Management Accounting: Understanding Systems, Reporting Methods, and Integration within Organizational Context - Desklib

This report discusses the concept of management accounting, types of management accounting systems, methods of management accounting reporting, and its integration within Eagle Eye Solutions. It also compares MA planning tools on the basis of their advantages and disadvantages and evaluates the effectiveness of MA in responding to financial problems of the company. The report emphasizes the importance of optimal capital structure, developing management information system, and controlling cost of products. It also explains the difference between marginal and absorption costing and the uses of financial reporting and statement for success and growth of business.

5 – Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
PART 1............................................................................................................................................3
Understanding Management Accounting....................................................................................3
Essential requirements of MA systems........................................................................................3
Different methods used in MA reporting.....................................................................................4
Principles of MA..........................................................................................................................5
Role of management accounting and management accounting system.......................................6
Income Statement Preparation under marginal and absorption costing.......................................7
Uses of financial reporting and statement for success and growth of business...........................8
Critical evaluation of how MA accounting systems and reporting methods are integrated
within an organizational context..................................................................................................9
Benefits of MA function to Eagle Eye.........................................................................................9
Conclusion of applying MA.........................................................................................................9
PART 2..........................................................................................................................................10
1. Comparison and contrasting three planning tools used in management accounting for
budgetary control with its advantages and disadvantages.........................................................10
2. Comparison of ways in which management accounting is effectively applied within
company in dealing and preventing financial problems............................................................13
CONCLUSION AND RECOMMENDATIONS..........................................................................15
REFERENCES................................................................................................................................1

INTRODUCTION
MA is of great importance in making managerial decisions with the help of budgeting,
forecasting and in-depth analysis of business affairs. This report is based on Eagle eye solutions
which is based in UK to provide digital platform for retail businesses. Such platforms are meant
for intelligent and real time connections with customers (Vakhrushina and et.al., 2018). Within
the two parts of this report, concept of MA, types of MA systems, methods of MA reporting and
its integration within Eagle eye has been evaluated. Also, comparison of MA planning tools on
the basis of their advantages and disadvantages has been done in this report. At last,
effectiveness of MA in responding to financial problems of the company will be evaluated here.
MAIN BODY
PART 1
Understanding Management Accounting
As explained and defined by CFI (Corporate Finance Institute), management accounting involves
the process of identifying, measuring, analysing & interpreting the information and data of
financial nature. For instance, financial manager within Eagle Eye can apply MA methods and
system in their organizational context for taking sound and effective financial decision, so that
management can ensure overall efficiency in business's regular operations.
Essential requirements of MA systems
The various MA systems that Eagle Eye is essential required to apply and follow within
its organizational context for greater efficiency and effectiveness are as follows:
Cost accounting system: The system is of great importance as it is concerned with the
categorization of overall cost of the organization into direct and indirect cost (Ax and Greve,
2017). For instance, cost accounting system can be implemented within Eagle eye solutions to
determine how much cost the company is incurring towards maintaining and updating software
from time to time. Accordingly, they can determine how much price they should charge for their
software solutions which is of great importance in ensuring overall profitability of the business.
Inventory management system: This system of MA provides with various procedures for
valuing inventory of the business like FIFO, LIFO and AVCO. For instance, there are many
inventory related issues that can arise within Eagle Eye to ensure smooth flow of inventory
during the process of production. It helps an organization to avoid problems of losses due to

breakage and theft. Accordingly, ordering of stock in a required quantity become possible at the
right time (Bento, Mertins and White, 2018). Also, with the help of efficient inventory
management system, identification and responding to trends can be possible. So that, customer's
warning can be fulfilled without getting delay and facing any shortages.
Job costing system: This system involves assignment of costs that an organization has incurred
to difference job and services performed within the organizational context. For example, Eagle
eye can implement this system to allocate overall costs to difference jobs such as hardware
solutions, software solutions, etc. By doing business can determine how much profitable each
different job is and whether to continue with the job or not. The system should be such through
which it can be identified that what is the cost of materials associated with each different jobs.
Price – optimization system: This system is very useful for the companies in deciding the right
price for their products by giving consideration to the demand of the company's products and
services in the market (Pedroso, Gomes and Yasin, 2020). To determine the right price for the
products, management within the company always spend enough time towards arriving at the
right price to sell their products in quick manner. It is the strategy helps a company in reaching
at a desired profitability levels by gaining insights on how sensitive their clients are to the change
in the price of the products. Through this system of MA, variations in demand can be determined
at different levels of price along with combining cost related data with inventory related
information, so that recommendations can be made on how profits can be improved.
Different methods used in MA reporting
There are various methods within the scope of management accounting that can be used by the
accountants and finance manager of Eagle Eye are as follows:
Budget reports: This kind of reports are useful in setting benchmarks for the performance which
is known as budgeted performance for the future of the company. Through this, expected cost
that may incurred in nearer future of Eagle Eye solution can be determined, so that at the end of
the budgeted period the actual costs are compared with that of budgeted one and accordingly, the
variance between budgeted and actual can be identified (G'iyosov, 2019). For instance, Financial
management team can prepare cash budget to determine how much closing cash balance they are
required to maintain and also can create spending plan for better management of liquidity and
short term solvency.

