Management Accounting Systems & Techniques

This project examines the management accounting systems and techniques used by British Wax Refining Company Ltd, a chemical manufacturing company. It explores different types of management accounting systems, methods for reporting, cost calculation under marginal and absorption costing, and planning tools. The project also analyzes how the company adapts its management accounting systems to respond to financial problems and compares its practices with those of a competitor, The Proton Group Ltd.

Management Accounting
Systems & Techniques 2

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
P1 Explaining management accounting and giving essential requirements of different types of
management accounting systems................................................................................................1
P2 Enumerating methods used for management accounting reporting.......................................3
P3 Calculating costs for preparation of income statement under marginal and absorption
costing.........................................................................................................................................5
P4 Listing advantages and disadvantages of different types of planning tools ..........................9
P5 Comparison of how organisations are adapting management accounting systems for
responding towards financial problems....................................................................................11
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Management accounting is one of the crucial system in company for attaining reliable
information for making well-mannered decisions. Present report deals with British Wax Refining
Company Ltd which is engaged in manufacturing of chemical products and its competitor in the
same industry is taken named The Proton Group Ltd. Management accounting types and reports
are explained. Moreover, planning tools are discussed in the report. On the other hand,
calculation of absorption and marginal costing are done and break-even analysis is being
conducted for new product. Furthermore, management accounting systems are explained which
are used to respond to financial issues. Thus, such accounting helps to strengthen internal
operational and activities of British Wax Refining Company Ltd.
P1 Explaining management accounting and giving essential requirements of different types of
management accounting systems
Accounting is art of properly recording, classifying, summarizing and analysing financial
information pertaining to organisation. It provides clarity in terms of overall standing of
company in effectual manner. It is required to be prepared so as to ascertain whether firm has
sound position or not. All the activities taken place in business namely gains, expenses,
payments and receipts are effectively summarized in a better way for presenting accurate
information to external and internal users (Cooper, Ezzamel and Qu, 2017).
Management accounting and financial accounting are two important tools for British
Wax Refining Company Ltd which is engaged in manufacturing of chemical product is located
in UK. Financial accounting is first step in assessing information about company as it records
each and every transactions occurred in British Wax Refining Company Ltd on daily operational
activities. The financial accounting helps to summarize transactions by which financials of
British Wax Refining Company Ltd are produced such as balance sheet, income statement and
cash flow statement. These are available to public to analyse overall health of organisation in a
better way.
On the other hand, management accounting is useful tool for taking well-structured
decisions by firm's management so that it may be able to inject external operations quite
effectually. Various managerial functions namely planning, organising, staffing, directing and
controlling becomes smoother. The information being imparted by management accounting
1

helps to strengthen its internal operations so that it may easily attain efficiency and deliver the
best products to clients. In addition to this, such data is not publicly available because internal
management seeks it and takes decisions accordingly. Functions of management accounting are
to make quality decision to control activities of business. Moreover, to accomplish all objectives
with the help of which organisation could be able to attain profits.
Different types of management accounting systems are as follows-
Cost Accounting systems-
Costs are to be incurred for attaining desired level of production. British Wax Refining
Company Ltd implements cost accounting in its operational tasks for accomplishing
manufacturing and delivers services to clients with ease. Expenditures have to be controlled for
maximising level of production. Hence, it is useful process for summarizing, allocating and
assessing alternative actions leading to control cost (TALEBI and BAHRI, 2018).
Actual costing-
It is used for ascertaining actual cost of labours, direct cost rates for determining cost of
specified items. Actual costing effectively traces direct costs in a better way and ascertain
expense of particular object. For example, management of British Wax Refining Company Ltd
can track how many hours does employees' require completing manufacturing at a particular day
so that actual cost of producing such item can be tracked.
Normal costing-
As the name suggests, normal costs being incurred for completing production is provided
by such costing. It is used to assign particular costs to items based on labour, raw materials and
overheads to produce them and as a result, makes up total product cost (MONEM and SAEIDI,
2017). For instance, British Wax Refining Company Ltd has to manufacture 1000 chemicals.
Normal cost of materials comes to be 40 per head. Direct cost of 20 per chemical and overhead
totalled to 10. Hence, total cost for producing 1 chemical turns out to be 70.
Standard costing-
The standard costing is done by British Wax Refining Company Ltd' management with
the help of past experience that how much amount of cost will be required to produce particular
item. Preset prices are made based on statistics and experience which have to paid for attaining
2

