Role of Management Accounting in Organization

This document discusses the role of management accounting in organizations and how it helps in maximizing profits and minimizing losses. It explores different management accounting systems such as cost accounting, inventory management, job costing, and price optimization. The document also discusses the essential requirements of management accounting systems and the methods used in management reporting. Additionally, it covers the application of various management accounting techniques and the pros and cons of different planning tools.

Faculty of Business and Management Studies
MANAGEMENT ACCOUNTING
Submitted by:
Session: February 2020

TABLE OF CONTENTS
INTRODUTION .............................................................................................................................3
LO1..................................................................................................................................................3
Role of management accounting in organization.........................................................................3
LO2..................................................................................................................................................8
Application of various management accounting techniques.......................................................8
LO3..................................................................................................................................................9
Pros and cons of various types of planning tools.........................................................................9
LO 4...............................................................................................................................................11
Adapting MA systems for responding to its financial problems................................................11
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14
APPENDIX....................................................................................................................................16

INTRODUTION
Management accounting pays attention on the accounting aimed at informing the
management on operational metrics of the business. It uses information related with cost of
goods or services that are purchased by company. The information is used for quantifying
decisions made on operational planning. Performance reports are prepared under the
management accounting for measuring the variances between budgeted and actual figures. MA is
different from that of financial accounting for collection of the accounting data for creating
financial statements. Report is based over Marks & Spencer which is an international retail
industry. It will be providing about the requirement and benefits or different management
accounting systems and application to M&S. It will provide about the MA reporting methods
used by company. Study will also include different MA techniques. It will provide about the
different planning tools & MA systems for responding the financial issues.
LO1
Role of MA in organization
Management accounting
MA could be describes as method used for describing accounting systems, methods and
the techniques with the special knowledge & ability that assist the management for maximising
the profits and minimising the losses. MA involves the application of the goods various concepts
and techniques for processing projected and historical data of the entity for assisting the
management for establishing plan related with economic objectives as well as decision making
for achieving the organisational objectives.
MA Systems and their essential requirements
There are various MA systems used by entities in effective management of the operations
of business. These systems are necessary for the management of the business.
Cost accounting systems
It is framework applied by company to approximate costs of the goods for profits,
valuing inventories and having control over cost. This system involves allocating the costs
using traditional methods or the activity based method of costing (Bromwich and Scapens,
2016). It is essential for approximating actual cost of the product is a crucial factor in decision
making. Costing system is focused over capturing manufacturing cost of the entity by weighing
inputs cost of the every step of the manufacturing process plus fixed cost like depreciation of the
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capital equipments. This is a method used by organisation for recording the cost information of
products.
Applications
CA is applied in production department to record all cost & expenses undertaken for
manufacturing goods and services. Benefits of cost accounting include identifying the accurate
costs incurred to manufacture products on per unit basis.
Benefits
It enables managers to decide the profit margins and prices. It provides different costing
methods that are used for measuring the costs and recording transactions. There are different
costing methods using which organisations are more accurately reporting the financial operations
of business.
Inventory Management (IM)
It is defined as process of overseeing & controlling ordering, storage & use of the items
that are used by the organisation for production of goods and services sold by it. IM system
combines application of barcode printers, desktop software, barcode scanners & mobile devices
for streamlining inventory management of the goods, stock, raw material and other products. It is
practice of overseeing & controlling quantities of the finished goods. Objective of the IM is
accurately understanding present inventory levels and minimising overstock & under stock
situations (Ax and Greve, 2017). Managers through effectively tracking the quantities across
various stocking location have the insight & capable to make the related decision of inventory.
Inventory of the M& S are the main assets and accounts for the investment that is tied to
products that are sold.
Application
Inventory management is applied by M&S for effectively managing the inventory
records. Being a retail industry it has to deal with large variety of inventory everyday. Systems
used in inventory management enables the managers in tracking the records of inventories.
Benefits
Company using the inventory management system is effectively enabling the
management to be informed about the movement of each inventory. Systems make the count of
inventory and update the records continuously that provide managers with accurate information
about the inventory stocks.
