Role of Management Accounting in Business Success

The provided report discusses how management accounting helps businesses like TSR pvt. Ltd. achieve sustainable success through cost reduction, efficient operations, and effective management control techniques. It highlights the use of budgeting tools to evaluate deviations from planned performance, identify areas for improvement, and optimize business outcomes.

Management Accounting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
LO1. Management accounting systems...........................................................................................1
definition of management accounting and essential requirements of different management
accounting systems.................................................................................................................1
methods of management accounting reporting.......................................................................2
Benefits and applications of management accounting system in an organisation..................3
LO2..................................................................................................................................................5
Preparing profitability statements using marginal and absorption costing method...............5
Critical evaluation of how management accounting systems and management accounting
reporting is integrated with organizational process................................................................8
LO3..................................................................................................................................................8
Advantages and disadvantages of different types of planning tool used for budgetary control.
................................................................................................................................................8
Application of different planning tools for preparing and forecasting budget.....................11
Evaluation and adaption of management accounting system in respond to financial problems.
..............................................................................................................................................12
How management accounting can lead organization to sustainable success.......................14
How planning tools helps in solving financial problem and lead to organization sustainable
success,.................................................................................................................................14
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................16

INTRODUCTION
Management accounting is concerned with the presentation of professional knowledge and
abilities to reveal accounting in policy formation, planning and control for the undertakings. The
present study is based on TSR pvt Ltd and further explains the requirements of management
accounting. The budgeting tools and techniques, their uses and applications.
LO1. Management accounting systems
definition of management accounting and essential requirements of different management
accounting systems
Management accounting is the branch of accounting and is prepared on the basis of the
accounting information so that effective strategies and policies can be formulated by the
managers that helps in the functioning of the day-to-day operations of the organisation. It assists
in planning, organising, directing and commanding the work of the company. It also enables the
TSR pvt. Ltd in focusing on three different areas that includes performance management,
strategic management and risk management.
There are various management accounting systems that plays an important role in maintaining
the management accounting optimally.
Inventory management system- TSR pvt. Ltd make use of inventory management system as
the management accounting tool that helps in attaining the optimum utilisation of resources. It
enables the firm in taking the decisions regarding the purchasing of raw material, and keeping
the record of the handling cost. It is a software that is adopted for controlling the investment in
the inventory.
Cost accounting system- It is a system used by the company in recording the manufacturing
activities using a perpetual inventory system which continuously updates records for costs of
materials, goods in process and finished goods inventories. It also provides information about the
manufacturing costs per unit of product.
Job costing approach- It is essential for the TSR pvt. Ltd to assign and accumulate the
manufacturing cost of the each product so that an activity in the premises can be identified. The
task and the job for which the cost are collected comes under the purview of this identifiable
activity. Contract costing is the type of job costing in which a contract constitutes a unit of cost.
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Optimisation system- it enables the business in choosing the cost effective approach so that the
product can be produced with no wastage or less wastage and with low cost. A mathematical
analysis is done regarding the price and the demand of the product. A particular price is set at
different levels to obtain the best price that increase the profits and the demands of the customers
are known so that product is prepared as per the customer specification and a large customer base
could be achieved.
methods of management accounting reporting
Various methods of management accounting reporting that facilitate the information regarding
the budget, accounts receivables, cost accounting and the performance of the operations of the
business. The methods are as follows-
Budget report- TSR pvt Ltd prepares this report in measuring the overall performance of the
company. It is made on the basis of previous experiences that the organisation has faced. An
efficient budget is one that is framed to meet the uncertain events in the future. It is useful in
determining the incomes and expenses of the company so that expenditure can be controlled and
the profits can be increased.
Performance reports- This report is created to review the performance of the company so that if
there any gap exist then corrective measures can be taken by the TSR pvt Ltd so that goals can
be achieved on time. Managers make use of this report to frame the effective strategies so that
forecast can be done in efficient manner. It also helps in getting the information that the task are
performed as per the set target so that perfection can be met.
Account receivable ageing reports- As the business highly relies on the credit so this report
plays a vital role in knowing the payment need to be made and the time period within which they
are to be paid. It helps in identifying the information about the defaulters and the collection
process of the company. In TSR pvt Ltd if there are large number of defaulters then company has
to take corrective steps in relation to tightening the credit policies. It assists in maintaining the
cash flow efficiently as it is essential for keeping the sound cash position.