Performance report: This report is useful in reviewing and analysing various performance
related factors of employees and different departments with the company. Like, Eagle Eye can
prepare performance report to evaluate those employees who are directly linked with the
production process to ensure higher productivity and quality of their IT solutions. With the help
of this report, requirement of providing training and development sessions can be understood.
Account Receivables ageing report: Framing credit policies become possible through this
method of MA along with appropriate cash flow management. The whole receivables balance are
first broken down on the basis of duration within which they are expected to make payments. For
managers, it is of high importance to identify that whether the company is facing any issues in
the process of collecting dues from its customers (Saukkonen, Laine and Suomala, 2018). If yes
and the majority of customers are not able to pay their outstanding balances, then this indicates
that Eagle Eye must tighten their credit policies. Time to time monitoring of account receivables
ageing report allows for looking over debts of the company.
Capital budgeting: This method of MA provides a useful insight about which project os most
profitable and appropriate for the business. For instance, to determine how to get back the
invested amount at the earliest can be facilitated by management accountant of Eagle Eye
through the application of pay back period technique of capital budgeting which is most suitable
for determining how long it will take for the business to get back their invested amount.
Inventory and manufacturing: To make manufacturing process highly efficient, MA accounting
reports can be used by Eagle Eye as these reports provides information regarding hourly labour
costs, per unit overhead costs and inventory wastes (Dierynck and Labro, 2018). With the help of
such information, manager can determine which production line needs improvements and how
bonuses can be linked with employees performance to reduce wastages and costs.
Principles of MA Compiling and designing: Accounting statements, reports, information and records along
with the evidence results related to future, past and present should be compiled and
designed in such a way to meet the needs of the Eagle Eye and resolve their problems
accordingly. Also, design of MA systems should be such that facilitate presentation of
relevant data and accounting information can also be modified to meet managerial
requirements.

 Relevance: Managers using information for the purpose of making decisions should be
relevant specifically (Vakhrushina and et.al., 2018). For this, management needs to
review organizational requirement on a regular basis to reflect the changes taking in the
business environment. For instance, budget reports must be prepared by utilizing present,
past, future, internal, external, non-financial and financial information to ensure
appropriate forecasting. Management by exception: While presenting reports and information to management,
this particular principle of MA has been followed. It means application of standard
costing techniques and budgetary control system within the framework of MA systems
(Ax and Greve, 2017). With this, the deviation of actual performance from planned
performance can be found out easily and accordingly informed to management to
understand what is going wrong and what actions must be taken by them.
 Credibility: The roles and responsibility of all the team members within different
departments must be defined in a structured form. Within Eagle eye ethical rules and
regulations must be followed to reinforce the aspects related to ethics in information
technology professionalism. In this way stake-holder's trust towards the company can be
improvised.
Role of management accounting and management accounting system
The managers of Eagle Eye Solution Ltd is need to fulfil the following role of
management accounting: Maintaining Optimal capital structure: The company need to manage optimal capital
structure within their company which involve debt, equity, loans, bonds etc. Thus it is
advisable to the Eagle Eye company to adopt optimal capital structure because it provide
them high benefits and is available at low cost of acquisition. For this, they can adopt
weighted average cost of capital model (Lyly-Yrjänäinen and et.al., 2017). Developing Management information system: Besides maintaining optimal capital
structure, the company's management also need to develop and implement management
information system. For example, with the application of systems within Eagle Eye
company, the managers are able to process its work more efficiently and error free.
 Controlling: This is basically one of the most crucial role of management accounting
department as it involve control of cost of products. It require proper communication

