Management Accounting: Types, Systems, Reporting, and Planning Tools

This report discusses the essential requirements of different types of management accounting, including principles, systems, and methods for reporting. It also covers planning tools such as budgetary control and zero-based budgeting, and their benefits and drawbacks. The report includes a case study of Sollatek (UK) Limited and how they use management accounting to respond to financial problems. Course code and college/university are not mentioned.

Management Accounting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
PART 1............................................................................................................................................3
The essential requirement of different types of management Accounting.................................3
Different types of management accounting systems...................................................................4
Different methods used for management accounting reporting..................................................6
Preparing income statement using absorption and marginal costing system .............................7
PART 2...........................................................................................................................................9
Benefits and drawbacks of various types of planning tools........................................................9
Use of management accounting system in responding to financial problem............................12
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................16

INTRODUCTION
Management accounting is the process in which managers use accounting information in
decision-making. It is a practice of measuring, analysing, interpreting financial information to
achieve organizational goals. In response, a range of management accounting principles has
emerged to cater essential requirements in report. The present report is based on Sollatek (UK)
Limited, founded in 1983. the company deals and manufacturing equipment such as electronic
equipment and industrial electrical. The current report will outline the understanding of
management accounting and explain the various methods used in cost accounting reporting.
Along with that report will describe about planning tools and their advantages and disadvantages.
At last report will also justify the comparisons in which the company uses management
accounting system to deal with financial problems of the organization.
PART 1
The essential requirement of different types of management Accounting
Management accounting method is being defined as undertaking the financial
information. The main objective of management accounting is to identify past trends and predict
future requirements to achieve financial goals.
Principles of management:-It includes budgetary control and costing system in company. This
is designed in such a way showing relevant data. The accounting information can be adopted to
meet the needs of management. Let us discuss few important principles of management
accounting. Integration- This principle assists firm in integrating all the required information which
company need to use at time of decision-making and attain overall objective of business. Designing and compiling- this principle of management accounting assist Sollatek in
designing the various reports so that all information relating to the business can be
analysed properly (Maheshwari, Maheshwari and Maheshwari, 2021). This in turn will
assist company in taking effective decision.
Role of management accounting and its system - The main objective of management
accounting is to maximize profit and minimize losses. The system assists company in decision-
making process and achieve organizational success. Sollatek must work on risk management,

planning, budgeting, investments, strategic planning (Massicotte and Henri, 2021). This system
plays a vital role in company to influence members in organizations to achieve firm's target.
Different types of management accounting systems
Cost accounting system: It is designed to record production activities using inventory
system and is also known as product costing system. It is helpful to estimate the cost of their
products for inventory valuation and profitability analysis.
When a firm uses a combination of both above mentioned system is known as hybrid cost
system.
Advantages Disadvantages
1. Cost accounting system assist in proper
planning as it involves accounting
relating to machine, labour, material,
overhead costs which assist company in
making proper strategies.
2. It is helpful in decision-making process
related to cost analysis, financial
analysis, control over materials.
3. Reducing price and profit maximization
is the main objective of cost accounting
system.
1. Cost accounting system is expensive in
nature. It consumes a good amount of
finance.
2. Unnecessary and time-consuming
process
3. cost accounting is based on estimates
and therefore cannot be relied upon.
Thus, it is not reliable process.
Job costing system:
Business unit must follow job costing system as it gives detailed information about cost
of material, production, labour (Hadid and Al-Sayed, 2021). Also cost associated with particular
production or service job are taken into consideration in the books of cost accounting.
The cost associated with a specific production or service job are taken into books of cost
accounting system.
Three types of job costing system:

