Management Accounting and Systems: Analysis and Techniques

This document provides an in-depth analysis of management accounting and its essential requirements. It discusses different types of management accounting systems and their benefits. It also explores various techniques used in management accounting for cost and profit calculation. Additionally, it highlights the importance of budgetary control and planning tools in financial management. Suitable for students studying management and accounting courses.

Management
Accounting

INTRODUCTION
Management accounting is a technique which is used for generating internal reports and
records so that information of organisational performance could be shared with internal
stakeholders. It helps to formulate decisions for future so that all the predetermined goals could
be accomplished. There are various benefits of it to all the entities and some of them are it
facilitates future decision making, helps to analyse current position of business etc. In order to
attain success, all the entities are required to assure that they are paying attention towards
formulating management records (Armitage, Webb and Glynn, 2016). It can help to reduce the
possibility of inappropriate decisions and strategies. Present report is based upon Innocent
Drinks which is a client of AJ and Sons an accounting and consulting firms. The trainee
accountant of the enterprise is asked by the client to generate management report. Present report
is focused with analysis of different elements in context of management accounting. These are
analysis of management accounting, some of the reports and systems that are related to it,
different techniques etc. Additionally, different types of planning tools applied in the procedure
of budgetary control along with comparison of companies on the basis of use of management
accounting to respond finance related problems is also discussed in the report.
TASK 1
P1 Definition of management accounting and description of essential requirements of various
types of systems used in it
Management accounting: It is a process which is followed by managers for analysing,
controlling and monitoring the progress of business. It helps to formulate strategic decisions for
future. In Innocent Drinks it is used by the management for making sure that all the decisions
which were taken by them are able to provide adverse or favourable results.
Management accounting is the procedure which is followed by the businesses for the
purpose of evaluating the reports that are generated by the managers for sharing detailed
information of operations with internal stakeholders. With the help of it, strategies are developed
by the managers for meeting predetermined business objectives.
The process which is focused by the management teams of businesses for controlling,
evaluating, determining and monitoring actual performance of business is known as management
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accounting. It is used by the senior executives of companies for the purpose of making sure that
they are dealing with all the organisational issues in systematic manner or not.
Management accounting system: Most of the entities use a specific framework for
assessing business performance and manage all the processes in organised way and it is called
management accounting system. While planning to attain growth it is very important for all
organisations such as Innocent Drinks to make sure that they are using different types of them so
that effective strategies could be formed (Caplan, 2016). There are various types of them which
are used in the entity. Some of them are discussed below:
 Price optimisation system: It is mainly focused with identification of best prices for all
the products that are sold by the enterprise to the customers. It is used in Innocent Drinks
for making sure that it is setting right price for the items that are sold by it to its
customers. The main requirement of this system for the company is that it can help the
managers to determine the price which will be able to facilitate the enterprise to meet the
predetermined goals such as customer satisfaction, higher profits etc.
 Inventory management system: In all the entities it is used to analyse that the goods
that are used for business activities is able to make items that are demanded by the
clients. There are three main types of it which are LIFO, FIFO and AVCO. The
companies where LIFO is used, managers use the recently purchased goods to make the
final product. When FIFO is used by the organisations then they use the earlier received
inventory to produce items (da Silva Nogueira and Jorge, 2017). If AVCO is used by the
enterprises then stock is utilised for carrying out business according to the average cost of
them. From all of them, Innocent Drinks is using FIFO method as it is a smoothies and
juice seller and if it will not use the previously bought goods for business then they may
become expired. One of the major uses of it for the entity is that it can guide to make sure
that sufficient stock is kept by the company to meet the requirements of customers.
 Cost accounting system: It is applied in most of the business entities to record the
information of expenses which are taking place because of the operational activities. It is
mainly used to make sure that the causes of all the expenses are identified. In Innocent
Drinks it is used by the managers for the purpose of keeping details information of all the
activities and costs that are taking place because of them. It is essentially required for the
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organisation because it can guide the managers to keep track record of all the expenses
(Doktoralina and Apollo, 2019).