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Job Costing Method
Job costing refers to accounting method which describes allocation of the production
cost to the individual items or the batches of the product items. System is used where the
products and services produced differ with each other. this involves the practice of aggregating
the data over costs relating with particular services or the manufacturing job. This record is
important for submission of the cost data for the consumers under contracts where costs will be
refunded.
Application
Job costing is used by the M&S when dealing with special orders placed by the
customers.
Benefits
It is useful by the management for evaluating the cost of producing a particular job. It
enables the firm to identity the costs associated with each job separately
Price Optimisation System
This method refers to application of mathematical analysis over corporations for
determining reactions of the consumers over the various prices of the goods and services by
different channels (Christ and Burritt, 2017). Demand of product changes at different price
levels and managers using price optimisation method evaluate the optimum prices to be set for
the products and services.
Application
Price optimisation is applied in the planning & decision making process by management.
Benefits
It provides the management with insight and results of evaluating the demand at different
price levels. Benefits of price optimisation enable the company to set optimum prices of the
product.
Essential requirements of management accounting systems
Cost accounting System
It individually measures and record cost then comparing the inputs with the actual
outcomes or results for assisting the management to measures the financial performance.
Managers of the Business rely over the accounting data n specific or general on the cost as the
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tasks of company could be explained through its costs. It is key concept used in MA as analytical
tools that are applied by managers for making the production process more efficient.
Inventory management
It constitutes function of the IM system to create the purchase order, relocating, adjusting,
receiving and disposal of the stocks. Inventory management makes the sales order packaging,
picking and shipping of the products. Managers conducts physical counts of stocks , cycle count,
creating, managing, sharing and scheduling the reports including printing of barcode labels
(Soderstrom, Soderstrom and Stewart, 2017). Benefits of the inventory management to the firm
includes to improve the bottom line of M&S, enhancing stock accuracy to improve the workflow
of the company.
Job Costing Method
Job costing method is required for providing important decisions to determine correctness
of the estimating system of the firm which is capable for quoting the prices which permits for
reasonable income. Information is also used by Marks & Spencer for assigning the inventorial
cost to the processed products. Job costing requires accumulation of information related to direct
materials, labour and the overheads.
Price Optimisation System
The optimisation systems enables the company and managers to be applied for
determining prices which company uses in the best manner for achieving the required goals and
objective and to maximise operating profits. Discovering alternatives through highest achievable
method or the cost efficient method under constraint given by increasing desired factors &
minimising undesired ones. Benefits of price optimisation enable the company to set optimum
prices of the product.
Methods used in the management reporting.
MA focus over internal data or information received from financial accounting. MA is
applied for plan, control and for making effective decisions. Accountants depend over the
financial statements that comprises of profit or loss statement, statement of financial position &
the cash flow statements. Managers use different forms of the internal accounting reports for
evaluating the corporate information. It includes the budgets cost report, products and the
performance report.
Budget Reports
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Preparing the budget is the main element in the MA. These budgets established by using the
prior budgets and adjust them to the future forecast. Budgets of company lists all sources of
revenues and expenses. Corporations attempts for attaining the objective & goals while being
within the budgeted amounts (Alawattage, Wickramasinghe and Uddin, 2017). Managers
considers new vendors for employing the suppliers of raw materials for saving the money. It also
looks for increasing the sales for reducing the expenses.
Cost Reports
MA measures the costs of products manufactured. The costs of the products and services are
calculated taking the overhead costs of the raw materials, labour costs plus the extra costs in the
consideration. Sum of all costs are allocated in the amounts of the products produced. All
information are summarised in form of cost reports. Reports provide the managers with
capability of viewing cost values of the product versus selling price. This assists the managers in
effective control and planning for the profit margins. Cost reports provide the detailed cost
information about the products and services that are produced and manufactured by the
company. The cost report provides information that are essential for decision making by the cost
account related to the costs and incomes that are produced. They allow the managers to decide
the profit margins of products and services after analysing the costs.
