Management Accounting Systems and Their Importance

The provided document is an academic assignment that explores the significance of management accounting systems in a company's operations. The assignment delves into different management accounting systems, including budgeting, cost accounting, and price optimising system, and their roles in addressing financial challenges. It also touches upon the contingency theory of management accounting and control, as well as the importance of flexibility in management accounting. The document concludes by emphasizing the importance of management accounting systems in a company's success.

Management
Accounting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
LO 3.................................................................................................................................................1
P 4 explaining different types of planning tools used for the budgetary control........................1
LO 4.................................................................................................................................................5
P5 Adoption of Management accounting system as to respond to the financial problems
Starbucks.....................................................................................................................................5
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................8

INTRODUCTION
Management accounting can be termed as a synonym of management and accounting that
concerns with that process of management in which they analyse and summarises financial
information of an organisation (Bromwich and Scapens, 2016). They prepare financial reports
for the purpose of using them in their decision making process. The present study includes a
report that provides information about various planning tools for budgetary control system with
advantages and disadvantage and application in the business organisation as well. Further, the
report also shows various management accounting methods implicated by accounting
professionals for performing their managerial activities as to enable an organisation in mitigating
financial obstacles and help it in attaining success as well.
LO 3
P 4 explaining different types of planning tools used for the budgetary control
Budget:
A budget is a form of report, includes information about the various activities of a firm
forecasted by its professionals. In other words, in can also be said that a budget is a financial plan
prepared by accounting practitioner for the purpose of forecasting various financial activities
like purchase, sale, cost, production, etc. of a business organisation. In addition, at last a budget
is also prepared by the managers by combining all the budgets (Jia and et.al., 2016). This
combined budget is termed as the master budget of the company.
For the purpose of forecasting the each activity of the business, managers can prepare
different types of budgets. Some major types are as under:
 Fixed budget: It is that kind of budget which doesn’t fluctuate with the change in the
amount of sale, purchase or any other activities. It is also termed as the static budget. In
the fixed budget, managers can measure short term as well as long term budgets.
Advantages disadvantage
Preparation of fixed budgets is the most
appropriate for the purpose of budgeting and
adjusting the seasonal expenses (There are
pros and cons to being less flexible, 2018).
The major disadvantage of this budget is that it
does not take into account uncertainties of the
business. In this order, it may provide negative
results.
It enables professional in ascertaining the This budget fails to analyse extra cost that is
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priorities of the business operations. needed to be incur by the business in order to
sale extra volume of product in the market.
 Incremental budgets: The Incremental budget is that budget which is prepared with the
help of previous budgets and adding the additional need of the business as per the future
objectives of the business (Zhao and et.al., 2017). In this regard, the budget helps
practitioners in detecting all additional requirements of a firm.
Advantages Disadvantage
It enables the managers in maintaining
sufficiency if the resources even when it wants
to enhance and expand its business.
Preparation of incremental budget fails to
encourage the innovation in the business.
As per this budget, managers can unable the
company to expand its business without having
huge fluctuation in the business.
This budget can not be used for the purpose of
forecasting long term operations of the
business.
 Flexible budgets: A flexible budget is that type of budget that keeps changing with the
change in sales volume, production level or change in any other activity of the company.
Advantages Disadvantage
The flexible budget helps in detect the spare
capacity of the business. For the purpose of
enabling the business as to use the 100%
capacity of it.
This budget may result in complicating the
things as managers need to follow a huge range
of rule while preparing this budget.
This budget can help the company in facing the
all the dynamic changes of the environment in
an effective manner.
It results in reduction of the discipline in using
various financial resources of the business.
 Zero based budgeting: Preparation of this budget starts by scratching each items and
activities of the business in each period . generally this budget is prepared by the newly
established businesses.
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Advantages Disadvantage
This budget can be termed as the most suitable
budget, as in this budget, managers justifies
each activities of the business and forecast its
future accordingly.
Preparation of this budget is a time consuming
process. as managers needs to start with zero to
prepare this budget.
It is the most suitable budget to be used in the
capital rationing situations of the firm.
Implementation of this budget needs to incur a
huge cost by the company. as it need to provide
proper training to its employees.
Management accounting system
Adoption of management accounting system leads in maintenance a proper control over
various activities of the business as to enhance its capacity and profitability as well.
with the help of management accounting system, the company becomes able to detect the
financial problems in advance by analysing the arrears in the business activities using various
planning tools as under:
Good financial governance:
With help of this planning tool, the managers collects various financial information about
the company and track each financial transactions as to analyse and the financial performance of
the company. They respond to the financial problems by detecting arrears in the financial
transactions and developing appropriate strategies for that as well.
Balance score card:
In this system, the company creates a different perceptive over different activities of the
business. Managers interrelates various activities detects the impact of one activities over others.
When the they detects any inefficiency in the business, with the help of this tool they detect all
the financial problems due to the inefficiency and develops the policies as to respond those
