Management Accounting: Types of Systems, Reporting Methods, and Cost Analysis Techniques

This report discusses the essential requirements of different types of management accounting systems, methods used for management accounting reporting, and cost analysis techniques. It also covers the advantages and disadvantages of planning tools and how organizations are adapting management accounting systems. The report is based on Prime Furniture, a private limited company in London, UK.

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK1.............................................................................................................................................1
P1 Describe about management accounting and give essential requirements of types of
management accounting systems...........................................................................................1
P2 Different methods used for management accounting reporting........................................4
TASK 2............................................................................................................................................6
P3 Calculation of cost using different costing techniques......................................................6
..........................................................................................................................................................8
..........................................................................................................................................................9
Part 2..............................................................................................................................................11
P4.Explain the advantages and disadvantages of different types of planning tools used for
budgetary control..................................................................................................................11
Task 4.............................................................................................................................................14
P5. Comparison of the way in which organisations are adapting management accounting
systems.................................................................................................................................14
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................17
.......................................................................................................................................................18

INTRODUCTION
Management accounting refers as the procedure to develop reports about activities and
operations of business which assist managers in terms of making short and long-term decisions.
Management accounting supports business in terms of pursuing goals by identifying, measuring,
analysing, communicating & interpreting data to higher authorities. Management accounting is
important because it recognises the financial situation of the business. It is necessary because it
helps managers to make operational decisions and also support in terms of increasing the
operational efficiency of the company(Acharya and Ryan., 2016). It also support in terms of
planning, organizing, motivating, directing and performance evaluation as well. Prime furniture
is taken into consideration in the present report. Prime furniture is a private limited company
which has share capital company based in 20-22 Wen lock road London, United Kingdom. The
company has eleven to fifty employees. In the present report, the discussion is about
management accounting system requirements and and also about methods used for management
accounting reporting. In addition to this, the report covers analysis about techniques of cost
analysis to prepare an income statement. Moreover, the report covers analysis about advantages
and disadvantages of planning tools. The report also consist of organisation adapting
management accounting systems in order to deal with financial issues.
MAIN BODY
PART 1
Describe about principles of management accounting
There are basically four principles of management accounting that every business must
comply with it. It includes designing and compiling, management by exception, control at source
accounting and accounting for inflation
 Designing and compiling: Under this head, accounting information reports, records and
other evidence of present, past and future results that should be designed and compiled to
meet out the requirements of particular business and problem-solving
 Management by exception: It is followed when information has been presented to
management. It means that standard costing techniques and budgetary control system are
followed in the management accounting system.
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 Control at source accounting: Costs are basically controlled at that point when they are
incurred-control at source accounting.
 Accounting for inflation: It is important to assess the value of capital which is
contributed by the owner of business that is concerned in terms of real value of money
through revaluation of accounting.
Evaluate how management accounting is integrated within the organisation
The key way through which system of management accounting contribute towards
continuous improvement in an organisation through integration and development of cost
management systems.
The benefits of the function to the organisation.
There are various advantages of management accounting function to the organisation
which includes planning, controlling, service to customers. In addition to this, organising,
coordinating, motivate and communicate into effective manner as well.
Critically reflect the application of management accounting.
Application of management accounting basically includes record keeping, planning and
control and decision making as well. Accounting basically help in terms of maintaining the
records of a business into systematic manner but it somewhere makes the process complicated by
applying various kinds of rules and regulations in it with changing period of time and annual
budgets as well.
TASK1
P1 Describe about management accounting & provide essential requirements of forms of
management accounting systems.
Management accounting: It is described as providing financial information and
resources to managers in terms of decision making. It is the recording and presentation of
information for benefits of different stakeholders of an organisation(Andon and et.al., 2015).
Management accounting also support businesses in terms of pursuing goals by analysing,
measuring, identifying, communicating and interpreting information to managers.
