Management Accounting: Tools and Techniques for Effective Decision-Making

This report delves into the crucial role of management accounting in modern organizations, exploring its various systems and their integration within a company. It examines the benefits of management accounting, including its contribution to planning, controlling, decision-making, and performance evaluation. The report further analyzes the financial performance of two competitor organizations, Kier Group and Balfour Beatty, using key performance indicators and financial ratios. It also provides a detailed comparison of three planning tools commonly used in management accounting: budgeting, variance analysis, and standard costing, highlighting their effectiveness in addressing financial challenges. This comprehensive analysis demonstrates the vital role of management accounting in achieving organizational success.

Management Accounting and its tools
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Table of Contents
Introduction......................................................................................................................................3
Task 1...............................................................................................................................................4
1. An explanation of the role of management accounting and management accounting systems...4
2. Explanation of how management accounting is integrated within an organisation....................5
3. The benefits of the function to the organisation..........................................................................6
Task 2 - Produce a portfolio of completed calculations for financial statements, including income
statements using variable costings...................................................................................................7
A. Select two competitor organisations. Find the last three years of the organisations’ financial
statements and analyse them with key performance indicators and appropriate financial ratios....7
B. Complete the following statements of profit or loss, under absorption and marginal costing
principles for the months of May and June...................................................................................12
Task 3 - Compare and contrast three planning tools used in management accounting, indicating
how effective you judge each to be and why. Your judgements should be supported by evidence.
.......................................................................................................................................................14
Conclusion.....................................................................................................................................16
Reference list.................................................................................................................................17
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Introduction
Management accounting, with the advancement of time and increase in competition, has evolved
as one of the most important and indispensible parts of an organization. Management accounting
plays various significant roles in an organization, the most important being effectual decision-
making. This report discusses about management accounting and its different systems along with
discussing their individual roles in an organization. It further moves on to the explanation on
how an organization can be integrating management accounting and benefits of the function to
an organization. This report has been prepared with reference to Dunlop Aircraft Tyres, a British
manufacturer specialist in manufacturing retreaders and aircraft tyres. It also consists of the
production of a portfolio of calculation of income statement and evaluation of performance of
companies with the help of financial ratios and KPIs along with evaluating the effectual planning
tools available in management accounting, which can be integrated within an organization.
3

Task 1
1. An explanation of the role of management accounting and management accounting
systems
As stated by Weygandt et al. (2015), management accounting or managerial accounting can be
referred to as the practice of conducting an analysis as well as communication of financial
information and other relevant data that partner in making decisions, devising planning as well as
management of performance. The field of managerial accounting also provides assistance to the
management of a company for financial reporting as well as controlling the activities performed
in the company along with formulating and implementing its strategies (Warren et al., 2015).
Management accounting plays the role of planning, controlling, problem solving, decision-
making and investing decisions in an organization.
Management accounting also comprises of various systems. The four main systems in
management accounting and their respective roles within an organization such as Dunlop
Aircraft Tyres are as follows -
 Cost accounting system - The costs that a company spends can not only be measured but
also reduced and controlled with the help of the management accounting system known
as cost accounting. Carlsson et al. (2016) stated that the cost accounting plays the role of
measuring costs, assessing them, comparing them against budgets and standards as well
as controlling and minimizing them.
 Inventory management system - Narsingh et al. (2016) opined that inventory
management systems help a company in the management and control of the company’s
stock and other non-capitalized assets. This system plays the role of replenishing the
inventory levels of the company on time, removing uncertainties and ensuring the
accurate inventory orders of the company (Gluhovsky et al., 2016).
 Price optimizing system - Ferreira et al. (2015) stated that the pricing strategy with which
a company sets the selling price of all its goods and services is known as the price
optimizing system. The role of this system is to ensure that a company has a strong
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customer base and is able to attract larger volume of customers along with maintaining its
desired profits.
 Job costing system - As depicted by the name, the job costing system helps an
organization in measuring and assessing the costs spent in order to perform and continue
performing the jobs in the company (Lanen, 2016). The role of this system is to help an
organization in ensuring that its job costs are controlled and the non-profit yielding jobs
are eradicated.