1)Direct materials
2)Direct labour
3)Overhead cost
Advantages Disadvantages
1. It is Helpful to calculate the profit
margin. From this company can decide
which operations are more profitable.
Thus, it is said probability is
maintained.
2. It is helpful to calculate the indirect
costs; it allows you to determine
productivity.
3. Job costing is flexible and accurate in
nature.
1. Requires a lot of documentation and
paperwork
2. Job costing can take some time to come
up with the figures you need. It requires
large numbers of labour which is used
in production process so, this leads to
more labour costs.
3. Job costing system doesn't provide an
accurate way of overhead cost control
this occurs lack of controlling
overheads.
Inventory management system
Tracking of goods throughout the entire supply chain in the company, from buying to
production to end sales (Gunarathne and Lee, 2021). Managers in Sollatek ltd. Will definitely
need a system to track and control the inventory in the business. Hence, by adopting inventory
management system firm can approach decision-making in business.
Advantages Disadvantages
Advantages
1. By managing order and inventory
company can reduce risk of overselling.
2. By keeping records of the product in
Disadvantages
1. This system is expensive and time-
consuming process.
2. Increase in infrastructure can lead to

details company saves times and
money.
3. By Developing efficiency and software
can help to increase productivity of
business. Thus, it helps to maximize
profit.
impersonal touch.
3. Holding inventory can lead to greater
risk of loss to changes in price. Thus,
this leads to fluctuations in production
price of goods.
Price optimization system: The system approaches the use of mathematical analysis to
decide how customers will respond to various prices structure for its products and services
through different channels. Sollatek ltd. must adopt price optimization system to deal with
profitability levels after knowing how easily customers are to changes in product prices (5
advantages of price optimization that you need to know, 2021).
This system plays a vital role in management accounting as it is helpful to determine the
objectives of company such as maximizing operating profit.
Advantages Disadvantages
1. It helps to take quick decisions based
on hard data.
2. Pricing software helps company to
react quickly to changes in the market.
3. Data allows companies to offer
products they know their customers
will like.
1. In this system product price are
optimized and well arrange to avoid
problems. Thus, guesswork leads to
lack of detailed information.
2. As it requires lot of time, company
make use of specialist pricing software
to avoid errors.
3. Launching and promoting low price
goods create a mind-set in which
consumers wait to buy items until they
are marked down.

Different methods used for management accounting reporting Cost report- This report adopts detailed information about utilization data, financial
statement data, cost and charges. Cost reports are prepared by Sollatek to keep itself
informed and to control costs. Profit margins and unnecessary expenditure are estimated
with the help of this report. Budget report- A company's budget report shows all the profit and loss to measure the
actual position of company. Therefore, company should maintain budget reports to keep
itself aware about financial stability in the market (Rikhardsson and Yigitbasioglu, 2018).
If the companies budget report is well maintained, then it will be easy to achieve mission.
Budget reports are used to provide incentives to employees that encourage them to
achieve goals. Inventory reports- In Sollatek ltd. Manufacturing process can become more efficient by
using this method as it includes per unit overhead cost, labour cost, wastages. Hence, the
report shows comparison between different assembly lines and find out the opportunities
for improvement to attain the required goals. Well maintained inventory reports can show
over-ordering inventory to keep budget in control and reduce uncertainty.
 Accounts receivable aging report- This report gives detailed information about bad debt
expense. Sollatek ltd. follows receivable report to attain detailed analysis of problems
associated with company's collection process. By adopting this method firm can layout
credit and selling practices. The company is suggested to identify irregularities in the
report and improve efficiencies.
 Performance report — A company performance report shows overall departmental
performance reports to make strategic decisions. It is also suggested keeping an accurate
measure of its financial strategy . Along with them management must determine the
evaluation of competitor analysis. To attain the most effective decisions the firm must
have authentic managerial accounting reports.
Preparing income statement using absorption and marginal costing system
Marginal costing
It may be defined as a system which is helpful in short term (less than one year) decisions
to calculate budgeting, cost control. It is the method to know the figure of contribution by
deducting sales and variable cost. The technique of presenting cost data in which variable and

sales are shown separately. The firm must adopt make or buy decision to attain financial
activities.
Features of marginal costing
1. In marginal costing method, fixed costs are treated as period cost.
2. It is helpful to determine the decision-making process to achieve financial goals.
Absorption costing
It refers to a technique for accumulating all the manufacturing costs which includes
Direct labour, direct material, overheads cost to maintain financial reporting (Kostyukova and
et.al., 2018).
Features of absorption costing.
1. It is more accurate costing method than other traditional methods.
2. This technique shows a higher net profit estimation because the method focus on less
fluctuations in net income
Calculation of absorption and marginal costs
Marginal costing Method
Particulars Amount
Sales(800*38) 30400
Variable costs
Direct Materials 14500
Direct Labour 8000
Variable production overheads 2000
Marginal cost 24500
Closing inventory(200*24.5) 4900
Fixed production overheads 5000
Cost of sales 24600

