Management Accounting Techniques and Tools

This report delves into various management accounting methods, including budgeting, systematic planning, and addressing financial issues. It demonstrates how these techniques can be applied to maximize profit margins, control core business activities, and resolve financial problems. The conclusion emphasizes the importance of management accounting in internal organizational management.

MANAGEMENT
ACOUNTING
1

Table of Contents
INTRODUCTION...........................................................................................................................3
SECTION 1......................................................................................................................................3
P1: Following various types of accounting system and their essential applications...................3
P2: Different types of accounting system use in reporting.........................................................4
P3: Different costing methods.....................................................................................................5
SECTION 2......................................................................................................................................9
Part 1...........................................................................................................................................9
P4: Merits and demerits of using planning tools in budgetary control.......................................9
Part 2.........................................................................................................................................11
P5: Various financial issues and measure to resolve it.............................................................11
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13
2

INTRODUCTION
Management accounting is significant part of organization whether the operation of the
organization is small or larger. It is the heart of the internal management system which supports
in decision-making, preparing strategies and planning for business operations (van Helden and
Uddin, 2016). Management accounting controls the activities of the organization and also frames
plan for each divisions of the organization. All the administration works are handling very well
by the management accountant by using the management accounting techniques. With the help
of these tools and techniques the management accountant evaluates the performance of entire
organization. The management accountant uses the accounting information in an appropriate
manner. NERO LTD. consolidates its organizational processes with the management accounting
for achieving the desire goals and objectives within the time period in an effectual manner (Lim,
2011).
SECTION 1
P1: Following various types of accounting system and their essential applications
The various types of management accounting systems and their essential role and
applications combine with the different organizational activities associated to NERO LTD. are
discussed as below:
1. Cost accounting system: - Cost accounting system is the system used by the organization
to estimate the cost of its products which includes cost control, profitability analysis, and
stock valuation. In this accounting system, the cost apportionment and allocation is
located on traditional costing or activity- based costing system (Gates, Nicolas and
Walker, 2012). This system measures individually and records the costs then compares
the financial performance of the organization. Cost accounting system is very essential
part of the management accounting because it provides the well-organized techniques
such as marginal costing, standard costing, budgetary control and inventory control to the
management accountant to minimize the cost and increases the profit margin.
2. Job costing system: - Job costing is the costing where the manufacturing costs allocated
to the separate unit or bunches of the products. This system is applicable where the
products manufactured are dissimilar from another one. It includes the cost data
collection which is related to the specific job. This cost data is utilized by the customer of
3

the organization for the evaluation the cost of product than afterwards they place an order
to the organization. The job costing system needs to collect the three types of direct cost
such as direct raw materials, labour and overheads.
3. Price optimization systems: - Price optimization system means the use of statistical tools
to determine the customer reaction towards the price of products and services which are
offered by the organization. This optimization system is used to determine the products
price on which organizations want to increases the operating profits. While deciding the
price, management firstly evaluates the pricing policies of the competitors (Hiebl and et.
al., 2015).
4. Inventory management systems: - Inventory management system is the system to control
the wastages of stock, managing the stock level in the business operations. The inventory
management system includes the system which tracks the inventory level, reorder level
and minimize the overstock and under stock problems in the organization systems. The
stock or inventory is one of the main assets for the organization through which they make
profits by converting into the useful products for the customers.
5. Management information systems: - Management information system is a computerized
organized database of financial information which produces the regular reports on
operations for every level of management in the organization. The most important
purpose of MIS to give managers feedback about their own performance and top
management can easily track the organization as whole (Macinati and Anessi-Pessina,
2014). The information which is displayed by the MIS i.e. the actual information over
against planned and also shows year before results to the managers.
The above accounting system helps the management to analyze the performance of the
business activities in most efficient and effective manner. These systems provide the opportunity
to the organization to maximize their profits and minimize the costs and wastage in the activities.
It also provides necessary accounting information to the various departments for their operations
(Jalaludin, Sulaiman and Nazli Nik Ahmad, 2011). So, it is necessary to have these above system
in the organization to achieve the goals and objectives in best manner.
P2: Different types of accounting system use in reporting
The report is a well- organized and orderly summarized the information about the
organization performance in the accounting year. These reports are utilized by management and
4

