Management Accounting: Principles, Techniques, and Tools

This document provides an overview of management accounting principles, techniques, and tools. It explains the importance of management accounting in organizational integration and decision making. The document also discusses different techniques and methods used for management accounting reporting, evaluates the benefits of management accounting systems, and analyzes the use of planning tools for budgetary control. Additionally, it covers the concepts of absorption and marginal costing and their application in calculating costs and preparing profitability statements. The document is relevant for students studying management accounting or related courses.

Management Accounting

TABLE OF CONTENTS
INTRODUCTION......................................................................................................................4
TASK 1......................................................................................................................................4
Explaining the principles of management accounting and stating its importance pertaining
to integration within an organisation......................................................................................4
Explaining different techniques and methods used for management accounting reporting. .4
Evaluating the benefits of MA systems and their application within an organisational
context....................................................................................................................................5
TASK 2......................................................................................................................................8
Calculating cost and preparing profitability statements as per absorption & marginal
costing....................................................................................................................................8
TASK 3....................................................................................................................................10
Explaining the advantages and disadvantages of different types of planning tools used for
budgetary control.................................................................................................................10
Analyzing the use of different planning tools and their application for preparing and
forecasting budgets...............................................................................................................12
Comparing how varied MA tools can be used for responding financial problems..............13
Analyzing how management accounting can lead organizations to sustainable success.....14
CONCLUSION........................................................................................................................14
REFERENCES.........................................................................................................................15

INTRODUCTION
In the recent times, every business unit is placing emphasis on employing
management accounting (MA) system with the motive to make optimum utilization of
financial resources. Moreover, such system lay focus on cost control as well as profit
maximization and thereby contributes in organizational success. For this project, NISA has
been selected which offers retail products or services to the customers. In this, report will
shed light on different system that can be used by the firm for evaluation and reporting
purpose. Besides this, report will shed light on the tools that assists in planning as well as
solving monetary problems effectually.
TASK 1
Explaining the principles of management accounting and stating its importance pertaining to
integration within an organisation
Management accounting may be presented as a process of offering financial
information and resources to the managers for decision making aspects (Weetman, 2019).
Principles of management accounting
 Cost reduction
 Presents solution considering both controllable and non-controllable cost
 Optimum utilization of resources
Importance of management accounting
 Helps in setting budgets or financial plans for upcoming time period
 Assists in setting prices for the products or services
 Provides management team with timely information for planning & decision making
purpose (Otley, 2016).
Explaining different techniques and methods used for management accounting reporting
Manger of Nisa prepares managerial reports for providing the team of higher
management with suitable information about internal performance. This in turn helps in
several aspects regarding panning, decision making as well as measuring and evaluating

performance. Reports which can be prepared by Nisa for decision making purpose are
enumerated below:
Job cost report: This report furnishes information about expenditure incurred while
performing specific job. It helps in doing evaluation of existing performance over estimated
revenue and thereby highlights profitability related to each job. Through this, business unit
can make efforts on the profitable areas and thereby improves performance level.
Budget report: It assists manager in doing assessment of departmental performance
and controlling cost. Further, variances found in the actual performance also help in setting
budget for the near future (Types of managerial reports, 2020). In addition to this, owner of
Nisa can also use this report for offering incentives to the employees.
Inventory report: By preparing and using this report manager of Nisa can make
manufacturing process more efficient. It contains information about wastage, cost level and
overhead expenses in relation to inventory usage and management (Cooper, Ezzamel and Qu,
2017). Along with this, inventory report also helps in doing comparison of different assembly
lines and thereby helps in setting bonuses for the best performing areas.
Accounts receivable ageing report: By this, cash flow can be managed and monitored
by Nisa prominently. Moreover, it presents time period from which debtor’s payment is due.
Through this, manager can ascertain customers who are facing difficulty in paying their
balances. In this way, such report helps in assessing problems that take place in company’s
collection process. Referring all these aspects, firm can take decision pertaining to allowing
credit extension to the customers.
Evaluating the benefits of MA systems and their application within an organisational context
Applicability and benefits of varied MA tools in the context of Nisa is enumerated
below:
Job costing
According to this, cost of production is determined referring to the number of
completed jobs. By applying this, manager of Nisa can identify whether production cost
exceeds overheads and price of material. Thus, referring this, resources can be used in the
profitable areas for improving overall performance.