Performance Reports
Management accountant apply budgets for making comparison between the budgeted
amounts with actual incomes and expenditures. Management evaluates differences that are
computed when shaping the new budget and the information concerning the amounts are listed
over the performance report. Performance reports are computed by the company every year but
there are corporations that are establishing them quarterly or half yearly. Reports assists
managers to plan for the future demand in the production & costs increase. (Nørreklit, 2017).
Performance report is used by the organisation to evaluate performance of different department
of the company. By identifying performance it could focus over more productive areas that are
profitable for the company and reducing the areas that are consuming cost. It enables the
company to change the structures of operations for increasing the productivity and efficiency of
management.
Inventory Reports
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Inventory reports are prepared by the organisation for effectively managing the inventory.
This is applicable to the management of different products. Inventory reports provide all the
information about the different inventories that are used by the organisation including raw
material, company assets or the raw materials. Inventory report includes the information about
the frequency of inventory movements within the organisation. The information is used by the
business to make inventory reports for making timely order for raw materials and other
components used in the organisation for production of the products or services. Using the
inventory reports projections for the future requirements of the inventory are made by the
management.
Evaluation of the management acconting systems and management accounting reporting.
MA systems provide the company with the systems that enable to properly managing the
business operations. It enables the management to keep adequate and complete record of the
financial events and transactions. MA systems effectively manage the financial information.
These financial information generated by the MA systems like inventoty management, cost
accounting, price optimisation help company to prepare financial reports which are essetial for
decision making. Management uses the report for timely placing the materials order, cost reports
for identifying the variances and other reports for deciding the profit margins of the product.
Therefore it could be said that and systems of MA are integrated with MA reporting.
LO2
Application of various management accounting techniques
There are various types of management accounting techniques which are used by the
organization. The two most widely used methods are stated below.
Marginal Costing System (MC)
It is utilized to determine the per unit price of the additional product produced. This
technique assits in determining the optimum production quantity of the company which assists in
evaluating the least price at which the product can be produced (Nespeca and Chiucchi, 2018). It
determines the break-even point after which the company will start earning profits.
Absorption Costing System
This technique is also called as full absorption costing as it indicates that the all the
manufacturing cost irrespective of either it is fixed or variable are assigned to the manufacturing
cost of the goods produced (Ray and Gramlich, 2016). Thus, the cost of finished goods includes,
direct inputs and variable and fixed production indirect cost. This method is preferred for
external reporting.
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The major difference in the marginal and absorption costing is that the marginal costing
(MC) only consideres variable cost while evaluating cost of production but in absorption costing,
fixed production overhead cost is also considered in manufacturing cost.
The cost can classified into various forms. Few of them are stated below.
Fixed cost: This cost remains constant and do not cary with the increase or decrease in
the production level of product or sales. Even in the situation of no production of goods or
providing of services, the fixed cost willl incur.
Variable cost: It is complete reverse of fixed cost as it varies in respect to the vary in the
level of activities. It will not incure in situation of no production.
Marks and Spencer is producing a unique clothing range made from organic raw material
for its retail outlets. The costs pertaining to it are stated in the appendix.
Analysis and interpretation: Under marginal costing, the fixed cost is completely
deducted from the amount of contribution while in absorption costing, only the amount of fixed
expenses used is taken into consideration while evaluating cost of production. Thus, there was a
difference in the final outcomes under both the methods. Therefore, absorption costing method is
considered more appropriate for carrying out cost analysis.
LO3
Pros and cons of various types of planning tools
Budgeting is the formal report which is prepared by the organization which includes the
estimated revenue and expenses to be incurred in a specific period to achieve the desired goals.
This report helps in planning the allocation of the resources and also assist in exercising the
control over the various operational cost and expenses of the business. It helps the organization
in measuring the differences between the budgeted and the actual outcomes so that remedial
actions can be taken to reduce it. The different tools that can be used by Marks and Spencer are
stated below.