externals for their own decisions in regards to the company. NERO LTD. uses this reporting
system to record all the important events related to the company’s performance. These reports
are prepared by the management at the end of the year and evaluate the entire performance of the
organization.
The various different types of reports prepared by the management and their advantages
are discussed below:
1. Costs reports: - The report allows to the management accountant to view the cost value
of products vs. selling price. It helps the management accountant to control the costs and
plans for profitability of the products. Cost reports include the raw materials, overhead,
labour costs of the manufactured product. These reports are shown to the top
management for the further decisions related to the business activities.
2. Budget reports: - The budgets are most important components of the management
accounting because it assists the management in future forecasting. The budgets are
prepared with the help of past data and estimate the future requirements (Zang, 2011).
Each budget is assigned to each department of the organization through which they
achieve their targets on the time.
3. Performance reports: - Performance reports assists the manager to apply the budgets to
measures the actual income and expenses to the budgeted figures. The difference in
between both is measured by the manager when they are preparing for the new budgets.
All the positive and negative aspects are recorded in this report for the further use. These
reports are prepared by the managers on yearly basis.
4. Receivable reports: - Receivable reports show all the receivables to the organization. It
includes all credit sales, debtors, and bill receivables. This report shows that how much
amount is due and paid by the customers of the organization. Receivable reports also
states that how much debtors are become bad- debts for the organization (Amoako,
2013 ). These reports also help the management to maintain the liquidity for the business
activities.
P3: Different costing methods
Cost accounting is an accounting method that main focus to capture a business cost of
production by evaluating the input costs of each step of production (Vakalfotis, Ballantine and
Wall, 2013). While cost accounting is usually used in the organization in various decisions-
5

making processes. Cost accounting is the most important tool for management in budgeting, and
also in preparing the cost control plans which enhances the net operating profits for the
organization.
Following there are different types of costing: Marginal costing: In this costing, only the variable costs are allocated or assigned i.e.
direct materials, labor, expenses and variable overheads to the production. It does not
include the fixed cost of production. Absorption costing: In this costing, the fixed and variable costs are absorbed to
production. The cost includes here are direct materials, labor, expenses, and fixed and
variable overheads. In the absorption costing, a portion of the fixed overhead cost is
assigned to each unit of production. Standard costing: In this costing, the costs are predetermined in advance for the product.
When the standard cost is used to control the cost it is known as standard costing
(McGraw-Hill.Soin and Collier, 2013). Standard cost is the estimated cost for the raw
materials, labor, and overhead for a particular time period. In standard costing, the
variances are incurred in between the actual and standard cost and accordingly the
manager takes the corrective action to maximize the production. Historical costing: In this costing, the costs are determined in terms of actual costs and
not the estimated standard costs. In this method costs are determined only after it is
incurred. Mostly the organizations follow this costing method because it is easy to
evaluate the cost and take on the spot measurement.
 Activity- based costing: The ABC system firstly collects the overhead cost for each
business activity and then assigns the costs of the activities to the products i.e. cost
objects of that activity (Bodie, 2013). In other words, activity- based costing allocates the
all direct and indirect costs to the cost objects. ABC is a crucial tool for making strategic
decisions, as it allows the manager to prepare the picture of exact profitability of product
lines, distribution channels, customer segments, etc.
Quarter 1
Particulars
Amount (in
￡)
6

Sales 66000
Less: Cost of sales
Opening inventory 0
production cost (78000*0.65) 50700
Less: Closing stock (12000*0.65) 7800
42900 42900
Contribution 23100
Less:
Fixed overhead 16000
Fixed & selling expenses 5200
21200
Net profit 1900
Quarter- 2
Particulars
Amount (in
￡)
Sales 74000
Less: Cost of sales
Opening inventory (12000*0.65) 7800
production cost (66000*0.65) 42900
Less: Closing stock (4000*0.65) 2600
48100
Contribution 25900
Less:
Fixed overhead 16000
Fixed & selling expenses 5200
21200
7

Net profit 4700
Reconciliation
Working note Q1 Q2
Variable costing profit 1900 4700
Opening inventory 0 7800
Closing stock 7800 2600
Absorption costing profit 4300 3100
Opening inventory 0 10200
Closing stock 10200 3400
Absorption costing for Quarter 1:
Particulars
Amount (in
￡)
Sales 66000
Less: Cost of sales
production cost (78000*0.65) 50700 0
Semi-variable (78000*0.20) 15600
Total Variable cost 66300
Less: Closing stock 10200
56100
Gross profit 9900
Less: -400
9500
Selling and distribution as fixed 5200
Net Profit 4300
Absorption costing for Quarter 2:
Particulars
Sales 74000
8

Less: Cost of sales
Opening stock 10200
COGS (66000*0.20) 13200
production cost (66000*0.65) 42900
Total Variable cost 66300
Less: Closing stock 3400
62900
Gross profit 11100
Less: selling expenses -2800
8300
Fixed expenses 5200
Net profit 3100
Working note
Fixed costs 16000
Budgeted cost of production
80000 per
units
Budgeted fixed cost 0.2
Variable cost per units 0.65
(b): Reason for analysing variations in profit
By using this calculation, it is rightly said that absorption and marginal costing methods
presents precious deviation in net profit. The crucial characteristic which is main to be taken into
accounts is linked with the fixed overhead expense as of that these difference are gain. This has
been presented underneath:
For the first quarter:
Overhead absorbed= (66000*0.20)= 13,200
Fixed overhead costs= 16,000
Under absorption: (2,800)
For Second quarter:
Total absorbed expenses: (74000*0.20)= 14,800
9

