Management Accounting: Theory & Practice

This assignment delves into the field of management accounting, examining both theoretical concepts and their practical application. It explores various research methods used in management accounting studies, including quantitative and qualitative approaches. The assignment also analyzes case studies and real-world examples to illustrate how management accounting principles are implemented in organizations.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1. Management accounting and essential requirements of its different types..........................1
P2 Various type of methods of management accounting reporting............................................4
M1 Measurement the benefits of management accounting systems used in organisational
context.........................................................................................................................................5
D1 Management accounting system and management accounting reporting.............................5
TASK 2............................................................................................................................................6
P3 Calculation of cost approaches to prepare income statement................................................6
M2 Using the wide range of management accounting techniques..............................................8
D2 Financial reports properly applied in organisation and interpret data of organisation..........8
TASK 3............................................................................................................................................8
P4 Advantages and disadvantages of different types of planning tools for budgetary control...8
M3 Analysing the use various type planning tools and their application for preparing budget
...................................................................................................................................................10
D3 How planning tools helps to solve the financial problems..................................................10
TASK 4..........................................................................................................................................11
P5 Compare how organisations are adapting management accounting system........................11
M4 how management accounting helps to managed financial problems to lead the
organisation...............................................................................................................................11
CONCLUSION .............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Accounting concept and methods have been mould as per the requirement and nature of
business. Management accounting is a concept used to maintain discipline and ethical manner in
operations (Baldvinsdottir, Mitchell and Nørreklit, 2010). Phenomenon of management and
accounting has become modern and are implemented in organisations as per the nature of their
administration and operation type. This report describes the meaning of management accounting
and various types of its tools used by organisation. Integration of direction accounting system
and management accounting reporting are also defined in this context. Absorption and marginal
costing techniques are explained in respect of evaluating the profit. Different types of planning
tools are defined subjected to make budgets and do strategic planning. Advantages and
disadvantages of planning tools are explained here as well. Importance of management
accounting is defined in respect of resolving the issues and problems associated with financial
planning. It is tried to connect the financial problems with management accounting.
TASK 1
P1. Management accounting and essential requirements of its different types
As per the definition given by IMA (Institute of Management Accountants), a
professional manner of keeping records, transactions and tracking of financial information are
considered as management accounting. The accounting system which remains essential in
respect of decision making, planning and performance management is considered in management
accounting. The accounting procedure and system remain important form the management point
of view are known as managerial accounting. Management accounting system provides a path to
achieve the core competence in task and helps to attain the desired goals in given deadline.
A system which provides a medium and tools to operate the management and operations
to keep the accounting records, financial information and forecasting plans in a proper manner is
also considered as management accounting (Herzig, Viere, and Burritt, 2012). An effective
management accounting system is the key to develop a strong organisational structure and
sustainable growth. It helps the managers and accountants to prepare the financial statements and
annual reports. These information are useful for the stake holders, shareholders, financial
institutions, banks and owners of company.
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There are three types considered in managerial accounting which are commonly used in
organisation. Strategic management, performance and risk management are the branch of
management accounting. To maintain the financial position of organisation at optimum level.
There are various type of management accounting systems are used like:
Cost accounting system: Cost accounting is one of the branches of management
accounting which remains essential and important for manufacturing and production industries.
This accounting system is also known as product costing system or system of accounting
(Lambert and Sponem, 2012). Cost accounting system furnish a structure of analysing the cost of
the product and determine the profit. It is also considered as profitability analysis and evaluate
the amount of stock. It become difficult to determine the cost of product and profitability, in
those organisation which remain align with multiple manufacturing process. Cost accounting
helps to execute the relevant data and bifurcate information which are useful to determine the
cost of product and profitability.
There are basically two major costing approaches divided in organisational context as
process costing and job order costing.
 Job order costing: Organisation which operates multiple manufacturing and producing
activities are considered as separate jobs. This costing system bifurcates different the
costs of distinct types of products which are produced through various types of business
process.
 Process costing: This cost accounting system is used in large manufacturing and
production firms. There are various types of processes remain associated in the
manufacturing process. Requirement of material, labour and wages are incurred
separately in these processes. This costing system helps to determine the cost of product
at every process. There is separate accounting records are maintained for these type of
manufacturing processes.
 Hybrid cost accounting system: Combination of process costing and job costing is
considered as hybrid cost accounting system. In this accounting system, there are certain
elements used from both the accounting systems to evaluate the cost of product. Cost
allocation and annexation of overheads based upon activity based costing system and
traditional accounting system.
