Management Accounting: Types, Methods, and Strategies

This article provides an overview of management accounting, including its types and methods. It also discusses different pricing strategies and planning tools for budgetary control. The content covers the subject of management accounting and is relevant for students studying finance or accounting courses.

Management Accounting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
LO1..................................................................................................................................................3
Management Accounting system and its types............................................................................3
Critical evaluation of integrating management accounting and reporting in an organization.....5
Methods used in management accounting reporting...................................................................5
LO2..................................................................................................................................................9
Calculating cost using appropriate techniques............................................................................9
LO3................................................................................................................................................10
Different types of planning tools for budgetary control............................................................10
Different types of pricing strategies that can be used to tackle financial problems..................12
LO4................................................................................................................................................13
Comparing the ways in which organization could use management accounting to respond to
financial problems.....................................................................................................................13
CONCLUSION..............................................................................................................................16
REFERENCES................................................................................................................................1
APPENDIX-1..................................................................................................................................2

INTRODUCTION
Management accounting (MA) is the branch of accounting which involves gathering and
analysing relevant information and involves preparing timely reports that assists the manager in
taking managerial decision. In this, reports are prepared periodically and often include details of
the company's details. Reports are prepared for internal use by the management. It assists the
managers and supervisors in monitoring the performance of the organization and the reports are
prepared on weekly, monthly or quarterly basis as per the requirement and can be prepared as
requested by the manager. In this report, Katie Walker Furniture is taken as an organization,
which is in manufacturing sector. This report covers, introduction to MA and the different
methods used for MA reporting. It also includes different types of MA techniques, different
tools that are used in budgetary control and also a comparison is drawn between two companies
in respond to different financial problems.
LO1
Management Accounting system and its types
As per IMA, management accountant is a profession in which professionals requires
executing and apply different professional skills and knowledge in order to take meaningful
decisions managerial, planning and performance management and helps in implementing control
to assist management in formulating and implementing strategic management strategy
(Management accounting. 2020).
In simple words, management accounting is the system that is used by the internal
management team to analyse the data both financial and non financial in order to take decisions
at the right time.
Different Types of management accounting system
MA system is the system deployed by the management that helps in preparing reports in
the that can be used by the management in taking decisions. There are different types of MA
system that can be used by the organization, some of them are stated below.
Cost accounting system: It is a system that helps in determining the estimated cost of their
product which is used for the profitability analysis and cost control. It assists manufacturers in
keeping track on the production activities (Yang, Yu and Wang, 2016). In simple words, it is
used by the manufacturing organization in tracking the organization's inventory through various
production. It starts by tracking the raw material as and when it goes through the production

process and then turned into finished product. For example, as the material moves from one stage
to another, the cost accounting system tracks and updates on the computer system The essential
of this system is that it must suits the size and nature of the organization.
Benefits:
 Periodical determination of profit and loss.
 Helps in executing control over material and supplies.
 Helps in classification and division of cost.
 Provides guidance for future production policies.
Inventory management system: It's a management tools that assists an organization in keeping
track of its inventory across the supply chain. It optimizes entire system from placing the order to
the supplier to the order delivery to the final customer. It includes the process of ordering, storing
and handling the inventory. It is important for every business irrespective of size. It is systematic
process which maintains and monitor the stocked products, raw material, finished and unfinished
products. The essential of this system is that it provides relevant information to maximize the
productivity.
Benefits:
 Helps in minimizing the inventory cost and increasing the sales and profits.
 Helps in integrating entire business.
 Maintain customer satisfaction.
 Reduces the risk of being out of stock.
Job costing system: This system involves gathering the information with respect to the cost
attached with a product and service. It is useful for businesses that provides products and
services of different cost which is based on the customer specification. It takes into account
direct material and labour cost and indirect costs. It is essential in order to provide complete
details about the contract to the customers.
Benefits:
 It helps in evaluating profitability of each job separately.
 It can be used for estimating the cost of job similar to the previous one.
 Helps in detecting defective work with specific job.
 It provides details about the different cost associated with the job such as cost of
material and labour and overhead expenses of each job.

