Management Accounting: Types of Systems, Reporting Methods, Cost Analysis and Budgetary Control

This report discusses the significance of management accounting in decision-making process. It explains the different types of management accounting systems such as cost-accounting system, inventory management system, job costing system and price optimization system. It also outlines the methods adopted for management accounting reporting such as budget report, accounts receivable ageing report, job cost report and inventory and manufacturing report. The report further describes the tools and techniques of cost analysis such as marginal costing and absorption costing system. Finally, it explains the planning tools of budgetary control such as cash budget.

Management Accounting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
P1: Types of management accounting systems...........................................................................3
P2: Methods adopted for management accounting reporting.....................................................5
P3: Tools and techniques of cost analysis...................................................................................7
P4: Planning tools of budgetary control .....................................................................................9
P5: Management accounting systems to handle the financial problems...................................10
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Management Accounting is defined as a procedure where all the financial information is
provided to the top management for decision-making process. In the current times, management
account is highly significant as it helps in identifying, analysing and interpreting the crucial
information to take managerial decisions. The management accounting make use of past
information and forecasts the future to make budgets or reports. The present report is based on
the case scenario of SOLLOTAK (UK) LTD. It deals in designing and manufacturing of
products such as switches, stabilizers, etc. The report will explain the different requirements of
management accounting and the method used for its reporting. Further it will outline the
different techniques and tools of cost analysis and shows which costing system is best for the
company. It will also describe the tools used for budgetary control with the major benefits and
drawbacks. Finally, it will explain that how management accounting system can be used to
handle financial problems.
P1: Types of management accounting systems
Management accounting is defined as a process to identify, analyse and communicate all
the information (financial) to the management to achieve the company's vision and mission.
Types of Management Accounting Systems:
Cost-Accounting System
It is an accounting system which is generally used by producers or manufacturers to
maintain all the production related activities using a particular system. Generally, this system
works by following the raw materials as and when they go to production process and turns into
finished products (Dierkes and Siepelmeyer, 2019). Sollotak Ltd. can also adopt cost-accounting
system to keep up with the production activities and to trace and track the cost of raw materials
and finished products. The system will write down the use of raw materials.
Advantages:
 The system fixes standard for everything thereby reducing wastage and losses. It helps in cost reduction because new and better production methods are followed.
Disadvantages:

 Future decisions are taken on the basis of past information.
 The cost is calculated on the grounds of full capacity utilization. In case of under-
utilization, the results shown may not be effective.
Inventory Management System:
It can be defined as a system where the businesses record the amount of goods they have
in their warehouses, at their display units or with other distributors. This will help you to
maintain right no. of goods at the right place (Muchaendepi. And et.al., 2019). By adopting the
Inventory management system, Sollotak Ltd. can track down its inventory level. It will assist to
keep the correct no. of goods at correct place and in appropriate quantity.
Advantages:
 In the absence of inventory report, the business will not have proper record of sales and
inventory and can mislead the employees. By maintaining the report, the business can pick out the slow moving goods and can take
necessary actions to clear them.
Disadvantages:
 This system software is very costly in the market. It is not affordable by small sized
business.
 Special training is required to successfully operate this system which is sometimes quite
lengthy and complicated.
Job Costing System:
This type of costing is described as a unique accounting method which is used to record
the expenditure incurred to produce a product. It is the process of collecting and calculating the
cost of materials, overheads and expenses for a particular product (ElMaraghy, and Alami.
2020). Sollotak Ltd., a manufacturing company can easily assign cost to different production
activities and how much expense is incurred for one job.
Advantages:
 The system gives freedom of cost controlling because the cost is calculated at every stage
of production process. It is easy to compare the cost of present job with that of the previous job.