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Traditional cost accounting system uses the applied theories and approaches to determine
the cost to each job and department.
Financial management and risk analysis: This is the accounting system that helps to
analyse the risk factors to determine the cost of product and for enhancing the profitability in
near future (Lukka and Modell, 2010). Risk is defined as a probability and possibility of happen
something wrong. This accounting system helps to analyse the factors and elements which affect
managing and operating skills of managers and organisation. This is a process which helps in
decision making and strategic planning process. It is an important tool used to identify the risk
factors. Managers and accountants become eligible to detect the potential issues and problems
which resist the growth and profitability of organisation. This is one of the complex parts of
managerial accounting. This process is divided in majorly three parts as identifying the risk,
estimated risk and solutions as well as managing the risk. This management system is very useful
for the organisations which deal in equities, shareholding, mutual funds and stock holdings.
Inventory and equity management: Managing the amount of stock and holding properly
and avoid the risk factors from the main objective of this management system. The organisation
which are connected with the business activities as retail sector, delivering the goods and
products from one place to another use this management accounting system (Budgetary control,
2017). It is a process which contains the process of ordering the amount of stock and storing
them in to a storage house using the inventory management system. This accounting system
provides the path to determine the optimum level of inventory to be store in storage house,
purchase order and break down points. Inventories are considered as current assents of an
organisation. There are various type of valuation methods are used under this accounting system
to calculate the cost of inventories. Just in time, material requirement planning, break down
analysis are the part of inventory management accounting system. This accounting helps to
reduce the carrying cost of inventories and prevent the extra cost of retaining the goods in
process.
Trend analysis and forecasting: Changes are the parts of the life and the same rule also
implemented to the business and organisations. This is a system helps to communicate the future
growth and development opportunities to the managers. It is an statistical analysis of customer's
interest and involvement for particular tasks and projects. It is a process of calculating the figures
amount of change in respect of sales of products and services. Customers interest and
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involvements are the main base of trend analysis. This management accounting system also
known as behavioural analysis. Records and information are maintained in graphical form. This
is one of the branch of management accounting which helps to identify the trend lines and
pattern in respect of product and services.
P2 Various type of methods of management accounting reporting
Methods and approaches of accounting helps to interpret the data and information in
adequate manner. There are varous type of evaluating methods and approaches used in
management accounting (Macintosh and Quattrone, 2010) Management accounting system and
management accounting reports are the summarised reports submitted to managers to make
effective analysing report. This reports are useful to managers and higher level authorities to
analysing the financial position of organisation and build a strong capital structure. Accounting
reports are the parts of financial planning and decision making process. Various type of
accounting reports are submitted to managers and higher level of management such as
Budgetary reports: this is format of producing the information related to upcoming
durations and times. These are the types of internal reports provided to the managers and
supervisors for related analysing the cost of future management and operations. Budgets are the
projections made to analyse the effective cost to be incurred in production, manufacturing and
administration activities. Budgetary reports are made with the helps of past financial and
accounting records. Financial statements of previous years, annual reports, sales and purchase
records, tax and provisions are the main sources used in framing the budgets. Budgetary reports
connect the current position with the desired goals of an organisation. Budgets are prepared
monthly, quarterly and annually as per the nature and type of business organisation.
Cost reports: these are the reports contains the details and information related to
expenses incurred for a particular time duration. Cost reports are prepared with the helps of
various type of cost records (Parker, 2012). There is a separate books are maintain to record the
purchase orders and invoice numbers. Raw material cost, labour cost, direct expenses and
overheads are record in the books. Overall analysis done in the end of year and a conclusive cost
report is prepared to analyse the total cost and requirement of resources for a year. This reports
helps to analyse the overall requirement of resources in terms of monetary and non monetary
funds.
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Performance Reports: Information and data related to performance of employees and
management departments are considered in performance reports. Organisational structure remain
divided in multiple structure and divisions. Leaders and departmental managers analyse the
performance of each and every individual. Outcomes are of each departments analysed in respect
of desired goals of organisation. Overall performance is consolidated in single format to evaluate
the performance of overall organisation.
Subsidiary or other reports: Figures and data which helps to complete the prime reports
and task are considered as subsidiary or other reports. This reports defines the sub divisions
progress and their achievements (Renz and Herman, 2016). Income and expenditure, cash flow
statements are analysed for small divisions and a separate reports is prepared. This report is
helpful and beneficial to mangers to analyse the cost structure for sub departments. It is a part of
internal reporting.
