Management Accounting: Systems, Techniques, and Applications

This report explores the fundamentals of management accounting, examining its role in planning, controlling, and decision-making within organizations. It delves into various management accounting systems, including cost accounting, inventory management, and price optimization, outlining their essential requirements and applications. The report further analyzes different methods used for management accounting reporting, such as budgeting reports, cost and revenue reports, and investment appraisal reports. It also demonstrates the calculation of costs using marginal and absorption costing techniques, providing a comprehensive income statement for a hypothetical company. The report then examines the advantages and disadvantages of various planning tools used in budgetary control, including standard costing, variance analysis, and responsibility budgeting. Finally, it explores how organizations adapt management accounting systems to respond to financial problems, highlighting the importance of benchmarking and key performance indicators in achieving sustainable success.

UNIT – 5 Management Accounting
1

Contents
Introduction:.......................................................................................................................3
P1: Explain management accounting and give the essential requirements of different
types of management accounting systems....................................................................4
P2: Explain different methods used for management accounting reporting..................7
P3. Calculate costs using appropriate techniques of cost analysis to prepare an
income statement using marginal and absorption costing.............................................9
P4. Explain the advantages and disadvantages of different types of planning tools
used in budgetary control.............................................................................................14
P5: How organizations are adapting management accounting systems to respond to
financial problems........................................................................................................16
Conclusion:......................................................................................................................18
References:......................................................................................................................19
2

Introduction:
The report helps in preparing an understanding about the various types of management
accounting systems and techniques used in determining the cost and other
determinants for improving the operational performance of the enterprise. In order to
fulfil this purpose Zylla Company has been taken into consideration which is large
multinational organisation and having its objectives for further expansion. The results of
this expansion has been the acquisitions and restructuring which needs adoption of an
adequate information system which can help managers in taking important decision
regarding the company. The report will help in describing these functions in respect of
the company. The techniques adopted for cost management of company will be
described and reports will be generated as per the same. The various types of tools
which are necessary for operating an effective budgetary control in the company and
responding to various problems relating to financial aspects will be explained in this
report.
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P1: Explain management accounting and give the essential requirements of
different types of management accounting systems.
Management Accounting:
The management accounting can be defined as the system which is concerned with
identifying, measuring, accumulating, preparing, interpreting presenting the financial
information which can be used by the management for planning, evaluating and
controlling the various operations and processes of the organisation. The role of
management accounting is thus significant in determining the appropriate economic
decision for the company which can assist in sound growth and development (Bromwich
& Scapens, 2016).
The traditional management accounting system was only concerned with managing the
business affairs but after the industrial revolution which was recognized in 1990 there
was need regarding the value added reporting which can allow for efficient and
effective decision making and management accounting evolved as a source of making
required information available to the enterprise.
Management accounting Financial accounting
The purpose of management accounting is
to assist management in planning and
controlling the business operations.
The purpose of financial accounting is
related with helping investors and creditors
in taking investment decisions (Arjaliès &
Mundy, 2013).
The detailed reports are presented in this
information system of the company.
The summarised reports are generated in
the form of financial statement of the
company.
The reports are generated at the will of
management and normally frequently.
The reports are generated periodically as
and when mandated.
Management accounting systems along with their essential requirements:
Management
accounting
systems
Description Essentials
4

Cost
accounting
system
The cost accounting system helps in
maintaining the cost records related
to various type of cost including
direct, indirect and other overheads
of the company. Example – The
preparation of income statement
(Bromwich & Scapens, 2016).
It is required to integrate the
cost accountings system with
relevant financial accounting
and appropriate recording is
requiring all the time.
Inventory
management
system
The inventory management system
is associated with closing stock of
the company and measures are
taken to optimise the level of stock to
be maintained in the company.
Example – Application of just in time
and response based inventory
system.
It is required to achieve
economies of scale and
control the inventory cost of
the company.
Price
optimisation
system
The price optimisation system is
concerned with optimising the selling
price level for the product and
services of the company which will
be a crucial factor in determining the
profitability of the company. Example
– The determination of selling price.
The demand and sales
pattern must be appropriately
established by the company
(Arjaliès & Mundy, 2013).
Job costing
system
The job costing system is
implemented in the company where
there are specific orders are obtained
form the customers and the
classification is required for cost
component related top that job or
order. Example – manufacturing
specific charger for customer (Cohen
& Wright, 2017).
The specific cost related to
each of the job or process
must be identified by the
company.
5

