The Importance of Management Accounting

Management accounting is a vital subject that plays an essential role in managing and assessing organizational performance. It provides necessary and timely information to managers, helping them make informed decisions. This assignment explores various types of management accounting systems, such as cost accounting and job costing, and their benefits. It also discusses how management accounting principles can be used to solve financial problems and address progress within organizations.

MANAGEMENT
ACCOUNTING
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Table of Contents
INTRODUCTION...........................................................................................................................3
LO 1.................................................................................................................................................3
P.1. Management Accounting and Different types of Management accounting Systems...........3
P2. Methods used for Management Accounting Reporting.........................................................4
LO.2.................................................................................................................................................5
P.3. Prepare an income statement using marginal and absorption costs.....................................5
LO.3.................................................................................................................................................7
P.4.Advantages and Disadvantages of different types of planning tools used for budgetary
control..........................................................................................................................................7
P.5.Management Accounting Systems helps to respond to Financial Problems.........................8
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12
Books and Journals....................................................................................................................12
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INTRODUCTION
Management accounting is the system which helps managers in making plans, policies
and strategies; it aids in decision-making process. This practice of management is applied to a
wider organisational context. It is a vast concept that includes important accounting practice
within it which guides and directs the managers. In this report we will discuss about the
importance and fundamentals of management accounting, different tools and techniques,
common costing systems like, job costing, absorption cost and the way managers resolve
financial issues with the use of management accounting system.
LO 1
P.1. Management Accounting and Different types of Management accounting Systems
The accounting system which analyse the cost incurred in business and prepare financial
reports that aids managers with the relevant information. It assists in planning and formulation of
business strategies which enables to achieve goals and objectives of organisation. The origin of
management accounting system helps the managers to forecast about future and enables in
understanding performance variances. There are no set principles, but according to role it plays
here are few accepted principles. These are, Management by exception, utilisation of resources
of company and Integration. These principles help in decision making process, internal
management, maintain customer value, etc, that are needed to be fulfilled objectives of
organisation.
Management accounting is a vast concept that differs from financial accounting system.
Information provided is used by internal management, which may not be audited and focus on
future trends. Whereas, the financial accounting focuses over past data and follows generally
accepted principles as well as information is audited (Chiwamit, Modell and Scapens, 2017).
Types of Management Accounting Systems Cost-accounting systems: It refers to system which tracks down the inventory as it goes
down various stages of production within organisation. It is generally meant for
manufactures. This system helps management to maintain required inventory and thus,
reduce the cost of warehouse and security.
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 Inventory management systems: In this system, the goods or inventory manage business
operations to the entire supply chains. It varies from business to enterprise and depends upon
the size and nature of business. It helps managers to make effective decision and investment. Job-costing systems: The managers can calculate cost of each job within organisation. Job-
costing system helps managers to know the amount of cost incurred on each job. This is a
relevant costing system that helps in maintaining data which is useful for business operations.
It is useful in construction business while making a particular batch of products (Goddard
and Simm, 2017).
 Price optimising systems: It is used to determine the reaction of consumers in relation to
different prices of products/services provided by company through different channels. This
enables managers to choose the price that will meet all its objectives.
Difference between management accounting and financial accounting
Management accounting Financial accounting
It helps in providing key information within
the organization.
It helps in providing information to people
outside the organization, particularly
stakeholders.
It is an optional aspect that can be initiated
based on will of the management.
It is mandatory for the organization to present
its financial accounting reports
It generally focus on future regulations It generally focuses on past transactions
P2. Methods used for Management Accounting Reporting
There are various types of reports prepared by management to know about the internal
issues and to get relevant information about them. They are: Performance report: The report is meant to understand overall performance of company.
It focuses over each employee within organisation. These are relevant reports as they help
management to make strategic decision and provide deep insight in working of company. Budget: They are prepared by every organisation whether it is a small business or large.
Department wise budgets are made in big companies. These budgets help to measure the
actual performance with set standards.
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 Sales Report: This report helps to know the revenue earned from sales by company. It
shows which avenues has generated more profit and which avenues are in loses, it helps
mangers to know which salesperson has contributed more to the sales of product/services.
 Cost Reports: In this report, the managers calculated the cost that incurred in production
of an item or product. It includes material, labour, overhead and wages and other factors
that are affects the cost of production (Jermias, 2017).
The information mentioned in these reports is utilised by the managers to make various
decision in relation to employees, products/services, etc. They act as the guidelines to managers.
Reports show the relevant information about overall business operations. Thus, the accuracy and
reliability should be there. If reports are not up to date then they hamper the performance of an
organisation. accurate reports make managers to take faster decision, formulate polices and plan
according to trends and changes, provide rewards to the hard-working employees and motivate
them to work for achievement of goals. To make a proper investment, produce goods in a cost
effective manner, all these activities of management can be achieved only when the information
in reports prepared are reliable. As the management operates in dynamic environment that keeps
on changing if the data provided is old and not up to date, this makes company to be stagnant in
its operations. Thus, above mentioned management report should be reliable, accurate and up to
date (Srinivasa, Kaura and Gilman, 2017).