Account receivable and ageing reports: there is record of cash inflow from debtors and
selling records, getting the payments and cheques from lenders are considered in account
receivable and ageing reports. There is a proper analysis of sales records and lending. To
analysing the cash requirement this reports are prepared.
Inventory management related reports: This reports are prepared to analyse the
requirement of raw stock, material to produce and manufacturing the goods. This reports helps
the managers to manage the optimum level of inventories in stocks. It is require to maintain the
minimum level of raw material stock for manufacturing process.
M1 Measurement the benefits of management accounting systems used in organisational context
Management accounting is a tools used to reduce the management and operation cost.
Improving the scale of accounting and management in respect of preparing cash flow statements,
income and expenditure statemented and financial potion statement (Soin and Collier, 2011).
Management accounting system is not only the key of effective management but also a
supporting tools to get competitive advantage and sustainable growth.
D1 Management accounting system and management accounting reporting
Scope of management accounting system is found vast in comparison of accounting
reporting. Accounting system provides a tools and paths to make accounting reports to managers
and accountants to organisation (Vaivio and Sirén, 2010). Management accounting system helps
to analyse the financial statements and accounting reports in effective manner. Accounting
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resorting is a work of responsibility and good managerial skills. Management accounting system
will help the managers of TESCO to manage the operations and functions in effective manner.
TASK 2
P3 Calculation of cost approaches to prepare income statement
Cost accounting is one of the branch of management accounting. Analysing the cost and
determine the profit margin is the main objective of this accounting system. This accounting
system remain beneficial and useful to the organisations which are engaging in manufacturing
and production activities (Management accounting, 2017). There are various type of
methodologies and approaches used to calculate the amount of profit and profitability of
organisation. It helps to calculate the cost of inputs incurred in manufacturing and production
process. This is the process helps to bifurcate the cost of company and organisation among
various divisions. Various type of cost techniques are used in cost accounting system. Such as Absorption costing: this technique is called as overall costing approach. This approach is
widely used in business and organisation to analyse the cost of product and evaluate the
profitability for each product (Qian, Burritt and Monroe, 2011). All the variable and fixed
expenses are considered in this cost technique. This cost approach is used in those
organisation which remain aligned with fixed and variable process of manufacturing. Direct costing: this is one of the cost technique used to calculate the direct cost of
material, wages, expenses subject to evaluate the profitability. All the direct variable and
fixed cost are considered in this technique to calculate the profit. Indirect material and
labour cost are calculated separately. Historical costing: It is a method of evaluation of profitability and cost of product in
respect of production and manufacturing process. This cost technique is fund in limited
areas. Cost for specific period are analysed as per this analysing method. Marginal costing: this costing techniques is used to bifurcate the variable and fixed cost
in manufacturing and production process (Fullerton, Kennedy and Widener, 2014). Cost
is calculated in respect of change of per unit. Variation in the cost evaluated parallel to
change in one production unit. All the variable expenses and cost are considered in this
costing technique and fixed expenses are not considered in while calculating the profit. Standard costing: There are two type of formats prepared in standard costing approach.
Actual cost and standard cost are bifurcated to find out variances and difference. Its helps
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the managers to understand the changes in cost and measurement of profit. It helps to find
out the difference creating factors from manufacturing process. Uniform costing: this cost approach is used to analyse the difference between the
principles and practices to undertake the control and distinguish the cost.
Net profit calculation on the basis of marginal costing
Per unit
price(£) No. of units Amount(£) Amount(£)
Sales revenue 35 600 21000
Less: Marginal cost
Direct materials -6 600 -3600
Direct labour -5 600 -3000
Variable production Overhead -2 600 -1200
Variable sales overhead -1 600 -600
-8400
Contribution 12600
Less: Fixed overhead
Production overhead -2000
Administration cost -700
Selling cost -600
-3300
Net Profit 9300
Net profit on the basis of Absorption costing
Per unit price(£) No. of units Amount(£)
Amount
(£)
Sales revenue 35 600 21000
Less: Cost of Production
Opening Stock Nil
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Cost of goods Produced(700*16) -16 700 -11200
Less: Closing Stock(100*16) -16 100 -1600
-9600
Gross Profit 11400
Less: Selling and Administration
cost
Selling and Administration cost per
unit(1300/600) -2 600 -1200
Sales Overhead -1 600 -600
-1800
Net Profit 9600
M2 Using the wide range of management accounting techniques
Evaluation of financial problems and producing a summarised financial report is the key
functional area of finance manager. There are various type of cost accounting techniques used in
organisation as per their nature and type (Van Helden and Northcott, 2010). Financial planning
and management is one of the branch of management accounting. As per above scenario cost
accounting techniques would be effective in terms of calculating profits and cost of product.
