Comparative Analysis of Management Accounting Tools

The given assignment involves tracing the overall position of organization as compared to its competitors, utilizing different planning tools to resolve various matters at an initial stage. For small and medium-sized enterprises, these tools can provide competitive advantages and serve as early warning systems to identify and address potential financial issues.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
ACTIVITY 1....................................................................................................................................1
Different techniques and methods used for management accounting reporting:.........................3
Management accounting system and management accounting reporting is integrated within
organisational processes:.............................................................................................................5
Calculate costs using appropriate techniques of cost analysis to prepare an income statement
using marginal and absorption costs:...........................................................................................6
ACTIVITY 2....................................................................................................................................8
Use of planning tools used in management accounting...............................................................8
Uses of different planing tools in forecasting budget..................................................................9
CONCLUSION..............................................................................................................................11

INTRODUCTION
Management accounting system refers to organisation's internal system that assist in
measuring and evaluating various process for management of business organisation (Arnaboldi,
Lapsley and Steccolini, 2015). It provide relevant data or information that can be used by
managerial personnel to take effective decisions and to handle adverse situations. This report
covers management accounting and its various aspects, core requirement of various management
accounting system and their benefits, different methods of management accounting reporting,
use of planning tools and, advantages and disadvantages of different planning tools in the context
of BCM Construction Ltd. BCM is UK based medium sized construction company, contractor
related to infrastructure project in transport and rail sector. This report also cover comparison
about way in which organisation can use management accounting to respond to various financial
problems and explanation about how responding to financial problems, management accounting
can lead organisations to sustainable success.
ACTIVITY 1
Management accounting system is a process which combines key organisational activities such
as identification, collection, selecting and evaluating the accounting information and data for
assisting management to take strategic decisions and to analyse organisation's performance.
Under management accounting system, managerial personnels analyse and identifies events that
may happen in business organisation and around business organisation while considering
organisation's core needs and objectives. Main focus of management accounting system is to
provide a framework that can assist management to achieve organisation's goals and objectives in
efficient manner. In BCM construction Ltd, management accounting systems is used by
management to identify, choose, gather and analyse the information which ultimately help
organisation to frame strategies and develop action plans. There are some major management
accounting system like price optimisation system, inventory management system, job costing
system, cost accounting system etc. that are used by management to identify any particular
problem and assess the performance of organisation during a particular period. Following are the
significant management accounting system used by management of BCM, as follows:
Inventory management system: It is most commonly used management accounting system that
is used by business organisations to manage various inventories such as finished goods, raw
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material, WIP, spare tools etc. This system provide assistance to accountants and management to
analyse the movement and flow of inventory within organisation which ensures proper
availability of inventories in organisation (Boiral, 2016). Various methods are adopted by
management to manage inventories like LIFO, FIFO and weighted average method. In BCM
construction Ltd this system is used to check the availability of raw construction material on
construction site and to avoid any storage or other inventory cost, which also assist company to
reduce any abnormal costs related to inventories.
Price optimisation system: Price optimisation system is a technical system used by
business organisation to asses how customer or consumer may respond at different – different
price levels for its various products and services. This system is applied by business organisation
to fix and determine the proper retail price of product. In BCM this system is applied by
management to minimise the contract price while maintaining their current profit margin. This
system help to gain competitive advantages to company. It also assist management in effective
utilisation of various resources of company.
Cost accounting system: It is most significant management accounting system which is
used by management to optimise the cost of product of its product and services. It help to assess
the excessive cost incurred by organisation. It also provide comparative analysis of various cost
which help to estimate or project future cost. It provides early identification of any event that
may be incur any additional cost. In BCM, this system is used to analyse the cost of construction
project and any escalation in cost of project. Company is using this system to asses the viability
of any new construction project. It is also used to evaluate the cost of construction project to
maximise project profit by reducing various unproductive costs.