Cost managerial accounting reports- It helps in computing the manufacturing cost and the cost
of other articles in the business. It facilitates the managers in ascertaining the realizable cost in
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contrast with the sales made. This report shows a clear picture in relation to all the costs that are
incurred in the production so that profit margins can be estimated accurately by the enterprise.
Benefits and applications of management accounting system in an organisation
Inventory Management system-
Advantages Applications
 To decouple or separate various parts
of the production process of TSR pvt
Ltd.
 To split up the firm from fluctuations in
demand and provide a stock of goods
that will provide a selection that is
variety for customers.
 To take the advantage of quantity
discounts.
 To survive against inflation.
 It is applied in maintaining the physical
inventory.
 It assists the store manager of TSR pvt
Ltd keeping the record of the inventory
and the requirement of the raw
material.
 For assessing the data regarding the
transfer of stock outside and
warehousing management.
Cost accounting system-
Advantages Applications
 Cost accounting system benefits the
TSR pvt Ltd in ascertainment of cost.
 It facilitates the decision making in
relation to the buying, replacing,
continuing, accepting or rejecting the
orders.
 It helps in measurement of efficiency.
 It enables the organisation in
preparation of budgets.
 Identify the unprofitable activities and
 It is applied under different situations
using different techniques and system
of costing to ascertain the cost.
 It determines the value of closing
inventory for preparing the financial
statements of the TSR pvt Ltd.
 It provides a base for operating policies
which may be determination of cost
volume relationship, whether to close
or operate a loss, to manufacture or buy
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material losses.
 Improves the productivity of the firm .
from the market etc.
Job Costing method-
Advantages Applications
 It is beneficial in knowing the cost of
product design per unit.
 It helps in reaching the economies of
scale in the production process of TSR
pvt Ltd.
 This method is more precise in
assignment of costs to projects than
process costing.
 It provides more useful information for
determining the profitability of
particular project.
 This method is applied for estimating
costs when preparing bids on future
jobs.
 It is applied to special order type of
industry which is devoted to the
execution of specific orders such as
ship building, printing press and road
construction.
 For ascertaining the cost and profit or
loss in respect of each job, contract or
project undertaken, the job costing
method is applied.
Optimisation System-
Advantages Applications
 This method will find the true optimum
of a response with fewer trials than the
non- systematic approaches.
 Facilitates Quantitative information
regarding the demand and the price.
 It is applied for preparing the
mathematical analysis of the price and
the demand of the product.
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LO2.
Preparing profitability statements using marginal and absorption costing method
Income statement of TSR Pvt. Ltd as per marginal costing technique (10000 units)
Absorption costing
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Critical evaluation of how management accounting systems and management accounting
reporting is integrated with organizational process.
Management accounting system provides TSR pvt. Ltd with both qualitative and
quantitative information which helps evaluate operational efficiency and financial performance
of business. Management accounting system helps in assessing operational efficiency,
productivity and performance of TSR pvt. Ltd and helps make strategic decision for development
and continuous improvement of the company.
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Management accounting system helps improve working and productivity of company by
integrating cost management system(How Do Managerial Accounting Systems Contribute
Toward a Company's Continual Improvement, 2019). This helps company measure cost
associated with input and take necessary action in reducing and eliminating cost that adds no
value to the development of business. Management accounting system helps in measuring and
evaluating quality related cost which helps in continuous improvement and development of TSR
pvt. Ltd. This helps company in delivering high quality products and services.
Producing financial reports as per the outcome derived
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Flexible budgets
5000 units 10000 units
Sales 125000 250000
cost of sales 50000 100000
prod contri margin 75000 150000
Variable S and A 15000 30000
net contribution margin 60000 120000
Less: total fixed cost
Fixed manufacturing o/h 40000 40000
Fixed S and A 30000 30000
Net profit -10000 50000
Management accounting reporting consists of various financial statements like profit and
loss statement income statement, balance sheet, job cost report, inventory report, budget report,
cost managerial report, account receivable report, performance report which are used by mangers
and internal staff of organization for critical evaluation of company's operational and financial
performance and helps in taking strategic decision to achieve goals and objectives of the TSR
pvt. Ltd.
Management accounting reports helps in analysing actual performance in comparison
with the budgeted report. Management accounting report helps in critically evaluating the future
course of action which leads to strategic decision making for achieving desired goals and
objectives.
The major drawback of management accounting is that it is mainly dependent on the
financial and cost accounting management reports. This reports provides only data which leads
to intuitive decision making.