manufacturing. For example, firm estimates for producing one chemical, it requires 1 pound of
material costing £2 and 1 hour of labour costing £20. It expects to produce 1000 chemicals for
next quarter, thus, total production cost comes at £22000. However, at end of production, total
cost comes out to be £35000. Thus, negative variance 13000 is attained which is unfavourable.
Inventory Management systems-
Inventory system is used for managing stock. JIT approach is used by company which
helps to order only desired quantum of inventory leading to controlling and minimising wastage.
Raw materials are ordered for manufacturing purpose with the help of JIT. Furthermore, for
work-in-progress, FIFO method is followed which uses inventory old inventory's first when item
is being sold out (Bui and De Villiers, 2017). Afterwards, finished goods that are processed
completely are offered to customers and finally sales are met. Thus, inventory management
system helps to judiciously inventory in optimum way. For example, JIT approach is used for
producing chemical items. The purchase price of item is taken along with maintenance cost,
storage expenditure etc. Then it is manufactured by deploying machines and final goods are
produced which are offered to customers.
Job costing systems-
The system is used to assign or allocate manufacturing cost to each product providing
management to keep track of expenditures in a better way. For example, British Wax Refining
Company Ltd allocates various costs of production. For raw materials, £105,000 is taken. Work-
in-progress includes balance of £95000 including direct and indirect cost of production. The total
balance of work-in-progress is £1434740 from it finished goods cost is deducted and balance
remains £77940. Manufacturing overhead balance totalled £237000. Thereafter, operating
income can be computed by deducting COGS (Cost Of Goods Sold) and thus, income comes at
£1409000. Thus, job costing system is quite useful for tracking and allocating costs of items.
P2 Enumerating methods used for management accounting reporting
Management accounting report is prepared for providing different aspects of operational
activities of British Wax Refining Company Ltd by which it may be able to take decisions with
ease. Moreover, it is used for clarifying business that on what aspects, it has to focus for
strengthening internal operations. The reports with their importance are as follows-
3

Inventory management report-
It is an important management report which is used to track stock in the best way
possible. In simple words, production department of British Wax Refining Company Ltd provide
list of materials needed for achieving manufacturing of chemical items. This report is offered to
top management with the help of which it analyses need of department and purchases raw
materials accordingly. Main importance of such report is that cost of handling excess inventory
is cut down up to major extent. This helps to reduce wastage and good quantum of production is
accomplished. Moreover, it presents accurate and right information to management which
ultimately aids in decision-making quite effectively (Ax and Greve, 2017). Thus, it can be said
that inventory management report is important for organisation in achieving optimum production
level and wastage of scarce resources are eradicated with ease.
Accounts receivable report-
Goods are sold on credit to customers which are termed as debtors as money remains
outstanding which has to be collected from them at later time span. In order to assess debtors and
amount remaining to get clear, accounts receivable report is prepared. This managerial report
help to ascertain balance remaining to be received from debtors. The report is effectively
produced for better analysis of money for collection purpose. Main importance of such report is
that outstanding money is determined from it. With this information, management tracks down
debtors so that they pay out their dues. It is beneficial for British Wax Refining Company Ltd as
it helps to recover amount within stipulated time in order to invest the same for accomplish daily
operational activities. Thus, it is quite useful from the perspective of organisation's management.
Cost accounting report-
Manufacturing firm produces goods incurring various costs namely direct, indirect, fixed,
variable and semi-variable costs (Schaltegger and Burritt, 2017). For controlling each of these
expenditures, cost accounting report is produced for making track of expenses quite effectually.
Importance of such report is that cost of various manufacturing overheads are easily analysed
and cost is allocated leading to achieve maximum production at minimum cost. This report is
quite crucial for firm so that desired level of production could be accomplished. Moreover, costs
are reduced up to a major extent by which good level of manufacturing can be attained. Hence,
4