Price optimization system: It is the process in which evaluates how demand varies with price
and helps in fixing the price of the product and is also depends upon the customer's willingness
to pay. It is very important if the organization wants to link the volume with the profits and most
essential for raising profit with the same customer base. It determines how sensitive its clients
with respect to the change in the price. The essential of this system is to get the complete
information of cost and the recommended prices.
Benefits:
 It automates the entire process.
 Helps in better and quick decision making.
 It helps in focusing on the various goals which results in better financial benefits.
 Helps in tracking and optimizing price.
All the above are the different MA system that the organization can use to effectively
manage their business functioning. The successful implementation of the same will help the
organization to better decision and avoid unnecessary cost and wastage.
Critical evaluation of integrating management accounting and reporting in an organization
The integration of management accounting and reporting in an organization results into
integrated system. This will help the organization in efficiently analysing the performance and
proper decisions which will help in proper decision making and the managerial reports provides
direction to the managers in order to make effective strategy.
Methods used in management accounting reporting
Managerial reports helps organizations in monitoring company's performance. It is
prepared periodically as per the requirement. A detailed analysis is given below.
Budget reports
Budget report is the management report prepared to compare the standards set with the
actual performance of the organziation during the period. It is used to analyse how close the
actual performance was in comparison to the budgeted performance (Brown, et.al, 2017).
Budgets are financial goals to be achieved which are based on future projection. It is prepared
based on the previous experiences. It lists out all the sources of earnings and application of
funds. The purpose of the business to accomplish its objectives and goals while staying within
the budget.

Account receivable aging report
It refers to a management tools used by the organization in evaluating the company's
account receivables (Dixon, 2017). It lists out the organizations complete customer list along

with the remaining balance. It also helps in determining the defaulters and any issues in the
company's collection process. This report provides an estimate of the amount of bad debts that
can incur and according to which provision is prepared.
Job cost report
It is report that tracks on the ongoing cost of the project. These are actually matched with
the revenue so that organization can determine the profits associated with the specific job
(Sullivan Denise, 2019). It helps the company to focus in the area where there are higher
earnings and does not waste time and efforts in the job with low margins. It also helps in
analysing the expense in the ongoing projects so the corrective actions can be taken before cost
escalate.

Performance report
This report is prepared to measure the organization's performance as a whole as well as
each employee within it. In large organizations, department wise reports are prepared, these
reports are used by mangers to take strategic decisions for achieving future goals of the
organization. These reports provide deep insight into the working of the organization. This report
plays an important role for the company to accurately measure their strategy.
LO2
Calculating cost using appropriate techniques
Calculations enclosed in Appendix-1
There are two different approaches that are used for valuation of inventory are marginal
and absorption costing methods. A detailed description is given below.
Marginal costing
It helps in de terming the variable cost per unit. It helps in ascertaining the additional cost
per unit and its impact on the overall profit of the organization with respect to change in the sales
volume. It is bifurcated into two types fixed and variable cost. It is used by the management for
decision making process which is mainly used in business expansion. As it helps in determining
break even point.
Absorption costing

It is the accounting method which captures different costs in relation to a particular
product. It includes both direct and indirect cost. This method is required by GAAP for external
reporting. In this method, fixed overhead cost is allocated to the products irrespective to the fact
whether the product is sold or not.
It can be inferred from the calculation that absorption costing is more appropriate than
marginal method of costing. Absorption costing method helps organization in looking at the cost
completely and will be able to form strategy based on cost effectively. It takes in account both
fixed and variable cost while calculating cost of production. Also, it puts emphasis on cost of
each unit and change in opening and closing stocks affects the cost per unit. Marginal costing is
beneficial for the companies who have just started out their business and wants to know the
contribution per unit and the break even point for further decision making. Absorption costing is
widely used and also required by GAAP for reporting purpose. Thus, absorption costing method
is best for the valuation of inventory.
LO3
Different types of planning tools for budgetary control
Budget usually estimates the future outcome of the organization and the financial position
of the business (Hoggett, et.al, 2018). It is for future planning and performance measurement
needs. There are different types of tools that can be used are stated below.
Zero based budgeting
It is a method of budgeting in which the process starts from the scratch, that is, from zero
base. In this, budget is justified for each new period (Zero Based Budgeting (ZBB) – Overview &
Advantages. 2019). Each and every departments are analysed for its needs and cost. Based on
this budget is prepared irrespective of whether budget is higher or lower than the previous year.
Advantages:
 It identifies obsolete process which is not necessary and are scrapped by the management.
 It changes with the change in organization as underlying assumptions needs to be
changes.
 It helps in efficient allocation of resources and increase profitability. It helps in lowering the cost as it carries out complete analysis.
Disadvantages:

 It is based on cost benefit analysis for a particular, the benefit of which can be achieved
in long term.
 It is a time consuming process that requires lot of time and efforts to formulate it.
 Manipulation can be done by managers to get more resource to their departments.
 May incur conflict among managers over the allocation of funds.
Capital budgeting
It is process of evaluation whether to invest in a particular project or not and huge
expenses to be incurred with the aim to obtain the best return on investment. It usually takes into
consideration long term perspective of the organization (Khan, 2019). It revolves around capital
expenditure of the organization. Most business have the future plan to expand their business
which requires enough capital, that's where capital budgeting is used.
Advantages:
 It helps in identifying and understanding the risk and its effects on the business.
 Helps in exercising adequate control over expenditure.
 Helps in better decision making related to investment opportunity. It abstains the organization from over or under investing.
Disadvantages:
 Decisions are majorly for long term and are irreversible in nature.
 Requires highly skilled professionals.
 Wrong decision will adversely affect the business for long term.
 Uncertainty or lack of accurate information will lead to wrong applicability.
Cash budgeting
It is a budget prepared for estimating the organizations cash receipt and expenditure for a
particular period. It takes into consideration cash inflow and cash outflow and helps in
determining the organization's cash position (Cash budget. 2020). This budget is used to
determine whether the organization is having sufficient amount to cash to carry out it day to day
business activities. It also helps in prioritizing the expenses based on its important. This budget is
made after preparing other budgets such as sales, purchase, production etc.
Advantages:
 It helps to coordinate the different activities.
 It helps in evaluating the cash position of the business.

 It determines whether organization is having cash to meet its daily expenses. Helps in getting the clear picture of the reality.
Disadvantages:
 It limits the spending power of the organization.
 It does not reflect right profit.
 It is based on the estimation and assumption.
 Can be easily manipulated as per the requirement.
So, these planning tools helps Katie Walker Furniture, in solving financial problems
which will help the organization in achieving sustainable success. To be successful it requires
successful implementation of the same.
Different types of pricing strategies that can be used to tackle financial problems
There are different types of pricing strategies some of them are stated below.
Penetration pricing: In this pricing strategy, company uses low prices in order to enter the
market or to introduce new product.
Advantages
 Acts as a barrier to new entrants.
 It reduces competition as weaker and small competitors will leave the market.
 Possibility to achieve dominant market position.
Disadvantages
 Low quality of product will lead to loss of customers.
 Price war with competitors lead to no gain of market share.
 Brand conscious customers may not switch to low price products.
Price skimming: With this strategy, businesses enter the market with high priced products with
the aim of gaining revenue (Tay, K., 2019).
Advantages
 Helps in gaining higher profits.
 Effective in recovering cost.
 Creates a high-quality image.
Disadvantages
 Tough competition.
 Much higher price may not be accepted by the consumers.

 May annoy customers who purchased the products initially and after which price drop.
Competitive pricing: In this, the prices used are based on the prices set by the other competitors.
The objective is to lower the price as compared to the competitors.
Advantages
 Keeps the price of the product down.
 Helps in retaining the market share.
Disadvantages
 It may impact the profits of the business.
 Price can be same with the competitors which requires it to use other marketing tactics.
LO4
Comparing the ways in which organization could use management accounting to respond to
financial problems
To order to identify the financial problems pertaining to the business, organization can
use different method of performance measurement tools. A detailed description of the following
is given below.
Benchmarking
It is the process in which the organization compares the product, services and processes
with the other competitors superior to it in the same industry. It provides necessary insight and
understanding about how the organization is working with respect to the similar organization
(van der Voordt and Jensen, 2018). It breaks down the entire process and identifies the area of
improvement. It allows businesses in gaining strategic advantage over its competitors and also
helps in improving its performance and productivity. It has number of benefits such as
competitive analysis, monitoring performance, helps in continuous improvement and planning
and setting goals.
Key performance indicators
It is a set of certain criteria that is used by the organization to measure its success. These
KPIs can be financial which includes net profit, revenue, expenses etc. The key performance
indicators differ from organization to organization and one industry to another (Key performance
indicator. 2019). It demonstrates how effectively company is able to achieve its objectives. It
focusses on strategic and operational improvement. Different business functions have different
key performance indicators. The business manager keeps a close eye on the performance and