The understandability of report means that it must be understandable by the people or the
one who are using it, a user must have certain basic knowledge of business activities. If given
data is not provided in a proper form then it may not be able to deliver the required information.
As mangers use them to make decision, formulate policies and marketing strategies, guides
employees, manages inventory, etc.; all these tasks would not be fulfilled if the information
provided is not understandable.
LO.2.
P.3. Prepare an income statement using marginal and absorption costs
Cost is an amount that is paid or given in order to get something gain return. It is usually a
monetary valuation of material, efforts resources, risks, time and utilities consumed and
opportunity that has been foregone for production. There are basically two types of cost in case
of company. These are fixed cost, variable cost and overhead cost. However, product costing can
be initiated in the form of absorption costing and marginal costing.
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Marginal Cost: it refers to that cost which incurred when an additional unit of an output is
produced. It brings change in total cost of production with one extra unit, it is done to know
where an organisation can achieve economies of scale.
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Absorption costs: This means the final unit of output would bare all cost of production, i.e.
it will include cost of direct material, labour and wages. It includes overhead cost within it.
LO.3.
P.4.Advantages and Disadvantages of different types of planning tools used for budgetary
control.
Types of planning tools:
Operating Budget: this budget is formed for the operations of organisation. It is maintained to
know debt obligations related to company and what areas of business needed the cash most.
These budgets are of great use as they are a flexible budgets which helps company to adjust it
expenses and increase it revenue as when required. They shows the amount of cash company is
having at present. Types of operating budgets: Sales Budget: These budgets show the revenue generated from sales in an organisation. It
shows income expected to be earned by company.
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 Expense Budget: It is meant to anticipate the expenses that will be incurred in the
business. Project Budget: This budget shows the difference in between sales and expenses. If the
profit anticipated is low then necessary actions are taken to improve the sales budget as
well as to reduce expense budget (Wei and Xima, 2017).
Capital Budget: This budget includes capital receipt and payments incurred in business. In
capital budget allocation of money is done for maintenance and acquisition of fixed assets, like;
land, building and machines, etc. fixed assets are the important in every business and thus needs
to be maintained for the working of business. The capital budget is crucial decision of
management which affects the organisation as whole (Parker, 2012).
Operating budget:
Advantages Disadvantages
It helps in managing current expenses of firm. It requires long term planning.
Provides accurate information. Time consuming process.
Help in assessing future needs. It requires more money and resources.
It assesses the company to know there needs
for its operations.
It is not suitable for small business.
Capital budget:
Advantages Disadvantages
Capital budget is an important tool as it guides
management in relation to the fixed asset.
It includes only quantifiable aspects.
It helps in knowing value of fixed asset held
within organisation.
Risk of uncertainty of techniques used in.
They assist in determining future destiny of a
company
It needs to be prepared urgently delay in
preparation can make a loss to company.
Helps to known the amount of fixed asset
company has.
It is a time consuming process.
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There can be difference in pricing at which the products are actually offered by different
competitors. They tend to determine their prices based on cost of production that has actually
being incurred by them. Supply and demand is another factor that ios generally being considered
by them while determining prices. In this scenario, consumers play an important role in it.
P.5.Management Accounting Systems helps to respond to Financial Problems.
Every company needs money for its operations. The role of finance in business is crucial
as every aspects of business neds a proper funding to operate. But, at times there are financial
problems arises that hampers the growth of business. These problems are common in all type of
organisation. Examples; Increasing amount of debt over company: They are bad indicators as company growth is
been stopped with increasing amount of debts. High amount of unpaid loans and
increasing limits of credit cards raises companies monthly expenses. At a certain point
where company fails to repay or the amount of it debts and loans exceeds it revenues then
it leads to bankruptcy of company. Lack of strong financial Management: if company dose not have a sound financial
management then it will note be able to sustain in market. The firm which overspend
there financial resources and underestimates the competitors, suffers from improper
financial management (Bodie, 2013).
 Not enough cash flow: Cash flows are important for company to run it business. If cash
flow of company shows negative balance then it will not be able to expand it business
and lastly it has to depend over borrowing of debt from outside parties.
To solve the above mentioned problems following methods can be used. Benchmarks: These refers to sets of standards which firm/company uses to check it
quality and to improve it performance in comparison to the other companies within the
industry. Benchmarks can be established by company itself or it can use the
predetermined standards that exist within environment. Organisation can set standards to
make effective use of financial resources, in order to avoid the wastage and duplication of
them. Further, management should set a benchmark to measure it performance. Key performance Indicators: These indicators shows the key operational areas of
organisation which it needs to be focused in order to achieve the objectives. They are the
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indicators that shows how effectively it is achieving the goals. They vary from business
to business depending on the priorities every firm has. The KPI for financial problems is
to see how much revenue is been generated by company. Budgetary Targets: The budget targets refers to a set amount of target which company
wants to achieved within a specific period, for example; if a company wants to increase it
sales by 1000 units by end of the current accounting period, this would be refereed to as
the budget target of company (Pondeville, Swaen and De Rongé, 2013).