Evolution and origin of management accounting: The concept of management
accounting has been introduced during industrial revolution. The evolution of management
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accounting is majorly driven by rapid innovation in information technology. It also perceived as
increase in competition in the business environment.
The system of management accounting first appeared in in the United States during
nineteenth century. The system of management accounting employed both complicated and
simple accounting methods.
Management accounting system: It refers to that system which is in the systematic form
of control used to influence members in organisation to achieve the firm's goals. There are
different kinds of system which every organisation has used in terms of analysing the actual
financial position in this competitive market(Azmitov and Korabelnikova., 2015). . It includes
cost accounting system, price optimisation system, inventory management system, job order
costing system etc. Prime furniture is basically a manufacturing industry due to which it is
important to consider under this system and implement the system accordingly.
Difference between financial and management accounting
Management Accounting Financial Accounting
Management accounting support in terms of
making profitable decision making for an
organisation. It provides information in the
form of monetary and non-monetary terms.
Financial accounting assist the management in
terms of analysing the actual financial position
of an organisation by preparing annual
financial records. It provides details related to
an organisation in terms of monetary aspect.
There are different kinds of management accounting system which are defined in the
following manner:
Cost accounting system: It is defined as system that provide data associated to
organisations cost that are invested within manufacturing of various goods as well as services.
With respect to prime furniture company, this system is most suitable in terms of adoption
parameter. This system provides relevant information of incurred cost in each manufacturing
activity. It also support the finance department in terms of making an effective budget for future
business activities(Chukwudi and et.al., 2018). There are different kinds of cost which include
direct & indirect cost. Direct cost refers to that cost or an amount which is directly allocated to
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manufacturing activity whereas indirect cost is that amount which is incurred in terms of
supporting the execution of manufacturing activity in direct ways.
Inventory management system: This system is engaged in terms of recording present
level of stock prevailing in company to meet customers requirements and needs. With respect to
prime furniture company, this system is required to maintain better relationship with their
clients(Dauth and et.al., 2017).This system is also helpful in terms of maintaining loyalty of
existing customers and retain them by having sufficient level of inventory in warehouses so that
orders which are pre-ordered can be deliver on time without any delay. Inventory management
system basically consist of three types which include LIFO, FIFO and AVCO. LIFO is that
concept where received inventory is used on primary basis for manufacturing activities. FIFO
means that products are purchased on earlier basis and it is first used in production activities.
AVCO means that it is the average cost which is distributed on the basis of units produced. With
respect to prime furniture company, the management is majorly responsible for gathering
information related to inventories which can be arranged and maintained through using this
particular kind of system.
Price optimisation system: This system basically provides information related to client's
actual perception towards pricing policy which is framed by an organisation. It is also helpful for
manager to bring new pricing policy in order to retain loyal customers (Dye and et.al., 2015).
This system is useful for Prime furniture company in terms of maintaining the existing customer
base by meeting all the expectations related with prices charged by them.
Job order costing system: It gives data regarding actual cost take place within
manufacturing of goods and services at workplace. This system is also supportive in terms of
keeping records of an organisation related to cost which makes easy for manager to estimate the
profitable unit which provides maximum amount in return(Ganyam, and Ivungu., 2019). Job
ordering cost system determines about the cost which is incurred in terms of manufacturing
furniture products and it is also helpful for managers to take decision into appropriate manner. In
this way, it help in minimising the cost and increases the income of an organisation.
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P2 Different methods used for management accounting reporting
Management accounting reporting: It is defined as an activity associated to
maintaining of business transaction that help management to take effective and profitable
decision for the company. This is used for purpose of regulating, planning, measuring
performance and decision-making. These reporting system includes cost accounting report,
inventory management report etc. The management of Prime furniture company have to produce
these types of reports in order to analyse the actual financial position and situation in the market.