2. Explanation of how management accounting is integrated within an organisation
Integrating management accounting is an important part of every organization. This is because
the benefits of management accounting are remarkable in an organization. Management
accounting can be integrated in an organization in a simple and easy way. In order to do so, an
organization requires the hiring of a good management accountant, who will be able to integrate
each of the management accounting systems in the organization with ease. The following are the
four systems with which management accounting can be integrated in an organization -
 Cost accounting system - According to Drury (2013), the cost accounting system can be
integrated within the context of an organization with the help of implementing the
absorption costing and marginal costing system within the organization, the use of
activity based costing or ABC for costing the operations of the organization. The
implementation of life cycle costing in the organization can also be helpful for integrating
cost accounting system within the organization. For example, Dunlop Aircraft Tyres can
be integrating management accounting within the organization with the help of using
these cost accounting systems.
 Inventory management system - As stated by McCullough and Blomgren (2017), the
inventory management system in an organization can be implemented with the help of
using EOQ (economic order quantity), management of inventories with JIT (just in time)
and use of MRP system (material requirement planning). With the use of these systems,
an organization can be integrating management accounting. For example, Dunlop
Aircraft Tyres can be integrating management accounting in the organization with the
help of inventory management system.
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 Price optimizing system - The pricing optimizing system consists of factors such as the
cost-profit-volume analysis, demand elasticity, price skimming, target pricing, etc.
(Ferreira et al., 2015). Use of these factors in an organization such as Dunlop Aircraft
Tyres helps it in optimizing its prices. Management accounting can be integrated in an
organization with the use of the price optimization system as well.
 Job costing system - According to Course (2015), the job costing system helps a
company in measuring job costs through process costing, batch costing, job costing, etc.
Organizations such as the Dunlop Aircraft Tyres can be integrating management
accounting within the organization with the help of job costing system as well.
3. The benefits of the function to the organisation
The benefits or advantages of integrating management accounting within an organization are
indispensible. As stated by Watts et al. (2014), the following are the benefits of management
accounting integration within an organization such as Dunlop Aircraft Tyres -
 Planning - Management accounting helps an organization in defining its objectives,
assessing its revenues and costs in future for setting up budgets, assessment of the
production requirements of an organization, etc.
 Costing - Management accounting helps an organization in calculating the profits, which
every cost unit generates and helps it in setting prices and valuing inventories in the
organization’s balance sheet.
 Controlling - Once the plans of an organization are made with the help of management
accounting, they should be reviewed for ensuring that the organization is following them
along with controlling them in case of identification of any inefficiencies.
 Decision-making - Management accounting plays a vital function in decision-making.
The decisions in an organization can be made effectually with the help of management
accounting integration.
 Performance evaluation - In addition to the above points, management accounting helps
in the assessment of the performance of an organization’s departments and workers
against their individual or divisional targets and budgets.
6

Task 2 - Produce a portfolio of completed calculations for financial statements, including
income statements using variable costings
A. Select two competitor organisations. Find the last three years of the organisations’
financial statements and analyse them with key performance indicators and appropriate
financial ratios.
The financial statements of a company can be analyzed in order to analyze the performance of
the company (Fazzini, 2018). In this report, two competitor organizations, Kier Group and
Balfour Beatty, which operate in the construction industry of UK, are going to be compared with
one another based on financial ratios and key performance indicators. The following discussion
shows the comparison of the financial ratios of Kier Group and Balfour Beatty -
Year Kier Group Balfour Beatty
Gross Profit ratio Net Profit ratio Gross profit ratio Net profit ratio
2016 8.93 % - 0.42 % 4.10 % 0.35 %
2015 8.64 % 0.17 % 2.26 % - 2.96 %
2014 8.61 % 0.37 % 1.80 % - 0.81 %
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2016 2015 2014 2016 2015 2014
Kier Group Balfour Beatty
-4
-2
0
2
4
6
8
10
Gross profit ratio
Net profit ratio
Figure 1: Figure comparing the profitability ratios of Kier Group and Balfour Beatty
during the past three years
(Source: Created by the author)
From the comparison of the profitability ratios of Kier Group and Balfour Beatty, it can be
analyzed that the gross profits of both these firms have increased from 2014 to 2016. However,
there has a terrible decrease in the net profit ratio of both the companies and it can be analyzed
that Kier Group has ended up with losses at the end of the year 2016. Thus, it can be analyzed
that the profits of both the companies is not satisfactory in nature. However, Balfour Beatty
shows a slightly better performance, since Kier Group has ended up with net loss rather than net
profit.