takes action if KPI is not inline with the organizations objectives. With the change in goals,
organization requires making changes in its key performance indicators as per the requirement.
Variance analysis
It is the quantitative method of measuring the performance of the organization by
comparing the actual with the budgeted ones. The business prepares the budget for different
needs and then compare it with the actual result to identify the variance between then which can
be positive and negative (Marzlin Marzuki and Ismail, 2019). Negative variance refers to the
situation in which actual performance is lower than the standards set and then management will
take relevant actions to identify the reasons for the same. For example, if the budgeted sales for a
period is £20,000 and the actual sales achieved is £18,000, so the analysis gives a difference of
£2,000. The variance analysis involves the investigation of differences and the interpretation of
the same with respect to why difference occurred. The reason in the above example can be
because of loss of customers who usually buy its products. The different types of variance
analysis that can be carried out are purchase price variance, variable and fixed overhead
spending variance, selling price variance, labour rate variance, labour efficiency variance,
material yield variance etc.
Balanced scorecard
It is the performance metrics which is used to identify and improve the business function.
It helps in providing feedback to the organization. In this, data collection is important for
providing quantitative data as managers of the organization gather and interpret the information
that helps in making out better decisions for the organization (Malagueño, Lopez-Valeiras and
Gomez-Conde, 2018). It covers four main aspects: learning and growth, customers, finance and
internal business processes. Learning and growth looks at the overall corporate culture. Internal
business processes refers to how smoothly the business is functioning. In this efficiency is very
important. Customer's perspective refers to the people who buys the product and services. Here,
customer satisfaction is the great tool or indicator of success. Next is financial, it takes into
account the financial health of the organization. So, all these perspectives are used for evaluating
and identify the financial problems.
Financial governance
It refers to the way the company gathers information, monitors and controls financial
information. It also presents the way company tracks its financial transaction and also the

guidelines required to followed in presenting the report. It helps in solving the financial problems
that may arise due to the non-compliance of statutory requirements.
Katie Walker Furniture Edward Johnson Bespoke Furniture
This organization is using benchmarking and
variance analysis to measure their performance
respond to financial problems. Benchmarking
has helped the organization in identifying the
areas of improvement in which other
competitors excels at. Variance analysis has
also helped the organization in identifying the
reasons for not achieving the desired targets
and also assists in taking corrective actions to
reduce the gap.
This organization is using key performance
indicators and benchmarking for identifying to
tackle their financial problems. By using KPIs
will help it in achieving the desired objectives
by setting goals of different levels. It will in
analysing why the organization is not able to
achieve these goals and work upon it, to
mitigate the problem. Benchmarking is also
used by the organization to compare its
performance with the competitors which helps
in determining the weaker area and work
towards its improvement.
Use of accounting system
IKEA has effectively implemented inventory management system which helps it in
managing its inventory properly. It will help in scheduling the material orders and also managing
the ordering and handling cost which helps in overall reduction in the inventory management
cost. IKEA has also used cost accounting system which has benefited it in taking control of its
cost structure which has resulted in higher profits. Job costing system has also been used in order
to analyse the cost associated with different jobs. It has helped IKEA in detecting the flaws and
errors and defective products and take relevant steps to reduce it.
Starbucks has implemented price optimization system which enables it to set the price of
its products and services based on the customer's willingness to pay. It has helped Starbucks in
optimizing its price and has also helped in quick decision making. Also, it has used cost
accounting system for controlling its manufacturing cost which has resulted in better profits. It
has helped in determining the initial pricing of the products, promotional and markdown pricing.

During the times of financial problems, it has helped in cutting down the prices of the products in
order to gain profits.
CONCLUSION
It can be summarized from the above that management costing is crucial for the
organization for its betterment. It helps Katie Walker Furniture in taking meaningful decision
which can help it in increasing its sales and profitability. The different MA system that can be
used by the organization has many advantages which will help the Katie Walker Furniture in
effectively achieving its business objectives. Thus, MA system helps in enhancing the overall
efficiency of the business which helps in effectively performing its key operations. MA
technique includes various budgetary control methods that can be used by the organisation in
identifying its financial problems and it also which helps the organization in budgetary control
processes. Thus, MA Katie Walker Furniture will be able to control its business expenditures
from its different business activities. So, it is very clear that the management accounting is very
important for the organization.

