Importance of Management Accounting Techniques

This report discusses the various management accounting techniques, such as price optimization, cost accounting, inventory management, and job costing, and their importance in business environments. It also touches on different methods of management accounting reports, like segmental reports, performance reports, and job cost reports. Additionally, it examines how these techniques can affect a company's profitability by comparing marginal and absorption costing. The report concludes with an overview of the advantages and disadvantages of various planning tools used for controlling budgets and discusses how different organizations adopt specific management accounting techniques to solve their financial problems.

Management Accounting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
P-1 Management accounting (MA) and its different types.........................................................1
P-2 Various methods of MA reporting.......................................................................................3
P-3 Calculation of marginal costs and absorption costs..............................................................5
P-4 Different budgeting tools with their pros and cons..............................................................7
P-5 Adoption of accounting system in organisation.................................................................10
M-1 Benefits of MA within an organisation.............................................................................12
M-2 MA techniques and its benefits.........................................................................................12
M-3 Different planning tools and their applications.................................................................13
M-4 How financial problems and MA leads to success............................................................13
CONCLUSION:.............................................................................................................................14
REFERENCES:.............................................................................................................................15

INTRODUCTION
Management accounting (MA) plays a very crucial role in every big, medium and small
organization. A concept of knowledge in which financial plans are schedules, applied at the
workplace, analysed and evaluated is known as management accounting (MA). It controls,
manages and communicate goals and objectives to the overall organization. Businesses consider
this particular aspect within working environment for making those kinds of decisions which are
related to internal criteria. It helps in maintaining and evaluating the financial performance by
preparing plans and budgets for specific time period. The present assignment shows various
system and methods which are used to take several decisions and complete process of MA
report. This report will show the requirements in preparing different types of MA systems. In
additional to this, profit and loss accounts formulated in the project by using two MA techniques
i.e. marginal as well as absorption costing. Also the pros and cons of different planning tools for
preparing budgetary control. At the end of current study it shows the effect of organization in
adopting the MA system to survive and respond to their financial problems.
For undertaking this report the organisation selected is Harrods Limited Company. The
cited firm is small and medium enterprise and belongs to retail sector. Thus, this report will help
in developing a relevant management accounting system for the cited establishment.
P-1 Management accounting (MA) and its different types
Business Report
From – Management Accounting officer
To- General manager
Harrods Limited Company
Subject- Management accounting system
Introduction- This report gives a brief description of cost accounting should be used in
Harrods Limited as it will help in control the flow of goods from manufacture to warehouse. As
a management accounting officer of Harrods Limited Company it is required that the company

uses cost accounting MA system.
Management accounting system
The key difference between managerial and finance accounting is that managerial
accounting helps managers to take decisions within the organization while financial accounting
helps in providing information to outside parties. MA is the process of preparing accounting
reports that provide timely and accurate financial information required by managers to take
daily decisions. These reports identify, measure, analyse, intercept and communicate the
organization goals. MA can be done by various techniques like margin analysis, constraint
analysis, capital budgeting, trend analysis, product costing and lean financial modelling.
Different types of MA:
 Price optimisation:- This system helps to determine the prices of different products. It
is an analysis in which the company determines how customers will respond to the
different prices of their products. By using this the company can meet its objectives of
maximising profits (Williams,, 2014).This strategy helps the company to know how
much business it can obtain by changing the price of its products. It is an important
component of overall price management which is crucial in determining profitability. It
can be used to estimate the elasticity of demand.
 Cost accounting:- It is a technique of classifying and recording the cost incurred for
producing the product. It includes the ascertainment of cost of every process, service or
unit. It deals with the selling and distribution of products along with cost of production.
It also helps in controlling the cost by managing the overheads and wages that has been
incurred on the products. These cost relates to sales and profitability of the business.
 Job costing: It involves the accumulation of costs of material, labour and overhead for a
specific product or batch. It is generally used in batch processing where the company is
engaged in production of different kind of products. The company gets the costs of a
particular product and its overall sales and profit (Renz, 2016).The company is able to

identify its low profit area and then take actions regarding improvements in that area.
 Inventory management: It is a process of ordering and storing or raw materials,
components or finished goods of a company. In retail industry the inputs and outputs are
the core components in it. A large amount of inventory can be liable to a company and
there is always risk of theft or damage Shortage of inventory can extremely affect the
production of business (Quattrone, 2016). So it is important that organisation must
maintain accurate and proper record of its inventory.
Conclusion: At the end, the cost accounting will be required to classifying and summarizing
various alternative course of action, so the production of goods will record income and revenue
from time to time, so it will impact on production, selling and distribution, and the inventory
management supervise the flow of goods and facilitate to point of sale. The organisation has set
the data which is used for the operating time so the business run smoothly. Price optimisation
will help Harrods Limited to determine the price of products and maximize profit.
P-2 Various methods of MA reporting.
From – Management Accounting officer
To- General manager
Harrods Limited Company
Subject- Management accounting reports
Introduction- In this there is a brief description of different MA reports that is used by
organisations is shown. These reports helps small business managers and owners to monitor
companies financial performance and can be prepared weekly, monthly or quarterly. There are
various types of reports.:
Importance of MA reports:
Provides information- main purpose of preparing report is that it provides information to
various levels of management (Maas, and et.al, 2016). It provides information like cash
inflow and outflow, fund inflow and outflow,etc. to the managers, chairman, supervisor,etc.
Selection- In the report only relevant information is included. It brings many alternatives out of

