Management Accounting Systems and Principles

This document provides an overview of management accounting, its systems, and principles. It explains the importance of management accounting in achieving business goals and presents different types of reports prepared under management accounting. It also discusses the benefits and uses of various management accounting systems and demonstrates how to prepare income statements using absorption and marginal costing techniques. The content is relevant to the subject of management accounting and is suitable for students studying accounting or business courses.

Management
accounting

INTRODUCTION...........................................................................................................................3
TASK1.............................................................................................................................................3
Explaining MA and importance of its systems along with its principles....................................3
Presenting different type of reports prepared under MA.............................................................5
Stating benefits and uses of different MA systems.....................................................................6
Preparing income statement by making use of absorption and marginal costing technique.......7
TASK 2..........................................................................................................................................11
Evaluating different planning tools with its benefits and the limitations..................................11
Explaining uses and application of different budgeting tools...................................................12
Comparing various systems in order to solve the financial problems (400).............................13
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
Management accounting is concerned with the study of identifying, measuring,
interpreting and interacting the information to the business for the purpose of achievement of
goals and objectives effectively and efficiently Unicorn is a retail company headquartered in
Lincolnshire, UK and it mainly deals in retail and wholesale distribution of groceries in the
country. The company is a wholly owned subsidiary of The CO-OP and was founded in the year
1977 by Dudley Ramsden and Peter Garvin and provides employment to more than 200
individuals. The current study will emphasize on the role of management accounting, its
principles, systems and several other planning tools towards the growth and success of Unicorn
UK.
TASK1
Explaining MA and importance of its systems along with its principles
MA definition: Management accounting also known as managerial accounting is the
process of studying business costs and other operations to prepare a financial report exclusively
for the internal management to evaluate the performance of managers and implementing other
strategies to help managers in better decision making. Management accounting is different from
financial accounting because its main objective is to provide assistance and guidance to the
internal users of the company so that the firm can make better decision.
Principles of MA:
Designing and Compiling: This principle states that the accounting information, records,
statements and other evidence of past or future must be made in such a manner that it meets the
needs of business and also solve its problems.
Management by exception: The principle of management by exception states that it is
essential to follow the two systems into management accounting which include budgetary control
system and standard costing techniques (Ghasemi and et.al., 2016). Use of these two systems
would help the firm in comparing the actual performance with standard performance and then

identifying the deviations. Furthermore, these deviations are corrected by taking various
informative measures to improve the performance of business.
Control at source accounting: The Control at source accounting principle states that the
costs are best controlled when they are incurred which means that the business must take
informative and necessary measures to exercise control over employees, raw materials and other
services.
Utilization of resources: This principle of management accounting is concerned with the
optimum utilization of resources which states that all the available resources must be used to
their top potential as it will help in maximizing the profitability for the organization.
Forward approach: The forward-looking approach states that by adequately applying
standard costing techniques, management accounting can identify the future problems and
develop certain standards to prevent the occurrence of future problems.
MA systems
Cost accounting system- The cost accounting is a system of management accounting
used by companies to ascertain the per unit cost of a product or service (ПАНЧЕНКО, 2018). It
is imperative for every organization as it helps in the correct ascertainment of costs which further
helps in deciding the final price of finished products. Cost accounting system is very important in
the bookkeeping process and it gives adequate information to the management regarding the
unnecessary costs that must be reduced to increase the future profitability of organization.
Job costing system- The job costing system is concerned with the process of collecting
information about the costs associated with a specific job performed (Taylor and Scapens, 2016).
Further this information is important to submit the cost information under a contract where the
costs are reimbursed. Adequate job costing by manager lead to improved profitability, project
estimation, management decisions and systematic financial reporting.
Inventory management system- The inventory management system involves the process
of monitoring the inventory and maintaining it. It includes all the assets, raw materials, work-in-
progress and finished goods. The main objective of inventory management system is to allow its
users to keep a track of goods across the business’s supply chain. An adequate use of inventory