REFERENCES
Books and journals
Brown, J. L., et.al, 2017. The effect of budget framing and budget-setting process on managerial
reporting. Journal of Management Accounting Research. 29(1). pp.31-44.
Dixon, K. D., 2017. The Basics of Financial Management. In The Business of Architecture (pp.
85-100). Routledge.
Hoggett, J., et.al, 2018. Accounting. Wiley.
Khan, A., 2019. Capital Budgeting and Improvement Process. In Fundamentals of Public
Budgeting and Finance (pp. 275-318). Palgrave Macmillan, Cham.
Malagueño, R., Lopez-Valeiras, E. and Gomez-Conde, J., 2018. Balanced scorecard in SMEs:
effects on innovation and financial performance. Small Business Economics. 51(1).
pp.221-244.
Marzlin Marzuki, N. A. R. and Ismail, J., 2019. Benefits and limitations of variance analysis in
management accounting. ACCOUNTING BULLETIN. p.15.
van der Voordt, T. J. and Jensen, P. A., 2018. Measurement and benchmarking of workplace
performance. Journal of Corporate Real Estate.
Yang, S., Yu, J. and Wang, X., 2016, January. Discussing on Management Accounting.
In International Conference on Accounting and Finance (AT). Proceedings (p. 5).
Global Science and Technology Forum.
Online
Cash budget. 2020. [Online]. Available Through:<https://debitoor.com/dictionary/cash-budget>.
Key performance indicator. 2019. [Online]. Available
Through:<https://www.accountingtools.com/articles/2017/9/28/key-performance-
indicator>.
Management accounting. 2020. [Online]. Available through:
<https://debitoor.com/dictionary/management-accounting>.
Sullivan Denise, 2019. Types of Managerial Accounting Reports. [Online]. Available through:
<https://smallbusiness.chron.com/types-managerial-accounting-reports-58384.html>.
Zero Based Budgeting (ZBB) – Overview & Advantages. 2019. [Online]. Available
Through:<https://cleartax.in/s/zero-based-budgeting>.
Tay, K., 2019. The Different Types of Pricing Strategies You Can Use in Wholesale Marketing.
[Online]. Available Through:< https://wholesalesuiteplugin.com/different-types-pricing-
strategies-can-use-wholesale-marketing/ >.
1

APPENDIX-1
Profitability statement as per marginal and absorption costing system is enumerated below:
Absorption costing
Calculation of cost per unit (CPU)
Year Overall cost
Add: indirect production
cost Total cost of production
1 30 25 55
2 30 23 53
3 30 24 54
Income statement
Year
Sales
(1)
COGS
(2)
GP
3 = (1 -2)
S&D
overhead
(4)
Adm.
overhead
(5)
Int.
expenditure
(6)
Total
expenses 7
=(4 + 5
+6)
NP
(3 – 7)
1 252000 152865 99135 5600 10100 1100 16800 82335
2 333000 242650 90350 7400 10100 1350 18850 71500
3 306000 199605 106395 7000 10100 1600 18700 87695
COGS calculation
Year Prod. Closing stock
1 3700 2800 900
2 4000 3700 300
3 3800 3400 400
Year
Stock
at the
beginni
CP
U
Amou
nt (in
£)
purchas
es
CP
U
Amou
nt (in
£)
Endin
g
stock
CP
U
Amou
nt (in
£)
COGS
(opening
stock +
2

ng of
period
purchas
es –
closing
stock)
1 0 55 0 3700 55 202000 900 55 49135 152865
2 900 53 47475 4000 53 211000 300 53 15825 242650
3 300 54
16184.
2 3800 54 205000 400 54 21579 199605
Fixed indirect production cost
Year Production Total cost CPU
1 3700 91000 25
2 4000 91000 23
3 3800 91000 24
Marginal costing
Calculation of cost per unit
Particulars Amount (in £)
Direct material 10
Labor 16
Variable production expenses 4
Total CPU 30
Profitability statement
year
Sales
(1)
COGS
(2)
Contribution
3 = (1 – 2)
S&D
overhead
(4)
Adm.
Overhead
(5)
Interest
expenses
(6)
fixed
indirect
prod.
cost
(7)
Total
expenses
8 = (4 + 5
+ 6 +7)
NP
9 = (3
– 8)
1 252000 84000 168000 5600 10100 1100 91000 107800 60200
2 333000 138000 195000 7400 10100 1350 91000 109850 85150
3 306000 111000 195000 7000 10100 1600 91000 109700 85300
3

year
Openin
g stock
per
unit
Figure
s (in £)
Add:
purchase
s
per
unit
Figure
s (in £)
Less:
closin
g
stock
per
unit
Figure
s (in £) COGS
1 0 30 0 3700 30
11100
0 900 30 27000 84000
2 900 30 27000 4000 30
12000
0 300 30 9000 138000
3 300 30 9000 3800 30
11400
0 400 30 12000 111000
4