Reason of relevance of information to the user, reliable, up to date and accurate:
Information recorded in the accounting reports should be authentic, genuine, up to date
and reliable as well(Griffin and Wright., 2015). So that trust and loyalty of stakeholders can
maintained into appropriate manner. For this purpose, it is required that transaction should be
recorded on daily basis with an accurate amount so that there should not be any mis-
interpretation with respect to data towards stakeholders.
Reason behind understanding and overall easy to comprehensive of reports:
Understanding and interpretation of reports must require by the management as it assist
them in making suitable and correct decision for the growth of business. Analysing the
information available in the accounting reports help stakeholders of Prime Furniture in
identifying their actual status in competitive market.
Types of managerial accounting reports:
Performance Reporting – It is an effective form of managerial accounting that help in
gathering data associated to work performance and other factors as well. In addition to this, it
also assist company to improve its performance by analysing as well as identifying the
requirements. Whereas senior manager can understand demands of employees which will help
in terms of reducing the workplace conflicts. Investors has the ability to understand the current
position of the business and in which direction it is heading. It is the parameter which generates
real time information about the performance of business and it supports in terms of setting real
targets. These targets can be achieved and it allows the management to focus into right direction
so that it lead towards increased productivity and profitability.
Cost accounting report: It offers about the summary of all costs related to articles which
are manufactured and it includes raw material costs, labour, overhead and added costs that are
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taken into consideration. The report offers about the capacity of Prime furniture to realise the
cost of prices of items versus their selling prices. Profit margins are monitored and estimated by
cost accounting reports that gives the real picture about all costs that went into procurement and
production of the articles (Jeter and Chaney., 2019). This report basically includes inventory
waste, overhead costs and labour cost on hourly basis. This report gives an exact understanding
of all expenses for better optimisation of resources among all departments. Cost accounting
report also support prime furniture in terms of making distinction between variable and fixed
cost that allows the firm to fix prices in different scenario. With support of cost accounting
reports, restocking of materials and control can be done on over materials.
Inventory management report: This report basically belongs to summary of all items
related to industry, business and organisation. It provides a comprehensive supply of different
items and account of stock for keeping the track record of goods. They move into the process
which includes serial numbers, cost of goods, lot numbers and dates(Jones and et.al., 2018). This
report also support in terms of discovering trends, identifying strengths and weaknesses and also
fulfils gaps and inefficiencies. Informed decisions with respect to Prime furniture has been made
with support of knowledge gained from this report(Jovanović and Vašiček., 2021). It shows all
the costs associated with holding, obtaining, inventory transportation and also ensure about
inventory stock into proper condition. It becomes necessary for an organisation with respect to
their survival that there should be good control over inventory otherwise the company lose
control over the profits.
Job costing report: It is defined as a report that is associated to the procedure of dividing
the overall expenses so that financial performance can be tracked in an effective and proper
manner. In addition to this, it is classified in to different forms that is material cost, labour cost,
field overhead cost and sub-contractor cost as well. It is analysed that job costing report is used
to accumulate the cost data. In relation to prime furniture, it make use of job costing procedure as
it help them to take effective decisions and attain higher profits as well.
TASK 2
P3 Calculation of cost using different costing techniques
Cost: It is referred as the amount that is invested in operation various activities of
business and is also includes efforts, time and so on.
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 Prime Furniture is engaged in manufacturing furniture products due to which it is
essential to examine cost which makes easy for manager to compare output with invested
cost.
 Cost consider two types such as direct and indirect cost. Direct cost relates with
manufacturing of furniture on direct basis whereas indirect cost relates with expenses
incurred in the process of manufacturing activities indirectly (Quattrone, 2016).
Cost analysis: It is the procedure to measure the overall advantages attained because if
actions and leads to high profitability.