Gross profit 5800
Administrative and selling
overheads 3250
Net profit 2550
Absorption Costing
Particulars Amount
Sales(800*38) 30400
Variable costs
Direct Materials 14500
Direct Labour 8000
Total production overheads 7000
Absorption costs 29500
Closing inventory(200*29.5) 5900
Cost of sales 23600
Gross profit 6800
Administrative and selling
overheads 3250
Net profit 3550
The difference in the profits of marginal and absorption costing is due to the treatment of
fixed overheads. In the above example the profit through marginal costing is £2550 whereas in
Absorption costing, it is £3550. In marginal costing, fixed costs are treated as period costs and
variable costs are treated as product costs but in absorption costing, the fixed costs are allocated
to the product costs in the manner of overheads. There is a difference of £5000 between the

marginal and absorption costs of the company because in marginal costing, only the variable cost
is added to the product cost while both variable and fixed costs are added to the product cost.
The better costing technique is absorption costing as it is showing higher profits than marginal
costing.
PART 2
Benefits and drawbacks of various types of planning tools
Budgetary control - The process in which income and expenditure of company are taken
into consideration (Amara and Benelifa, 2017). To achieve maximum profitability in Sollatek
ltd. the manager should give proper detailing of budget preparations, distributing responsibilities.
The company goals are set up under the system so that they can be directly compared with the
actual performance.
Types of planning tools-
Zero base budgeting (ZBB):
It is an approach of budgeting in which all expenses are taken into consideration for each
and every new period. This budget assist Sollatek ltd. to maintain needs and costs within an
organization ''zero base'' would be helpful. Zero base budgeting is used by organization to handle
lower costs. This helps to allocate all income to specific expenditure and savings.
Advantages Disadvantages
1. ZBB helps organization to evaluate the
expenses and to find the fair result in
such a way that company can achieve
its target .
2. It is helpful in removal of unnecessary
expenses. Therefore, accuracy is
maintained in zero base budgeting.
3. Achieve Strategic goals using lower
1. ZBB is time-consuming process
because a new budget is made each
period
2. Short term perspective in the
organization by distributing more
resources to operations with higher
revenues (Zero Based Budgeting,
2021).

costs theory.
4. Helps in decision-making process
3. Sectors like research and development,
or any sectors having long term
horizon, may get overlooked.
Cash budget
It is an estimation of the cash inflows and outflows over a specific period of time. Cash
budget assist Sollatek ltd. to maintain cash needs and helps to determine an effective allocation
of money. This could be for a weekly, monthly, annually, or quarterly budget (Weetman, 2019).
This budget gives detailed structure of amount whether to continue work or not.
Advantages Disadvantages
1. Calculation of credit amount
2. Find out the amount of expected cash
received from clients.
3. Focusing on inflows and outflows of
cash.
4. Helpful in financial planning.
5. Helpful in achievement of target.
6. Helpful in management control of cash.
7. Knowing the position of organization.
8. Allocation of resources.
9. Better budget
1. Limitations of overall productivity.
2. Limitations on spending money.
3. Cash can be easily misplaced.
4. Limitations on ability to build a credit
profile.
5. Terminate rewards.
6. Relies on termination of future needs.
Activity based budgeting (ABB)
In this method activities that incur costs are recorded, analysed and researched for
business development (Johnstone, 2020). This budget helps manager in identifying total units
and estimating the cost per unit. Sollatek ltd. should follow three steps: identification of cost
drivers, estimating cost, total units projecting.
Advantages Disadvantages

