Management Accounting - Tools and Techniques

Management Accounting

Table of Contents
TASK 1 .........................................................................................................................................1
P1- Management accounting and requirements of its different systems.....................................1
P2- Methods of management accounting reporting.....................................................................3
P3- Cost calculation and preparation of income statement using absorption and marginal
costing..........................................................................................................................................5
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

Introduction
Management accounting is a financial analysis technique which is
subordinated by accounting knowledge and financial information disseminated by
accounting professionals to the management body of the organisation in order to
aid the executives in making key critical decisions, designing of programme
structure and evaluating performance of the business (Kaplan, Robert and Anthony,
2015). For drawing better study of management accounting tools and techniques
LSEC Ltd., a newly formed business entity engaged in manufacturing circuit
boards is studied to apply practical and theoretical aspects of management
accounting literature in a real life business situation.
TASK 1
P1- Management accounting and requirements of its different systems
Fig. 1- Flowchart of MA systems
1
Management
accounting system
Cost accounting
system
Inventory
management
system
Job costing system Price optimisation
system

Management accounting is a systematic flow of important financial data and
valuable financial information related to a specific fiscal period of LSEC Ltd. To
the managerial personnel. The information is highly regarded as a foundation layer
to draw decisive inferences from and help the business grow in a positive direction.
Management accounting is quite different from financial accounting as per their
fundamental use and objectives. Financial information is dedicated towards the
general public. Firms provide financial statements for open public to see and know
about the profitability situation of the business. Generally, stakeholders are
concerned about the financial information and for the preparation of statements,
help of financial accounting is taken, whereas management accounting is purely
internal and used only by the management (Chiwamit, Modell and Yang, 2014). It is
assisted by various sub sets called as management accounting systems. These
systems provide sectoral data which is merged in a single management information
system. Some key systems are as follows:
Price optimisation system: It is a combination of various quantitative
models used to understand demand fluctuations at different price levels. The
information is further processed using costing and inventory levels to optimise
price structure to lowest possible (Brewer, Garrison and Noreen, 2015). This system
helps in keeping prices competitive, initial pricing, promotional pricing and
deciding value proposition. Company uses this technique to identify the pricing
sweet spot and hitting it, or trying to maximise profits through increasing
consumers willingness to pay.
Inventory management system: It is related with the use of technological
software to track the inflow and outflow of goods, inventory laying at the
2

warehouse and in the transit (Ward, 2012). Through this system, a proper check on
the movement of goods can be traced which helps in eliminating wastage risks,
reducing over stocking or under stocking and ensuring easy availability of goods.
Job costing system: It is a system of cost information accumulation related
to specific service job or manufacturing function. The information is forwarded for
the use of the management to provide it to the client in contract for cost
reimbursement (Wickramasinghe and Alawattage, 2012). Typically, a job costing system
assimilates three major types costs known as direct materials, direct labour, and
overheads.
Cost accounting system: This system is related with intense study of costs
associated with the production of goods. This system evaluates every cost incurred
during production process to keep a cost control check, reduce wastage and help in
deciding prices for the final products (Trucco, 2015). The two internal costing
technique as a part of this system are job order costing and process costing.
P2- Methods of management accounting reporting
Based on the analysis and insights drawn from systems, reports are prepared
to evaluate the performances of the systems, concerned departments, their
processes, deviations between budgeted situations to the actual situations to help
the management in identifying internal problems and drawing their possible
solutions (Modell, 2014). LSEC Ltd. analysts prepare various reports provided to
executives for decision-making which are discussed here as follows:
3

Job cost report: This report contains the ongoing costs accredited with the
production process. It enlists the current state of jobs functioning on the production
and all other job costs which were incurred during the previous years. It helps in
performance evaluation and cost control mechanism. Jobbing is a technique often
used in manufacturing firms to identify each single unit of factor production
engaged in manufacturing process. Assigning cost to each factorial helps in
deciding final price for the business.
Inventory report: This report includes detailed descriptions about the
inventory levels at various warehouses and storage units, total production level,
raw material entered, goods in production and goods in transit etc. it is a mixture of
many small reports which forms a part of final inventory report (Morden, 2016).
generally businesses take loans by mortgaging minimum volume of stock at a time.
This system helps the firm in maintaining requisite level of inventory at all times to
abide to the loan terms.
4
Management
accounting
reports
Job cost reports Inventory reports
Account
receivable and
aging reports
Performance
management
reports

Performance report: This report includes details about performance
evaluation of various business segments like personnels, strategies, departments,
market standing, products etc. the variations between the budgeted figures to the
actual figures helps management in identifying solutions to the problems. These
reports are prepared with the help of techniques and models offered by eminent
management thinkers to evaluate performance using various mathematical and
behavioural models. Performances are subjective in nature so are the models.
Models rates every factor based on various factors which gives a comprehensive
view of various parameters.
Account receivable report: This report contains periodic details of the
creditors and debtors, bills to be received, due dates, funds in circulation, interest
rates, and other terms and conditions associated with credit policy of the business
(Suomala and Lyly-Yrjänäinen, 2012). This report helps in tracking funds flow,
managing money better and reducing financial losses. This report also includes
total amount of funds received and paid in a year which helps the management in
identifying liquidity situation of the firm.
P3- Cost calculation and preparation of income statement using absorption and
marginal costing
Cost Analysis: This analysis is used to establish a positive relationship
between cost and output. Costs incurred on production should result in fruitful
outcomes. The management uses this technique to identify various possible
solutions to adapt correct inputs and use those inputs in production for maximum
benefits (Schaltegger and Csutora, 2012).
5

