Management Accounting and Reporting Methods

This document provides an overview of management accounting and the essential requirements of different management accounting systems. It also discusses the different methods used for management accounting reporting. The document further explores the absorption and marginal costing method and the advantages and disadvantages of using different planning tools for budgetary control. The content is relevant to the subject of Management Accounting and is suitable for college or university students.

MANAGEMENT ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1 Explanation of management accounting and essential requirements of different
management accounting systems.................................................................................................1
P2 Different methods used for management accounting reporting.............................................3
TASK 2............................................................................................................................................5
P3 Absorption and marginal costing method...............................................................................5
TASK 3............................................................................................................................................8
P4 Advantage and disadvantage of using different planning tools that can be used for
budgetary control at workplace...................................................................................................8
P5 Adoption of management accounting systems to respond to financial problems................10
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Management accounting is the one of the area that have huge significence for the firms. It
can be observed that it help firm in measuring its operational effeciency. In the current report
different management accounting systems are explained in detail and along with this reporting
systems are discussed in research study. In middle part of the report, marginal and absorption
costing is done and results are interpreted. At end of the report, different systems that can be
used to respond to finacial problems are discussed briefly. Through these stages research study is
passed and completed.
TASK 1
P1 Explanation of management accounting and essential requirements of different management
accounting systems
To
The Directors of Small White Elephant Restaurant Date: 18th December 2017
Sub: Management accounting systems adoption and their significance
Management accounting is the discipline that assist firms in measuring internal efficiency that
is in the business operations. Usually, firms operating in manufacturing sector aimed to control
cost at workplace. Focus need to be made on improving internal efficiency of the business
operations so that cost remain below determined standard limit. Number of tools and
techniques are present in the management accounting that help firm to compare its
performance against set benchmarks and identifying areas where innovation need to be done in
business operations. Varied sort of approaches like variance analysis and budget etc (Harris.
and Durden, 2012). are available in mentioned discipline that assist managers in making hard
core business decisions whenever required. All these methods have due importance for the
firms because they help companies in working in right direction in legitimate way.
Management accounting systems have due significance with respect to application of these
methods. This is because management accounting system reflect appropriate manner in which
data or information or facts can be stored in books of accounts. It is the information that is
produced by system which helps firm in obtaining different results on application of these
approaches at workplace. Different management accounting systems that are available to firms
are given below. Cost accounting systems: Cost accounting system is one of the most important system
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that is usually used by most of the business firms. In this system usually, costs or
expenses are recorded on basis of fixed expenses, variable expenses and semi variable
expenses. Nature of all these expenses is totally different from each other. It can be
seen that in this accounting system, all expenses are recorded in these mentioned
categories. Number of advantages are associated with the mentioned accounting
system because on the basis of obtained records, managers easily find out that how
much amount they spend on fixed, variable and semi variable category (Boyns and
Edwards, 2013). This help them in preparing a plan about cost control in the business
and making adjustment in it so that cost reduction target can be achieved in the
business. Thus, it can be said that there is huge significance of cost accounting systems
for the firms. Small White Elephant restaurant can make use of this accounting system
because this will help it in tracking rate at which variable expenses are elevating in the
business and steps needed to be taken to handle entire condition. Operational efficiency
can be increased in the business by working on inputs that are provided by the
accounting system to the restaurant. Job costing systems: Job costing system is another system that is used by those firms
specifically that are operating in manufacturing sector. Many times, firms have to
develop customised products in large quantity for their clients. Due to different
specification obviously, costing will also be different and due to this reason, it is very
important to do costing of product separately. Job costing system helps firm in
achieving its target and under this, separate books of accounts are prepared for each
product line and different sort of expenses are recorded in them (Mat, Smith. and
Djajadikerta, 2010). It can be said that job costing system is more suitable for the firms
that are operating multiple product lines in their business. Small White Elephant
restaurant is one of the growing restaurant in the UK and in short span of time period,
it gained huge popularity. It can be observed that in this restaurant, wide variety of
products are served to the customers across different price range. It is very important to
do accounting of expenses in these product lines separately so that better overview can
be obtained about their costing and actions can be directed in right direction to ensure
that expenses will remain in control in the business. It can be said that job costing
system is very beneficial for the firm because it will help Small White Restaurant in
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making more precise decision with respect to determine sales price of varied dishes
with change in raw item’s cost in the market. Process costing: It is also one of the system that is preferred by many firms because it
assist them in doing costing of product lines more accurately. In process costing
approach, usually costing of each phase is computed and then relevant cost is added to
identify overall cost of each product line. There are number of advantages of using
process costing approach because under this it can be easily find out that for which
production process stage cost is increasing rapidly and need control on time so that cost
can be managed in the business (Endenich, Brandau and Hoffjan, 2011). It can be said
that deeper information about costing of product is gathered through process costing
system than any other costing system. If Small White restaurant does not adopt this
accounting system in its business then also there is no problem because for
manufacturing dishes long time is not required in terms of different stages. Hence, it
can be said that there is huge importance of process costing systems for the firms but
due to limited length of operations it does not too much require use of process costing
management accounting system at workplace. Throughput accounting system: It is known as the modern accounting system and
under this main focus is on cost control through improving business operations. It is
the accounting system that was developed by Israeli business man and now become
quite popular among people at fast rate. This system is now becoming very popular
across the globe and used by many firms (Shields, 2015). This is because in it analysis
of activities is done and on that basis, it is identified that in which activity there is need
to work in order to improve performance.