 Job order costing system: It is mainly focused with recording costs of different types of
operations which are carried out by the company. In Innocent Drinks it is used for the
purpose of analysing the costs in relation of various activities that are carried out on the
basis of specification of clients. It is vital for all the organisations such as Innocent
Drinks to use it because it can help management to take control over those jobs that are
resulting in very high costs.
P2 Description of various types of methods which are used for management accounting reporting
Management accounting reporting: The process which is followed by mangers of
companies to generate the management report is called management accounting reporting. It is
mainly focused with analysis of actual performance of business so that all the long-term goals
could be accomplished. In Innocent Drinks it is used by the managers so that they can stay
updated about the actual position of business as well as the progress (Elliot, Paananen and
Staron, 2020). Currently, the managers of the organisation are formulating four different
management reports to record detailed information of business. Detailed analysis of them is
covered in following discussion:
 Inventory management report: It is generated for keeping information of goods that are
used to manufacture the products that are sold to clients. In Innocent Drinks it is used to
analyse that the entity is having sufficient resources to make smoothies and juices
according to demand of customers. It is very beneficial for the company as it help it helps
the managers to determine that they have to order to stock for meeting requirements of
clients or not.
 Accounting receivable report: All the companies which are making credit transactions
create it so that information of debtor could be maintained. Innocent Drink’s managers
are also using it to track the owed amount of such clients who were not able to make the
payment at the time of purchase and promised to pay it in future. The main benefit of it to
the entity is that it helps to determine the outstanding amount which is required to be
recovered from different clients.
 Performance report: It is one of the common reports which is generated in small, large
and medium sized companies in order to evaluate performance of business as well as the
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individuals who are working with the entity. In Innocent Drinks it is used by the
managers to analyse that the decisions that are made by them for betterment of enterprise
are affecting in positive manner or leaving negative impacts (Elmassri, Harris and Carter,
2016). Apart from this, it is beneficial for the enterprise because it guides the
management to evaluate performance of all the staff members so that they could be
rewarded for their good work and dedication.
 Budget report: This management report is mainly focused with the allocation of funds to
all the business activities which are performed by the organisations. Innocent Drink’s
managers are generating it to assure that all the operations are carried out in proper way
with sufficient funds. It is advantageous for the entity as it helps to ignore the situation of
overspending of financial resources.
M1 Different benefits of various types of management accounting systems along with their
application within the enterprise
In Innocent Drinks the managers are using different types of systems in management
accounting. Benefits of them along with the application are as follows:
 Inventory management system: It is applied in Innocent Drinks because it helps to
monitor that the entity can meet expectations of all the clients with sufficient goods or
not.
 Price optimisation system: It is utilised in Innocent Drinks by management because it is
beneficial to determine the best possible price for smoothies and juices which can meet
expectation of client and help to achieve business goals such as satisfied customers.
 Cost accounting system: Managers of Innocent Drinks are using it because it helps them
to determine cost associated with various operations which are carried out by the
enterprise.
 Job order costing system: The management of Innocent Drinks is using it as it helps to
analyse cost of each and every job which is performed by the entity separately.
D1 Analysing the integration of management accounting reporting and its systems with the
organisational processes
In Innocent Drinks the managers are applying various systems of management accounting
and also using different reports of it so that all the operational activities could be carried out
systematically. One of them is cost accounting system which is applied to assess the costs so that
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decisions for controlling them could be taken. One of the main reports is account receivable
report which is generated to strengthen the credit policies according to credibility of debtors.
Inventory management system and report are used to analyse that the entity is having right
amount of stock to fulfil the needs of customers.
TASK 2
P3 Calculation of cost and profits by using various types of techniques used in management
accounting
Marginal costing: This technique is used for the purpose of analysing the cost of all the
units that are produced by the enterprise during the accounting year (Hodgkinson and Sadler-
Smith, 2018). Only variable costs are used in its calculations.
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Absorption costing: Under this costing technique the managers try to make sure that the
cost which took place which making the products for clients are absorbed from the revenues of
the same items (Janvrin and Watson, 2017).