with the help of cost accounting report, British Wax Refining Company Ltd is able to track cost
of items and thus, control is initiated leading to increased production.
Budget report-
Budgets are prepared in order to make proper analysis of expenses which will be incurred
for attaining operational activities in a better way. It is prepared by company for comparing
estimated projections with that of actual performance for a particular period. In simple words, it
can be said that budget report is prepared for comparing how close was actual performance with
that of estimated performance. It helps to effectively make prediction with regards to
performance for comparing sets of data (Honggowati, Rahmawati, Aryani and Probohudono,
2017). The budget report follows the same format of income statement such as revenue is listed
first followed by Cost of goods manufactured, general expenses and net operating profit.
Favourable and unfavourable variances are analysed and as such, business is able to make
improvements if unfavourable variance exists. Thus, it is quite important from the perspective of
management.
P3 Calculating costs for preparation of income statement under marginal and absorption costing
Marginal and absorption costing statements are important way to analyse overall cost of
overheads, materials and labour in production process. It helps to ascertain net income received
after deducting expenses. The calculation of both costing statements are provided below-
Preparation of income statement of Marginal costing
5

Preparation of income statement of Absorption costing
6

It can be interpreted from above table that under marginal costing, variables of 3200 is
giving cost of production totalled as 9600. In relation to this, total revenue for both costing
statements are considered to be 33000. However, net income of costing statements differs from
each other. In marginal costing, net profit is 17500, while under absorption costing, it comes
17700 having difference of 20 pounds.
7

It can be analysed from above table that break-even analysis has been made in relation to
introduction of new product in the market by British Wax Refining Company Ltd. The selling
price is 40 and variable cost per unit is 13. Thus, by deducting both CPU is attained amounting to
27. Fixed expense of 6000 is taken which will be incurred and thus, BEP (in units) is 222 while
BEP (in value) is 8888.89. Moreover, for getting profit of 10000, 593 products have to be sold
by company in effective manner. On the other hand, Margin of Safety is also calculated which
provides clarity that 72 % of revenue falls down when 800 items are only sold. This means that
company has to sell more products for enhancing level of profits. If less items are sold, then
break point of sales will be less resulting into loss to organisation.
Difference between marginal and absorption costing
Basis Marginal Costing Absorption Costing
Definition It is a technique used for
determining total production
cost in effective manner
(FARSHID and GARKAZ,
2018).
Costs are apportioned to
individual cost centre for
determining total cost of
production under absorption
costing technique.
Recognition of cost It takes only variable cost as
product cost. While, fixed
However, absorption costing
considers both variable and
8

costs are treated as period
costs.
fixed cost as product cost.
Profitability aspect It is measured by P V (Profit
Volume) ratio.
Profitability gets reduced
because fixed cost is included
in it.
Opening and Closing stock Main emphasis is on additional
unit, and as a result, changes in
stock either closing or opening
does not affect cost per unit of
product.
It is just opposite in absorption
costing as emphasis is on each
unit. Thus, change in opening
and closing stock affects per
unit cost.
Presentation It is presented by taking total
contribution into account
(Surbhi. 2015).
While, it is conventionally
presented mainly for fulfilling
liabilities of tax and financial
reporting.
P4 Listing advantages and disadvantages of different types of planning tools
According to the definition given by CIMA, budget is quantitative expression of plan
made for particular time period. It includes sales and revenue volumes being estimated, assets,
liabilities, costs, cash flows and other expenses. The budgeting practices are much influenced by
practice made by firm up to major extent. Thus, it can be analysed in a better manner that
planning tools are used for making budgets quite effectively and are based on influences by
firm's policies. Different planning tools along with benefits and drawbacks are enumerated
below-
Cash Budget
This type of planning tool is used for making estimation whether British Wax Refining
Company Ltd has sufficient amount of cash for operational activities. Cash receipts or inflows
and cash outflows or payments are being estimated with the help of cash budget (Agrawal and
Cooper, 2017).
Advantages
9