Advantages Disadvantages
 Profitability can be determined
pertaining to each job.
 Helps in doing estimation about cost
(Job costing advantages and
disadvantages, 2020)
 Requires clerical work
 Time consuming process
Cost accounting
Such system of management accounting assists in determining cost of production
(both fixed & variable). In other words, by accumulating both direct and indirect expenses
manager of Nisa can assess production cost. Further, by adding mark-up or desired profit
margin in the unit cost product’s price can be ascertained (Maas, Schaltegger and Crutzen,
2016). By using following formula manager of Nisa can set suitable price:
Price = unit cost + (cost * profit%)
Advantages Disadvantages
 Facilitates elimination of wastage,
losses and inefficiencies from
operations.
 Ensures cost reduction
 Helps in identifying reasons behind
profit or loss (Advantages and
Disadvantages of Cost Accounting,
2020)
 Assists in setting suitable prices of
product
 Offers framework for decision
making by taking into account
previous figures, whereas
management is concerned about
future.
 Leads problems of under and over
absorption
Inventory management system

Company can track stock level more effectually by using inventory management
software or system. Moreover, it furnishes information about orders, sales and deliveries
aspects. Further, it also helps in preparing documents in relation to work order, material etc.
Manager of Nisa can do appropriate valuation of stock by taking into account various
methods such as LIFO, FIFO etc (Hopper and Bui, 2016). In addition to this, methods such
JIT (just in time), EOQ (economic order quantity) etc is highly significant which assists in
maintaining enough stock within an organization and reduces cost level.
Advantages Disadvantages
 Ensures saving of both cost and time
 Increases operational efficiency
 Optimum utilization of stock
 Facilitates uninterrupted production
 Highly expensive
 Involves high complexity
 Elimination of business risk to the
limited extent
Price -optimization system
In the context of Nisa, by using this system manager of Nisa can monitor or track
customer’s responses or behavior at varied price eve. Hence, by taking into account price
optimization system manager can set suitable prices of the products or services in line with
the customer’s expectation.
Advantages Disadvantages
 Facilitates optimal price fixation
 Helps in enhancing customer base
 Requires greater understanding about
the concepts
 Time intensive practice

TASK 2
Calculating cost and preparing profitability statements as per absorption & marginal costing
Specifically absorption and marginal costing are the two methods which Nisa
undertakes for assessing profitability aspect.
Cost assessment, as per absorption and marginal costing, pertaining to Alpha is
enumerated below:
Particulars Marginal costing Absorption costing
Direct material 5 5
Direct labor 8 8
Variable production
overhead
2 2
Fixed production overhead - 5
Total cost per unit 15 20
Profitability statement as per absorption costing:
Particulars Unit Per unit figure Amount (in £)
Sales 1500 35 52500
Less: cost of goods
sold
3000
Gross profit 20000
Less: indirect
expenses
Fixed selling &
distribution expenses
10000

Variable S&D
expenditure
7875
Net profit 2125
Computation of COGS
Particulars Unit Per unit figure Amount (in £)
Opening stock 0 20 0
Add: purchases 2000 20 40000
Less closing stock 500 20 10000
COGS 30000
Income statement according to marginal costing method is as follows:
Particulars Unit Per unit figure Amount (in £)
Revenue 1500 35 52500
Less: variable
expenses (COGS
22500
Less: variable selling
& distribution
expenses
7875
Contribution 30375
Less: fixed expenses
Fixed production
overhead
15000
Fixed selling & 10000

distribution expenses
Profit 5375
Particulars Unit Per unit figure Amount (in £)
Opening stock 0 15 0
Add: purchases 2000 15 30000
Less closing stock 500 15 7500
COGS or total
variable cost
22500
By doing assessment, it has found that business unit should follow absorption costing
system for cost and profitability assessment. Moreover, absorption costing method presents
highly suitable view of production cost as it considers both fixed and variable expenses
(Geddes, 2020). This in turn gives clear indication about profitability aspect.
TASK 3
Explaining the advantages and disadvantages of different types of planning tools used for
budgetary control
There are several tools which Nisa can employ for the purpose of budgetary control
includes investment appraisal tools, cash and operating budget. By undertaking such
budgeting frameworks organization can monitor or compare expenses and thereby take
suitable measure for improvement (Ax and Greve, 2017).
Cash budget
It may be presented as financial framework which includes both estimated cash
inflows and outflows pertaining to the specific time frame (Weetman, 2019). By preparing
cash budget manager of Nisa would become able to know whether company has enough
funds for performing business activities or not.
Advantages Disadvantages