LO3
Advantages and disadvantages of different types of planning tool used for budgetary control.
Budgetary control is an important tool used for evaluating the actual performance with
the budgeted plan(Van der Stede, 2015). The main purpose of preparing budget is to provide
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management with clear guidelines about the organization resources and also helps in evaluating
performance of employees and various departments in the TSR pvt. Ltd. Budgetary control helps
management in comparing budgeted reports with actual performance and in case of any
deviation corrective measures will be taken. This helps in eliminating wastage and leads to
achieve economies of scale.
BUDGETS
A budget is a financial plan to estimate cost, revenue, expenses resources, capital for a
particular period of time to achieve desired task and objectives.
ADVANTAGES OF BUDGETING
Budgeting helps in strengthening and coordinating the activities across various
department of TSR pvt. Ltd. It also helps in timely evaluation of deviation and take necessary
action to resolve the problem. Further, the benefit of budgeting is that it assist as planning the
future needs of the company and make strategic decision according to the goals and objectives.
In addition, it helps in analysing and evaluating the most profitable unit of the company and take
measures to enhance the performance.
DISADVANTAGES OF BUDGETING
Preparation of budget is a very time consuming process and staff is focused on achieving
the desired target and not exceed it which leads to lower operational efficiency of TSR pvt. Ltd.
Further, staff of the organization may feel demotivated if targets set are too high to accomplish.
In addition, budget are only concerned with the financial outcomes which may not give accurate
and reliable results.
FIXED BUDGET
A fixed budget is also known as static budget. It is a financial plan which do not flex
throughout the financial period. Costs are largely fixed to minimize expenses even if revenue
fluctuates(Miller, 2018).
ADVANTAGES OF FIXED BUDGET
This tool of budget helps in easy application of budget throughout the financial period
without any change in the budget plan. Static budget plan gives clear insight of the TSR pvt. Ltd.
Cost and profit. In addition, flexible budget is prepared for the whole business for useful analysis
of data and forecasting future needs. Fixed budget helps in measuring profits and performance of
business.
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DISADVANTAGES OF FIXED BUDGET
The greatest disadvantage of fixed budget is that it lacks flexibility. This type of budget
has to be rigidly applied in the working of organization to achieve desired target. Further, fixed
budget is not the fundamental and reliable way to analyse expenses. In addition to this, fixed
budget operates at only particular unit or department.
FLEXIBLE BUDGET
Flexible budget is a budgeting planning tool which can vary or change according to the
need of the TSR pvt. Ltd. This financial plan is more useful than fixed budget. A flexible budget
plan is applied to the whole company in various departments.
ADVANTAGES OF FLEXIBLE BUDGET
Flexible budget helps in better control of cost for effective operational efficiency and
productivity. This planning tool of budget gives more accurate and reliable data according to the
needs of company and helps measure performance of the budgeted plan from actual. It also helps
in better coordination between various department of the TSR pvt. Ltd.
DISADVANTAGES OF FLEXIBLE BUDGET
The major drawback of flexible budget is that it makes prediction difficult for mangers
which limits the ability to make effective decision to achieve desired target and goal. This
planning tool makes estimation of tax difficult. In addition, flexible budget plan may be difficult
to apply as it is complicated and difficult to understand(Otley, 2016).
INCREMENTAL BUDGET
Incremental budget is a planning tool used to prepare new budget with the incremental
value added to the budget for a particular period by considering previous years budget or actual
performance.
ADVANTAGES OF INCREMENTAL BUDGET
This method is simple to implement and easy to interpret(Budgeting Methods -
Incremental Budgeting, 2018). Incremental method helps in operational and funding stability.
DISADVANTAGES OF INCREMENTAL BUDGET
This method of budgeting do not encourage innovation. In addition, this method assumes
that operations of the organization will continue in the same stable way.
ZERO BASED BUDGET
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Zero based budgeting is a type of budgeting control tool in which all the expenses of the
period is clearly justified according to the needs and objective of the organization.
ADVANTAGES OF ZERO BASED BUDGET
This method of budgeting provides correct and accurate information. In addition, it also
helps in allocating resources and ensures careful planning by analysing past budget plan.
DISADVANTAGES OF ZERO BASED BUDGET
Zero based budgeting is an exhaustive and time consuming process.
This method of budgeting has implementation and formulation problem.
