra Packaging TPG
They are going through financial situations
such as unnecessary expenditure with respect
to manufacturing of cost as well as lack of cash
flow while carrying out their business
operations. These crisis leads to minimisation
of productivity as well market shares
associated with business.
They are going through situations such as
unhealthy relationship that have incurred from
investors and have been resulted to withdraw
of funds from firms that have led to adverse
impact on their performance with respect to
competitive market. This problem occurred
due to lack of communication among
stakeholders and management.
The management of Essentra Packaging can The leader of TPG organisation needs to use
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identify solution for this specific situation by
the usage of benchmarking technique. This will
assist them within formulation of strategies for
planning as well as estimation of products
prices as they needs to low with respect to the
cost offered by their competitors (Harrison and
Lock, 2017). It denotes initiative that will
assist them within bringing organisation within
competitive positioning within market.
performance indicator technique for
improvisation of overall performance of firm in
terms of generation of revenue. Thus it will
lead within satisfaction of their shareholder as
they might have gained adequate profits. It will
assist firm to improvise overall functioning of
business operations within working culture.
Conclusion
From the above report, it has been concluded that management accounting is essential for
the organisation as this assist their management to make decisions and inform them regarding
metrics of the business operations. There are some system of management accounting such as
cost accounting system, price optimisation system etc. this aids them to formulate internal
decisions. Also, there are several management accounting reports like performance report,
budget report and many others which aids organisation to know about the firms and employees
performance. Moreover, income statement is prepared in context of marginal and absorption
costing. For solving the financial problems some tools are used such as benchmarking, financial
governance etc.
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Online
Financial accounting vs Management Accounting. 2019. [Online]. Available through:
<https://www.educba.com/financial-accounting-vs-management-accounting/>.
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