Job costing system: This unique but important management accounting system, which is
used by, business organisations, wants to allocate various cost to different jobs and task. This
system is generally use by business organisations for internal analysis of costs by classifying
them as job or task to evaluate the viability of any particular job. Job order costing system is
apply to assign and accumulate various manufacturing and production costs of single unit of
output. In BCM, this system is use when various construction projects of company are different
from each other or are of different nature and each of them has significant costs. Company is
using this system to classify this significant cost as job to enhance accountability. Following are
some important information is which are necessary for job costing system, as follows:
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Direct martial: Under job, costing system information of direct material is required to
allocate or assign them to particular task or job. In BCM accountants and project managers
collects information of direct material and allocate them to particular task.
Direct Labour: Labour cost is use in job costing system, to classify labour cost incurred
on particular job or task. In BCM, labour engaged in particular project is classified and allocated
to calculate overall project cost (Booth, 2018).
Different techniques and methods used for management accounting reporting:
In management accounting system, reporting is done by lower level managers to top-
level management. Main purpose of reporting under management accounting system is to
provide a complete idea about management accounting process and its various aspects. Managers
in various formats do such reporting, as there is no specific format is prescribed. It is done as per
requirement of organisation. There are one or more techniques and methods to report matter or
facts under management accounting system. These methods are form as per different – different
requirements of business organisation. In small and medium sized enterprises like BCM,
reporting is effective manner for assessment of overall performance and to form new strategies
or action plans. In BCM, responsible managerial personnel’s through different reports and
methods of reporting communicates the significant matters or issues to higher-level management.
Then by using these reports management form strategies to achieve organisation's objectives and
evaluate whether there is modification required in existing strategy. Following are some major
techniques and methods applied by BCM for reporting, as follows:
Variance analysis: This type of management accounting reporting method is use to
analyse and evaluate the deviation of forecasted amounts or actual amounts to identify any weak
area in production and manufacturing process. This method is use to recognise or identify the
main reason of any difference or variation between actual and budgeted amount. A variance
reported in report may be favourable or unfavourable; an unfavourable or adverse variance is
required to be analyse critically. Focus of managers and accountants by reporting under this
method is to find out any under or over utilisation of company's resources. In BCM, variance for
various construction management to identify any adverse difference computes costs. If any
unfavourable variance identified then management take actions for reducing or eliminating such
variance. A quantity variance identified in construction project shows that company used
excessive input (Bromiley and et.al, 2015).
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Budgeting: It is essential tool for business organisation to assess their present and future
performance, and to formulate strategies as per projection. Under this method of reporting,
managers forecast the income and expenses to calculate projected income or profit, which
provides a comparative analysis of present and future performance of business organisation.
Managers prepare actions plan to achieve such projected performance. In BCM, manager
prepares various budgets like cash budget, sales budgets, purchase budgets etc. to analyse the
overall present and future performance of company. Management take vital business decisions as
per outputs of different budgets.
Performance Report: Under this method of reporting overall organisations performance
as well as employee’s performance is analysed for a particular period. This report emphasises on
proper utilisation of human resources. It also used to optimise the aggregate employees costs. In
BCM, using this reporting technique performance of project managers, engineers, administration
employees etc. are awarded as per their commitment to company. In company, employee
engagement policies are framed as per performance report.
Activity based costing (ABC): In activity based costing, managers classifies and allot
various expenses or costs to different overhead activities and then assign them to various costs.
Using this reporting system, organisation can identify and analyse critically the relationship
between various costs, functions, overheads and products. Through analysis of this relationship,
indirect costs are allocated more effectively than traditional method. Although, it is complex to
allocate some expenses using this technique. Indirect costs for example staff salaries,
management costs etc. are difficult to allocate to a particular product. In BCM, this method is
used to allocate indirect cost related to particular construction project to analyse the relationship
of costs and overall project (Bryer, 2013).
Standard costing: Under this method of management accounting reporting a critical
comparison made between standard amount and actual amount of item related to organisation's
product or service. This system evaluated organisation efficiency to operate its functions as
compare to standards fixed as per previous performance of organisation. Reporting can be done
on monthly, quarterly or annually as per organisation's requirement. In BCM, project managers
determine the standards as per their experience, previous performance and industry trends. Then
after a particular period of time actual performance is compared with such standards to assess
their performance.