management system helps in better tracking of goods, minimizing waste and leads to better
investment related decisions.
Price optimization system- It is a tool of management accounting used by the
organization to identify how its customers would respond to different prices for its products and
services through different channels (Shevelev, Sheveleva and Gvozdev, 2017). Price
optimization system is used by companies to identify the perfect price at which it will generate
maximum sales and earn huge profits as well.
Presenting different type of reports prepared under MA
Different types of reports prepared under management accounting are as follows:
Budget reports: Budget reports play a significant role in measuring the success of an
organization because it acts as a roadmap that the management needs to follow in order to
achieve the organizational goals and objectives effectively and efficiently. It is imperative for
every firm to prepare a budget report as to keep a list of all the future income and expenditure
required to achieve the desired targets within a fix amount. The business managers also need to
compare the actual spending with the set budget and then take corrective actions accordingly.
Account receivable aging reports: Account receivable reports are imperative for
businesses that heavily rely on extending credit. Breaking down of remaining balances of clients
into specific time period can help business managers in identifying the defaulters as well as find
issues in the firm’s collection process (Ciuhureanu, 2018). Sometimes, there are a lot of
defaulters and in this situation the company should tighten up its credit policies because it is
important to have cash flow in the business. It is also important for business to understand that in
some situations bad debts must be written off however the company should also have an accurate
knowledge of who owes them what to ensure transparency.
Cost managerial accounting reports: Management account also helps in ascertaining the
actual cost of goods and services produces. It takes into account all the raw material, labor and
other indirect costs that are required in the process of manufacturing. A cost report provides all
the necessary details to the managers like a comparison between the cost price and selling price
of goods and how it can be reduced by eliminating unnecessary expenses like minimizing
overhead costs, hourly labor rates, wastage of raw material. Thus, the main objective of cost

accounting report is to ensure optimum utilization of resources for a business so that it can
achieve high profitability.
Performance reports: The performance reports are created for the purpose of analyzing
the overall financial and managerial performance of the organization during the course of year
and how these performances can be used to make key strategic decisions by the business
managers in the future. The role of performance reports is vital for Unicorn as it helps in keeping
an accurate measure of its strategy towards the targeted mission.
Other Managerial Accounting Reports: Other managerial accounting reports include
project reports, competitor’s analysis reports, suppliers’ reports, latest business trends and other
similar reports that are important for every organization to analyze and make suitable business
decisions. Some business reports are prepared by the managers whereas others are outsourced to
the third parties (Shields and Shelleman, 2016). It is important for every business to make sure
that all the reports are been prepared by the experts who hold significant experience in that field
so that there are minimum chances of errors and mistakes. Moreover, the business managers
should have access to all the management accounting reports as it would help in making better
financial & managerial decisions.
Stating benefits and uses of different MA systems
Systems Benefits
Price optimization system The advantage of price optimization includes
immediate financial benefits like it provides
various opportunities to the business to focus on
increasing its margin of sales and the overall
profitability (Hirata and Bortoletto, 2019). Also, it
helps the management in making better and quick
decisions related to understanding the taste and
preferences of consumers in a better manner.
Inventory management software The inventory management system helps in
reducing the risk of overselling which results in
loss of control and disappointed customers. Also, it
helps in avoiding excessive stock ups and stock
outs of raw material which saves cost for the

company. Lastly, it helps the business in making
better and more profitable decisions by providing
better understanding of the demand forecast and
sales trend.
Job costing system The job costing system helps the managers in
assessing the performance of their employees in
terms of the productivity, efficiency and cost
control. This further helps the managers in
identifying the employees who are not able to
achieve their targets.
Cost accounting system The major benefit of cost accounting system is that
it helps the managers in cost controlling by
identifying the resources that are not necessary and
are just adding up to the cost of goods and services.
It further helps in increasing the profit margin of
the company.
Preparing income statement by making use of absorption and marginal costing technique
Absorption costing- It refers to the method that indicates all kinds of manufacturing costs
that has been assigned to units of the goods produced. It takes into account both variable and
fixed overheads for producing product.
Marginal costing- It is the tool where only the variable cost is been charged to cost unit
and the fixed cost for a specific period is entirely written off against contribution.
£
Particulars
Cost per unit
(£)
Direct material 8