P2 Different methods used for management accounting reporting
There are different approaches of management accounting reporting because varied
operations are performed in the business. In these different sort of reports, firm performance is
measured in different manner. Different methods of management accounting are explained
below: Budget report: In budget reporting method, there are number of items that are covered
and with respect to this, standards are given in the table. Against these standards there are
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actual results that are obtained by measuring firm performance. On comparison of both
values, information about company performance is obtained by the managers. Thus, this
report is prepared on monthly basis by targeting specific duration. Thus, this report not
only help firm in comparison its own performance in respect to standard but it also helps
them in finding out that in comparison to previous months how much difference comes
their performance. Hence, it can be said that budget report has due importance for the
firms as it helps it in measuring performance from multiple sides. Thus, in perfect
direction firm efforts going due to usage of budget report in the business (Messner,
2016). Small White Restaurant can make use of the budget reporting system in the
business as it is very simple to prepare budget and for specific individual need not to be
hired that have strong technical background. However, one need to take care while
making predictions by estimating growth rate of sales revenue and expenses in the
business. In order to solve this problem, experienced person can be given task to prepare
budget for the firm. There are number of advantages and disadvantages of using budget
report in the business. Advantages are already explained above. One of major
disadvantage of using budget report is that assumption is made in it and on that basis,
standards are determined which may be wrong in future time period. Usually, in a year
forecast is made about future time period in terms of growth rate of business and its
expenses. These projections may prove wrong for the firm and in case this happened then
it is possible that firm perform good but it is considered bad by the managers because
actual results are not aligning to the predicted values. Thus, it is one of the big limitation
of budget method. Hence, standards must be prepared with due care because by doing so
it can be ensured that performance will be measured accurately and strategic decisions
will be taken more precisely. Job cost report: It is another most important reporting system because under this in the
report cost for different jobs of business tasks are reported in the books of accounts. This
reporting method is used by most of business firms at workplace. In the job cost report
for all product lines individually figures are computed in terms of expenses that are made
in the business (Bennett, Schaltegger and Zvezdov, 2011). Thus, it can be said that job
cost report gives more in-depth information about cost of product lines and due to this
reason, most of firms preferred to prepare job cost report in the business. Small White
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Elephant restaurant can also prepare job cost report for its different product lines because
by using same, it can better gain insights of its business. On single report, managers
identify that which product line is in their control in terms of expenses and which product
line is out of control in the business. Thus, it can be said that input is received about the
product line on which special attention need to be paid so as to maximise profitability in
the business. Income statement: Income statement is also one of the management accounting report
approach. Under this in depth segregation of expenses is not done in the business. One
can see final value of all expenses that are made in the business (France, 2010). Income
statements of quarters are compared to each other in order to find out that in which areas
firm perform good and in which areas it give poor performance in its business. Income
statement also give overall overview of the company performance and due to this reason,
it is widely used in the business for making decision. Only limitation of this method is
that it does not show segregation of marketing expenses in the business. Hence, it cannot
be identified by looking at income statement that in marketing expenses which sort of
expenditures are highly made like expenses on social media and public relations etc. Account receivable reporting: Account receivable reporting is another mode of reporting
as under this approach receivables are reported in the books of accounts and firm comes
to know that how much receivables can be turned in to bad debts and how much can be
encased immediately in short duration. Cash management strategy is better formulated on
basis of account receivable reporting method. Hence, it can be assumed that there is high
importance of account receivable system. Small White Elephant restaurant time to time
prepare account receivable reporting in its business because usually in business there are
debtors (Viere, von Enden and Schaltegger, 2011). If debtor’s size increased at rapid rate
then there are chances that cash can be locked in bad debts. It is the account receivable
reporting that help managers in ensuring that on time debt amount is recovered from
debtors in the business. It depends on the Small White Elephant restaurant that by using
account receivables in which manner it manages cash inflow in the business.