Zero based budgeting
Under this budgeting technique, the budget prepared in the previous year is not taken into
account. The process starts from the scratch, the entire research and analysis is conducted with
respect to the items to be included in the budget (Nnoli, Adeyemi and Onuora, 2016). In this, the
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mistakes that were occurred in the past year will not be repeated in the current year. This method
helps in making more accurate and appropriate budget with very least difference from the actuals
as everything is taken from the zero level. Proper justification is not required as in case of
traditional form of budgeting as each and every item is included after carrying out proper
research and its impact.
Advantages
 This approach does not take into account the past year’s budget.
 Complete research is conducted whenever the budget is prepared.
 This method supports in reducing the cost since it conducts complete analysis. This approach is preferred mostly in case of products which are prone to frequent market
changes.
Disadvantages
 It is a time intensive method for preparing the budget.
 It is little expensive as market research is conducted entirely.
 Data can be easily manipulation in order to get more resources.
Activity Based Budgeting
It is another method of planning tool in which the organization prepares the budget based
on the activities carried out by it. The budget is completely dependent on the estimation made in
respect to the resources to be used along with amount of productivity it will generate (Dhubea
and Al-Riami, 2017). This method does not take in account the past year budget for preparing the
present year budget. This method assists the organization in identifying the various costs and
expenditures in association with various business activities which is being carried out in the
production process. This form of budgeting tool helps in identifying any discrepancy in the
system which leads to costs and wastages so that timely actions can be taken to correct it.
Advantages
 This planning tool can be easily implemented with less time and effort.
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 It provides assistance to the organization in determining any production in the activities
and the production process. It is prepared without considered past year budget.
Disadvantages
 It requires exercising the professional knowledge and skills.
 It is an expensive process for the purpose of implementation.
Operational Budgets
This budget is mainly prepared for the operational activities of the business entity. It
provides forecasted value of the revenue and expenses of the organization which depends upon
the previous year trend (Tsofa, Molyneux and Goodman, 2016). It considers the past yar budget
for preparing the new budget. It provides assistance to the organization with respect to the proper
allocation of the resources among the various organizational departments.
Advantages
 This budget is very easy to prepared and simple to understand.
 Provides helps in effective allocation of financial resources. Effective in exercising control on the cost and expenses of the business entity as per the
set plan.
Disadvantages
 It is dependent upon the past year’s budget, thus, chance of getting errors increases.
 It is impossible to make the accurate forecasting about the future business activities.
Variance analysis
This analysis states the deviation between the actual outcome with the standard figures. It
provides a picture about the performance of the busienss. For example,
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6 7 800 750
Standard
Price of
product A
Actual Price of
product A
Standard
Quantity of
product A
Actual Quantity
of product A
Price variance = (7-6) * 750 = 750 (Adverse)
Advantages
 It assist the manager in forward looking busienss decisions. Useful in exercising control.
Disadvantages
 Analysis is done when financial results are disclose which is done much later.
 Budgeting might be done vaguely leading to deviation.
LO 4
Adapting MA systems for responding to its financial problems
With the changing working scenarios, the importance of information has increased over
the period of time as it helps in measuring the performance of the organization. Some of the
budgetary control methods are stated below.
Benchmarking
This budgetary control method is used for evaluating the performance of the organziation
with the best rated firm in the industry. The actual performance of the organization is compared
with that of the competitor in the industry (Tee, 2016). The deviation in the form of process,
technology, activity is determined and remedial steps are taken to improve the performance of
the organization. Benchmarking has various of benefits as it assist in taking competitive analysis,
or effectively managing the performance and also helps in implementing steps for improvement
and planning and setting of aims. Thus, benchmarking will help M&S in determining the
loopholes in its process and management so that it can implement remedial steps for mitigating
it.
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Key performance indicators
This approach is utilized for the purpose of comparing the progress of the business in
terms of targets set. It takes into consideration both monetary and non-monetary aspects for
evaluating the performance (Rodrigues, Pigosso and McAloone, 2016). For instance, sales
growth, customer satisfaction level, increase in profits and reduction in cost etc. The various
business functions and activities have various KPIs. The business manager is required to keep a
close eye on the performance so that remedial actions can be taken if KPIs are not in accordance
with the entity’s objectives. It will help M&S in analysing eth eprformnace of its department and
employees based on teh set indicators and according to which, it will take crucial step for
imrpoving it.