among the departments regarding cost related information (Abernethy and Wallis, 2019).
For this, managers of Eagle Eye company need to adopt variance analysis tools to
identify the gap between actual and standard income and expenses.
Income Statement Preparation under marginal and absorption costing
Sales in Kg 40,000 kgs
Units produced 35000 kgs
Sales price €15 per kg
Closing stock 5000 kgs
Variable manufacturing costs € 5 per kg
Fixed manufacturing costs € 70000 per year
Variable marketing & administrative expenses € 2.5 per kg of sale
Fixed marketing & administrative expenses € 100000 per year
Cost structure under absorption costing
Variable manufacturing costs + Fixed manufacturing cost
€5 + €70000/ €35000
€5 + €2 = €7
Income Statement under Absorption costing
Sales (40000 kgs* $15) 600000
Less cost of goods sold
Variable cost of goods
manufacture (35000 * $7)
245000
Less closing stock (5000 kgs
*$7)
-35000 (210000)
Gross contribution margin 390000
Less variable marketing & -87500

administration expense (35000
kgs* €2.5)
Contribution margin 302500
Less period expenses
Fixed marketing &
administrative expenses
100000
Net Operating Income 202500
Income Statement under variable costing
Sales (40000kgs * 15) 600000
Less variable cost
Variable manufacturing cost
(35000 * €5)
175000
Variable marketing and
administration expense
(35000* €2.5)
87500 -262500
Gross Profit 337500
Less Fixed manufacturing cost 70000
Less Fixed marketing and
administrative expenses
100000 -170000
Net Profit 167500
Reason of difference between marginal and absorption costing
The gap arises between net profit under marginal and absorption costing is because of
only one reason and that is fixed cost of production. In marginal costing, the fixed cost of
production is fully charged by company from contribution and not from the cost of operations
(El-Shishini, 2017). But on the other hand, in absorption costing the fixed cost of operation is
charged from sales by converting them into cost per unit.

Uses of financial reporting and statement for success and growth of business
The financial statements and reporting basically provide real-time analysis using ratio
analysis tool to the Eagle Eye company with the help of which the company can determine its
profitability and liquidity performance. The financial reports is also used by the management of
the company to identify and gauge liquidity position of the company. For example, currently the
Eagle Eye company acquire funds from only equity financing which does not allow them any tax
benefits (Botes and Sharma, 2017). So, if the company really wants to earn more profit with tax
saving they have to adopt the debt financing and equity financing both in 2:1 ratio.
Critical evaluation of how MA accounting systems and reporting methods are integrated within
an organisational context
Both MA systems and reporting methods are helpful for Eagle eye in making better decisions for
enhancing business efficiency. It helps in understanding position at present and analysing it for
identifying future business opportunities. Through integration of inventory management systems,
Eagle eye can determine how much inventory level they should maintain (Bento, Mertins and
White, 2018). For example, Unilever by using JIT method for managing its inventory became a
largest retail company in UK. Also, job cost report are helpful in identifying cost associated with
different jobs to eliminate the one which is not profitable for the business. However, it is always
advisable to first consider the business objective prior to integration of any MA systems or
reporting methods as poor integration may leads to non-accomplishment of goals and also
financial loss for the company.
Benefits of MA function to Eagle Eye
The following are benefits of adopting MA tools and techniques within organizational system:
 Marginal analysis is useful for Eagle eye in determining profits from generating revenue
by offering software solutions to customers.
 Break-even analysis is useful in determining the minimum level of sales to avoid losses
in business and also helps in setting margin of safety (Pedroso, Gomes and Yasin, 2020).
 To identify and report the causes of variance in actual and planned performance to the
management, variance analysis is very necessary.

Conclusion of applying MA
To enhance motivation among employees and profitability of business, adoption of MA
systems and reporting methods is necessary. The tools, functions and benefits of MA and its
implementation within Eagle Eye has been evaluated in this report. Also, MA helps in improving
reliability and cost transparency within Eagle eye along with building brand image and
expanding to global level.
PART 2
1. Comparison and contrasting three planning tools used in management accounting for
budgetary control with its advantages and disadvantages
Planning tools of management accounting (MA) helps the Eagle Eye solution Ltd to
solve its financial issues with the preparation of budgets and forecast. The various planning tools
available to the Eagle Eye company are as follows:
 Budgetary Control: This is a planning tool which is used to plan and control the
production and selling of goods and services of company. The main purpose of budgetary
control is promoting communication and coordination among departments along with
motivating managers and evaluating performance (Sedevich-Fons, 2018). For example,
the Purchase department of Eagle Eye solution Ltd need to continuously communicate
with the Production department in order to know about the quantity of raw material and
equipment required to purchased. This require preparation of budgets such as cash, sales,
purchase, production budgets etc.
Advantage and disadvantage of Budgetary control
Budgetary Control
Advantage Disadvantage
 This tools is helpful for companies to
maintain coordinates activities among
various departments.
 For example, if all the departments of
the Eagle Eye company clarified and
justified request of each other by using
 In case if the application of budgets
within the Eagle Eye company are
done rigidly and mechanically than it
causes major problem to the company.