problems.
Key performance indicators
This tool helps the managers in determining the efficiency of performance of various
departments in the business including their own performance. In this regard, it helps in involving
a better monitoring in the business. In this regard the managers can effectively detect the
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problems in the business. By developing appropriate strategies for them, they can effectively
help the company in responding to those problems.
Variance analysis:
The variance analysis is a major part of management accounting. In this process, the
managers of the business compare the actual with budgeted performance and determines
efficiency or inefficiency of various activities of the business in terms of variance.
In the process of variance analysis, the managers determines numerous variance like,
purchase variance, material cost variance, labour variance, sales variance, etc. with the
influences of this determinations, professionals can detect need of firm as to enhance its capacity
and can develop their plans, strategies and policies for the business accordingly (Otley, 2016).
The variance analysis results in development of managerial strategies in more effective way and
enhance the capacity of the company as well.
Advantages
 This analysis enables the managers in measuring the performance of company.
 It enables firm in detecting areas of inefficiency and develop strategies accordingly.
 As per variance analysis, managers can eliminate wastage of various financial resources
if entity.
 With the help of variance reports of the previous year, the managers can prepare more
realistic budget for the business.
 In addition, this technique of the managers also helps the managers in detecting the
problematic areas of a firm as to develop the most effective strategies for the company.
Disadvantage
 The variance analysis focuses on the detection of the areas of inefficiency. This analysis
fails to determine the reason behind it.
 This analysis may provide negative result to the company as the difference between
actual and planed performance always need not to be due to the inefficiency of the
business. Sometimes, it can be because of change in various influencing factors of the
company like, inflation rate, change in the labour rate, etc.
 Further, this analysis is quite time-consuming process.
 Manager require professional skills for the purpose of performing variance analysis
activity for the entity.
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In this, the variance analysis helps the managers in the performance of their managerial
functions (Hiebl, 2018). Further, there are also various pros and cons of this technique of the
management accounting system. the company should carefully adopt this technique into the
business for the purpose of gaining appropriate result from this adoption.
Pricing strategies:
Pricing strategies are those strategies with the help of which managers set the price of the
products or services to be sold to the customers. By adopting these strategies, the company can
set the price of the product in such a way so that the customers could easily get ready to pay that
sum for the product and company could earn the sufficient amount of profit as well.
There are numerous types of pricing strategies that can be used by the managers in order
to set the most appropriate price of the product like, economy pricing, pricing for market
penetration, psychology pricing, etc.
The major advantages and disadvantage of the pricing strategies are as under:
Advantages Disadvantage
It helps in setting the best price of product. Adoption of this strategy needs the professional
skills of managers.
it leads in attracting customers towards the
company due to its most appropriate price.
Processing of this strategy is a time consuming
process.
LO 4
P5 Adoption of Management accounting system as to respond to the financial problems
Starbucks
Cost accounting system: The cost accounting system is that part of management
accounting system that concerns with the monitoring all the cost related activities and
development of strategies for the business as to develop the cost efficiency in the business. This
system of management accounting is adopted by IKEA, with the help of which it monitors all the
cost related activities of the business. Further, this system also helps the company in analysing
cost efficiency of each operations of it. In this regard, the company unable to develop itself as
the most cost efficient.
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This system helps the IKEA in determining the areas using excessive of cost and
determining the problems that can be arise due to that as well through which managers can
develop appropriate strategies for facing those problems
Inventory management system: Starbucks has adopted the inventory management
system in organisation. As per this system, the professional tracks movement of inventory in an
entity. This system helps the company in executing flow of the stock in business (Taieb and
Atiya, 2016). Further, managers also enable to analyse sufficiency of stock by determining the
minimum requirement in the company.
In this regard, by having effective control over the inventory, the managers unable the
company in responding to various financial problems that can be arisen due to the ineffective
inventory management like, insufficient production, not meeting demands, etc.
Price optimising system: The Sainsbury adopts this system in its business operations. in this
system, the company analyses the response of customers for various price of the product. After
analysing it carefully, the company sets the best price of the product with the help of which it can
gain the positive response of customer along with generating the highest amount of profit as
well.
Management accounting system for solving business problems
This system enables professionals in detecting inefficiencies in business with managers
who develops effective strategies in solving those problems. For example, If the cost of
Starbucks keeps enhancing, the company can adopt the cost accounting system. With the help of
this system, the company can detect the actual areas of ineffective cost and reason behind the
ineffectiveness as well. In this regard, by managers can develop the most appropriate strategies
for the ineffectiveness and help the company in solving the business problems.
With the help of this system, the manager safeguards the company from the major
financial problem i.e. losing customers due to charging higher amount of price.
In this regard, it can be analysed that all the management accounting system helps the
companies in facing various financial problems effectively.
CONCLUSION
From the above analysis, it can be concluded that management accounting system is an
essential part of a company. Adoption of various management accounting system can help the
managers in effective performance of their managerial functions. Further, there are various
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management accounting systems with the help of which managers can unable the company as to
respond various financial problems.
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