1. It allows operational needs to be
balanced and helpful in decision-
making process.
2. It Shows resources and activities are
related, along with that it shows
performance evaluation to achieve
goals. Hence, allocation of resources is
maintained.
3. It has more approach in a dynamic
atmosphere and takes up a forward-
looking view rather than looking at
previous activities.
1. It is lengthy process that requires lots of
time.
2. It is more expensive than the traditional
way of budgeting.
3. Mangers with deep knowledge can
prepare this budget as it requires more
technical understanding. Without skills
activity based budgeting cannot be
made.
Use of management accounting system in responding to financial problem
Financial problems- when the finances are holding you back from reaching your targets.
To avoid financial problems Sollatek ltd. Should use management accounting system and find
out the solutions.
Benchmarking- The process in which company can measure about how well they are
performing in comparison to others (Latan and et.al., 2018). Sollatek uses benchmarking as it
also measures key business practices and comparing business ideas around the world.
Advantages Disadvantages
1. Helpful in identify areas for
improvement.
2. Authorize a mind-set of continuous
improvement.
3. Improves efficiency to gain an
independent outlook about how well
1. New technology can create leap
performance. Example-use of electronic
data interchange.
2. Major drawback of company is unable
to gather overall information for

one perform compared to others.
4. Allows new goals to set and enhances
work quality to increase client’s
satisfaction.
benchmarking.
3. As it requires a team of expertise,
increase in expenses would become a
major drawback of benchmarking.
Financial governance: The concept in which one can relate how business manages its
financial information. This concept helps Sollatek ltd. to monitor cash flow, data analysis, study
detailed information of operations and disclosures.
Advantages Disadvantages
1. It shows the entire life cycle of data and
where that data appears.
2. Helpful to identify risks faster.
3. Integrating the financial activities into
other business operations to achieve
targets.
4. Budgets and plan study are more
accurate in financial governance. In this
way efficiency and profitability is
maintained.
1. Poor financial governance leads to
material errors, fraud, poor decision-
making.
2. Lack of financial governance lead to
regulatory penalties and reduced
confidence of employees.
3. Lack of proper data tracking and data
security leads to fraud in the company.
Variance analysis
The detailed information about actual performance which shows the difference of
planned behaviours mentioning outcome of an event is being influence. Variance analysis assist
company to assess the price and quantity of materials, labour and overheads (Gunarathne, Lee
and Hitigala Kaluarachchilage, 2021). The main objective of variance analysis is to compare
standards with actual so that performance of organization will be judged.
Advantages Disadvantages

1. Variance analysis is a good method for
evaluation of budget process to solve
financial problems.
2. Identify the managerial issues,
expenses issues, revenue issues,
criminal issues.
1. The process of establishing standard
costs can be lengthy.
2. Some organization may also associate
bonuses, which leads to manipulate
information.
Key performance indicators
KPIs provide targets for teams in an organization to make better decisions. KPIs helps
organization in measuring performance over time for specific purpose and guide every area of
company at strategic level.
Advantages Disadvantages
1. KPIs help quickly understand time is
money and it can further support
efficient management
2. KPIs can help minimize bias and focus
on the growth of decision-making
process (The Pros and Cons of KPIs,
2021).
3. KPIs can maintain the efficiency in
communication, boost teamwork to
achieve certain tasks.
1. Not always offer actionable information
immediately
2. Negative promises can create a trickle-
down effect for other teams.
3. If employees don’t understand what it
being asked of them, leads to
communication breakdowns.
Comparison between Sollatek ltd. and Alfatronix ltd.
Sollatek ltd. Alfatronix ltd.
This company follows key performance On the other hand, this company adopts

indicators to measure performance over a time
for a specific goal. Thus, in this way company
help people across the organization to make
better financial and strategic decisions.
variance analysis method to find out the actual
performance which shows the difference of
planned behaviours. Thus, in this way
Alfatronix ltd. Improve the efficiency and
control financial problems to achieve targets.
CONCLUSION
The above report concluded that management accounting is process of preparing reports
in financial accounts to achieve business operational goals. Along with that management account
determine the performance variances. The present case discussed essential requirements of
management accounting like cost accounting, job costing and others. In addition to this different
method of management accounting reporting was discussed like cost report, budget report,
inventory report. Further the report outlined budgetary control and its different types of planning
tools like cash budget, zero base budgeting and activity base budget. In the end it was analysed
that management accounting system can be used to solve financial problem like benchmarking,
variance analysis, key performance indicators and others. Along with that a brief note on
comparative analysis between two companies using management accounting system.

REFERENCES
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Rikhardsson, P. and Yigitbasioglu, O., 2018. Business intelligence & analytics in management
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