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Management accounting system and management accounting reporting is integrated within
organisational processes:
Integration between organisational processes concerned with BCM and different reports
develop a path for functions of company to focus on predetermined results and goals in effective
manner. Performance report of BCM and various processes assist managerial personnel’s to
prepare plan for near future projects of construction and increase in cost leads to reduction is
project cost and increase in probability. Integration between standard costing and organisation's
processes arise the need to focus towards achievement of standards income or gain which help to
determine the strategies and action plan. In company various accounting and other financial
process provide a basis for preparation of various reports under management accounting system.
Variance analysis report is interested within organisation process as it bring management focus
towards effective utilisation of human resources.
Benefits of management accounting systems:
Merger of various management accounting system in a business organisation ensures
achievement of organisation's objectives and goals because these different systems have their
own benefits and advantages (Grabner and Moers, 2013). Following are major benefits of
different management accounting system, in the context of BCM, as follows:
Different accounting
systems
Benefits
Job costing system  It assist BCM in projection of all kind of cost throughout
their construction process.
 It exhibits duplication of works and efforts as the some job
or task will be emulated.
Price optimisation system  BCM determine the behaviour client behaviour based on
different project costs.
 It assist in enhancing the operating profits with most
appropriate prices.
 It help in classification of customers as per their attitude at
different price level.
Cost accounting system  BCM measure the effectiveness and efficiency in various
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construction processes and then help in improving by
using this system.
 It assist company to determine the cost of projects and
reduction of prices.
 It provide essential information for planning process.
Inventory Management
System
 It help BCM to increase the accuracy inventory orders.
 It improve the effectiveness and efficiency and assist in
saving money and time.
 It reduce the additional inventory costs that may occur due
to mismanagement of inventories.
Calculate costs using appropriate techniques of cost analysis to prepare an income statement using
marginal and absorption costs:
Marginal Costing:
May June
Selling Price 50 15000 25000
Less: Marginal Costs
Direct materials per unit 8 2400 3040
Direct labour per unit 5 2500 1900
Variable production
overheads per unit 3 1500 1140
Total 6400 6080
Less: Opening inventory - 3200
Add: Closing Inventory 3200 1280
Gross Profit 11800 17000
Less: Fixed Costs
Fixed selling expenses 4000 4000
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Fixed admin expenses 2000 2000
Fixed Production cost 4000 4000
Less: Sales commission 750 1250
Net Profit 1050 5750
Absorption Costing:
May June
Selling Price 50 15000 25000
Less: Absorption Costs
Direct materials per unit 8 4000 3040
Direct labour per unit 5 2500 1900
Variable production
overheads per unit 3 1500 1140
Fixed Production cost 10 3000 3800
Total 11000 9880
Less: Opening inventory - 5200
Add: Closing Inventory 5200 2080
Gross Profit 9200 17200
Less: Fixed Costs
Fixed selling expenses 4000 4000
Fixed admin expenses 2000 2000
Less: Sales commission 750 1250
Net Profit -550 6150
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Budgeted and actual cost of metal used in
producing Product A
Budgeted material cost
per unit of the product 2kg at £10/kg
Actual output 1000 units
Actual material
purchased and used 2200kg
Actual material cost £20,900
Inventory ledger record for May under the LIFO valuation method
Date Reference Purchase Issues Balance
(Inventory)
Units £/
Units
£
Total Units £/
Units
£
Total Units £/
Units
£
Total
05/01 Previous balance
(inventory) 40 3.00 120.0
0
05/12 40 3.00 120.0
0
Bought 25 units at £ 3.60
each 20 3.60 72.00 20 3.60 72.00
05/15 20 3.60 72.00
Issued 36 units 16 3.00 48.00 24 3.00 72.00
05/20 24 3.00 72.00
Bought 20 units at £ 3.75
each 20 3.75 75.00 20 3.75 75.00
8

05/23 Issued 10 units 10 3.75 37.50 24 3.00 72.00
10 3.75 37.50
05/27 9 3.75 33.75
Issued 25 units 25 3.00 75.00
05/30 Issued 5 units 5 3.00 15.00 4 3.75 15.00
Inventory ledger record for May under the AWC valuation method
Date Reference Purchase Issues Balance (Inventory)
Units £/
Units
£
Total
Uni
ts
£/
Units
£