VARIANCE ANALYSIS
This method of budgeting is prepared to analyse the actual outcome of the plan with the
budgeted figures. This method analysis the deviation in plan accurately and take necessary
measures to resolve the problem.
ADVANTAGES OF VARIANCE ANALYSIS
This planning tool is beneficial in analysing the cause of deviation and take necessary
remedial action quickly to achieve target accurately. This method is used to control cost
effectively by highlighting inefficient performances.
DISADVANTAGES OF VARIANCE ANALYSIS
This method largely focus on the past performance rather than focusing on future performance.
Application of different planning tools for preparing and forecasting budget.
Fixed budget helps management of TSR pvt. Ltd in analysing any shortfalls in business.
It is useful in tracking unexpected expenditures and assign cost to the unexpected expenses by
reducing expenses in other areas which are less important. Fixed budget helps in preparing
budget by not changing any variables throughout the financial plan. Fixed budget helps
management of TSR pvt. Ltd in forecasting budget by measuring performance and evaluating
profits by keeping cost low(Muller, 2019).
Flexible budget is a planning tool used by TSR pvt. Ltd to adapt to current needs of the
organization and is useful in covering unexpected emergencies and is beneficial in curbing
expenses. Flexible budget helps in preparing budget which can change according to the need of
the organization. Flexible budget helps management of the TSR pvt. Ltd in forecasting budget
and make decisions by analysing actual plan with the budgeted plan and in case of any deviation
management takes necessary action to resolve the problem.
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Incremental budget is useful in planning and orientation of budget plan for the future to
achieve desired goals and objective of TSR pvt. Ltd. This planning tool of budgeting helps in
preparing budget by using past financial budget reports to add more incremental value to the new
budget plan.
Zero based budgeting is effectively useful when cost benefit analysis is considered. This
method of planning tool is applicable to those budgets which involve overheads but is not
associated with direct cost. Zero based budgeting is helpful in forecasting and monitoring
operations and management of the TSR pvt. Ltd,
Variance analysis is used by management of TSR pvt. Ltd to determine the cause of
variance by analysing actual performance with the set budget. Management of the organization
helps in forecasting the pinpoint cause of the deviation. This method is helpful in preparing
budget by monitoring the budget figures with actual figures. Variance analysis helps in
forecasting part data and helps in develop future business performance(Variance Analysis –
Overview, Budgeting, Benefits .2018).
Evaluation and adaption of management accounting system in respond to financial problems.
DETECTION OF FINANCIAL PROBLEM THROUGH VARIOUS PERFORMANCE
INDICATORS
Ratio analysis
It is a fundamental analysis of the firm's financial performance and credibility by
analysing information through various financial statements. Ratio analysis measures profitability
and evaluate operational efficiency of the TSR pvt. Ltd. It helps in detecting financial problems
of the company by considering various financial ratio like current ratio, profitability ratio,
liquidity ratio, working capital ratio, return on capital employed ratio, inventory turnover ratio.
Debt to equity ratio, account receivable turnover ratio, etc. which helps detect actual financial
stability and performance of business.
Ratio analysis helps detecting liquidity of cash in the company, in case of any shortage of
cash necessary action will be taken accordingly. It helps detect the ability to repay cash as
quickly as possible.
Return on capital employed ratio helps detect financial position of the TSR pvt. Ltd and its
ability to generate profit. In case company is generating lower profits necessary solution is taken
and detect problem effectively and efficiently(Williams and Dobelman, 2017).
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Key performance indicators
Key performance indicator helps in evaluating the performance of the of the TSR pvt.
Ltd effectively and efficiently to achieve desired goals and objective of the company. This
performance metric is used at every level of the organization to evaluate and track performance.
There are several performance metrics which helps detect the financial problem of the
organization. It is easy to measure goal of the organization in quantitative terms by setting target.
Key performance indicator of performance metric like sales. profit, cost of production,
cost of goods sold, etc. helps determine the reason of increase or decrease in profit, sales. It helps
detect cause of variance and find necessary solution to problem(Parmenter, 2015.).
Benchmarking
Benchmarking is the method of indicating and measuring performance by setting the
benchmark for performance. In case of any deviation from the set benchmark management of
TSR pvt. Ltd takes necessary measures to evaluate financial performance of the organization and
take necessary measures accordingly to resolve the problem.
Benchmarking helps in detecting financial problem of the TSR pvt. Ltd through product
benchmarking which helps in finding the strength and weakness of the product and resolve the
problem by implementing and designing new products. It can detect the problem of increases in
coast which can be resolved by implementing process benchmarking which finds reason for
increase in cost and achieve economies of scale by reducing cost and increasing profit.