 One of the main merit of using cash budget is that debt can be easily avoided. The cash is
set aside for meeting emergency situations if any in the future.
 It is prepared in a way by which total spending could be tracked by organisation and as a
result, no shortage of cash exists.
Disadvantages
 The main limitation of cash budget is that apart from having good cash position does not
reflect that firm has good profit which is limitation of cash budget. It is used to estimate future needs but it does not provide current year needs and as result,
it is not reliable for company.
Variance Analysis
It is useful planning tool for making analysis of actual performance with that of budgeted
performance which is required for assessing whether there are any deviations. If deviations
exists, then improvement is taken in order to make proper evaluation of actual performance.
Hence, variances are analysed and accordingly, firm takes action for improving upon the same
(Singhvi and BODHANWALA, 2018).
Advantages
 Quick remedial action can be taken by company so that firm is able to make necessary
improvements. Moreover, it is utilised for controlling cost in organisation.
 Variance analysis is useful for profit planning carried out by management of British Wax
Refining Company Ltd. Furthermore, all inefficiencies are extracted out by it.
Disadvantages
 It is not a good technique as it does not provide whole picture of company with regards to
inefficiencies analysed. Some other tools have to be relied for better clarity. It draws only attention towards discrepancies but do not provide way to resolve it.
Master Budget
This type of budget is prepared which is summed up budget for all divisions of
organisation. It includes financial planning, budgeted income statement, balance sheet and cash
10

flow forecast. It is used for making one complete budget which includes all financials in
effective manner.
Advantages
 It serves as motivation for workers which is helpful for making comparison of actual
performance with that of estimated performance.
 Planning is made in advance which helps to fix the problem if any in a better way and
profitability increases quite effectually.
Disadvantages
 Main disadvantage of master budget is that it is rigid in nature as divisional staff is forced
to accomplish set targets as pressure from top management prevails and leads to lower
revenue estimates and higher expenditure predictions (Master Budget. 2018).
 It cannot be easily modified as certain steps have to be followed. Moreover, it includes
preparation of lengthy charts and graphs.
P5 Comparison of how organisations are adapting management accounting systems for
responding towards financial problems
Approaches British Wax Refining Company Ltd The Proton Group Ltd
KPI Business is effectively ascertaining KPI
for achieving objectives in a better way.
Since, company is newly formed, it adds
value to product for expanding its
customer base. Management is also
involved in implementing well-mannered
strategies for enhancing overall
performance.
Company is differently using KPI in
operational activities and mainly focusing
on sales revenue for increasing profitability.
Furthermore, it is engaged in manufacturing
chemicals and costs are effectively
controlled by it.
Benchmarking Benchmarking is one of the important
part for resolving financial problems in
the best way possible. British Wax
Refining Company Ltd is using
The Proton Group Ltd also relies on
benchmarking for responding to financial
problems with ease. However, it uses
generic benchmarking by which it does not
11

competitive benchmarking which has
imparted with benefits to it. This is
because it directly compares its
performance, process of production and
method of its rivals in chemical industry
which enhances its performance quite
effectively.
follow strategies in accordance to its
competitors but follow unrelated business
procedures which are not with regards to
similar industry.
Ratio Analysis Ratio analysis is being used by British
Wax Refining Company Ltd. This is
because it focuses mainly on liquidity
and efficiency position so that it may
pay-off its liabilities in a better way.
Short-term obligations are paid by
company by which overall health in
terms of obligations can be enhanced.
Organisation also uses such useful
technique for assessing financial position in
the best way possible by deploying metrics
for measurement of company's health.
Profitability position is ascertained by it
with the help of gross margin and net profit
ratio.
Balanced
Scorecard
The balanced scorecard is important tool
for resolving financial problems in
effectual manner (Granlund and Lukka,
2017). There are various perspectives of
balanced scorecard such as financial,
customer, internal process, learning and
growth (organisational capacity). Firm
uses financial perspective of balanced
scorecard by evaluating efficiency in
utilisation of resources and assessing
financial performance in effectual
manner. Furthermore, internal process is
being followed by it to bring quality in
products for enhancing satisfaction level
of customers and efficiency in
It also uses balanced scorecard for
responding to financial issues in effective
way. It uses customer or stakeholder
perspectives and organisation capacity.
Customer perspective is used for providing
satisfaction to them by adding value to the
products delivered to them. Moreover,
organisational capacity is done by seeking
human capital, infrastructure, modern
technology (Granlund and Lukka, 2017).
Hence, it uses such balanced scorecard
perspectives which help it to respond to
financial problems.
12