Management accounting system contains the accounting procedures which helps to
communicate the information related to decision making process.
D2 Financial reports properly applied in organisation and interpret data of organisation
Finance mangers and analyst make the reports related to financial position of an
organisation. Financial reports helps to frames the capital structure as per compatibility of
business (Ward, 2012). A healthy financial structure of depends upon the proper ratio of equity,
debts and surplus. Proper analysis and evaluation are required to prepare an effective and
meaningful financial report to managers and higher level authorities.
TASK 3
P4 Advantages and disadvantages of different types of planning tools for budgetary control
Planning tools helps plays vital role in making the plans and decision making process.
There are various type of planning tools are used to make budgets and forecasting plans.
Budgetary control is a process used to analyse the upcoming events and incidents. It is a process
helps the managers to understand the dynamics of forecasting plans and estimation about the
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future cost. Budgets provides a projected score in respect of management and operation for
subsiding years. There are some formal financial statements prepared in respect of business
activities and operations. This is the technique which helps to make projected details as per the
data and informations of precious year. Various type of analysation and differences are identified
in respect of detecting the problems and issues. Results and outcomes are evaluated with the
projected plans.
Advantages of budgetary control
 Budgetary control process helps to understand the cost of production and manufacturing
process. Budgets provides an estimation subject to operation and management for
upcoming years. This process remain associated with future planning and strategic
planning to control over all cost of organisation. This is the part of managerial accounting
and assist managers to take risk for garbing the growth and developing opportunities.
 Budgets helps to communicate the multiple departments of an organisation and also helps
to promote the coordinator approach of together working (Zimmerman and Yahya-Zadeh,
2011). It helps to maintain an effective communication system with in the organisation.
Budgets helps to build a disciplined and ethical structure in organisation.
 Budgets ensure the credibility and future comparability in respect of achieving the
targets. It forces the manages to look forward and beyond the limits. Budgetary control
process encourage the spirit of thinking for future. It is a process provides opportunities
to participate independently and effectively.
Disadvantage of budgetary control process
 This is the critical process contains large amount of risk and uncertainty. Budgets do not
provide surety of guaranteed success. It is an estimation about furture operations and
activities to attain organisational goals.
 Traditional approaches and applied theories only used in budgetary control process.
Major parts remain avoided from the criteria of making budgets. Traditional approaches
and theories remain the part of budgetary control process.
 Managers and accountants are answerable to the higher level authorities. Budgetary
control is a process include various type of risks and uncertainties which create
complexities.
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 It resist the new managers and employees to participate in making plans and taking
decisions. Results and outcomes remain uncertain in respect of proposed plans. Complex
situations and diverse business environment reduce the credibility.
 There is lack of communication found while making plans and project to allocate the
resources in effective manner. In appropriate manner of allocating resources and
mediums becomes the reason of departmental conflicts and issues.
 It also effect the actions and performance of employees. Individual aims, objectives and
goals could not be determine by this process. This process remain centralised towards
organisational growth rather than developing the performance and capacity of individual.
 This process contain huge amount of investment in the form of monetary and non
monetary funds. It is a time consuming approach which take to much time to sort out the
issues and conflicts in time.
Different types of planning tools which are used in budgeting, there advantages and
disadvantages.
 Incremental budgeting methods; Incremental budgeting is essential part of
management accounting which are concerned with making small assessment to existing
budget for making new budget. In this budgeting method only incremental amount are
added to new budgeting numbers. There are various advantages and disadvantages of
incremental budgeting methods are given below.
Advantages:
 This method is easy to implement because it does not contain any complex calculations.
 It ensure continuity of funding for various departments without mentioning detailed
information of funds requirement.
 There is no large deviations are seen in the budget year after year because change year
after year.
 The changes made in budget can be seen immediately which are related to incremental
budgeting.
Disadvantages
 it is usually incremental in nature because it change the overall structure of budget which
respect to company which are different from present year to existing year.
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 Incremental budgeting may cause management to lead into scenario which are called
budgetary slack which leads to generate lower revenue and higher expenses.
Zero based budgeting method:
Zero based budgeting is a method in which all expenses must be justified for each new
period. This process of this method is it starts from zero to every activities concerned with
budget. There are various advantages and disadvantages of this methods are given below:
Advantage
 It is highly useful to non profit or service company.