Balanced scorecard
Balance scorecard is the planning system which is utilized by the organization to
communicate what it desires to achieve to the employees of the business entity (Nørreklit, Kure
and Trenca, 2018). It helps in aligning the work that everyone is carrying out with the strategy
and prioritizing the projects with respect to the requirements and the needs. This helps M&S in
identifying and improving the various internal business processes which results into better
outcomes based on 4 perspectives of it.
Activity based costing
This method is more focussed on precisely distributing the overhead to those items to
which it is related it (Vetchagool, Augustyn and Tayles, 2018). This system is useful for targeted
decrease of the overhead expenses. It beneficial to use it in complex environment where it is
difficult to sort the machines, products and other complex processes. This approach will help
M&S in meeting the problem of overhead cost allocation and it will also help in taking steps for
reducing the overhead expenses.
Financial governance
Financial governance is the process through which the company gathers, manages and
monitors the financial information and performance of the business (Bhagat and Bolton, 2019). It
includes how the organization tracks its transactions, performance and exercise control over the
data and compliance. It will ensure that all the transactions and reporting requirements are being
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followed by M&S. It will help in complying with the regulations . Thus, it willa ssit in facing teh
financial problems in an effective way.
Marks and Spencer Starbucks
In Marks and Spencer, two planning tools are
used benchmarking and activity based costing
method. Benchmarking will assist in comparing
the performance of the entity with the competitors
best in industry with respect to product process
(Süss and et.al, 2016). Activity based costing
method will also help in allocating the overhead
expenses incurred with the product to which it
belongs to. This will be very beneficial for Marks
and Spencer for managing its complex business
processes.
Starbucks uses key performance indicators and
benchmarking for the purpose of identify the
financial problems. KPIs will help in monitoring
and evaluating the business performance in respect
to the key targets set (Hwang and et.al, 2017). This
will help in evaluating the performance of each
and every employee in terms of their performance
and productivity. Under benchmarking, Starbucks
compares its product and process with its
competitors for identifying its areas of
improvement so that it can work on its growth and
progress.
CONCLUSION
It can be summed up from the above that management accounting (MA) is an important
aspect of accounting which should be considered by the organization for its betterment and
successful achievement of the desired goals. It helps Marks and Spencer in taking rightful
business decisions which provides assistance to it in increasing its revenue and profits. There are
various MA system which can be utilized by Marks and Spencer whcih will result into benefits
that will assit in timely accomplishment of the business goals. Therefore, management
accounting (MA) system provides assistance to the business in improving the performance and
effectiveness which helps in effective functioning its key operational activities. MA technique
involves different budgetary control techniques that can be used by Marks and Spencer in
determining the monetary problems and it also provides assistance to the firm in implementing
control activities. Therefore, with MA Marks and Spencer will provide support to organizations
expenses from its various operational activities. So, it can be said that the management
accounting (MA) is very essential for the business entities intaking the crucial business related
decisions.
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REFERENCES
Books and Journals
Alawattage, C., Wickramasinghe, D. and Uddin, S., 2017. Theorising management accounting
practices in Less Developed Countries. The Routledge Companion to Performance
Management and Control. pp.285-305.
Ax, C. and Greve, J., 2017. Adoption of management accounting innovations: Organizational
culture compatibility and perceived outcomes. Management Accounting Research. 34.
pp.59-74.
Bhagat, S. and Bolton, B., 2019. Corporate governance and firm performance: The
sequel. Journal of Corporate Finance. 58. pp.142-168.
Bromwich, M. and Scapens, R.W., 2016. Management accounting research: 25 years
on. Management Accounting Research. 31. pp.1-9.
Christ, K.L. and Burritt, R.L., 2017. Water management accounting: A framework for corporate
practice. Journal of cleaner production. 152. pp.379-386.