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TASK 2
P3 Absorption and marginal costing method
Table 1Profit by absorption costing method
Amount Amount
Particulars 21000
Sales 9100
Cost of production -1300
Less: Closing stock 7800
Variable cost 13200
Contribution
Less: Variable sales indirect expenses 600
Less: Fixed cost, production overhead 2000
Administration expenses 700
Selling cost 600 3900
Net profit 9300
Table 2Profit by marginal costing method
Amoun
t Amount
Sales 21000
Less: Cost of production 11200
Less: Closing stock -1600
9600
Less: Over absorption of fixed production
overhead -100
Production cost of sale 9500
Gross profit 11500
Less: Variable sales overhead 600
Less: Fixed costs and administration cost 700
Selling cost 600 1900
Net profit 9600
On analysis of facts it can be said that net profit amount is 9300 in case of absorption costing
method and value of same is 9600 in case of marginal costing method. It can be said that both
marginal and absorption costing methods show different amount of profitability. There is high
profit in case of marginal and absorption pricing method. There is difference between both of
these costing methods which are absorption and marginal costing method. Calculation process is
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slightly different for both costing approaches (Salehi, Rostami. and Mogadam, 2010). Interesting
fact is that in case of marginal costing method only variable expenses are taken in to account for
computing overall cost of the products. Contrary to this, absorption costing is completely
opposite and under this both fixed and variable expenses are taken in to account to do costing of
products. Thus, there is slight difference but it brings big variation in results. Marginal costing
method indicate more profitability then absorption costing method due to non-inclusion of fixed
expenses in the business. Before further discussing these approaches in more detailed manner it
is very important to understand fixed expenses, variable expenses and semi variable expenses
nature. Fixed expenses are those that remain unchanged and always remain stable in the
business. On other hand, variable expenses are those that never remain same and values keeps on
changing consistently in the business. Semi variable expenses are those in which some portion
remain fix and some remain variable. In different combinations, these expenses are made in the
business. Usually, in the business variable expenses are made by the firms by higher amount.
While doing calculation always one of the question comes in front of managers that which of
approach they must use in their business for calculation (Stergiou, Ashraf and Uddin, 2013). In
other words, it can be said that it is difficult for managers to determine whether they must use
marginal or absorption costing method in their business. There is importance of both costing
methods for the firm. In case of absorption costing fixed expenses are take in to consideration
along with variable expenses. It can be observed that every year purchase of fixed asset is not
done that directly make an important contribution to entire production process. If same happened
truly in case of any company then in that case, it is better to make use of marginal costing in the
business because inclusion of fixed expenses in the business does not make sense. On other
hand, in case of marginal costing one thing can be considered which is that even fixed expenses
are not incurred directly in relation to production process it is the cost that is incurred in the
business and firm have to cover that cost out of cash flows. From this point of view if situation is
taken in to consideration then inclusion of fixed expenses in the business seems right. Thus, it
can be said that both costing methods must be used in the business. There is benefit of using this
strategy because if marginal costing is only used then in that case managers can easily identify
that what amount of profit is earned if only those expenses are taken in to consideration that are
heavily contributing to production process (Zainun Tuanmat and Smith, 2011). On other hand, if
absorption costing is used then it is identified that how much profit is earned if both expenses are
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taken in to account. Hence, by doing so effect of these expenses on business revenue is computed
and it can be said that analysis help managers in making decisions more in proper manner. It can
be said that firms must use both approaches at workplace as there are few of positive and
negative points associated with these approaches. According to need these approaches must be
used at workplace and proper evaluation of expenses must be done in the business so that better
decisions can be made and operations can be governed in proper manner.
TASK 3
P4 Advantage and disadvantage of using different planning tools that can be used for budgetary
control at workplace
There are number of planning tools that are used by the firms in their business and all of
them have some advantages and disadvantages. Different sort of planning tools that are available
to the business firms are budget and capital budgeting appraoches. In class of budget
classifications can be done.
 Cash budget: It is one of the most important type of budget that is prepared by all sort of
business firms. In the cash budget estimations are made about cash inflow and outflow
and on that basis net available balance is identified. By using cash budget planning is
done about expenditures that willl be made in the business. In other words it can be said
that efforts are made to make expenses within determined limit and in this regard plan is
prepared (Fowzia, 2011). On this basis it can be said that cash budget is the one of
important planning tool for the firm. There are number of advantages and disadvanage of
the cash budget.