this tool, than their resources
allocation will automatically get
improve (Sedevich-Fons, 2018).
 It is also helps in enhancing
communication with the employees
and the impact of which the specific
resources, revenue and activities
required to carry out business are get
to know by company managers.
 Sometime the lack of employees
engagement in the preparation of
budgets cause demotivation.
 For example, while preparing budgets
if managers of Eagle Eye company do
not provide information about
particular expenditures to employees,
than they will not be committed to
them.
 With the help of reallocation tool the
managers of the company take proper
and appropriate corrective actions.
 Their may be chance of increase in
perception of unfairness and rigid
budgets create difficulty to company to
obtain money from any new source
and ideas (Sedevich-Fons, 2018).
 Cost Volume Profit analysis: This is basically most significant management planning
tool that help the company in analysing the effect of sales volume and product cost over
its operating profit (Abernethy and Wallis, 2019). For example, Eagle Eye solution
company with the help of cost volume profit analysis can estimate the income and
expenses figure and than compare it with the actual one. The variance and break-even
analysis is a tool used for computing the gap between standard and actual amount and no
loss and no profit sales point.
Advantages and disadvantage of cost volume profit analysis
Cost Volume Profit Analysis
Advantages Disadvantages
 It is very easy to calculate the
estimated figures using the standard
 The disadvantage of the break-even
analysis tool is that it assume that all

formulas which get easily changes as
per the change in variables.
 The variance among the estimation
and actual are also easily analysed by
the managers of Eagle Eye company
with the use of this planning tool of
management accounting (Abernethy
and Wallis, 2019).
their fixed cost remain fixed all over
the time.
 But it is not possible in reality because
there is no fixed cost in real world.
 The break-even analysis helps the
Eagle Eye company in planning their
future sales which they have sale for
earning profits.
 For example, in case if the company's
sales are not increasing than they need
to make changes in their products and
service prices using pricing strategy.
 The accuracy of this planning tool is
not 100% correct because it is based
on the assumption that variable cost
remain constant all level of sales level.
 This is not correct and along with that
sometime separation between variable
and fixed cost is became difficult for
company (Abernethy and Wallis,
2019).
 It is also helpful for the company to
calculate the margin of safety where
the company's contribution is higher
than its fixed cost.
 With this, the managers of Eagle Eye
company can adopt strategy to reduce
its fixed as well as variable cost.
 Pricing Strategy: The pricing strategy is a planning tool which require adoption of
appropriate pricing policies such as value-based, premium, penetration and skimming
pricing (Lyly-Yrjänäinen and et.al., 2017). This further help the company in achieving its
pricing and business objectives such as survival, high quality product and service,
maximizing profit and market share etc. For example, the main objective of Eagle Eye

solution Ltd is providing customized and high value IT service to its clients. So, with the
use of this tool they get to know that adopting of value-based pricing method is best for
them to achieving its objectives.
Advantage and disadvantage of pricing strategy
Pricing Strategy
Advantages Disadvantages
 Value-based pricing strategy helps the
Eagle Eye company to know about
their customers taste and preferences
along with what they willing to pay
for company products.
 In case if company's product have the
ability to attract and retain the
customers at even high price than
increasing prices is helpful for them.
 Sometimes using value based pricing
strategy may lead to loss to the
company.
 It is because they start avoiding cost of
their service in order to keep their
customer happy (Lyly-Yrjänäinen and
et.al., 2017).
 That's why selecting the price as per
what their customer willing to pay is
not always good.
 Demand pricing allows management
of the company to optimise its
products price as per the demand of
their service in the market (Lyly-
Yrjänäinen and et.al., 2017).
 For example, sometime Eagle
company can use low price technique
to increase their market shares by
providing various discounts and
schemes to customers.
 If the company increases its product
quality and failed to increase its
products price than it may lead to loss
rather than profit to the company.
 That's why it is important for them to
analysed its cost first and set the prices
as per the value of the product.
 But they need to make sure that its
product and service price must cover
all its cost.