Income statement: This statement is one of the financial statements
prepared to determine the financial health of the business. This statement is
prepared in dedicated format which contains lists of profits and losses occurred
during a period, It is prepared by deducting expenses from the income earned
during the period to identify net loss or profits. It tells the operating health of the
firm (Yalcin, 2012).
Absorption costing: This costing system undertakes all fixed and variable
costs into account during the production (Strauss, Kristandl and Quinn, 2015). It
undertakes all overhead as well as direct costs incidental to the production into
account and then allocates them to individual accounts. This method is fruitful in
calculation of inventory levels as it contains all costs such as variable, fixed and
overheads costs in one head.
Marginal costing: Under this method, total cost is ascertained as a result of
change in total cost due to addition in cost as an effect of increase in one additional
unit of production. It includes the incremental value of the cost, not all costs.
Marginal costs for goods which are customised are pretty high as compared to
goods which are produced in large volumes as it reduces the variable cost per unit
element.
Selling Price £273
Production Unit 4000 Units
Total Cost of manufacturing a Circuit Board £210
Direct Material £70
6

Direct Labour £90
Direct Expenses £30
Employees in the manufacturing department are to be paid £9 per hour
Fixed Admin Costs £20000
Other Overhead £60000
A .Normal level of production:
Rate per Unit At 4000 circuit boards
Sales £273 1092000
Direct Material £70 280000
Direct Labour £90 360000
Direct Expenses £30 120000
Other Overhead
£15
(£60000/4000) 60000
Fixed Admin Costs
£5
(£20000/4000) 20000
Total cost of manufacturing a circuit board £210 840000
Profit 252000
B. Profit calculated as per information extracted from Sales and Cost Ledgers (Sold 3200
Circuit boards):
Rate per Unit
At 3200 Circuit
Boards
Sales 300 960000
Direct Material
90
(£288000/3200 Units) 288000
7

Direct Labour
83.25
(£266400/3200 units) 266400
Direct Expenses
32.5
(£104000/3200 units) 104000
Other Overhead
9.25
(£29600/3200 units) 29600
Fixed Admin Costs
6.25
(£20000/3200 units) 20000
Total cost of manufacturing a circuit board 221.25 708000
Profit 252000
If 3200 circuit board sold as normal manufacturing cost as described in A.:
3,200 circuit boards
Sales 273 873600
Direct Material 70 224000
Direct Labour 90 288000
Direct Expenses 30 96000
Other Overhead 15 48000
Fixed Admin Costs 5 16000
Total cost of manufacturing a circuit board 210 672000
Profit 201600
8

Findings: From the above calculations taken two scenarios of A and B into
account. Scenario B where per unit cost is taken as 300 per unit is profitable
for the business as compared to the sales rate per unit at 273 for the same
amount of unit. Looking as per the feasibility analysis the firm should long
for option B price band.
CONCLUSION
From this report, it can be concluded that management accounting is a great
source for the management to form policies and strategy framework for the future.
Management accounting practices at LSEC Ltd. Has evolved into a precise set of
structural decision-making system which has enabled the firm in achieving growth
figures. Using various systems, reports, tools and techniques offered by
management accounting literature has empowered the business with technical
adaptabilities and problem solving mechanism.
9

REFERENCES
Books and Journals:
Brewer, P. C., Garrison, R. H. and Noreen, E. W., 2015. Introduction to managerial accounting.
McGraw-Hill Education.
Chiwamit, P., Modell, S. and Yang, C. L., 2014. The societal relevance of management
accounting innovations: economic value added and institutional work in the fields of
Chinese and Thai state-owned enterprises. Accounting and Business Research. 44(2).
pp.144-180.
Kaplan, Robert S., and Anthony A., 2015. Advanced management accounting. PHI Learning.
Modell, S., 2014. The societal relevance of management accounting: an introduction to the
special issue. Accounting and Business Research. 44(2). pp.83-103.
Morden, T., 2016. Principles of strategic management. Routledge.
Schaltegger, S. and Csutora, M., 2012. Carbon accounting for sustainability and management.
Status quo and challenges. Journal of Cleaner Production. 36. pp.1-16.
Strauss, E., Kristandl, G. and Quinn, M., 2015. The effects of cloud technology on management
accounting and decision-making. Management and Financial Accounting Report. 10(6).
Suomala, P. and Lyly-Yrjänäinen, J., 2012. Management accounting research in practice:
Lessons learned from an interventionist approach. Routledge.
Trucco, S., 2015. Financial accounting: development paths and alignment to management
accounting in the Italian context. Springer.
Ward, K., 2012. Strategic management accounting. Routledge.
Wickramasinghe, D. and Alawattage, C., 2012. Management accounting change: approaches
and perspectives. Routledge.
Yalcin, S., 2012. Adoption and benefits of management accounting practices: an inter-country
comparison. Accounting in Europe. 9(1). pp.95-110.