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Calculations of BEP and margin of safety:
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M2 Application of various management accounting techniques used for formulating of reporting
documents
Different management accounting techniques which could eb used by Innocent Drinks are
as follows:
Standard costing: This technique of management accounting states that all the entities
such as Innocent Drinks should determine the variation between actual and standard expenses.
For this purpose, budgeted and actual costs are required to be analysed.
Historical costing: This type of costing demonstrates that all the entities like Innocent
Drinks should record the figures of liabilities and assets on their actual cost in the balance sheet.
All of them should not be recorded on market price.
D2 Interpretation of financial reports generated for range of business activities
The results that are generated with the help of marginal and absorption costing techniques
are showing that when the entity will use marginal costing the it will result in loss of 7000 for
April and profit of 17000 for month of May. On the other hand, when absorption costing will be
used then it will result in loss of 13000 for April and profit of 15000 or may. It shows that the
organisation should use marginal costing it as its profits are high.
TASK 3
P4 Budgetary control and various types of planning tools that are used in it along with their
advantages and disadvantages
Budget could be defined as a detailed finance related plan that is generated on yearly
basis for meeting all the future objectives and the steps that are required to be taken to meet
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them. On the other hand, the procedure which is used to make sure that the funds that are
allocated to different activities are not overspent is known as budgetary control. In Innocent
Drinks managers are using budgetary control to analyse that the monetary resources that are
assigned to different departments are utilised by them properly. The company is using various
types of planning tools in budgetary control. (Le and Dang, 2020). The detailed analysis of them
along with their advantages and disadvantages is as follows:
Zero based budget: This budget is mainly focused with justification of all the incomes
and expenses for whole accounting year. As its name specifies it starts with a zero base for all
the periods. In Innocent Drinks it is used by the management team to monitor the position of
business during the accounting years separately by recording information of all of them
according to the years.
 Advantages: With the help of it, the managers can allocate resources to different
activities according to their requirements as it justifies all the incomes and expenses. It
also helps to identify the inefficient operations so that they could be stopped and
possibility of loss for future could be ignored.
 Disadvantages: The management skills that are required for generation of it are very
advanced so the entity may have to hire a skilled manager. The process of creating this
budget is very rigid so the possibility of mistake in it is very high (Mahajan and
Deobagkar, 2020).
Activity based budget: Under this type of budget the managers prepare the budget after
considering all the overheads for accounting year. This budget does not consider the records of
past year to formulate the records of current year. In Innocent Drinks it is used by the managers
to analyse yearly progress and improvements in performance of business.
 Advantages: It helps to improve relationship with the staff members because by using it
they can also analyse the actual performance of business and take part in decision
making. Apart from this, activity-based budget eliminates bottlenecks which enhances
accuracy of budget.
 Disadvantages: The cost of creating this budget is very high which may create difficulty
for small entities as they cannot bear very high cost of budgeting. It is beneficial for short
time period it could not be used for long run (Malmi, 2016).
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Flexible budget: This budget is flexible and adjustments according to business
transactions could be made in it. It is used by Innocent Drinks to make sure that it can make
changes in the records at the last day of reporting so that accurate position of business could be
determined.
 Advantages: It could be modified with time and all the adjustments could be made in it
till the last day of accounting year. With the help of it accurate spending for the year
could be determined.
 Disadvantages: It is very confusing method of preparing budget because more and more
modifications create confusion for the managers to make sure that which report is
accurate.
Balance score card: It is a performance measurement tool which is used in businesses
for recording the information of financial as well as staff member’s performance. It is a semi
structured report that helps the businesses to keep track record of execution of all the business
activities. In Innocent Drinks it is used by the management for the purpose of analysing that all
the employees are executing all the activities that are assigned to them for carrying out
operations. Some of the advantages and disadvantages of it are as follows:
 Advantages: With the help of it all the business activities could be aligned with the
strategy and vision of business. Apart from this, it helps to improve the internal and
external communication of the organisation.
 Disadvantages: It does not aid decision making because it is not a decision-making tool.
It is not beneficial in formulation of well-defined strategy. Apart from this, it does not
provide recommendation for future developments.
