Management Accounting: Advantage & Disadvantage

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1 Management accounting and its systems which are essentially required...............................1
P2 Methods of management accounting reporting......................................................................2
M1 Benefits of systems used in management accounting with their application........................3
D1 Evaluation of management accounting systems and its reporting's integration within
organisational processes...............................................................................................................3
TASK 2............................................................................................................................................4
P3 Calculating cost by using appropriate techniques in cost analysis.........................................4
M2 Application of range of management accounting techniques...............................................7
D2 Interpretation of data of business activities............................................................................7
TASK 3............................................................................................................................................8
P4 Advantages and disadvantages of planning tools used in budgetary control.........................8
M3 Use of different planning tools and application of them in preparing and forecasting
budgets.......................................................................................................................................10
TASK 4..........................................................................................................................................10
P5 Comparison of application of management accounting system by different organisations to
respond financial problems........................................................................................................10
M4 The way in which management accounting can lead organisations to sustainable success12
D3 Use of planning tools in solving financial problems to lead organisation towards
sustainable success.....................................................................................................................12
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Management accounting is a technique of keeping record of internal environment of the
organisation and it is also known as managerial accounting. With the help of it managers try to
analyse that the efforts which were made by them to reach predetermined goals are resulting
positively or negatively (Alyousef and Mickan, 2016). This report is based upon LSI Architects
(Design) Limited which is a client of Equilibrium Asset Management a medium sized financial
consultant established in United Kingdom. This assignment covers various topics such as
management accounting system and methods for their reporting, calculation of costs with the
help of different costing techniques and use of planning tools in management accounting. Along
with this, use of all the management accounting systems in respond to financial problems is also
covered under this project.
TASK 1
P1 Management accounting and its systems which are essentially required
Management accounting: The process which is used by managers of the business
entities to determine that organisation is performing well or not is known as management
accounting. There are various types of systems which are used by management of LSI
Architects (Design) Limited in order to execute business activities in appropriate manner.
Description of all of them is as follows:
Cost accounting system: It can be defined as a framework which is used by different
companies to determine cost of different products or services which are delivered to clients. In
LSI Architects managers are using this system to estimate accurate cost of different buildings
which are constructed according to requirements of customers. Essential requirements of it for
the organisation is that it helps to analyse up to date information regarding expenses which are
related to different operations (Azmitov and Korabelnikova, 2015).
Price optimisation system: It is a system which guides organisations to set best suitable
price for all the products or services which are sold to clients. Managers in LSI Architects
Limited are using it for the purpose of setting such rates for all its services so that higher profits
could be generated by fulfilling requirements of customers. Essential requirement of it for the
company is that it guides top level executives to make sure that they set optimum prices for all
facilities so that objectives such as profit maximisation and customer satisfaction could be met.
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Inventory management system: It can be defined as a system which is used by
companies for different activities such as monitoring, evaluating and overseeing processes which
are conducted for management of stock used for business operations. In LSI Architects all the
managers are using it to keep track record of materiel which is used by the company to construct
buildings. Essential requirement of it for the organisation is that it guides management to be
aware of actual status of stock so that material could be ordered on right time (Boiral, 2016).
There are three different types of it which are as follows:
 LIFO: In this method of inventory management recently received goods are used for
business operations, therefore it is called Last in First Out.
 FIFO: While using this method of inventory management managers use earlier received
inventory for business execution, hence it is called First in First Out.
 AVCO: In this method all the goods are used by organisation on the basis of their
average cost for business activities so it is called Average Cost Method of inventory
management.
From all the above described methods management in LSI Architects Limited are using
FIFO method to manage inventory. One of the main reason behind using it is no effect of
purchases at the end of the period on net income and cost of goods sold.
P2 Methods of management accounting reporting
Management accounting reporting: Managers follow specific procedures to prepare
management reports which is known as management accounting reporting. There are various
types of reports that are generated by managers in LSI Architects to analyse that business is able
to reach long term goals or not. All of them are described below in detail:
 Performance report: In most of the business entities this type of report is generated by
managers for the purpose of analysing that operation and staff members are performing
appropriately or not. In LSI Architects Limited management generate it to monitor that
all the employees are working productively or not so that organisational goals could be
achieved. It is beneficial for the company because with the help of it decisions for the
betterment of enterprise could be formed if the performance of business is very low
(Campanale and Cinquini, 2016).
 Inventory management report: It ca be defined as a report which covers detailed
information regarding goods which are utilised by organisations to perform all the
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operational activities. In LSI Architects Limited management create it to keep track
record of stock which is used to construct buildings. It is advantageous for the entity
because it can guides managers to check requirement of goods to fulfil needs of
customers.