P2: Explain different methods used for management accounting reporting.
Budgeting reports – The budgeting reports of the company are associated with
presenting the budgeted results along with the actual results of the company. The
comparison will allow the company to identify the various variables and deficiencies in
the operating system of the company. Example – Sales budget and production budget
(Cohen & Wright, 2017).
Cost and revenue reports – The cost and revenue reports are associated with
identifying the various costs and related revenue of the company in order to record them
in the accounting system of the company. The accounting system then will be utilized to
generate the financial reporting of the company for analysing the financial performance
and position during the period.
Inventory reports – The inventory reports of the company are concerned with providing
the relevant information about the closing stock of finished goods and the work in
progress remaining in the company. The supply chain management and the
manufacturing process will be analysed for developing the reports required for
managing the inventory levels in the organisation.
Investment appraisal reports – The investment appraisal reports can be defined as
the reports which help in evaluating the proposals which requires heavy investment and
the long term period planning is required. The investment proposals will be analysed on
the basis of the internal rate of return, payback period, net present value acquired for
each of the report. This will help the company in managing the capital resources
adequately (Granlund & Lukka, 2017).
6

M1: Evaluate the benefits of management accounting systems and their
application within an organizational context.
Increased productivity – The use of various types of management accounting system
helps the company in evaluating the manufacturing process and the deficiencies in the
production operations can be identified in accordance with the efficiency reports. The
same will help the company in increasing the productivity by implementing the
measures required for the same.
Efficient use of resources – The reports related with the budgeting reports and
standard costing enable the management in analysing the needs and requirements of
each department for continuing the business operations. This will help the company in
performing well and allocating the adequate resources to the same (Granlund & Lukka,
2017).
Efficient decision making – The decision making process of the company becomes
efficient after utilizing the relevant and accurate information for taking the economy
business decisions.
D1: How management accounting systems and management accounting
reporting are integrated within organizational processes.
The integration between the organisational processes of Zylla Company and the various
types of management accounting systems can be achieved by considering and aligning
the objectives of each of the processes with the management accounting systems and
effectively communicating the desired results for the same. The same will help the
company in maang8ing the business affairs accurately and appropriately in context of
the organisation as a whole.
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P3. Calculate costs using appropriate techniques of cost analysis to prepare an
income statement using marginal and absorption costing.
The cost volume analysis of the company is an efficient tool for recognizing and
classifying the cost pattern of the company in relation to the manufacturing operations
and distributing the cost incurred by the company in the supply chain process. The
various types of cost that can be classified in the production activity are as below:
 Direct costs
 Indirect costs
 Fixed costs
 Variable costs
 Semi variable costs
Marginal costing – Marginal costing is the method of accounting for cost identification
purposes of the company in which only variable cost are considered for identifying and
generating the income statement of the company and the fixed costs are charged to the
profit and loss acquired by the company in the form of contribution identified during the
period. The method of accounting is suitable for taking decisions in the company for
accepting the various proposals (Giannopoulos, et. al., 2013).
Absorption costing – The absorption costing method of cost accounting is the
traditional way of costing in which all the cost incurred in the manufacturing process of
the company consisting of variable and fixed cost are utilized for considering the
investment proposals. The financial reports related to costing statements of the
company are prepared after considering the net profit or gross profit acquired by the
company in this method. The method of costing is suitable for generating the full costing
reports of the company as it involves the consideration of full cost and the real profit
acquired by the company during the period can be ascertained based on that.
8

M2. Apply a range of management accounting techniques and produce
appropriate financial reporting documents.
XYZ Ltd. presents the monthly information as presented below for the month of July:
Selling price is £35 per unit and sales were 1500 units while production was 2000 units.
Calculate cost using absorption and marginal costing.
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Income statement as per absorption costing for the month of July for XYZ Ltd.
Working Note:
10

Income statement as per marginal costing for the month of July for XYZ Ltd.
Working Note:
.
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D2. Produce financial reports that accurately apply and interpret data for a range
of business activities.
Reconciliation statement:
Working Note:
The reconciliation statement shows that the unbalanced net profits acquired in marginal
costing and absorption costing methods is the result of absorbing the fixed overheads at
a predetermined absorption rate in absorption costing method. This has resulted in
difference in net profits in both the methods of costing (Giannopoulos, et. al., 2013).
12