Total Units
£/
Unit
s
£
Total
05/0
1
Previous balance
(inventory) 40 3.00
00
120.00
00
05/1
2
Bought 25 units at £
3.60 each 25 3.600
0
90.00
00 65 3.23
08
210.00
00
05/1
5 Issued 36 units 36 3.2308 116.30
77 29 3.23
08
93.692
3
05/2
0
Bought 20 units at £
3.75 each 20 3.750
0
75.00
00 49 3.44
27
168.69
23
05/2
3 Issued 10 units 10 3.4427 34.427
0 39 3.44
27
134.26
53
05/2
7 Issued 25 units 25 3.4427 86.067
5 14 3.44
27
48.197
8
05/3
0 Issued 5 units 5 3.44 17.213
5 9 3.44
27
30.984
3
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ACTIVITY 2
Use of planning tools used in management accounting
BUDGET: It refers to projection and forecasting of various costs or expenses, incomes
and resources during a specified period of time and generally complied and re analysed on
periodic basis. It is used by business organisations as internal tool and used to develop new
strategies and plans. Budget is business statements that combines estimation of various costs,
income or revenues that exhibits organisation's performance in near future. It is used by
management to formulate and develop strategies to achieve the budgeted performance within
specified time. It also point out towards the need of amendment in strategies and action plan in
order to achieve organisation's objectives and goals. In BCM, accountants and managers prepare
budgets and then top management use these budgets to develop strategies and action plan while
considering short term and long-term objectives of company. In company, cash budget is used to
analyse the movement and availability of cash to avoid any difficulties in near future. Budget is
tool of budgetary control through which organisation can control their various budgets to ensure
profitability. Budgetary control is a regular process performed by managers to assess the
performance and set financial plans though various budgets (Granlund and Lukka, 2017).
Following are key advantages and disadvantages of various planning tools applied in budgetary
control, as follows:
Cash Budget
It is most considerable planning tool that mainly includes forecasting and estimation of
cash inflow and outflow within an enterprise in respect of a particular period. This budget
specifically used to measure the availability of cash in an organisation to operate. In BCM, first
cash is allotted for each of its construction project than cash budget is prepared by budget to
ensure that enough cash is available to perform various activities. It point out towards need of
cash for particular function or activity. A detailed cash budget help to identify any theft or loss of
cash in organisation.
Advantages: In BCM, this method is used to track the movement of cash at online and
real time basis, help to maintain liquidity position within company.
Disadvantages: Accountants to manipulate or hide the actual performance or company
can use some time cash budget.
Operating Budget
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Under this planning tool, management of respective company based on forecasted
revenue or sales for a specific period makes a systematic forecast of income and expenses. In this
budget, capital expenditures and incomes are not included due to their long-term nature. This
budget is prepared while considering the operating expenses only. In BCM, for each of its
construction project a operating budget is prepare (Kober, Subraamanniam and Watson, 2012).
In company, first several sub budgets is prepared for each operating element them a combined
operating budget is prepared to analyse how efficiently company's project is operating, whether it
fulfils the goals of project.
Advantages: It is a kind of short term budget thus it help BCM to plan and organise its
day-to-day operations effectively and to enhance the accountability.
Disadvantages: As it is short term by nature and prepared by mangers on daily basis
normally which consume time and increase the complexity in operate routine working of
company.
Master Budget
It is planning tools, which combines all small budgets prepared by various managers at
different level and belongs to different department. It provides an assessment of overall
performance of organisation by combining various small other budgets. In BCM, different
project managers prepare various budgets and at last, a master budget is prepared by mangers to
develop a complete picture of company's performance.
Advantages: It provide a smart assessment of company's performance at a glance, which
help to develop new strategy for whole company quickly, and in efficient manner.
Disadvantages: Master budget prepared by organisation shows lack of specificity thus
department wise or project wise allocation of problem is difficult to identify.