 Costs may be saved in efficient operations.
 It forces management executive at different levels for active participation in budgeting
process.
 It does not carry any inefficiency and forwarded to next year.
Disadvantage
 It is very time consuming process.
 There are more paper work involve in the preparation of zero based budget.
 Manager of organisation can be threatened by zero based budgeting .
Activity based budgeting methods : Activity based budgeting methods concerned with
different activities that incur cost in every functional area of company . It help to adjust the
different budgets to calculate inflation and development of business. There different advantages
and disadvantages of this methods are given below:
Advantages:
 it is more accurate in costing of different types of products, customers, distributional
channel.
 This is easier to understand by the everyone.
 It determine the performance of organisations
 it shows the various steps which are involve in budgeting of organisation.
Disadvantages:
 it takes lots of time to evaluate different activities which are related to different activity.
 Overhead costs are not controlled in this methods.
 It is very complex budgeting methods because there are various activities involve in it.
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M3 Analysing the use various type planning tools and their application for preparing budget
Budgetary control is a process helps to frame and deign the budget format. Budget is a
forecasted report of actions and plans for near future or upcoming sessions (Williams, 2014).
Various type of planning tools are used to make budgets and forecasting the plans such as risk
map, decision tree, stake holder matrix, swot analysis and diagrams, radar chart.
D3 How planning tools helps to solve the financial problems
Planning tools helps to solve the complex financial problem and utilise the financial
resources as per requirement. It assist the managers to maintain the level of cash, track the
financial position to build a strong capital structure of company (Zimmerman and Yahya-Zadeh,
2011). It helps to analyse the potency of various type of finance resources. It produce the
information related to generating the finance from various type of options of finance.
TASK 4
P5 Compare how organisations are adapting management accounting system
Management accounting system provides large visibility of management and operations.
This helps to communicant individual goals and objectives with the organisational goals. This
helps to prepare forecasting reports and budgets to ascertain the cost of organisation. Changing
business environment and complex business highly affect the operations and management
system of organisation. Management accounting system is made of multiple rules, guidelines,
concepts and assumptions.
As per changing business environment organisations are adapting management
accounting concepts and systems to achieve core competence in management and operations. As
per the above discuss scenario managers of TESCO needs to implement a better accounting
system to operate its functional and administrative departments. Organisation deals in consumer
products and managers have to manage the flow of cash and requirement of finance. To make
effective management and achieve competitive advantage the manager find out some certain
fields to cover the cost of management and operation. Various supporting tools as bulletins,
newspapers, business magazines and journals are the sources helps to create the dimensions of
adapting the management accounting system in organisation.
Cost accounting system and management information systems are the most relevant
accounting systems can be implemented in organisation. Cost accounting system will help to
determine the cost of product and maximizing the profitability. It will help to control the order
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levels and bifurcating the product as per the type and nature. Inventory management system is
one of the effective technique help to analyse the trend and customer interest subject to product
and services. Risk analysis and management would help to detect the future risk and challenging
factor subject to growth and development of organisation.
Budgetary control process would to provide estimated results in respect of desired
success. It would help to build an string capital structure for sustainable growth.
M4 how management accounting helps to managed financial problems to lead the organisation
Find out best finance options for maintain the capital structure is the main financial
problem occur in organisations (van der Steen, 2011). Capital structure remain divided majorly
in three parts as equity share capital, debts and reserves and surplus. It is require to maintain the
optimum level of amount. All these resources contains the feasibility and consistency in respect
of making financing decision.
CONCLUSION
This context is prepared to define the dynamics and scope of management accounting in
organisational context. Various type of management accounting systems are used to operate the
functional and operation. Wide range of accounting techniques used to appropriate financial
reporting discussed in this context. Contrary methods of accounting are defines used in finial
reporting. Cost approaches such as marginal and absorption costing are explained to determine
the cost of product and calculating the profit. Various type of planning tools are discussed in
respect of making budgets and forecasting the plans. Benefits and losses of planning tools in
respect of resolving the financial problems discussed in this context. Steps are discussed subject
to adapting the management accounting system in organisation.
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REFERENCES
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Online
Management accounting, 2017. [Online]. Available through:
<http://www.businessdictionary.com/definition/management-accounting.html>.
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Budgetary control, 2017. [Online]. Available through:
<http://www.fao.org/docrep/w4343e/w4343e05.htm>.
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