which management has to choose best one.
Controlling- these are prepared to measure the actual performance of employees. If there
occurs any variances then corrective actions are taken by the management to control that. In this
way it helps in controlling.
Achieving overall objectives- It gives the management a clear idea and instructions on how to
increase profits which will help them in achieving their overall objectives.
 Segmental report: These reports discloses the financial statements of various operating
segments of the company. It helps the creditors and investors giving the information
regarding the financial results and position of most important operating units of the
company. It is mostly been used by public held entities rather than privately held ones.
An operating segment is engaged in activities where it can incur expenses and earn
revenue. These reports are generally used where there are similar products, services,
customers or distribution methods (Fullerton, and et.al, 2014) It uses various
information I.e material expense items, interest expense, revenues, depreciation, income
tax expense, etc.
 Performance report: - It shows the outcome of an activity or work of an individual
within a specific time frame. It compares the actual outcomes with standard as well as
variance between these two figures. This report is important because immediate action
can be taken if there is an unfavourable variance.
 Inventory management report: These reports are generally used in companies which
produces different types of products. A comparison is made by management between
different production line within the company by comparing working hours, labour cost,
per unit cost, overhead cost, etc. Low performing production units are identified and
improved by providing more funds. It is done to make the production process more
efficient (Fullerton, and et.al, 2013).
 Accounts receivables ageing report: It helps the managers in managing cash flow and
identifying from how long a customer is the creditor of business. It allows the business

to extend their credit to customers. It helps in finding out the problem in collection
process of business. It includes the invoices that are 30,60 days or more. The business
should make strong credit policies if any customer is unable to pay their balances. It
also helps the collection department to view their old debts and restricting customers by
not giving them further debt.
Job cost reports- It shows expenses for a specific unit. They are matched with the revenue to
evaluate each units profitability. It helps in identifying the areas where there are growth
opportunities instead of wasting time and money low profit margin areas. It is also used in
analysing the expenses during the progress of unit so that managers can improve the areas
where cost is being incurred(Ax, and Greve, , 2017)
Conclusion:
Harrods Limited Company should use the technique of inventory management report as it will
help in identifying the remaining stock. As it operates in retail industry so there are various
products. It should maintain record of each item so that if there is excess stock the company can
use it in production of other products.
P-3 Calculation of marginal costs and absorption costs.
Statement of profit and loss on the basis of marginal costing:

From the above calculation it shows that net profit of Harrods Limited is 4300 for accounting
year. In calculating marginal costs only the variable costs is considered. Including the production
cost affects the net profit.
Statement of profit and loss on the basis of absorption costing:

From the above calculation it shows that net profit of Harrods Limited is 6600 for accounting
year. In calculating absorption cost both fixed and variable costs is considered. But it does not
include production cost. So this affects the net profit of the firm.
Differences:
Basis Marginal cost Absorption cost
Meaning A decision making technique
for getting the total cost of
production
A method in which total cost
of production is ascertained by
fixed and variable cost
Classification Fixed and variable Production, selling and
distribution
Cost recognition Variable cost is considered as
product cost and fixed cost is
considered as period cost
Both fixed and variable cost is
considered as product cost

Highlights Contribution per unit Profit per unit
Cost per unit Opening and closing stock
does not influence the cost per
unit
Opening and closing stock
influences the cost per unit.
Profitability It does not get affected It gets affected.
Cost data Presented to total contribution
of each product
Presented in conventional way.
Decision making It is used in decision making
process
It is used for external reporting
Inventory valuation It is not used for inventory
valuation
It can be used for inventory
valuation
Fixed production overhead It does not consider fixed
production overhead
Fixed production overhead s
considered.
P-4 Different budgeting tools with their pros and cons
Zero based budgeting- it is a method in which all the expenses are made to zero for each new
period. Managers have to justify that a project is essential and of high priority. The benefit of this
budgeting helps in maintaining the balance between all departments (Otley, and Emmanuel,,
2013)
Advantages:
 It is useful for non profit or service organisations as cost can be saved in inefficient
operations.
 It do not carry any inefficiency as the same is carried to next year.
 It promotes operational efficiency as it is not based on incremental approach.