P4. Explain the advantages and disadvantages of different types of planning tools
used in budgetary control.
Standard costing - refers to the process of establishing the various types of cost
standards for the activities concerning the company and their product analysis in order
to determine and analyse the variances for the same. Standard costing can be utilized
as a tool for management accounting purposes in order to control the cost of the
company and the manufacturing process concerned (Holt, 2014).
Advantages:
 The tool helps in budgetary control and controlling the cost expenditures of the
company.
 The budgetary targets of the company can be analysed for their accuracy and
correctness.
Disadvantages:
 The determination of standard cost requires subjectivity involved and can be
inaccurate.
 The behavioural implication cause by standard costing can act as a problem for
the management (Otley, 2016).
Variance analysis – The process of variance analysis refers to the comparison made
between the standard cost ad actual cost of the company in the manufacturing process
and supply chain processes. The method can be helpful in identifying the deficiencies
and analysing the profitability.
Advantages:
 It is the most effective tool for controlling the various costs in supply chain.
 The operations can be improved after considering the variances obtained in this
tool.
Disadvantages:
 The results of variance analysis can be inaccurate where there are high number
of transaction and processes included.
 The process is time consuming and requires lot of skills (Weißenberger &
Angelkort, 2011).
Responsibility budgeting – The budgeting process refers to the tool in which various
accountabilities are established for the personnel and the department concerned. The
establishment if various responsibilities will help the company in making process moiré
efficient.
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Advantages:
 The employees of the company gets motivate and encouraged for performing
well in the company.
 The deficiencies can be related with each of the person responsible.
Disadvantages:
 The allocation of responsibility is a lengthy process and requires lot of time.
 The responsibility budgeting tool ignores the short term results of the company.
M3. Analyse the use of different planning tools and their application for preparing
and forecasting budgets.
The various planning tool helps the management in performing the various functions of
planning, organizing and controlling. Also the use of these planning helps the enterprise
in various processes like:
Planning – The planning purpose of the management is concerned with estimation
process which requires proper and adequate financial as well as non-financial
information to be available with the company. The information about past, present and
future estimation will help in planning the budgeted activities of the company.
Controlling – The controlling function will be associated with forecasting the level of
activity to be performed. The application of standard costing and variance analysis n
helps in identifying the deficiencies and taking steps in advance for producing solutions
for the same (Anderson, et. al., 2015).
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P5: How organizations are adapting management accounting systems to respond
to financial problems.
The modern organisations having complex business problems requires different types
of planning tool in order to manage their business activities and ensuring that the
business operations are continued. The various types’ problems which are recognized
in modern business organisation are concerned with managing the funds of the
company and acquiring the optimum amount of cash level to be maintained in the
company. The other problems are associated with inventory management which results
in inventory obsolescence and the optimum inventory is not achieved in the company
resulting in heavy financial losses (Otley, 2016).
The various types of management accounting tools helps in responding to these
financial problems by recognizing the type of investment required:
Benchmarking – The benchmarking process in management accounting systems help
in improving the financial performance in a more logical and systematic way while
measuring and comparing the actual performance of the enterprise with the others, and
then utilizing the results in order to improve the performance and to achieve the
targeted objectives. The process of benchmarking helps in providing solution by
providing answers to different questions like:
 Who performs better?
 What is the reason of them performing better?
 What are the deficiencies in our performance?
 What are the necessary solutions in regard to those problems identified?
Key performance indicators – The KPI is also the tool used in management
accounting functions in order to measure the performance of an activity which is being
recognized critical for the organisation. The various types of key performance indicators
consist of financial as well as non-financial indicators and the analysis of these KPI
helps the management in improving the overall financial status of the company
(Weißenberger & Angelkort, 2011).
15

M4: How, in responding to financial problems, management accounting can lead
organizations to sustainable success (D3).
The various financial problems of the company are in association with the inefficiency in
the business operations and the processes performed by each of the business
personnel and the management. The sue of different types of benchmarks and the key
performance indicators helps the company in evaluating the problem and determining
the solutions required in order to gain the competitive edge in the market.
The investors in the market analyse the company performance by identifying the
financial statement which are the result of the financial performance of the enterprise
during the period. The application of ratio analysis helps the company in improving the
quality of reporting and achieving better financial results. Therefore more and more
investors will be looking forward to invest in the company which will help them to
acquire an m\large extent of market and being sustainable in the market ( Anderson, et.
al., 2015).
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Conclusion:
The above report concludes that the management accounting function which will be
adopted in the company Zylla will help in improving the overall business performance of
the enterprise in relation to the financial as well as non-financial items. The application
of different types of system will ensure that proper accounting system and costing
system is applied in the company which will enhance the quality of reporting. The use of
different planning tools will ensure that the budgets implemented in the company are
providing sound controlling system for the company. The management accounting will
be significant in responding to various financial problems and also it will help the
company in acquiring the competitive edge.
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