Direct labour 5
Variable production cost 2
Fixed production overhead 5
Fixed production overhead incurred actually £15000
Fixed selling & distribution expense
£10000 per
month
Variable selling & distribution expense
15% of sales
value
Selling price 35
Sales 2000 units
Income statement as per absorption costing
Particulars
Amount in
£
Sales (1500*35) 52500
less: Cost of goods sold (1500*20) 30000
Gross margin 22500
less: Variable selling & distribution expense
(15% of
52500) 7875
Fixed selling & distribution expense 10000
Net operating income 4625

Working note
Unit product cost
Particulars
Amount
in £
Direct material 8
Direct labour 5
Variable production cost 2
Total variable production
cost 15
Fixed production overhead 5
Unit product cost 20
Income statement as per marginal costing
method
Particulars
Amount in
£
Sales (1500*35) 52500
Less: Variable expenses
Variable production cost (1500*15) 22500
Variable selling and administrative expenses (52500*15%) 7875
Contribution 22125
Less: Fixed expenses

Fixed productin overhead 15000
Fixed selling and administartive expenses 10000
Net operating income -2875
Working note
Unit product cost
Particulars
Amount
in £
Direct material 8
Direct labour 5
Variable production cost 2
Total variable production
cost 15
Profit reconciliation statement
Amount in
£
Profit under absorption costing 4625
Less: Fixed production overhead (5*1500) 7500
Profit under marginal costing -2875
Interpretation- The above analysis shows that the profits resulted as pound 4625 as of
absorption costing and -2875 as of marginal costing. This shows that absorption costing
technique is better as compared to marginal because it gives an accurate and true picture of the

profits as it includes both fixed and variable cost as its production cost while marginal costing
only involves variable cost as part of its production.
TASK 2
Evaluating different planning tools with its benefits and the limitations
Zero based budget-The zero-base budgeting is a budgeting method under which all the
expenses are to be justified for each new period (Papke-Shield and Boyer-Wright, 2017). This
process requires analyzing of the needs and costs of every budget from the beginning and the
budgets are built around what is required for the next period.
Advantages Disadvantages
The zero-base budgeting focuses on better decision
making which further helps achieving the goals and
objectives of the organization
The zero-base budgeting system is rigid and, in
some situations, it leads the management to avoid
expenses that are necessary for organization.
It uses cost-benefit analysis to reduce the
expenditure and maximize the benefits of the
business.
Another problem with the system is that it is
suitable only for the achievement of long-term
goals and a company cannot use them if it wants to
achieve short term objectives.
It also helps in allocation of resources that are both
economic and efficient for the organization.
It requires a lot of time and efforts to be
implemented which may sometime cause
managerial conflicts within the organization.
Capital budget-Capital budget is the process that is undertaken by a business to analyze
and evaluate the potential of major projects and investments.
Advantages Disadvantages
The major benefit of capital budgeting is that it
helps the company in identifying the risks
associated with the project and whether it should be
adopted or not.
Capital budgeting sometimes leads to increase in
the investment of fixed assets which affects the
operating cost of the business as well.
It also helps the business in making long term
strategic investments by analyzing the returns on it.
Most of the times, these techniques are dependent
on assumptions as the future is uncertain which can