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(b): Reason for analysing variations in profit
The above calculation depicts that there is difference in net profit due to changing costing
methods(Nicholls., 2018).The main reason of arising such differences is due to inclusion of fixed
cost in absorption costing method. The same is been presented underneath:
For the first quarter:
Overhead absorbed= (66000*0.20) = 13,200
Fixed overhead costs= 16,000
Under absorption: (2,800)
For Second quarter:
Total absorbed expenses: (74000*0.20) = 14,800
Fixed costs= 16,000
Under absorption= (1200)
(c): Reconciliation Statements:
It needs to be done by taking crucial difference those are arises in a project that can help
in reducing those gaps.
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Part 2
P4.Explain the advantages and disadvantages of different types of planning tools used for
budgetary control
Description of Budget: It is considered about as forecasting tools that are used to calculate
towards the revenue and expenditures for particular period of time (Schaltegger and Burritt.,
2017). The manager of prime furniture create better design several types of budgets for their
clients as per the requirement of them.
Budget preparation: It includes is having many steps that are used to addressed the making
of budget as it involves all expenses and income to create identify better future requirement
too.
Different types of budget.
 Capital Budget: This kind of budget is exercised in order to keep records about all
activities that requires having large base of investments of capital and also making
support the prime furniture.
Advantages Disadvantages
In capital budget it covers all the information
about finance related that are invested in
certain project for high revenue expectation.
As it has collective records of all departments
that are hard to make observe and controlled.
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And also finance performance of company.
 Operating budget: This defined as a approximation about all future within income and
expenses on which basic past sales and profit and prime furniture. This is used by a
company to support the executives of business in order to identify the proper utilisation
of financial resources which are allocated.
Advantages Disadvantages
It provides a clear view of monetary resources
that are used by company.
According to this budget figure and data are
not easily manipulated.
Alternative Method of Budgeting:
 Zero Based Budegting: It starts from a base of Zero figure as it developed through Prime
Furniture with respect of their customer with the objective of reduce operational cost and
after that justifying the recorded expenses in books.
Advantages Disadvantages
It accurate in manner as it requires to
formulated for every year.
This is not counted systematic for short term
within organisational planning.
Traditional budgeting
This nature of budget which is based on the inflow as well as outflows of cash over a
specified time duration and this considered through prime furniture to better track company with
better financial resources.
Advantages Disadvantages
It shows the profit and loss of the company in
clear way.
This restricts the credit transaction ability
where individual would not bale to make their
their further payments.
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Behavioural issues of budgets: This will helps to effective communication as well as
coordination among their worker and measures to utilised by organisation because of they
focused on actual case of budget rather than estimated figure.
Pricing Strategy: To fix the price about better goods and services about a company through use
several kind of pricing strategies. Some of considered as below: Penetration: In the company of Prime Furniture company's mainly focus on minimum
way of pricing which are marketed to their customers.
 Premium: In this prices are high of the product where company use to promote in wide
level where it create strong impact on customer needs and wants.
Ways through which prices are determined: In order to identified the prices analysis
of market situation is required about t0o know competitors strategies such as Laz furniture who
also manufacture middle base furniture is rival of Prime furniture.
Supply Demand consideration: This is based on the market condition that are required
to effective analyse through Prime furniture where they analyse the demand the market to
mapped competitive advantages.
PEST Analysis:
According to this model of external factor it hel0ps to provide information related to
competitive marketplace opportunities and challenges on which company can get attain effective
competitive advantages effectively(Budget Analysis).
 Political: As the changes in the governmental polices or unstable through better political
conditions can impact on prime furniture while formulating strategies.
 Economic: The continuously fluctuations in the inflation as well as deflation rates can
effect Prime Furniture customer purchasing power.
 Social: The timely the taste and preferences makes major part in customer point of view.
As the company is having both factors demographic and geographic factor. The company
product furniture is allows the middle range of products and services to pitch the people
effectively.
 Technology: According to this factor makes high role in every sector that comprises
improve the efficiency to generate business productivity. In UK, the scope of technology
has wide range as well as it creates major development on Prime Furniture to gain more
positive outcomes effectively(Rathore., 2019). Artificial intelligence would enhance high
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range of efficiency increased to attain more productivity factor to attain more positive
outcomes.