Comparison of how organisations are adapting management accounting systems to respond to
financial problems
In business world, the management accounting system had played number of important function
within an organisation. Such as internal management of staff and useful operation and main
significant, to resolve the types of financial issues that can hinder overall performance and
profitability of respective company (Lachmann, Knauer and Trapp, 2013). in the context of BCM
various kind of accounting system are beneficial in resolving assorted kind of financial issues
that are defined below:
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Financial problems are defined as the situation in which company are not able to perform
day to day activities, manage existing workforce and meet the desired objective. These problems
mainly occurs due to lack of sufficient financial resources. There can be multiple financial issues
that is faced by BCM while operating different construction or other operation. These problems
are required to be resolved within specific period in order to reduce the impact on financial
position of company during an accounting year. Some of these are discuss underneath:
Spending more than earning: This problem arise when company is not getting enough
return on different investment made during a time. BCM plans to increase their revenue by
investing in different project such as contracting small apartments of single story for student
migrating for different countries. As a result, company is not able to promote its product line and
faces problem of shortage of funds to run other basic business activities. There must be proper
management of monetary resources so that earning can be increase and investment are made on
only those projects that will deliver better results in future.
Special order: This kind of problem is related with constructing something special for
special clients on particular order according to their needs and standard of living. In context of
BCM, this problem are very common as customer demand for different unique feature while
building their houses. Thus, it is not easy for company to fulfil the demand of each clients due to
many reasons such as lack of professional and skilled labour, insufficient resources unplanned
analyse of market etc. Many time the problem pf special order are so high that it can impact the
existing customer to move their investment to other option (Lee, 2012).
Company uses different management accounting tool in order to determine the different
type of financial problems and ascertain the best possible resolution that support to overcome
these problems. These are discuses underneath:
KPI: This tool mainly help to measure the performance of internal department, operation
and employees those are part of company in order to make valuable decision. Another feature of
this tool is to measure the actual and current effectivity of BCM while attaining predefined goals.
Key Performance indicator in BCM support to characteristic the total cost and overall return on
specific investment that are made project (McLean, McGovern and Davie, 2015). The
management of respective company use to determine the problem of more spending than earning
that reduce the profitability during a year.
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Benchmarking: It is considered to be most vital accounting tool which help BCM to set
specific standard for measuring the performance in context to their competitors. Benchmarking
mainly support to determine the issues that hinder the overall performance of company and
reduces global image. In context to BCM this tool is used to determine the problem of Special
order as they regularly check the list of customer moving to other option in search of companies
fulfilling their special needs and order.
Financial governance: This tool is consider to be most beneficial accounting tool that help
management to create the effective solution in respect to various financial problems which are
faced by companies. This tool mainly includes gathering of useful information, managing and
controlling reasons and grounds of errors and try to focus most appropriate solution to the
problems. In BCM, manager keep a systematic record of each monetary dealing so that problem
of more spending and less return can be resolved. By using financial governess, manager of
respective firm use to gather resources and labour that are helpful in contributing building as per
the special order to customer (Malinić and Todorović, 2012).
Comparison:
BCM FT Group
It is one of the construction company that faces
problem of pricing. This is the main reason
because of which customer are not satisfied
and they start searching new option to fulfil the
need of construction.
This company deal in construction operation
and faces other financial problems of
unexpected order by customer.
In order to deal with the existing problem and
developing valuable solutions management of
respective firm implement the price
optimization system that help them to fix the
best suitable prices for different apartments in
order to fulfil the needs of people and attain the
maximum profit.
It is very important for respective company to
have a skilled team, which are responsible to
manage the special order from client. They
must have skilled labour in order to complete
the construction as per the demand of
customer. This would directly increase the
sales of company and increase customer base
(Morden, 2016).
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CONCLUSION
From above report, it has been articulated that management accounting system is crucial
aspect of a business organisation. It provide a true and fair view about organisation's
performance and practices. It purely emphasises towards achievement of organisation's goals and
objectives. It also help in effective strategy formulation and implementation process. Reporting
under management accounting system provide assistance to top management to trace the overall
position of organisation as compare to its competitors. Different planning tool also vital for
organisation to resolve different matters at initial stage. For small and medium sized enterprises,
these tools can provide competitive advantages. These tools also act as early warning tool for
organisation to identify and resolve any adverse financial event that may rise in near future.
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