performing operational activities.
CONCLUSION
Hereby it can be concluded that management accounting is one of the important tool for
enhancing overall internal operations of organisation. Reports prepared are imparted to
personnels which help it to take decision-making for strengthening position in the best way
possible. Moreover, it is provided to them for making better decisions. Planning tools being used
in company are another important way for assessing requirements so that it may be able to
analyse needs with regards to expenses to be incurred. Moreover, variance analysis is another
useful tool for making analysis of deviations if any found out in actual performance with that of
planned performance. Thus, improvements can be done with ease. On the other hand, various
management accounting systems are used for responding to financial problems in effective
manner and as a result, British Wax Refining Company Ltd is able to resolve the same.
Furthermore, marginal and absorption costing both are reliable methods for allocating
manufacturing costs and thus, income statements are prepared.
13

REFERENCES
Books and Journals
Agrawal, A. and Cooper, T., 2017. Corporate governance consequences of accounting scandals:
Evidence from top management, CFO and auditor turnover. Quarterly Journal of
Finance. 7(01). p.1650014.
Ax, C. and Greve, J., 2017. Adoption of management accounting innovations: Organizational
culture compatibility and perceived outcomes. Management Accounting Research.34.
pp.59-74.
Bui, B. and De Villiers, C., 2017. Business strategies and management accounting in response to
climate change risk exposure and regulatory uncertainty. The British Accounting
Review. 49(1). pp.4-24.
Cooper, D. J., Ezzamel, M. and Qu, S. Q., 2017. Popularizing a management accounting idea:
The case of the balanced scorecard. Contemporary Accounting Research. 34(2). pp.991-
1025.
FARSHID, E. and GARKAZ, M., 2018. Slippery slope or compensatory behavior? The role of
moral disengagement and narcissism in accounting ethical decision making.
Granlund, M. and Lukka, K., 2017. Investigating highly established research paradigms:
Reviving contextuality in contingency theory based management accounting
research.Critical Perspectives on Accounting. 45. pp.63-80.
Honggowati, S., Rahmawati, R., Aryani, Y.A. and Probohudono, A.N., 2017. Corporate
governance and strategic management accounting disclosure. Indonesian Journal of
Sustainability Accounting and Management.1(1). pp.23-30.
MONEM, R. and SAEIDI, M., 2017. THE SAFETY-RELATED COST ENGINEERING IN
WORK ENVIRONMENTS FROM THE MANAGEMENT ACCOUNTING APPROACH
AND USING MODERN PERFORMANCE MEASUREMENT SYSTEMS.
Novas, J. C., Alves, M.D.C.G. and Sousa, A., 2017. The role of management accounting systems
in the development of intellectual capital. Journal of Intellectual Capital. 18(2). pp.286-
315.
14

Schaltegger, S. and Burritt, R., 2017. Contemporary environmental accounting: issues, concepts
and practice. Routledge.
Singhvi, N. M. and BODHANWALA, J. R., 2018. Management accounting: Text and cases. PHI
Learning Pvt. Ltd.
TALEBI, B. and BAHRI, S. J., 2018. The relationship between management accounting system
Components, task uncertainty, decentralization and performance of managers
manufacturing company Bonab.
ONLINE
Surbhi. 2015 Difference Between Marginal Costing and Absorption Costing. [Online]. Available
through: <https://keydifferences.com/difference-between-marginal-costing-and-absorption-
costing.html>.
Master Budget. 2018 Online. Available through:
<https://efinancemanagement.com/budgeting/master-budget>.
15