 Facilitates quick identification of
potential deficit and surplus
 Debt can be avoided significantly
 Less effective in comparison to
modern budgeting tools namely ABB,
ZBB
 Highly relies on estimations for
meeting future needs
Operating budget
It implies for the forecast of both revenue and expenses with regard to specifically one
or more future period. At the beginning of year, manager of Nisa can draft operating budget
which in turn exhibits expected activity levels for the concerned period (Burney and Malina,
2019). Thus, by undertaking this budget manager of Nisa can monitor operational
performance.
Advantages Disadvantages
 Assists in tracking performance of
entire business
 Ensures flexible budgeting
 Focuses only on financial outcomes
while preparing budgeting framework
 Time consuming exercise
Investment appraisal tools
Nisa can undertake this tool for planning purpose when it has investment or growth
options. It mainly includes payback period, net present value, average and internal rate of
return. This helps in analyzing the viability of capital project and thereby aid in effectual
planning.
Advantages Disadvantages
 Presents suitable framework for
decision making by considering time
value of money concept.
 Not helpful when initial investment
varies
 Payback method does not highlight
profit that will be generated after the

 Clearly indicates return associated
with project
recovery of initial investment.
Analyzing the use of different planning tools and their application for preparing and
forecasting budgets
Cash budget for the period of 6 months is enumerated below:
Particulars January February March April May June
Cash inflows
Opening cash balance 3000 8500 14325 20491.3 27015.8 33916.6
Sales 15000 15750 16538 17364 18233 19144
Other income 2000 2000 2000 2000 2000 2000
Total cash inflows 20000 26250 32862.5 39855.6 47248.4 55060.8
Cash outflows
Material 5000 5250 5513 5788 6078 6381
Labor 3000 3000 3000 3000 3000 3000
Other expenses 3500 3675 3859 4052 4254 4467
Total cash outflows 11500 11925 12371.3 12839.8 13331.8 13848.4
Cash surplus or closing cash
balance 8500 14325 20491 27016 33917 41212
The above depicted cash budget shows that sales and profitability of firm will
increase significantly in the upcoming time period. Manager of Nisa can undertake cash
budget for evaluating and monitoring performance level. On the basis of this, deviations can
be assessed timely which helps manager in taking corrective measure for performance
improvement.
Applicability of investment appraisal
For instance: Nisa has two investment proposals with varied initial investments. In
this regard, company can select the most suitable option over other one by employing
investment appraisal technique. Through evaluation, it has assess that manager should focus
on investing funds in project A. Moreover, it shows higher and positive net present value or
return as compared to option B.
Computation of NPV

Year
Cash
inflow
(projec
t A)
PV factor
@ 10%
Discounted
cash inflow
Cash
inflow
(projec
t B)
Discounte
d cash
inflow
1 20000 0.909 18182 18000 16364
2 25000 0.826 20661 23000 19008
3 21000 0.751 15778 19000 14275
4 26000 0.683 17758 24000 16392
5 32000 0.621 19869 28000 17386
Total discounted cash
inflow 92248 83425
Less: initial investment 70000 70000
NPV 22248 13425
Comparing how varied MA tools can be used for responding financial problems
With regards to business unit, bottleneck in the performance is usual which in turn
directly impacts organizational performance. Thus, there are several tools which can be
undertaken by Nisa for dealing with financial problems pertaining to reduction in
productivity, profitability, market share and increase in cost.
Benchmarking: Now, for assessing and getting information about performance trend
business unit emphasizes on setting benchmarks. It offers input to Nisa for performance
evaluation in the context of sales etc.
Key performance indicators: In the recent times, company lays emphasis on setting
KPI’s pertaining to sales, profit, market share etc. Thus, by comparing actual performance in
against to the KPI’s manager of Nisa can identify reason takes place behind performance
deterioration.
Variance analysis: This is another most effectual tool which assists in responding
monetary problem. Moreover, it clearly exhibits deviations take place in the existing
performance over standards along with the causes (Quattrone, 2016). Thus, referring causes
manager of Nisa can take significant measure for performance improvement.
Balance scorecard: It measures company’s performance by taking into account both
financial and non-financial measures. This includes mainly four aspects pertaining to
customers, financial, internal business, innovation and learning. In this way, balance