SWOT analysis:
Strength Weakness
The good brand image of Prime Furniture in
the marketplace is a strength of it.
They less focused on spending for R&D
activities as it results in inappropriate
information towards the market changes.
Opportunity Threat
In order to attain high growth and success a
company have expansion opportunity in the
marketplace.
Huge market competition is a threat for the
company as all competitors focused on gain
high market shares
Balance score card: This is defined as a performance management tool that are in used
by Prime Furniture 's manager in order to analysed and monitor the employee’s performance and
reduce unfavourable circumstances that are in activities.
Task 4
P5. Comparison of the way in which organisations are adapting management accounting systems
The good management accounting system information should comply with various
number of characteristics including verifiability, objectives and comparability, reliability through
better understanding to make relevance decision making. There are financial issues due to
create various reasons which include of the following:
Sudden expenses: Through financial issues faced by Prime furniture is small scale
business where they would trade through insufficient planning to incurred less cost and time.
Late payment by customers: Through Prime Furniture can also financial issue that data
make issues due to receiving late payment can make the business regulation suffers in negative
manner.
To better resolve the financial issues there are some of method which Prime furniture can
follows effectively.
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Key performance indicators: In order to measure and assess the processes companies often use
KPI'S. It is tracked by organisation in order to analyse the manufacturing process. It will help the
prime furniture company in controlling actions and behaviours of workers which will further
define the process. This criteria is majorly used for purpose of measuring success related to
predetermined objectives and goals.
Benchmarking: It is a quality improvement tool which identifies what companies are
doing and how other companies perform and how well company performs in terms of measuring
and improvement parameter as well(Utomwen and Danjuma., 2015). Benchmark can also be
used for purpose of comparing the processes which is used in Prime furniture and Laz furniture
company as well.
Financial governance: It refers to the way company manages, collects, control and
monitor the financial information. It supports the prime furniture to have an entire view of life
cycle of data and where data appears which results in clear ownership and accountability of
financial issues.
Budgetary targets: It is defined as approximation of finance required within a specific
year by Prime furniture in order to analyse the variances by measuring actual with standards to
deal with challenges of finance.
Comparison
Prime Furniture Laz furniture
The main reason for facing financial issue by
the company is spending more income on
unnecessary expenses
Delay in payment is due to reason of
customers weak financial stability of an
organisation.
The use of accounting system is required to
adopt as it assist in analysing the actual cost
incurred in manufacturing activities. This will
help manager in terms of making decision
regarding investment.
Inventory management system is required to
adopt in order to resolve the financial issues as
it assist in terms of maintaining sufficient
inventory in warehouses.
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Compare the ways in which management accounting can be applied and prevent the financial
problems in organisations
Management accountant basically provides key insights that supports a company's
management team in terms of making many of their decisions. They also support for decision-
making within a company by providing the wealth of statistical and financial information. This is
basically assisted by powerful software of accounting. With respect to prime furniture, they have
also resolved their problems through support of particular software of accounting which
maintains record of every kind of transaction at organisational level.
Give recommendations to the organisation on which methods to apply in order to achieve
sustainable business success
To become sustainable at organisational level, a company needs to develop a particular
kind of capacity within itself to continuously identify the factors that is affected by the holistic
growth in the long term. It also requires to build knowledge and skill set in terms of how to
counter the adverse factors and roll out the changes within itself in a self sufficient manner.
CONCLUSION
By analysing the above study, it is analysed that management accounting supports in
terms of achieving growth of an organisation and success of an organisation is also dependant on
the information available with them. Accounting manager is mainly responsible for making
corrective decisions and plans in terms of adopting reporting and accounting systems. There are
two costing methods which are named as absorption and marginal costing method. Among these
two methods, the best method is used by an organisation in order to achieve goals of a company.
For reduce company's expenses there are some tools which are necessary that includes flexible
and cash budget etc.
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