Kier Group Balfour Beatty
Year Quick ratio Current ratio Quick ratio Current ratio
2016 0.51 0.99 0.87 0.91
2015 0.6 1.13 0.82 0.88
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2014 0.66 1.09 0.92 0.989
2014 2015 2016 2014 2015 2016
Balfour Beatty Kier Group
0
0.2
0.4
0.6
0.8
1
1.2
Quick ratio
Current ratio
Figure 2: Figure comparing the liquidity ratios of Kier Group and Balfour Beatty during
the past three years
(Source: Created by the author)
According to Chiaramonte and Casu (2017), the liquidity ratios are the ratios from which the
capacity possessed within a firm for meeting off the short-term liabilities can be determined.
From the above figure and table, it can be analyzed that there has been a constant up and down
movement in the quick and current ratios of both the firms. However, none of the accounting
years of the firms show an optimum and satisfactory liquid position of the firms. Thus, it can be
analyzed that the liquidity positions of both the companies are low and in order to maintain a
sound liquidity, corrective measures must be taken by the firms.
Year Kier Group Balfour Beatty
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Debt to Equity
ratio
Debt to assets
ratio
Debt to assets
ratio
Debt to equity
ratio
2016 0.83 0.19 0.3 1.9
2015 1.08 0.23 0.31 1.7
2014 1.23 0.21 0.29 1.22
2014 2015 2016 2014 2015 2016
Kier Group Balfour Beatty
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
Debt to equity ratio
Debt to asset ratio
Figure 3: Figure comparing the solvency ratios of Kier Group and Balfour Beatty during
the past three years
(Source: Created by the author)
As stated by Rahman (2017), the solvency ratios of a company indicate the capacity of a firm to
meet all its debts, including long-term debts as well with the use of its total assets and total
equity. The comparison of the debt to equity ratio of these two competitor organizations indicate
that the debt to equity ratio of Kier Group has decreased from 2014 to 2016 while that of Balfour
Beatty has increased from 2014 to 2016. However, both the firms are quite solvent in terms of
debt to equity. The debt to asset based solvency of Kier Group also shows an improvement from
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2014 to 16. However, the debt to asset ratio of Balfour Beatty shows a major increase from 2014
to 2016.
In addition to financial ratios, the performance of an organization can also be evaluated on the
basis of key performance indicators (KPIs). As stated by Parmenter (2015), KPIs can be referred
to as the measurable values, which demonstrate the effectiveness and efficacy of a company in
the accomplishment of the key goals and objectives of the company. The following points show
the comparison of the key performance indicators of the two competitors Kier Group and Balfour
Beatty -
Year Kier Group (in millions) Balfour Beatty (in millions)
2014 2015 2016 2014 2015 2016
Sales 2,906.90 3,275.90 3,991.40 8,745 7,264 6,955
Net profit 10.7 5.5 -16.8 -35 -59 106
2014 2015 2016 2014 2015 2016
Kier Group Balfour Beatty-1,000.00
0.00
1,000.00
2,000.00
3,000.00
4,000.00
5,000.00
6,000.00
7,000.00
8,000.00
9,000.00
Sales
Net profit
Figure 4: Figure comparing the two key performance indicators of Kier Group and
Balfour Beatty
(Source: Created by the author)
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The comparison of the two key performance indicators of the two competitors shows that the
sales of both the companies are good. However, the sale of Balfour Beatty is quite higher than
that of Kier Group. On the other hand, the comparison of the net profits of the two competitors
indicates that the net profit of Balfour Beatty has improved from 2014 to 2016. However, there
has been a remarkable decrease in the net profit of Kier Group from 2014 to 2016.
Thus, from the overall analysis and comparison of the performance of the two competitors Kier
Group and Balfour Beatty from the firms’ respective annual reports and financial statement, it
can be stated that there is a need of improvement in the performance of both the companies. It is
important for both the companies to take necessary measures for improving their liquidity and
profitability. However, between the two companies, Balfour Beatty shows a better performance
than Kier Group’s financial performance.