 It helps in active participation of all executives.
Disadvantage-
 A very time consuming process as a lot of paper work is involved in this.
 It restricts the managers in developing new ideas and changes.
 It is tough to implement it because of lack of acceptance by employees in some
departments like research and development.
Incremental budgeting- A budget which is prepared by using previous year budget. In this
increment is made in for every resources required. It is not recommended as it fails in accounting
changing circumstances (Quinn, M., 2014) It is stable as changes made are gradual. It helps in
operating department on the basis of funds allocated. It is assumed that activities will continue to
work in same way as it don't.
Advantages-
 It is very simple to understand as it provides flexibility in preparing.
 It allows gradual changes in the organisation.
 By avoiding conflicts between various departments as it keeps everyone on same page.
Disadvantages-
 It is made by assuming that expenses will be same as previous year but in business
frequent changes always occur.
 It do not provide any extra fund for employees as a incentive. This demoralizes the
employees motivation.
 It encourages higher spendings so that the budget is maintained next year also.
Fixed budgeting- It is a budget which does not change irrespective of any change in sales. It is
based on single level of activity (Renz,, 2016) It is assumed that company will work only on
specified level.
Advantages-

 These budgets need not to be updated continuously throughout the year.
 It gives a strong insight to company costs and profits by performing the variance analysis.
This allows company to see where they are underestimating or overestimating its revenue
and expenses.
 It helps in controlling costs by making smart decisions.
Disadvantage-
 Its lack of flexibility restricts the company to allocate additional resources if there is any
change in departments performance ( Williams, 2014)
 It is based on previous data so new business may find it difficult in implementing them.
 Companies having fluctuations in sales can not implement this budget.
You need a budget- It is spreadsheet layout that is very easy to understand. It can create a
monthly budget in few minutes. Rather than creating budget on future income it creates by using
previous year income. It helps in creating reports and graphs that shows that where all the money
is going. Its advantage is that it helps in easy creating of budgets of every month. It also shows a
clear description of distribution of money. A budget can be made within minutes. Its
disadvantage is that it does not download transactions from financial institutions rather the user
have to download it from banks and then upload it into this software.
Personal capital- It helps in tracking both budget and investment accounts. It helps in
downloading the transactions manually. The cash flow is tracked by the expenses made in each
category. It tracks both the investment I.e taxable and retirement and also asset allocation,
returns, dividends,etc. (Quinn,, 2014)
Quicken- it is designed to handle all the finances including investment, bill pay and reporting. It
will automatically download transactions by connecting to financial institution.
Mint- It is just like quicken as it provides a wealth of information on spending, budgets, and
trends. Once you have entered basic information such as income, assets, liabilities, and net worth
it automatically tracks money.

P-5 Adoption of accounting system in organisation.
The MA officer must consider all the factors that is required while making a budget. In
constantly changing business environment it is important for Harrods Limited must survive in
the market.. It is important to have flexibility in budget so that the manager is able to take better
decisions that helps in achieving the objectives and goals of business (Quattrone, 2016) The
budget must be made by focusing on the requirements of all the departments of Harrods Limited.
Time. Cost, ,labour, etc and many other factors must be considered.
Key performance indicators- there are some key performance indicators in accounting that
determines the organisation financial performance. These indicators are net profit, accounts
payable, accounts receivable and some other internal factors which is used for evaluating the
performance. All these factors are been compared with previous year. If net profit of current year
is low as compared to previous year then corrective actions are taken to find out the problems.
This is done to ensure that in future the problem do not occurs again. The accounts payable
shows the amount of money to be paid by company to its creditors. There is a comparison
between creditors of previous and current year. If creditors are increased it shows that the
company is not able to pay their amount. This lead to poor financial performance and
accordingly actions are taken by the managers to solve this. For this changes must be made in
credit policies. Similarly a comparison is made between the debtors (persons from which the
company will receive money) of previous and current year. If there is increase in debtors it
shows that the company is not able to receive money from its debtors. This also lead to poor
financial performance. Strong debtors policy must be made in order to recover money from
debtors (Maas, and et.al, 2016). This will overall lead to better financial performance in future
and business will be able to achieve its goals and objectives.
Financial governance- It is a part of corporate governance which states that the financial
policies must be strong within an organisation. It focus on areas where the responsibility and
accountability lie for finances, the role and strategic resource plan and annual budget are made. It
improves the performance and efficiency of employees as well as managers. The managers must
have skills and knowledge in determining the financial statements of the organisation. It also