M1 Benefits of systems used in management accounting with their application
Management accounting
systems
Application and benefits
Cost accounting system In LSI Architects managers use cost accounting because it
helps them to manage costs by reducing unnecessary
expenses.
Price optimisation system It is used by managers of LSI to set optimum price for all the
building manufactured by it so that long term business goals
such as customer satisfaction.
Inventory management system Managers in LSI are applying inventory management system
within the organisation as it helps to check company's
requirements regarding inventory which is required for
business activities.
D1 Evaluation of management accounting systems and its reporting's integration within
organisational processes
Managers in LSI Architects (Design) Limited are using management accounting systems
and reporting techniques for the purpose of running business in systematic manner. Inventory
management system and report is used by them to check actual status of goods so that all the
operations could be executed properly. Price optimisation system is also used by them to set
appropriate prices for all the services which are rendered by it so that expectation level of clients
could be matched.
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TASK 2
P3 Calculating cost by using appropriate techniques in cost analysis
Marginal costing: It can be defined as the technique which is used by business entities to
determine marginal profit. All the variable costs are ignored in the calculation of it and fixed is
used to calculate profit.
Calculation of marginal profit for Galway Plc is as follows:
Absorption costing: It is a method of costing which is used to analyse absorption cost
for the company. All the fixed and variable expenses are taken in to consideration while
calculating profits with the help of it (Cazier and et.al., 2015).
Calculation of absorption profit for Galway Plc:
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Valuation of stock by using LIFO method:
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Valuation of stock by using weighted average method:
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M2 Application of range of management accounting techniques
There are various management accounting techniques which can help the organisations to
analyse actual position of the company. Some of them which could be adopted by LSI
Architecture (Design) Limited are as follows:
Standard costing: Under this technique of management accounting managers can
compare the actual and budgeted production to determine variance between them. With the help
of it strategic decision could be formulated.
Historical costing: According to this technique all the organisations such as LSI
Architects are required to show all the assets and liabilities in the final accounts on their actual
costs. Main elements which are focused by it are building, land, vehicles etc.
D2 Interpretation of data of business activities
From the calculation of marginal and absorption costing it has been analysed that first
method have resulted in profit of 5750 for June month and another one is showing 4550 profits
for the same period. According to this calculation organisation should sue marginal costing as it
is showing higher profits as compare to another one. LIFO method is showing the closing
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balance of 15 pounds and weighted average method is showing the balance of 30.98. from both
the methods organisation should use weighted average method as it shows that higher cost bas
compare to LIFO.
TASK 3
P4 Advantages and disadvantages of planning tools used in budgetary control
Budget: It is a type of financial plan which is formulated by management of
organisations for future activities in order to reduce possibility of challenges such as lack of
monetary resources. In LSI Architecture managers are formulating budgets to execute all the
operational activities appropriately so that predetermined objectives could be achieved. Main
purpose of creating budget is to forecasting future requirements of funds for business and then
arranging them to run the operational procedures smoothly (Guenther and et.al., 2015).
Budgetary control: It is a process in which management of entities set performance and
financial goals for business by comparing current and previous situations. It is highly required
for organisations such as LSI Architects because it helps to reduce spendings which are not
required for business. Two main types of planning tools are used in it which are described below
in detail:
Master Budget: It can be defined as a budget which is a summary of all the functional
budgets which are generated by an organisation in a specific time period. The process of
formulating it is very complex as it documents different elements such as predicts sales for
future, purchased, expenses which may take place in upcoming period and production levels. In
LSI Architects (Design) Limited managers create it to reduce burden of internal stakeholders to
check end number of budgets. They can analyse it and gather information of all the other
financial plans to determine actual position of the company (Kalkhouran and et.al., 2015). For
example, with the help of master budget managers in LSI Architects (Design) Limited can make
sure that the opening stock and budgeted production is equal to actual sales or not. Advantages
and disadvantages of it for LSI Architects (Design) Limited are as follows:
Advantages: Master budget helps managers and other stakeholders to gather brief
information of all the other budgets as it is the summary of them. It provides bird's eye view of
the business which is beneficial for all the members to check actual position of the company so
that strategic decisions for future could be formulated. It guides all the top level executives to
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form master plans for betterment of business and reach long term business goals by providing
brief information of current status of business to stakeholders.
Disadvantages: As it is a combination of different budgets so it is not able to specify
causes of all the expenses due to brief information of all of them. It is very difficult to read and
update master budget because of complexities in the formulation process of it. All the budgets
including master budget are based upon estimations so it can create uncertainty for business. It is
based upon certain assumptions which may not prove right over the period.