Financial Governance: The predetermined rules that is been issued to provide governance or
protection to financial resources by there regulators (Kaplan and Atkinson, 2015). These set
standards or rules issued by the finance governance helps to regulate and check over financial
resources of company. It helps in preventing problems in many ways:
 Improved companies reputation by controlling and checking over the financial assets of
company.
 Reduces burden of debts and loans from organisation as resources are properly
maintained and guided.
 Makes companies image stronger in the market.
 Resolve the issue of cash flow from business.
 Decreases conflicts from organisation and helps to reduce duplications and frauds.
Characteristics of an effective management accountant: Flexibility : The management should be adjustable and flexible, he should be able to
adapt to the changes within environment/ organisation. He should accepts the challenges
and take advantages of opportunities. Good Communication Skill: The communication skill of managers should be excellent,
he must be able to communicate the relevant information to there employees, collogues
and client. This will strength relationship between the employees and managers. Time Management skill: Managers are to take into consideration various issues of
organisation. They make strategic decision, thus they are lined up with various task in
line, so it becomes important for managers to effectively managed it time skills. Creativity: They deal within dynamic environment that keeps on changing, a manager
with a creative mind can easily adapt to these changes. Further, to resolve some issues
they need a creative approach rather than textbooks solutions.
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 Effective Organisation: He should be able to organise the company in an effective
manner. It must have all the required information, reports and data to the related issues.
This will help him find a quick solution to the problems.
Apply these skills of management to solve financial problems:
 The skills of management like effective communication, this will help to generate
management information it required, also when subordinates provides proper and timely
information this would help managers to solve any issues if arises.
 Creativity of managers help it to get over any untimely or contingent liabilities arises in
an organisation or outside environment. Further, the creative approach of him towards
problems will able to get a better solution in a cost effective manner.
 The managing of organisation as whole is key aspects that resolves the issues of financial
problems as mangers will be able to effectively control over the financial assets of
company. This will reduce the need and dependency of firm over debts and loans.
 Effective management of time will generate more revenue. When a manger will be able
to effectively manages it given time, he can focus over core issues of business that affects
company performances. Also, he will be able to make effective and timely decision for
arrived issues and control environment from getting worsen (Klychova and et.al., 2015).
The strategies of management accounting helps to combat the problems of financial
management. Financial statements of company is of great significance to each parties whether it
be outside or inside of organisation. The financial statements help management to know it
positions and progress in an accounting year (Nixon and Burns, 2012), Similarly these
statements attracts potential investors and enable the existing ones to know that there
investments are in safe place and generates good rate of return. Creditors finds the state of there
money through the financial statements it builds there faith and trust over companies'. Further,
government can formulate taxation policies for the a particular industry by knowing there
financial positions. Thus, it becomes important aspects of an organisation to provide a reliable,
accurate and up to date information in there financial statements so the outside parties can rely to
them.
CONCLUSION.
Management accounting is evolutionary subject, that plays an important role in managing
and assessing the organisation. It helps mangers to get necessary and timely information as and
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when required. Various types of system of management accounting like; cost accounting, job
costing, etc. helps mangers to know about the cost incurred in production and the cost of various
jobs within business. The reports prepared by management helps to address about the progress of
organisation and enables to measure there actual performance with set standard. Further, there
are various ways in which management accounting principles can be used to solve the financial
problems.
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REFERENCES.
Books and Journals.
Bodie, Z., 2013. Investments. McGraw-Hill.
Chiwamit, P., Modell, S. and Scapens, R. W., 2017. Regulation and adaptation of management
accounting innovations: The case of economic value added in Thai state-owned
enterprises. Management Accounting Research. 37. pp.30-48.
Goddard, A. and Simm, A., 2017. Management accounting, performance measurement and
strategy in English local authorities. Public Money & Management. 37(4). pp.261-268.
Jermias, J., 2017. Development of management accounting practices in Indonesia. The
Routledge Handbook of Accounting in Asia, p.104.
Kaplan, R. S. and Atkinson, A. A., 2015. Advanced management accounting. PHI Learning.
Klychova, G. S. and et.al., 2015. Management aspects of production cost accounting in horse
breeding. Asian Social Science. 11(11). pp.308.
Nixon, B. and Burns, J., 2012. The paradox of strategic management accounting. Management
Accounting Research. 23(4). pp.229-244.
Parker, L. D., 2012. Qualitative management accounting research: Assessing deliverables and
relevance. Critical perspectives on accounting. 23(1). pp.54-70.
Pondeville, S., Swaen, V. and De Rongé, Y., 2013. Environmental management control systems:
The role of contextual and strategic factors.Management accounting research. 24(4).
pp.317-332.
Srinivasa, D., Kaura, A. and Gilman, R., 2017. A Systematic Review and Variance Analysis:
Does Plane of Dissection Affect Nerve Injury Complication Rates in Various
Rhytidectomy Techniques?. Plastic and Reconstructive Surgery Global Open. 5(9 Suppl).
Wei, W. E. I. and Xima, Y. U. E., 2017. Research on Accunting Development Cost Per Graduate
Student in University. Canadian Social Science. 13(1). pp.11-15.
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