helps in allocating resources to employees. After that the comparison is made between the
resources allocated and employees performance(Ax and Greve,2017). It also helps in measuring
day to day transactions .
Budgetary target- Budgets are set every year and accordingly the performance is evaluated. A
budget shows that what are the targets that have to be achieved. It is always made by comparing
the previous years targets. It shows the employees what task they have to do. Budgets are
necessary for long term success of business. They set specific targets for each employees to
perform. This provides direction to employees for their work. If these targets are not set it can
lead to disputes among the employees. At last these targets are matched with employees
performance to know whether they have achieved that target or not. If not then corrective actions
are taken by managers to improve their performance. These budgets also provides right direction
to employees and mangers to achieve organisational objectives.
Balanced Scorecard- It provides an indication that how a firm has performed in the past. It is a
traditional financial reporting systems which offer a little information on how a firm will be
performing in future. There are basically four indicators: customer, business, learning and
growth and finance indicators (Otley, and Emmanuel, 2013.)Customer indicator measures
customer satisfaction, customer retention and market share. Business indicator measures costs,
quality of product and business process such as production, order fulfilment,etc. Learning and
growth indicator measures employee satisfaction, employee retention,etc. And the last one
financial indicator measures operating income, return on capital employee, etc. This factor is
crucial in because it shows the differences between previous and current year financial position.
Managers take remedial actions for improving this indicator. It also helps in giving a little idea of
what will be the position of firm in future.
M-1 Benefits of MA within an organisation
As MA officer it is required that Harrods Limited must use the accounting system of
budgets as it is a small firm and operates in retail sector. It will be very useful for them to reduce
their cost and improve cash flow (Fullerton, and et.al, 2014. ). There are few departments and
employees working in Harrods Limited so the focus should be on areas where there are

opportunities for them to grow. They will be able to know where they have to invest and reduce
cost. This will lead to rise in overall performance of Harrods Limited. To gain long term benefits
and to survive in the market it is important that the firm uses MA. This will help them in
competing in the market.
M-2 MA techniques and its benefits.
 Financial planning- It is a process in which planning is done to achieve primary
objectives and goals. It includes both long term and short term financial objectives
(Quattrone, P., 2016).
 Revaluation accounting- This technique helps in maintenance of capital of enterprise. It
shows the impact of changes in prices on preparing the financial statements. It contains
information about the capital of company like its debtors, creditors, fixed assets, current
assets, etc.
 Fund flow statement- It helps in analysing the changes in financial position of business
between two dates by comparing the inflow and outflow of funds. It helps a lot in
financial analysis and control.
 Cash flow- It gives the detailed information of inflow and outflow of funds. It is very
useful for analysing liquidity of business. It summarises the cash inflow and outflow of
business during a particular period, a month or a year
 Decision making- It gives management an option to select the best alternative from
different alternatives through techniques of capital budgeting, marginal costing, etc.
 Historical costing- It provides data of cost relating to each job, process and department
so that comparison can be made with standard cost. It guides the management in cost
controlling and future planning (Renz,., 2016).
 Analysing final accounts- It is used so that forecast can be done by using the data of
financial statements. It uses the techniques of trend analysis, cash funds, ratio analysis
and cash flow statements.. It helps in giving information for the investors and creditors.

 Communicating- It means to communicate information to managers at the right time and
in right form so that effective planning can be done.
M-3 Different planning tools and their applications.
The Harrods Limited must use the bottom up tools for budgeting the project as it is a small
organisation so it becomes easy to use these techniques in achieving their objectives. In retail
sector employees are closely related to sources of revenue so they have the knowledge and
expertise in their work. It helps in motivating the employees and they get more involved in
decision making. It improves the communication and coordination between their employees and
managers (Williams, 2014) The manager will know about the skills and abilities of employee and
according to it the task will be given to the. This increases the efficiency of working of
employees and leads to achievement of goals. It also help in retaining of employees so Harrods
Limited will not have to waste time and cost in hiring new ones.
M-4 How financial problems and MA leads to success.
In Harrods Limited MA leads to proper controlling and managing their business by improving its
overall performance. If proper budgets are given to each unit then the employees will give their
best performance. Also that unit will work effectively and efficiently. This will lead to
controlling the cost of the product and increases profitability. MA finds loop holes in the
performance and gives direction to improve that. It also helps in maintaining balance between
goals and financial performance of Harrods Limited .To measure their performance and to tackle
business problems it is important that business use effective technique of MA. By doing this
Harrods Limited will be able to make growth and development in competitive market.
CONCLUSION:
This report shows different management accounting system like price optimization, cost
accounting, inventory management and job costing and their importance in business

environment. Further the different method of MA reports like segmental report, performance
report, job cost report, etc are discussed (Quinn, 2014).The calculation of net profit by using
both marginal and absorption costing and how they affect the profitability of firm. The
advantages and disadvantage of various planning tools used for controlling budget. At last how
the management accounting techniques like non profit accounting, inventory accounting,
managerial accounting and industry specific accounting are been adopted by different
organization to solve their financial problems.