Cash Budget: It can be defined as a budget which is generated to record all the cash
transactions so that actual liquidity of business could be estimated. Main purpose of creating it is
to determine that the organisation is generating sufficient amount to execute business activities
smoothly or not. In LSI Architects (Design) Limited management focuses on formulation of it as
it helps to determine the monetary funds which are going to be received in upcoming period in
future. The figures which are recorded in it includes collected revenues, all the expenses which
are paid, receipts from debtors etc. In other words it could be defined as a plan which reflects
future position of business (Leotta, Rizza and Ruggeri, 2017). All the expenses such as
depreciation which are not faced by companies in monetary terms are not recorded in this
budget. For example, different types of receipts such as cash receipts, payment received from
buyers, and payments such as salaries, wages, lean, interest etc. could be analysed with the help
of cash budget. Some of its advantages and disadvantages are as follows:
Advantages: While formulating cash budget all the debts are ignored which helps the
organisation to analyse actual receipts and payments. As it records only cash transactions so it
make the company more resourceful which helps to spend more money to execute business
activities in more systematic manner. With the help of cash budget potential deficit for LSI
Architects (Design) Limited could be identified quickly by managers. It facilitates small as well
as large enterprises to communicate their financial position with internal and external
stakeholders as it helps to determine cash balance at the end of financial year.
Disadvantages: There is lack of flexibility in cash budget because if any modification is
made in any transaction then it is not possible to record it in the budget. It is based upon
estimations and it is not possible to trust them properly because it may get changed with time. It
could be manipulated by managers because they want that records should reflect position image
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of the company. In cash budget there is lack of non financial factors which creates barriers for
stakeholders to analyse contribution of them in organisational performance.
M3 Use of different planning tools and application of them in preparing and forecasting budgets
Different types of planning tools are used by managers of LSI Architects (Design)
Limited in order to prepare and forecast budget for the organisation. These are master and cash
budget. With the help of both of them management try to analyse actual situation of business and
then formulate strategic decisions for future. It helps them to be prepare to deal with
uncertainties which may take place in upcoming period and affect functionality of operations.
TASK 4
P5 Comparison of application of management accounting system by different organisations to
respond financial problems
Financial problems could be defined as such issues which are faced by companies due to
insufficient monetary resources. For all the companies such as LSI Architects (Design) Limited it
is very important to be aware of such situations which may create such types of challenges
(McLean, McGovern and Davie, 2015). All the finance related issues which are faced by the
organisation are as follows:
Improper money management system: When an organisation do not have experienced
and skilled staff members then they can make mistakes while recording funds in appropriate
accounts. This problem is also faced by LSI Architects (Design) Limited which creates financial
problem for it and affect the process of attainment of organisational goals.
Sudden expenses: Sometimes such expenses takes places which are not expected and
then companies have to spend money on them to reduce possibility of huge risks for business.
LSI Architects (Design) Limited is also dealing with this type of financial challenge which
results in lack of funds for future activities (McVay, Kennedy and Fullerton, 2016).
In order to identify both the above described problems managers in LSI Architects
(Design) Limited are using following techniques:
KPI (Key Performance Indicator): It is a type of technique which is used by business
entities to measure success or failure of different procedures which are conducted for attainment
of long term business goals. There are two main types of it which are financial and non financial
(KPI, 2019.).
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Financial KPIs are used to identify such expenses that may take place suddenly and affect
the success of business.
Non financial KPIs are used by business entities to find errors in such business processes
which are not related to financial resources (Trucco, 2015).
Managers in LSI Architects (Design) Limited are using financial KPIs to identify sudden
expenses so that appropriate strategies could be formed to deal with them.
Benchmarking: It is another technique which is used by business entities to compare
their strategies with other organisations to identify errors in their processes. In LSI Architects
(Design) Limited management use it to identify the problem of improper money management
system by comparing its policy with competitors.
After identification managers are required to find a system which can help to resolve the
financial challenges. For this purpose financial governance is used which is discussed below:
Financial governance: It can be defined as a system which guides business entities to
formula all the financial statements in appropriate manner by following all the financial
principles. In LSI Architects (Design) Limited managers are using it to resolve challenges such
as sudden expenses and improper money management system. With the help of it all the
financial records will be formulated in systematic manner which will make the money
management proper and it can also reduce possibility of unforeseen expenditure. When funds
will be manages appropriately then finance could be saved for sudden expenses.