2. Comparison of ways in which management accounting is effectively applied within company
in dealing and preventing financial problems
The different management accounting tools and techniques uses by various companies in
order to deal with the financial problems and also to solve it are as follows:
Benchmarking:
This is basically the best tool of measuring the performance of the company's products
and services along with the processes with that of its competitors. This means that, with the help
of benchmarking the company can able to change the scope of the service they offer to its
customers. For example, in Eagle Eye company their main issue is related with the competitive
advantage which they are not able to gain in UK market. That's why to deal with this issue the
company decided to adopt the Benchmarking techniques as it is helpful for encouraging team
building and cooperation (Johnstone, 2018). After application of this technique the Eagle Eye
company able to became one of highly competitive information technology service provider
company in the UK market.
Inventory Management systems:
This is a technique which help the company to know about the stock level that every
company need to be ordered at a point of time in order to avoid shortage of inventory. For
example, in Tesco company they mainly faces issues related to supply of stock to its supermarket
and stores all around the world on time (Drury, 2018). So, for this they have decided to use Just-
in-time inventory management tool and the impact of which they started ordering 90% of their
stock directly to supermarkets and only 10% to the warehouse. After application of inventory
management technique, the company is able to manage its inventory and timely fulfilment of
customers requirement related to products and services.
Investment appraisal techniques:
This helps the company to know about the investment project which can provide them
higher returns using the various method of capital budgeting. Some methods basically consider
the time value of money such as NPV and IRR that's why is more advisable to the company. For
example, in Pharmacy2U company they faces issues related to high profitability investment
projects. This means that company have the ability to acquire the funds at low cost but face
difficulty in investing the fund in profitable projects (Petera, P., Wagner, J. and Šoljaková, L.,
2020). So, in order to solve this financial issue the company has decided to adopt the Net Present

Value method to select the investment projects. After the adoption of this technique the company
is able to select the most profitable assets and equipment for investment purpose.
Break-even Analysis:
The break-even analysis technique of management accounting help the company to
understand its no-loss and no-profit sales point. Along with that they can also compute its margin
of safety of the company's products and services. For example, In Verdant Leisure company the
managers has viewed that company are suffering losses and identifying its reason is difficult for
company. So, they decided to adopt the break-even analysis tool of marginal costing to identify
the reason behind company's product losses. After adoption of this MA technique, the company
now able to earn a continuous profit as they able to identify whether the reason of no profit is
products fixed cost, variable cost or selling price (Dahal, 2019). That's why it is also advisable to
the Eagle Eye company that they need to adopt this techniques for the success and growth of its
business to both local and international level.
CONCLUSION AND RECOMMENDATIONS
The report has concluded the various planning tools and techniques of management
accounting along with their advantage and disadvantage. The impact of which the report has
concluded the tools that Eagle Eye company need to incorporate within the business so that they
can achieve its business operational and financial objectives. Further, the report has concluded
the real world example of companies which are using MA techniques within its company to
solve financial problems. The roles and principles of management accounting techniques are also
concluded in this project along with its integration and benefits to Eagle Eye solution Ltd. The
recommendations on methods of MA that is available to the Eagle Eye company with the help of
which they can achieve sustainable business success are as follows:
 It is recommended to the Eagle Eye company's managers that if they want to identify its
liquidity position than they need to adopt the budgeting techniques and prepare monthly
cash budgets or cash flow statements (Botes and Sharma, 2017). This also help them in
ensuring its cash needs for their business expansion and development purpose.
 In order to expand its business, the company can also able to fulfil their cash needs by
acquiring funds from different sources such as debt and equity. Thus is advisable to the

Eagle Eye company that they have to acquire the fund in optimal and ideal ratio i.e., 2:1
from debt and equity financing.
 For identifying its non-profitable service process, it is advisable to the company that they
have to adopt the process and service based costing. This helps the managers of Eagle
Eye company to identify the process which incur high cost but do not deliver any profit to
the company (El-Shishini, 2017). Then such process have to be dissolve by the company.
 At the time when Eagle Eye company wants to invest their funds on purchase of any
assets and equipment, then it is recommended to the company use NPV or IRR method of
capital budgeting. It is because this method consider the time value of money and provide
best and profitable investment plan out of various alternatives.
 Along with that in order to determine the profitable and optimal level of output or
service, the company can use CVP or Break-even analysis (Napitupulu, 2020). This help
the company to know about its profitable output level and also identify about the poor
and lower performance of the employees of the company.

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