scorecard offers opportunity in relation to evaluating performance from such perspectives and
enables to take measure for performance enhancement.
By doing assessment, it has identified that Nisa undertakes benchmarking technique
for identifying and resolving monetary problems. In the case of decrease in productivity and
profitability business unit can do comparison of existing performance over benchmarks.
Referring causes Nisa can take action pertaining to practicing intense promotional strategies
and cost control measures. By this, Nisa can maximize sales and thereby profitability as well
(Ax and Greve, 2017). On the other side, Qbic hotel undertakes balance scorecard model as it
assists in measuring performance from several perspectives. Moreover, for gaining
competitive edge over rivals firm is required to monitor performance from all perspectives.
However, in comparison to Qbic, MA technique undertaken by Nisa is highly effectual.
Moreover, it clearly indicates both variance and causes associated with the same.
Analyzing how management accounting can lead organizations to sustainable success
Management accounting tools such as benchmarking, variance analysis etc gives
timely indication to the firm about the areas where improvement requires. For instance:
variance analysis system provides Nisa with suitable reasons pertaining to non-achievement
of predetermined goals or objectives. In this way, by doing modifications in the existing
strategic framework within suitable time company can avoid deficiency takes place in
performance and thereby leads sustainable success.
CONCLUSION
By summing up this report, it has been articulated that through undertaking MA
systems manager of NISA can get suitable information about cost, profit, stock level etc.
Besides this, it can be inferred that by preparing reports management team of the organization
can take strategic decisions and thereby gets desired level of outcome or success. It can be
summarized from the evaluation that MA tools are highly significant which helps in doing
and making financial forecast effectually. It can be seen in the report that by using
benchmarking NISA resolves monetary problems and thereby ensures sustainable success.

REFERENCES
Books and Journals
Ax, C. and Greve, J., 2017. Adoption of management accounting innovations: Organizational
culture compatibility and perceived outcomes. Management Accounting Research. 34.
pp.59-74.
Burney, L. L. and Malina, M. A. eds., 2019. Advances in Management Accounting. Emerald
Group Publishing.
Cooper, D. J., Ezzamel, M. and Qu, S. Q., 2017. Popularizing a management accounting idea:
The case of the balanced scorecard. Contemporary Accounting Research. 34(2). pp.991-
1025.
Geddes, B. H., 2020. Emerging Technologies in Management Accounting. Journal of
Economics and Business. 3(1).
Hopper, T. and Bui, B., 2016. Has management accounting research been
critical?. Management Accounting Research. 31. pp.10-30.
Maas, K., Schaltegger, S. and Crutzen, N., 2016. Integrating corporate sustainability
assessment, management accounting, control, and reporting. Journal of Cleaner
Production. 136. pp.237-248.
Otley, D., 2016. The contingency theory of management accounting and control: 1980–
2014. Management accounting research. 31. pp.45-62.
Quattrone, P., 2016. Management accounting goes digital: Will the move make it
wiser?. Management Accounting Research. 31. pp.118-122.
Weetman, P., 2019. Financial and management accounting. Pearson UK.
Weetman, P., 2019. Financial and management accounting. Pearson UK.
Online
Advantages and Disadvantages of Cost Accounting. 2020. Online. Available through: <
https://accountlearning.com/advantages-disadvantages-cost-accounting/>.

Job costing advantages and disadvantages. 2020. Online. Available through: <
https://content.wisestep.com/job-costing-meaning-objectives-advantages-disadvantages/>.
Types of managerial reports. 2020. Online. Available through: <
https://smallbusiness.chron.com/types-managerial-accounting-reports-58384.html>.