Disadvantages:
 Controlling measures are taken only after the costs are incurred. Therefore, no possibility
of cost control. At times of inflation, comparing the cost of a job is pointless.
Price Optimization System:
A system where price is derived from the market database that will give maximum profits
to the company and can optimally meet the company's goals and objectives is known as Price
optimization System (Gupta, and et.al., 2020). Different types of survey data are used such as
consumer surveys, demographic surveys, etc., Sollotak Ltd. with so many product line can make
an effective use of price optimization system by effectively pricing the products.
Advantages:
 This system helps to get rid of any manual work and reduces the chances of mistakes. The system studies the consumer's buying pattern and help companies in quoting the
prices in a better way.
Disadvantages:
 Consumer database does not always produce correct results. Sometimes, they can be
biased and manipulated.
 Setting a price in dynamic environment which is constantly changing is a difficult task in
this system.
P2: Methods adopted for management accounting reporting
Reports are very significant for the companies to smoothly handle the daily operations. There are
various methods adopted for reporting the management accounting which are as follows:
Budget report: A company has a report that compares the accomplished results to the
intended budget. The budget report examines what all expenses are incurred on a high level so
that necessary steps can be taken (Church, Kuang, and Liu, 2019). Such tool is often used to
keep a control over the results. Budget report, to a certain extent, can protect the company
against any threats in the future. Budget reports help Sollotak Ltd. in projecting sales or
production levels for the upcoming year. In case of achieving the sales target of £100000 for the
next month, Sollotak Ltd. can either increase their production or can reduce their selling price in
order to attract new customers.

Advantages:
 All the activities of different departments can be easily co-ordinated with help of
budgeting. The report consist of all the action to be executed. Therefore, through reports, objectives
are translated into actions.
Disadvantages:
 If employees are not able to perform up to the standards, such budgets can demotivate the
employees.
 The company has to perform within the standards which makes it impossible for the
employees to come up with innovative ideas.
Accounts Receivable Ageing Report: In management accounting, this type of report is
defined as classifying the receivables according to the date on which they become due so that a
calculation can be made about the losses (bad debts) incurred by the company. Receivables
emerge when the company makes the credit sale (Suwantari, Ariana, and Suprapto, 2020). If the
customer is making late payments on a regular basis, its credit worthiness can be assessed from
this report and necessary actions can be taken. Such report helps the business to collect their
balance outstanding on time without any delay. With the help of such report, Sollotak Ltd. can
check whether their debtors are making the payments on time or how much extra time they are
taking to settle the accounts.
Advantages:
 Calculating working capital becomes easy as the company has knowledge that when a
customer will make the payment. Maintenance of such reports can relieve the company from debt collection and can focus
on other important areas.
Disadvantages:
 Drafting of such a report proves to be costly in case of companies having less finance. Report making is also a complicated work because all the minute details about the debtor
has to be recorded.
Job Cost Report: Here, cost of materials, labour and overhead of a particular job are
gathered. It is a report that records the cost of a project which is in process. In job costing report,

constructing the correct cost estimates is crucial (Drobyazko, and et.al., 2019). The reason being
if cost estimation is not done appropriately, then the rest of the work will be affected badly.
Sollotak Ltd. With the help of proper cost estimation, can continuously monitor and report the
work so that corrective measure can be taken in case of any deviations.
Advantages:
 Efficiency of each job is carefully studied so that a job which is less efficient can be
addressed within the proper time frame. Each job's profitability can be easily measured which supports the company to continue
with a particular job or not.
Disadvantages:
 Unwanted and undesirable cost can arise at any time which cannot be eliminated
completely. Such costs will increase the cost of a job.
 The employee has to record all the raw material and labour used for a particular job
which is sometimes tedious.
Inventory and Manufacturing Report: Inventory management is very important because it
directly affects the cash flow of the company. Inventory reports maintains accurate information
with all the details about inventory (Muchaendepi, and et.al., 2019). This reports helps the
companies to smoothly perform its operations without any disturbance because the company can
track the inventory. In case of excess inventory, Sollotak Ltd. can clear the stock and in case of
shortage, company can make necessary arrangements to refill the stock. The inventory report is
an all-inclusive report as it precisely includes all the information about a particular transaction.
Advantages:
 Inventory reports helps in saving a lot of time as it is can be easily traced which all goods
are in the warehouse and which needs to be produced or procured. It helps to retain the customers by easily fulfilling the demands of customers on time.
Disadvantages:
 Inventory report are complex and complicated that they are not easily understandable by
the employees.
 In the dynamic and complex business environment, such reports can only reduce the risk
up to a limited extent.