Variance analysis: It is a technique which is used for the purpose of determining the
difference between standard and actual figures. It can help the managers to analyse that they are
able to estimate future figures systematically or not. In Innocent Drinks it is used for making sure
that the management get aware of the variances in budgeted and actual values of sales and other
activities. Some of the main advantages of disadvantages of it are described below:
 Advantages: Variance analysis is beneficial for the organisation for making detailed,
forward looking and effective decisions which helps in effective execution of all the
operations. Apart from this, it also acts as the control mechanism.
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 Disadvantages: It is based upon the finance related results that are released very late.
The budgeting exercise is loosely performed in it and it is bound to deviate from the
actual numbers.
Investment appraisal: It could be defined as the technique which is used for evaluating
all the investment related options that are available to the organisation for meeting all its future
goals and objectives. If there are various investment related alternatives are available then it
could be used to select one of the best solutions. It is used in Innocent Drinks for the purpose of
analysing that the business is carried properly or not. Some of the main advantages and
disadvantages of it are described below:
 Advantages: It is very simple and easy to calculate technique which can help to select
best suitable investment alternative. It is a very simple measure of risk which helps to
evaluate the longer payback and higher risks.
 Disadvantages: There are various types of techniques of it and for users it may create
confusion for using the best technique for evaluation. Apart from this, time value of
money is used in some of the techniques which may result in difficulties for the users in
evaluating the results.
M3 Analysis of uses of planning tools for forecasting and preparation of budgets
In Innocent Drinks the managers are using various types of planning tools so that budgets
could be prepared and forecasted. These are flexible, activity and zero-based budget. It will be
beneficial to make arrangements of them and prepare budget so that possibility of huge losses in
future could be ignored. Zero based budget is utilised to determine the expenses for the specific
year so that arrangements for the same could be made. Flexible budget helps to make
adjustments in records so that future expenses could be estimated. With the help of it, all the
future expenses are forecasted which results in formulation of budgets for upcoming period so
that possibility of lack of funding could be ignored.
TASK 4
P5 Comparison of organisations on the basis of uses of management accounting systems to
respond finance related issues
When an organisation faces issues due to lack of funding then it is known as financial
challenges. In order to sustain in the market, it is essential for entities to identify the causes of
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them and try to deal with them strategically so that possibility of losses in future could be
ignored (Rikhardsson and Yigitbasioglu, 2018). All the finance related problems faced by
Innocent Drinks are described below:
Sudden expenses: When an expense which is not planned takes place then it is known as
sudden expense. In order to deal with it, the managers have to spend funds that were kept for
other activities and due to this the situation of lack of funding takes place. Some of them, that are
related to Innocent Drinks are repair, staff recruit cost etc.
Delayed payments by the debtors: If an entity is selling goods on credit then it is very
important for it to make sure that all the debtors make payment on the due date. If they get fail in
clearing the outstanding amount then it results in financial issue for the company. This problem
is also affecting Innocent Drinks because of most of the debtors of it are not making payments on
time.
Some of the main issues that are faced by Beleaf Juice and Smoothie Bar are as
follows:
Lack of inventory: Due to this issue the businesses may face issues because it results in
inappropriate execution of business which affects the availability of cash. It is faced by Beleaf
Juice and Smoothie Bar which is resulting in inappropriate funding for business.
Lack of information of the costs: It is also a financial issue which is faced by entities
and results in lack of funding. Due to this problem, Beleaf Juice and Smoothie Bar is facing the
inappropriate funding to meet all the costs.
In order to identify all the above described issues different types of techniques could be
used. All of them are described below:
Benchmarking: It is mainly focused with comparative analysis of company’s policies
with the competitor so that errors in the strategies could be determined. In Innocent Drinks it is
used by the managers to identify the problem of late payments by clients because by using
benchmarking the managers can compare the credit policies with competitor. It will help to
analyse the issues that are resulting in late payments and then credit policy could be strengthen to
ignore this problem (Samuel, 2018). In Baleaf Juice and Smoothie Bar it is used for the purpose
of identifying the problem of lack of inventory by comparing the availability of it with other
entities in the market as it is used for comparative analysis.