prove to be very risky for the company.
It also provides competitive advantage to the
company by helping them in choosing best
investments.
These decisions also focus on achievement of long
term goals and objectives which means they cannot
be used for short term purposes and also are
irreversible in nature.
Rolling budget- A rolling budget as the name suggests is a continuous budget which is
updated on regular basis as soon as the previous one expires. It is also called as budget roll over.
Advantages Disadvantages
It helps in making better decisions related to
expenditure because some times managers have a
lot of money left therefore in this situation, it helps
in investing those funds into the next year’s budget.
The rolling business is time consuming which
means that managers sometimes spend a lot of time
preparing fresh forecasts instead of focusing on
present tasks and objectives.
It is more accurate and reliable source of budget
because there are no fixed targets which reduces
the level of manipulation in business.
It becomes out of date immediately because the
business environment is dynamic therefore it is
risky to operate in.
It can adopt to short term business changes easily
which is very important for the organization as it
can help in achieving the goals and objectives.
It sometimes plays a negative impact on employees
as they are continuously working towards the
revision of budgets and thus it may demotivate
them.
Explaining uses and application of different budgeting tools
Tools Uses
Zero based budget It helps in re-examining each and every items of
the company from the zero base so that new
strategies can be developed which leads the firm
towards success (Pellerin and Perrier, 2019).
Rolling budget It is counted as the most useful tool for Unicorn as
it helps in knowing the constant changes in the
items and updates regarding the sales and income
in a regular interval of time.
Capital budget It is considered as the useful tool for the firm as it
helps in selecting the most suitable project by

reflecting viability, feasibility and desirability of
the proposal.
Comparing various systems in order to solve the financial problems (400)
Benchmarking- It is the strategic management tool which allows an entity in setting goals
and measuring the productivity based on the most suitable practices. It is the practice within
which the quality level is been used as the point of reference for evaluating the activities by
making the comparison. It helps in resolving the problem relating assessing situation and the
processes and also helps in improving performance. It is an exercise that is applied appropriately
and is performed on a routine basis for the purpose of gaining a competitive edge and also in
refining the performance in major areas of the business.
Key performance indicator-It is the measurable value which demonstrate the way in
which company achieves its key business goals and the objectives. Companies make use of KPIs
at various levels for evaluating their success in reaching the targets (Amara and Benelifa, 2017).
It helps in overcoming the financial problems in relation to attaining targets with optimum or
effective use of the resources.
Balanced scorecard- It refers to the strategic management type of performance metric that
is been used for identifying and improving several internal functions of the business and their
resulting outcomes. It is been used for measuring and facilitating the feedback to the company
and helps in focusing on 4 major perspectives of business that is customer, internal process,
external growth and financial. It helps in solving any kind of financial challenge that is faced by
the firm like lack of funds, low demand, inefficient processes etc.
Variance analysis- It is the study of deviations between actual and the budgeted behaviors
with respect to performance of the business. It helps in ensuring control over the organization
and also enables in achieving the targets as per the set standards so that no any gap could be
resulted between actual and budgeted performance within an enterprise (Taylor and Scapens,
2016). This in turn assists in overcoming the financial related problems that is ineffective
controlling, inadequate resources, lack of efficiency in performance etc.

ABC Ltd UNICORN
This company makes use of variance analysis and
key performance indicator as its MA systems in
order to resolve its financial problems and ensures
appropriate controlling with efficiency so that
objectives can be achieved within the specified
time frame and as per the set strategies.
However, this firm adopts balanced scorecard and
benchmarking which helped the company in
gaining competitive advantages and a focus on
each and every perspective of the business so that
appropriate measures could be taken for
overcoming the financial problems.
CONCLUSION
From the above study, it can be concluded that management accounting plays a
significant role in the growth of an organization not only in the term of sales and profitability but
also by improving the internal function of the business, motivating the employees and helping
managers in making better decisions by analyzing the key growth factors effectively and
efficiently. It also stated that it is imperative for Unicorn retail to use the applications of
management accounting like cost accounting, job costing, inventory management system and
price optimization as it helps the firm in making better decisions and also in eliminating the
unnecessary cost and expenses. Thus, it can be said that managerial accounting is an integral part
of every business and should be used adequately to achieve the targeted goals and objectives.

REFERENCES
Books and journal
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