P3: Tools and techniques of cost analysis
Cost Analysis can be defined as a process where the relationship between cost and output
is calculated. In other words, cost analysis calculates the cost incurred in employing the inputs or
raw materials and how effectively and efficiently they are put to used to get the optimum level of
production.
Marginal costing: Marginal costing is a technique to showcase the cost and sales data in
such a way that to give a proper direction to the management for decisions like whether to buy a
particular item or to perform in house production (Averina, 2019). It also guides them in
decisions of sales mix selection. Here, fixed cost is directly added to profit and loss account and
only variable cost in considered. In this system, all the variables comes under cost of sales
calculation. Then, the contribution is calculated by subtracting the cost of sales from the total
sales. After this, fixed cost for that particular period is deducted from the contribution to find out
if there is any surplus or deficit.
Absorption Costing System: In this system, 3 types of cost are considered. First, fixed cost
which remains constant. Secondly, variable cost which changes with the changes in production
levels and third is semi-variable cost which changes in batches (Johnsson, Normann, and
Svensson, 2020). It calculates the costs after are incurred. This system is adopted so that both
indirect and direct cost can be identified.
Marginal costing
Particulars 2020 2021
Sales 276000 368000
Less :
Direct material 61200 69700
Direct labour 39600 73800
Fixed cost 94500 94500
Marginal profit 80700 130000
Absorption costing
Particulars 2020 2021
Sales 276000 368000
Opening inventory 1,20,000 1,60,000

Add: cost of production 1,440,000 1,640,000
Less :
Fixed cost 94500 94500
Total absorption costing 1501500 1753500
Income statement
Particulars Marginal Absorption
Sales revenue 276000 368000
Cost of goods sold
Less : opening inventory
100800 143500
Gross profit 175200 224500
Less : fixed cost 94500 94500
Operating profit 80700 130000
Interpretation: After the calculation of net profit from Marginal Costing and Absorption
Costing, it was absorbed that net profit according to the marginal costing is £80700 and and
according to the Absorption Costing, it is £13000. The absorption costing is better than the
marginal costing because it includes all the fixed costs in the calculation and not just the variable
costs.
P4: Planning tools of budgetary control
Budgetary Control: Budgetary control is the procedure where actual output is compared with
the budgeted output to calculate any deviations or difference in the two take necessary actions to
rectify the same. It is a measure to control the business operations. Initially, budget are drawn up
and then the actual results are calculated. There are various types of tools which are used to in
budgetary control. They are as follows:
Cash Budget: A budget is a statement of the anticipated cash inflows and outflows during
a particular period. All the revenues to be generated and expenses to be incurred are recorded in
a budget so that a company can have complete knowledge about their cash position (Felicia,
2019). A cash budget prepared by Sollotak Ltd. shows that they have shortage of cash in the
upcoming period to make their payments. It shows that the company has excess of expenditure