There are various organisations which are using management accounting systems to
respond all the financial problems. The company which is selected for the comparison with LSI
Architects (Design) Limited is Asseal Architecture. The comparison of both of them is as
follows:
Basis LSI Architects (Design) Limited Asseal Architecture
Cost
accounting and
inventory
management
systems
Management in the organisation are
using cost accounting system to deal
with the problem of sudden expenses
because it helps to control the costs
which helps to reduce possibility of
such expenditures.
Management of the organisation use
inventory management system to deal
with the issue of lack of funds for
goods. It can help to determine
requirement of stock which can guide
managers to make budget for
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purchases.
Price
optimisation
and job order
costing
In order to deal with problem of
improper money management system
managers use price optimisation
system which helps organisation to set
appropriate prices for all the services
and manage finance properly.
Improper management of business
activities problem is creating financial
challenges for the organisation. In
order to deal with it managers are
implementing job order costing which
helps to keep track record of all the
business processes in detail and
manage the same (Wickramasinghe,
2015).
Process
costing
Managers of LSI are using process
costing to perform all the business
activities in systematic manner and
reduce possibility of financial
problems such as improper money
management system, sudden expenses.
In Asseal Architects process costing is
used by managers in order to deal with
business challenges such as lack of
financial resources by making sure that
all the activities are performed in
appropriate manner.
M4 The way in which management accounting can lead organisations to sustainable success
Management accounting systems are beneficial for LSI Architects (Design) Limited
because with the help of them organisation can deal with different financial challenges such as
sudden expenses, improper money management system etc. Different techniques in management
accounting could be used by company to respond them. These are KPI, Benchmarking and
financial governance. If all the issues are dealt properly then it can help the enterprise to to attain
sustainable success.
D3 Use of planning tools in solving financial problems to lead organisation towards sustainable
success
Management in LSI Architects (Design) Limited is using different planning tools such as
cash and master budget in budgetary control. Both of them can also help managers to respond
financial challenges such as sudden expenses and improper money management system because
with the help of them such issues could be determined in advance. Cash budget can help to deal
with all the financial problems by allowing managers to use funds for them.
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CONCLUSION
The above report concludes that management accounting is a technique which is used by
large as well as small companies to keep track record of internal environment of the organisation.
For this purpose different system and reports are focused by managers as all of them can help to
make the work easier. Costing techniques such as marginal and absorption are could be used by
enterprise to determine net income. Different planning tools such as master and cash budget are
used by entities in budgetary control so that actual position of company could be forecasted. All
of them are also used in resolving financial issues as with the help of them problem could be
predicted in advance.
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REFERENCES
Books and Journals:
Alyousef, H. S. and Mickan, P., 2016. Literacy and numeracy practices in postgraduate
management accounting. In Multimodality in Higher Education (pp. 216-240). Brill.
Azmitov, R. R. and Korabelnikova, L. L., 2015. Problems of implementation of management
accounting automation in Russia. Mediterranean Journal of Social Sciences. 6(1 S3).
p.384.
Boiral, O., 2016. Accounting for the unaccountable: Biodiversity reporting and impression
management. Journal of Business Ethics. 135(4). pp.751-768.
Campanale, C. and Cinquini, L., 2016. Emerging pathways of colonization in healthcare from
participative approaches to management accounting. Critical Perspectives on
Accounting. 39. pp.59-74.
Cazier, R. and et.al., 2015. The impact of increased disclosure requirements and the
standardization of accounting practices on earnings management through the reserve for
income taxes. Review of Accounting Studies. 20(1). pp.436-469.
Guenther, E. and et.al., 2015. Material Flow Cost Accounting–looking back and ahead.
Kalkhouran, A. A. N. and et.al., 2015. A conceptual framework for assessing the use of strategic
management accounting in small and medium enterprises. Global Business and
Organizational Excellence. 35(1). pp.45-54.
Leotta, A., Rizza, C. and Ruggeri, D., 2017. Management accounting and leadership construction
in family firms. Qualitative Research in Accounting & Management. 14(2). pp.189-207.
McLean, T., McGovern, T. and Davie, S., 2015. Management accounting, engineering and the
management of company growth: Clarke Chapman, 1864–1914. The British Accounting
Review. 47(2). pp.177-190.
McVay, G., Kennedy, F. and Fullerton, R., 2016. Accounting in the lean enterprise: providing
simple, practical, and decision-relevant information. Productivity Press.
Trucco, S., 2015. Financial accounting: development paths and alignment to management
accounting in the Italian context. Springer.
Wickramasinghe, D., 2015. Getting management accounting off the ground: Post-colonial
neoliberalism in healthcare budgets. Accounting and Business Research. 45(3). pp.323-
355.
Online
KPI. 2019. [Online]. Available through:
<https://www.klipfolio.com/resources/kpi-examples>
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