APPLICATION OF MANAGEMENT ACCOUNTING SYSTEM TO SOLVE
FINANCIAL PROBLEMS IN THE ORGANIZATION.
Cost control management accounting system
Cost control is the most effective management accounting system which is used to reduce
cost of expenses and take necessary control measures to reduce cost and achieve economies of
scale. It helps TSR pvt. Ltd in detecting cause of the wastage of resources and identify the areas
which are overestimated and underestimated. This helps in controlling cost and achieve
economic value to increase operational efficiency of the organization.
Price optimization management accounting system
ICS the major competitor of TSR pvt. Ltd aims to use price optimization management
accounting system to detect financial problem of ICS company. Price optimization method is
used to analyse the demand of the product in case of lower sales due to high pricing of products.
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This method helps in determining accurate price of the product or services according top the
demand and achieve operational efficiency and profitability.
How management accounting can lead organization to sustainable success.
Management of the organization takes effective measures to resolve rthe problem
effectively and efficiently which will lead to increase in operational efficiency and productivity
which will help attain organizational goals and objectives of TSR pvt. Ltd.
Management of the organization consider various performance tool to evaluate the
operational and financial performance of the organization. Ratio analysis is used to detect
various financial problems like low cash liquidity and inability to pay debt on time. This helps
management to detect problem on time by making cash available to repay the debt this helps
TSR pvt. Ltd top maintain its credit worthiness and goodwill of the company(Penman, 2015).
In case of increase cost of product management use key performance indicator tool to
reduces cost of the unit and achieve economies of scale by controlling cost of TSR pvt. Ltd.
Management also use benchmarking for performance metric to determine the strength and
weakness of the particular unit and take necessary action to improve the quality of product or
services which will lead to increase in profit and operational efficiency of company.
Various management accounting system is used to resolve and detect financial problem
to control cost and reduce wastage and expenses. Management also use price optimization
method to attract larger customer base by providing products and services by optimizing price
which leads to higher market share of the TSR pvt. Ltd.
How planning tools helps in solving financial problem and lead to organization sustainable
success,
Budgeting helps in timely evaluation of deviation by comparing actual performance with
the budgeted performance. It helps in critical evaluation of the employees performance and how
they are adding value for the development of the TSR pvt. Ltd. It helps management of the
organization in evaluating various variables and forecast how these variables will affect the the
operations of business(Ferreira, Lee and Simchi-Levi, 2015).
In case of any variance in the actual plan management of TSR pvt. Ltd take necessary
measures to resolve the problem. This helps build operational efficiency and performance of the
organization by reducing cost and increasing sales which leads to higher profits and sustainable
growth and success of TSR pvt. Ltd.
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CONCLUSION
From the above report it is concluded that management accounting helps in ascertaining
the cost related information and the cost reduction tools. It increases the efficiency of
performance of the TSR pvt Ltd by providing the information regarding the position of the firm.
Effective management control techniques maximize the profitability of the business.
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REFERENCES
Books and journals
Ferreira, K. J., Lee, B. H. A. and Simchi-Levi, D., 2015. Analytics for an online retailer:
Demand forecasting and price optimization. Manufacturing & Service Operations
Management. 18(1). pp.69-88.
Miller, G., 2018. Performance based budgeting. Routledge.
Muller, M., 2019. Essentials of inventory management. HarperCollins Leadershi
Otley, D., 2016. The contingency theory of management accounting and control: 1980–2014.
Management accounting research. 31. pp.45-62.
Parmenter, D., 2015. Key performance indicators: developing, implementing, and using winning
KPIs. John Wiley & Sons.
Penman, S. H., 2015. Financial Ratios and Equity Valuation. Wiley Encyclopedia of
Management. pp.1-7.
Van der Stede, W. A., 2015. Budgeting and management control. Wiley Encyclopedia of
Management. pp.1-7.
Williams, E. E. and Dobelman, J. A., 2017. Financial statement analysis. World Scientific Book
Chapters. pp.109-169.
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How Do Managerial Accounting Systems Contribute Toward a Company's Continual
Improvement .2019. [ONLINE]. Available
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toward-companys-continual-improvement-71678.html>
Variance Analysis – Overview, Budgeting, Benefits .2018.[ONLINE]. Available
through:<https://cleartax.in/s/variance-analysis>
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