over revenues. In such a case they can request for a short term loan from a bank to ensure cash
availability at that time. Preparation of cash budget helps the Sollotak Ltd. to generate the cash
flows without any interruptions. The major advantages of cash budget is that the company never
runs out of the cash and can make the arrangements well before time. But at the same time, the
cash budget is just an estimation based on the past results which cannot be always accurate.
Zero-Based Budgeting: It is a procedure where a budget or statement is made from the
start. The previous budgets are not considered in zero based budgeting. Here, each and every
expense requires a justification before including it in the final budget. If a particular expense
does not entertain the company, it can be excluded. Sollotak Ltd. can make use of ZBB to make
a decision of buy or make (Beredugo, 2019). Zero based budgeting is very beneficial because all
the items and expenses are justified and more profitable items can be included in the budget. It
also helps in cost reduction. Conversely, zero based budgets are complicated and time-
consuming because it has to be created every time a new item is added.
Activity Based Budgeting: ABB is a budgeting tool which recognizes and analyses the
activities and direct cost associated with it. Once the activities are identified, then the cost
associated with each activity is calculated. Sollotak Ltd. can also adopt this budgeting by
identifying the crucial activities and allocating cost to that activity. The key benefits are that
there is no wastage of resources. Each activity is carefully studied before applying cost to it.
Secondly, incompetent activities can be ignored and which improves the operational efficiency
of the business. However, it requires a thorough understanding of the activities which is,
sometimes, lacked by the employees. ABB is a costly and complicated tool to be adopted.
P5: Management accounting systems to handle the financial problems
Running the company smoothly is not an easy job. It comes with all difficulties and
challenges at every step. Financial stability must be maintained in the company otherwise it can
incur huge losses. There can be problems of insufficient capital or wasting the money on too
much promotion or any other unnecessary expenses. The company now-a-days are adopting the
management accounting systems to solve such financial problems which are as follows:
Benchmarking: Benchmarking is a procedure where standards are set and the company's
performance is reviewed against the other group of organization with similar business operations
(Anthopoulos, Janssen and Weerakkody, 2019). Benchmarking can also be done with the
company by comparing the present performance with the past performance of the company. For

example, the business can take past years’ average sales and can set it as a benchmark to evaluate
how efficiently they are generating their sales for this year. Sollotak Ltd. can make a good use of
benchmarking technique to analyse and improve its performance. Sollotak Ltd. can set their
competitors as a benchmark and can set targets accordingly.
Advantages Disadvantages
a) The company can keep a close check that
where they are lacking and can improve their
performance.
b) By setting the benchmarks, the company can
see where they are standing in the market and
can deliver better results and enhance their
position in the market.
a) Sometimes the company gathers wrong or
insufficient information and set standards
accordingly. It results in heavy losses to the
company.
b) It is not always true that benchmarking helps
in enhancing the business performance and
position as it helped the other companies to be
in top positions.
Key Performance Indicators: KPIs are the standards or the barometer that give useful
information about the financial position of the company. KPIs are generally the relationship or
ratio between any two components such as current asset to current liability ratio or the
profitability ratios (Haber and Schryver, 2019). The Sollotak Ltd. can check its solvency by
computing the current ratio. The company can easily check how efficiently they can pay their
obligations and can maintain credibility in the market. Suppose the company is having current
assets of $90000 and its total current liabilities of $30000 then, its current ratio will be 3:1. But
the ideal current ratio should be 2:1. The can set KPI of 2:1. It means the company has enough
liquidity to pay their dues on time. But even after clearing all their dues, there are still funds
which are kept idle by the company. Such funds can be invested by Sollotak Ltd. in more
productive uses. The company can make use of Key Performance Indicators to track their
performance and growth and cut down their costs.
Advantages Disadvantages
a) KPIs provide results with perfect accuracy
which are measurable and can be tracked to
a) Employees are focused to complete the task
without focusing on the quality. KPIs may

achieve the goal.
b) Each employee knows well in advance
about the goals to be achieved. So, they move
in same direction without any chaos.
prove to be effective to achieve the short term
goals and does not prove to be beneficial in the
long term.
b) The information provided by the KPI is not
proficient enough to be executed.
Variance Analysis: Variance Analysis is a control measure to determine the difference
between standard budgets and the actual results. A trend line can be constructed to view any
variance from the set standards and necessary actions can be taken to get back on the track.
Suppose the Sollotak Ltd. has drafted a budget for sales to be £150000 but the actual sales
counted to £110000 only. A variance analysis gives a deviation of $40000. After proper
scrutinization, it was found that there are close substitutes of the company's product. The
company has to take necessary actions like increasing the promotional activity or to have some
innovation in the products to induce the sale.
Advantages Disadvantages
a) Necessary actions can be taken immediately
after finding any deviations so that the
company's operations ran smoothly.
b) A particular department or an employee can
be responsible for particular deviation instead
of fixing it to the entire organization.
a) With technological advancements and
changes in the methods of production on a
frequent basis, a new budget is to be made
every time which requires a lot of time and
energy.
b) the company can sometime manipulate the
data to get favourable results or to avoid the
negative deviations.
Balance Scorecard: Balance scorecard is a strategical tool which connects the all the
objectives, goals, and targets to the main vision of the organization. All the financial and non-
financial objectives are recognized and the priorities are given to each objective. The BSC allows
the senior management to consider four perspectives of the company. First is, the customer's