B. Complete the following statements of profit or loss, under absorption and marginal
costing principles for the months of May and June
i) Absorption Costing (AC)
Particulars May June
Amt (in £) Amt (in £) Amt (in £) Amt (in £)
Sales (or revenue) £
1000000.00
£
750000.00
Less: Cost of sales (COGS)
Opening inventory Nil Nil
Cost of production
Direct labour £
300000.00
£
300000.00
Direct material £
200000.00
£
200000.00
Fixed overheads £
300000.00
£
800000.00
£
300000.00
£
800000.00
Less: Closing inventories 0 £
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200000.00
Cost of sales £
800000.00
£
600000.00
Profit (AC) £
200000.00
£
150000.00
(ii) Marginal Costing (MC)
Particulars May June
Amt (in £) Amt (in £) Amt (in £) Amt (in £)
Sales (or revenue) £ 1000000.00 £ 750000.00
Less - Cost of sales
(COGS)
Opening inventory Nil Nil
Cost of production
Direct labour £ 300000.00 £ 500000.00 £ 300000.00 £ 500000.00
Direct material £ 200000.00 £ 200000.00
Less: Closing inventory Nil £ 125000.00
Marginal cost of sales £ 500000.00 £ 375000.00
Contribution £ 500000.00 £ 375000.00
Less: Fixed costs £ 300000.00 £ 300000.00
Profit (MC) £ 200000.00 £ 75000.00
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Task 3 - Compare and contrast three planning tools used in management accounting,
indicating how effective you judge each to be and why. Your judgements should be
supported by evidence.
One of the main benefits of integration of management accounting within an organization is the
contribution of management accounting in the solution and pre-emption of financial troubles.
The planning tools available in management accounting help an organization in its procedure of
pre-empting and solving financial problems. Management accounting helps an organization in
selecting a wide range of planning that can be used for different purposes within the
organization. The following are the planning tools, which are commonly utilized in management
accounting -
 Budgeting - The procedure with which a company prepares and implements its financial
plan for a specific period is called budgeting (Bogsnes, 2016). Budgeting is a commonly
used planning tool of management accounting within organizations all over the world.
Budgets prepared in a company can be of different types, such as cash budget, production
budget, expenditure budget, capital budget, operating budget, etc. Each of these budgets
plays a significant role in allocation of costs and resources of a company and estimating the
expected incomes of the company. Budgets also allow a company in the comparison of its
budgeted results and the real results, which in turn helps a company in the solution and pre-
emption of financial troubles. For example, the use of budgeting in Dunlop Aircraft Tyres
will be helping the company in planning its finances, reviewing its profitability, evaluating
its performance, planning its funding sources, allocating cash in an optimum manner as
well as conducting bottleneck analysis. Therefore, budgeting is one of the most suitable
planning tools to be used for solving and reducing financial problems.
 Variance analysis - In addition to budgeting, another planning tool utilized in management
accounting is variance analysis. As stated by Chang (2016), the variance analysis is a
quantitative-based planning tool that involves the examination of the variances (differences
in simple words) in the financial results of a company in comparison to the results that had
been expected or had been forecasted. For example, variance analysis facilitates a firm in
the determination of selling price variance, profit variances, sales variances, material
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variances, labor variances, etc. Through the help of determination of the variances in the
financial performance of a company, the company is able to determine the financial factors
that leading to financial troubles such as poor sales, low profit, high cost, etc. and in turn
helps in taking steps that lead to the solution and pre-emption of financial troubles. For
example, Dunlop Aircraft Tyres can be able to determine the reasons behind the company’s
financial problems such as variances in profits, variances in sales, variances in costs, etc.,
thereby helping the company in responding and minimizing financial troubles. Hence, this
proves that variance analysis is an appropriate tool for responding to a company’s financial
problems.
 Standard costing - According to Eisenberg (2016), the planning tool that is used in
management accounting for the compare and contrast of the costs spent in a company with
the standard costs that had been predetermined. High costs spent in a company are the main
reason for which financial problems arise in the company. The comparison of the real costs
to the standard costs helps in determining the excessive costs that have been incurred in a
company, which in turn helps in the solution and pre-emption of financial troubles in the
company. For example, Dunlop Aircraft Tyres can be using standard costing for the
compare and contrast of the costs spent in the company with the standard costs that the
company had predetermined. Thus, standard costing is also a suitable tool for reducing and
preventing financial troubles.
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Conclusion
Thus, the analysis and findings from this report helps in the determination of the role and the
importance of management accounting within the context of an organization. The evaluation of
the role of management accounting and its systems such as inventory management and cost
accounting system helps in realizing why and how management accounting has become an
indispensible part of an organization. The calculation of income statements and use of KPIs help
in analyzing the role of management accounting in the preparation of financial reports while the
comparison of planning tools such as the standard costing, budgeting and variance analysis
indicates how management accounting can be useful for the pre-emption, minimization and
solution of financial troubles.
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