Fixed costs= 16,000
Under absorption= (1200)
(c): Reconciliation Statements:
It requires to be completed by making important variation which arises in a project that
could assist in reducing those gaps.
Particular Q1 Q2
Profit from absorption 4700 5900
-2800 -1200
Profits as from marginal 1900 4700
Working notes:
Fixed charges= 16,000
=66000*0.20= 13,200
Under absorption=(2800)
= 74000*0.20= 14,800
Fixed expenditure: 16000
Under absorption= (1200)

SECTION 2
Part 1
P4: Merits and demerits of using planning tools in budgetary control
Planning is the important part for all the organization because it helps the managers to
think in advance about the future for the business operations. With the help of planning the
manager can controls the various activities of the organization. Planning can be used for short
duration as well as long duration according to the management requirements. Planning helps to
all departments to achieve their targets in well- defined manner and assists the management to
increases the profit margins for the business operations. Now a scenario is changed, the
organization are becoming more advance in planning their methods of planning has been
changed from traditional budgeting tools towards cloud- based budgeting tools and uses various
software according to their needs (Vinayagamoorthi and et. al., 2012).
10

Different planning tools and their application which is used in preparation of projected
future budgets are explained below:
Prediction or forecasting tools: This tool is very effective tool for the management in
which future projections are made with the help of past data (Lukka and Vinnari, 2014). While
preparing the budgets the past and current trends are analysed by the manager in deeply manner
so that their in mistake incur in the future.
Merits
 It helps the management to prepare the future forecast budget in very well- manner.
 This tool helps in preparing the all types of budget.
Demerits
 It creates very difficult to predict for future because future prediction is not very easy and
change rapidly. It incurred cost for the organization.
Contingency tools: Another important aspect in preparation of the budgets is contingency
or future event which affects the budgets. While preparing the budgets the manager evaluates the
total uncertainty which affects the organizational profitability index. To fix this problem, the
manager prepares the strategies for the contingencies and enormously estimates and evaluates the
risk creating factors which affects the future budgets.
Merits
 It helps the manager to eliminate the risk factors for the future budgets.
 It also assists the manager to take the important decisions for the organization.
Demerits
 It is a time consuming process because it requires deeply study of risk creating factors. It is also takes time to prepare it.
Systematic planning: It is also known as scenario planning which is the technique of the
planning. This planning is makes the assumptions about the future and how the business
environment will change in the future which affects the business operations of the organization
(Wickramasinghe and Alawattage, 2012). In other words, the systematic or scenario planning
helps to the manager to identify a particular set of uncertainties and different realities which
might happen in the future of the organization business activities.
Merits
11

 It assists the manager to plan for future uncertainty and accordingly they take decision for
it.
 It is the most important method for evaluating the future uncertainty.
Demerits
 Correct future prediction is very difficult for the manager of the organization because it
changes every minute of time.
 It creates so many issues when the manager estimates for the future.
Part 2
P5: Various financial issues and measure to resolve it
It is very important for all the organization to prepare the plan and policies for the
business activities according to their requirements. It increases the productivity of the business
when it creates plans according to it. Financial issues come when the plans are not matched with
the business activities and it incurred further cost for the organization (Hilton and Platt, 2013).
The issues may be come from the external environment like change in the government policies,
tax rates, inflation rates, etc. which affects the business activities of the organization.
The management can use the following management accounting ways to react quickly to
financial issues of the organization:
Firstly, identify the financial issues by applying various management accounting techniques
and address them without any delays.
Secondly, the organization should interpret the financial governance and understand it and
analyze it. The financial governance monitors the financial issues and prevents it in most
effectual manner.
Thirdly and lastly, apply the management accounting techniques and tools set to prevent these
financial issues in the organization by applying these methods, the management of the company
can faces these problems in most appropriate manner.
CONCLUSION
From the above mentioned report, it is rightly said that by evaluating the management
accounting methods, it has been concluded that it is very effective and necessary technique for
the organization business processes. NERO LTD. earns lot of benefits while applying the
management accounting tools and techniques. By applying the various management accounting
12

systems and their reporting methods helps the management accountant to maximize the profit
margins of the organization. With the utilization of several different planning tools in the
organization helps the management to control the core business activities it. The company can
solve the financial issues by applying the appropriate techniques to resolve them. Finally it has
been concluded that the management accounting is the crucial part of the internal management of
the organization.
13