perception towards the company. Secondly, what all things can be better performed in the
organization. Next is, how the company can improve and innovate themselves and lastly, how
the shareholders are treated in the company.
Advantages Disadvantages
a) It helps the company in maintaining the
balance as all the employees are well aware
about the goals and can measure their
performance accordingly.
b) It also nurtures the easy communication
between different departments of the
organization.
a) Such scorecards needs to modified
redesigned for every organization as different
company's have different needs which is time-
consuming task.
b) It considers only the internal factors of the
organization ignoring the external factors
which are of more significance to the entity.
Financial Governance: Financial governance means complying with all the government
rules and regulation in carrying out the business smoothly without any interruptions. The
government has to protect the interests of all stakeholders. All the government rules and
regulations must be followed in order to create a good corporate governance. It is a pre-requisite
for the company so that investors and creditors can trust the business of the organization.
Advantages Disadvantages
a) The company with good financial
governance can easily take long term
borrowings from the market.
b) Shareholders and stakeholders gets a safety
of their money invested as they are well aware
about the financial governance of the company.
a) Sometimes, the company may extend the
accurate financial reports which can deceive
the investors and creditors.
b) financial governance may increase the cost
of the business and can be a burden on the
company.
COMPARISON OF THE MANNER IN WHICH MANAGMENT ACCOUNTING SYSTEM IS
ADOPTED TO SOLVE FINANCIAL PROBLEMS
Business organizations are facing a lot of financial issues which needs to be addressed
and solved immediately. Sollotak Ltd. uses KPI to measure it performance and profitability. The

company make use of sales growth metric in KPI to evaluate total sales generation. The company
proposes to increase the sales growth by 20% from previous year A favourable growth in the
sales in the future period shows that the company is going in the right direction. Sollotak Ltd.
can set a target to increase the revenue from sale by quarter and focusing on a particular target
market. It will help the company to realize the sales growth in efficient manner. Now, with the
help of KPI, organization achieved the predetermined target. The net sales showed an upward
trend of 20% from previous year. Therefore, KPI is beneficial for Sollotak Ltd. company to set a
quantifiable target and achieve it within a time frame. It helps the company to be on track with
minimum deviations.
On the other hand, AVK/SEG Ltd. uses Balanced scorecard to evaluate the performance
and manage any financial issues. AVK/SEG Ltd. wants to maintain the efficient and committed
sale forces. The company must focus on all elements through which it can maintain the sales
force. However, balanced scorecard is a lengthy process which is to customized according to the
organization. A lot of data and information is required for balanced scorecard. Therefore, KPI is
far better than the balanced scorecard.
CONCLUSION
By summing up this report, it can be said that management accounting system helps in
reducing the cost of the product with better production techniques to be implemented and to
maintain the optimum inventory level. It can also be noticed that different types of budgets aid
the management to make better decision for future. In addition to this, it can be concluded that
usage of absorption costing method proves to be beneficial because it includes the fixed cost in
calculation of the cost and profit. Further, it can be concluded that budgetary control tools helps
in managing and controlling the business operations of the organization. The cash budget
maintains the cash balance so that the company can clear their payments on time. Finally, it can
be observed that there are various tools to handle the financial problems. Usage of benchmarking
helps to set targets in accordance with the competitive firms. It can help in increasing the
productivity and profitability of the company.

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