Advantage
 One of the main advantage of cash budget is that by using same expenses can be
controlled in the business in proper manner. This wil lead to increase in profit in
business.
 Second main advantage of cash budget is that it is easy to prepare it and there is no need
to hire specific talented person to prepare budget.
Disadvantage
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 Major disadvantage of using cash budget is that it is based on estimations and if
estimation will be made wrongly then in that case wrong business decisions can be taken
on the basis of budget (Hutaibat, 2012). Fixed budget: Fixed budget is another alternative that is available to the business firm. It
is totally inverse of cash budget as in this sort of budget values of all elements of budget
is made constant. Like cash budget there are some merits and demerits of fixed budget.
Advantage
 One of major advantage of fixed budget is that its value almost remain same and never
get changed. Hence, firm manager do need to devote its special time for preparation of
budget for the business.
 Other main advantage of using fixed budget is that one just need to take a look at budget
to ensure that it can be used in the business even business condition change slightly
(Pimentel and Major, 2010).
Disadvantage
 One of disadvantage of using fixed budget is that in case business condition changed at
fast rate it is not possible to make use of fixed budget in the business. If it will be used
then in that case wrong decisions can be taken in the business.
 Zero based budgeting: It is slightly different approach because under this approach
simply no allocations are made to any department until manager present its own
department budget in front of seior managers. There are some of advantage and
disadvantage of zero based budgeting which are given below.
Advantage
 One of major advantage of using zero based budgeting is that under this systematic
approach is followed to prepare budget for the business firm. Hence, it can be said that in
zero based budget projections are highly relevant to the firm.
Disadvantage
 One of the major disadvantage of using zero based budgeting is that its process is lengthy
and time consuming. Capital budgeting method: In this approach project evaluation is done and under this
project are evaluated on basis of different methods like internal rate of return and net
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present value method (Jalaludin, Sulaiman and Nazli Nik Ahmad, 2011). Some of
advantage and disadvantage of capital budgeting method are explained below.
Advantage
 Major advantage of using this approach is that projection is made about expenses that can
be incurred in business project. Hence, planning goes hand in hand with passage of
project duration.
Disadvantage
 Major disadvantage of mentioned approach is that with increase in duration project cost
may increase and it can be difficult task to prepare plan in proper manner which lead to
wastage of time.
P5 Adoption of management accounting systems to respond to financial problems
Financial problems are faced by most of business firms and it is the management
accounting systems that are used to respond to financial problems. Some of the management
accounting systems that can be used to respond to financial problems are as follows. Key performance indicators: KPI is the one of the most important tool that is used to
respond to financial problems. Currently, Small White Elephant Restaurant is facing
financial problem like less availabeility of cash in business. In order to respond to
problem KPI can be used in which actual values can be compared to standards and on
that basis it can be identified how big is financial problem (Hammad, Jusoh. and Ghozali,
2013). According to level of identified problem steps that can be taken to solve problem
are identified. In this way firm respond to financial problem. Balanced scorecard: Balanced score card is the one of the most important approach as
under this method there are four parameters where firm performance is measured and
evaluated. These four parameters may be financial, customer and stakeholder, internal
process and organizational capacity (Management accounting, what is management
accounting?, 2017). On these four parameters some targets are determined and actual
performance is compared against these targets. By doing so firm performance is
evaluated and areas where focus need to be made like improper management of cash are
identified. In this ways balance score card help firm to respond to financial problems. Financial governance: Financial governance is the specific approach to respond to
financial problems. In this approach rules and regulations are alredy determined and same
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need to be followed while performing tasks (Amidu, Effah and Abor, 2011). In case
someone that is performing activities related to finance is facing specific problem and
make mistaken in business then in that situation that specific person will be held
responsible for its mistake and it will respond to financial problems. Such kind of
practice ensured that one before performing any action will think about it and will take
right action which will help company in solving financial problem that it is facing in its
business due to change in an condition or business performance.
CONCLUSION
On basis of above discussion it is concluded that management accounting is the one of
the most important domain that have significence for the firm. This is because in management
accounting there are number of methods that help managers in measuring firm performance in
proper manner. It is also concluded that management accounting systems must be selected by
considering number of factors and according to suitability same must be choosen. It is also
concluded that varied reporting methods must be used in the business so that better decisions can
be made in the business. Specific system must also be followed to respond to specific financial
problem in order to handle situation.
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REFERENCES
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Messner, M., 2016. Does industry matter? How industry context shapes management accounting
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Online
Management accounting, what is management accounting?., 2017. [Online]. Available
through:< https://debitoor.com/dictionary/management-accounting>.
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