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KPI (Key Performance Indicators): When entities want to analyse that the policies that
are formulated by them will result positively or negatively then it could be used for the same
purpose. Two different types of KPIs are used by the entities according to their requirements.
Financial KPI is used to determine financial errors such as unplanned expenses and their causes.
Non-financial KPI is used to identify the issues in business activities that are not performed by
finance department. These are supply chain, logistics, retail management, distribution etc. In
Innocent Drinks the managers are using financial KPI to identify the problem of sudden expense
as it helps to determine the causes of such expenses. In Beleaf Juice and Smoothie bar it is used
to identify the problem of lack of information of cost because KPI is used to evaluating the
finance related problems.
While planning to resolve the identified issues financial governance could be used which
is described below:
Financial governance: It is mainly associated with the rules and regulations that are
required to be followed by all the organisations while generating accounting records. It guides
the accounting professionals to make sure that they are taking all the principles in to
consideration while creating record. With the help of it, the managers of Innocent Drinks try to
resolve the problem of late payments by clients and sudden expenses. It guides the staff member
to make sure that they are keeping proper funds to deal with such issues (Yaakob and Gegov,
2016). In Beleaf Juice and Smoothie Bar it is used for the purpose or resolving the issues of lack
of inventory and information about costs. By using it all the rules and regulations could be
followed properly which will reduce the possibility of financial issues.
Comparison:
Innocent Drinks Beleaf Juice and Smoothie Bar
The managers of organisation are using cost
accounting system to ignore the possibility of
sudden expenses because with the help of it
they can estimate all the costs in advance and
be ready to deal with them.
The managers in the entity are using inventory
management system so that they can deal with
the issue of lack of inventory to meet the
expectation of clients.
The managers within entity are using price
optimisation system which helps them to
ignore the possibility of late payments from
The management is focused with the use of job
order costing so that the problem of lack of
information about costs of different jobs could
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clients because when right prices for the goods
are decided the it results in ignorance of
delayed payments.
be dealt in systematic manner.
M4 Analysing the uses of management accounting to respond financial challenges and leading
the organisation to sustainable success
Management accounting is a technique which helps managers to determine the possibility
of financial challenges and find effective solutions for dealing with them. KPI and benchmarking
are used to identify them so that all of them could be resolved systematically. Financial
governance is used to make sure that company follows appropriate accounting principles so that
all the financial issues could be dealt systematically. If all of them will be used then the
organisation can deal with all the financial issues that are resulting in ineffective execution of
operations. In Innocent Drinks and Belief Smoothie and Juice Bar benchmarking, KPI and
financial governance is used for the purpose of responding to finance related issues.
D3 Evaluation of uses of planning tools to solve the financial problems and lead the organisation
to sustainable success
In Innocent Drinks various types of planning tools are used by the managers in order to
plan, prepare and forecast budgets. Some of them are flexible, zero and activity-based budgeting.
All of them can also be utilised to deal with finance related issues like unplanned expenditures
and delayed payments from clients. All the budgets are used to forecast the costs which could be
faced by the company in upcoming period and funds for them could be kept in advance so that
the situation of adverse impact of them on the operations could be avoided. There are several
other planning tools that could also be used by the organisation which are variance analysis,
investment appraisal and balance score card. All of them can help to deal with financial issues by
guiding the managers for formulation of effective strategies for business.
CONCLUSION
This report concludes that all the companies are required to make sure that they are
following the concept of management accounting as it is very important to take control over all
the business activities. Apart from this, different types of systems and reports of it are also
required to be focused by entities so that success could be acquired. Different types of techniques
such as marginal, absorption, standard and historical costing could be used to generate financial
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report. When companies face finance related issues like sudden expenses and delayed payments
from clients then all the planning tools and techniques could be used to deal with them. In order
to deal with them some of the planning tools such as flexible, zero and activity-based budgets
and techniques like benchmarking, financial governance etc. could be applied. Some of the other
planning tools are variance analysis, investment appraisal and balance score card. All of them
can help to formulate budgets and deal with financial issues.
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REFERENCES
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