Dhubea, H. M. S. B. and Al-Riami, S. A., 2017. THE APPLICATION OF ACTIVITY-BASED
COSTING AND ACTIVITY-BASED PLANNING INFLUENCES DECISION
MAKING. Asia-Pacific Management Accounting Journal. 12(1). pp.1-38.
Hwang, G. and et.al, 2017. Developing performance measurement system for Internet of Things
and smart factory environment. International journal of production research. 55(9).
pp.2590-2602.
Nespeca, A. and Chiucchi, M. S., 2018. The impact of business intelligence systems on
management accounting systems: The consultant’s perspective. In Network, smart and
open (pp. 283-297). Springer, Cham.
Nnoli, U. F., Adeyemi, S. S. and Onuora, O. A., 2016. Zero-based budgeting: pathway to
sustainable budget implementation in Nigeria. Business Trends. 6(3). pp.28-35.
Nørreklit, H. ed., 2017. A philosophy of management accounting: A pragmatic constructivist
approach. Taylor & Francis.
Nørreklit, H., Kure, N. and Trenca, M., 2018. Balanced Scorecard. The International
Encyclopedia of Strategic Communication. pp.1-6.
Ray, K. and Gramlich, J., 2016. Reconciling full-cost and marginal-cost pricing. Journal of
Management Accounting Research. 28(1). pp.27-37.
Rodrigues, V. P., Pigosso, D. C. and McAloone, T. C., 2016. Process-related key performance
indicators for measuring sustainability performance of ecodesign implementation into
product development. Journal of Cleaner production. 139. pp.416-428.
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Soderstrom, K.M., Soderstrom, N.S. and Stewart, C.R., 2017. Sustainability/CSR research in
management accounting: A review of the literature. Advances in management
accounting. 28. pp.59-85.
Süss, A. and et.al, 2016, March. Benchmarking time-of-flight based depth measurement
techniques. In Smart Photonic and Optoelectronic Integrated Circuits XVIII (Vol. 9751, p.
975118). International Society for Optics and Photonics.
Tee, K. F., 2016. Suitability of performance indicators and benchmarking practices in UK
universities. Benchmarking: An International Journal.
Tsofa, B., Molyneux, S. and Goodman, C., 2016. Health sector operational planning and
budgeting processes in Kenya—“never the twain shall meet”. The International journal of
health planning and management. 31(3). pp.260-276.
Vetchagool, W., Augustyn, M. M. and Tayles, M., 2018. ISO 9000, activity based costing and
organizational performance. Total Quality Management & Business Excellence. pp.1-24.
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APPENDIX
Cost details:
Particulars
Sales 800 units
Production 800 units
Variable production cost 640000
Fixed production cost 160000
Variable selling and dist. Cost 320000
Fixed selling and dist. Cost 240000
Normal activity level 800 units
Units produced in quarter 1 220
Units sold in quarter 1 160
Computation of profit under absorption costing
Particulars
Sales revenue (A) (160*2000) 320000
Less: cost of production:
Variable cost (220*800) 176000
Fixed costs (220*200) 44000
Add: Opening stock -
Less: Closing stock (220000/220*60) -60000
COGS 160000
Less: Adjustment for over-absorption of fixed
production overheads
(1/4 of 160000) –
44000 -4000
Add: Selling and dist. o/h:
Variable cost (160*400) 64000
Fixed costs (1/4*240000) 60000
Cost of sales (B) 280000
Profit (A)-(B) 40000
Computation of profit under marginal costing
Particulars
Sales revenue (A) (160*2000) 320000
Less: cost of production:
Variable costs (220*800) 176000
Add: Opening stock -
Less: Closing stock (176000/220*60) -48000
Variable COGS 128000
Add: Selling & Dist. o/h:
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Variable cost (160*400) 64000
Cost of sales (B) 192000
Contribution 128000
Less: Fixed cost:
Production costs 40000
Selling and dist. cost 60000
Profit 28000
Reconciliation statement Amount
Profit under absorption costing 40000
Less: Fixed production o/h (60*200) 12000
Profit under marginal costing 28000
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