Analysis of Management Accounting Systems

The given document is an academic assignment that requires the student to analyze the working of management accounting systems at different levels of organization. It also involves applying these systems to make better reporting for tracking performance and using planning tools like forecasting, contingency, and scenario to deal with financial issues. The assignment references various books and journals on management accounting research, including topics such as strategic management accounting, social and environmental accounting, and management accounting change.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1 ...........................................................................................................................................1
P1 Management accounting system and its types.......................................................................1
P2 Management account reporting and its types.........................................................................2
M1 Benefits of management accounting system........................................................................4
D1 Management accounting system and its reporting are integrated within organisational
process.........................................................................................................................................5
TASK 2............................................................................................................................................5
P3 Calculation of cost using an appropriate techniques..............................................................5
M2. Various types of accounting techniques:.............................................................................7
TASK 3............................................................................................................................................8
P4. Advantages and disadvantages of different planning tools used for budgetary control.......8
M3 Uses and applications of planning tools for preparing and forecasting budgets..................9
TASK 4............................................................................................................................................9
P5 Responses of management accounting system to deal with financial problems...................9
M4 Management accounting can lead organisation to sustainable success in responding to
financial problems.....................................................................................................................11
D3 Planning tools respond appropriately to resolve financial problems..................................11
CONCLUSION .............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Management accounting is a process of preparing various management reports and
accounts that provide accurate financial information to the management. It provides information
to the internal authorities of company. These reports mainly show the amount of revenues, cash,
payable, receivables, accrued incomes and outstanding expenses of the enterprise. Management
accounting system helps the company to get the proper information of the business execution
process and its operations. This system helps the management of the company to evaluate cost
and to make various strategies to maximize profits of the company(Banerjee, 2012).
Ovation Systems Ltd is a UK based manufacturer, designer and supplier company of
video surveillance products. This report is mainly based on management accounting system and
consist various informations such as management accounting reports, various planning tools that
are used in budgetary control and discussed about financial problems that a company has to face
and the ways to resolve them .
TASK 1
P1 Management accounting system and its types
Management accounting is a decision making tools that provide various information to
the management to make appropriate decisions according to the requirement of the company.
Ovation Systems Ltd use management accounting system to provide exact information of
company's performance to insider and outsider parties of the organisation. The main objective of
this system is to get the insider information of the business operations and its execution process.
This system is used to form policies and strategies for the business in order to maximise its
profitability. It makes decision making process easy and convenient by reducing workload of
managers (Bouten and Hoozée, 2013). There are four type of management accounting system
that are used by the managers of Ovation Systems Ltd. These systems are explained below:
 Cost accounting system: This system is used by the management of Ovation Systems
Ltd to determine the cost involved in the manufacturing process of the products. It
measures and records the cost individually then compare input results to the output and
actual results to the budgeted. This comparison helps the managers to get the actual
knowledge of financial performance of the company. It also estimate the profitability of
the business and helps to achieve planned goals of the company. It will be more easy for
1

the managers to use a cost accounting strategy for definite projects to find out the bottom
line. This system is very helpful for the company because it helps to track the internal
cost and keep the record of every activity of enterprise.
 Price optimisation system: This is a method that is used to analyse customer's reaction
to the different prices of products. Ovation Systems Ltd use this system to determine the
prices that will help to reach the objectives of the company. This system mainly focuses
on the customer's willingness and the responsibility of the managers to find the price that
customers are willing to pay for their product and set the price according to them. It helps
the company to attract the customers and win their loyalty by providing them valuable
products with appropriate price that they can afford (Cadez and Guilding, 2012).
 Inventory management system: It is the system that keep the record of moving products
in and out of the company and it records all the inventory related information. This
system is used by the managers of Ovation Systems Ltd to supervise the flow of
inventory from business concern to storage warehouses. Inventory management system
helps the managers to get the overall information of inventory whether it is in warehouse,
transit or in market. It include storing, controlling, monitoring and ordering inventory for
the business. It also help the company to reduce the risk of improper management of
inventory.
 Job costing system: It is a system that is used to record the cost of a manufacturing job
rather than process. With the help of this system the managers can keep the track record
of the cost of each job. This is used within Ovation Systems Ltd in various situations
such as when each job is different and performed to the customer's definition. It provides
the idea of direct and indirect cost involved in production process. It also determines the
manufacturing cost consistently by dividing them in overhead, direct material and labour.
It helps to estimate the cost at their actual value. Ovation Systems Ltd use this method to
control the use of raw materials, labour work time and cost of equipments (Contrafatto
and Burns, 2013).
P2 Management account reporting and its types
Management account reports consist that information which is collected through the
accounting records of the company. These reports show the accurate informations to the
managers and stakeholders of the company. The reports are very transparent, so the stakeholders
2

like customers, investors can easily understand the information mentioned in it. Ovation Systems
Ltd prepare various types of management account reports such as budget, account receivables,
inventory management and performance reports to maintain its financial statements on regular
basis. The various types of reports are explained below:
 Budget reports: It is the main report in management accounting because it consist the
information of actual budget of the business. It helps the managers to set and control the
cost across the company. When the managers are able to estimate the expenses in prior
years it helps to estimate the budget of upcoming years. These reports are prepared by the
management of Ovation Systems Ltd to to list all sources of earning and expenses. It
also help to achieve organisational goals and mission by staying within the limit of
budget. The budget report of Ovation Systems Ltd is based on previous reports that help
to estimate the unforeseen circumstances that might occur. These reports are very
important for the company to because it provide valuable informations that is used by the
managers to minimize losses and increase profits.
 Account receivables reports: These reports are prepared to get the exact idea of the
receivables that a company has to collect from its clients and debtors. It shows the
outstanding amount of customers with their name. Ovation Systems Ltd use these reports
to analyse the credits to be collected from debtors. Account receivable reports are very
beneficial for the company to keep a record of those customers who are not able to make
the payment at the time of purchase and promise to pay the amount after a certain period.
It is very important for the organisation to record the data of owed amount by the
customers, hence it facilitates the managers get exact information of outstanding amount
and to recover the same (Cuganesan, Dunford and Palmer, 2012).
 Inventory management reports: These reports are used to make manufacturing process
more effective by keeping an exact record of inventory, which reduce the possibility of
waste material. It include various informations such as inventory waste, labour cost and
overhead cost. Ovation Systems Ltd generate inventory management reports to maintain
a proper description of the inventory. It include proper maintenance of inventory, because
if the inventory is out of stock it can result in loss of customers. Not a single company
want to loose its customers. So it provides information to the managers of Ovation
Systems Ltd before the inventory goes out of stock. It is very beneficial for the company
3

because it can show the actual status of the inventory whether it is in warehouses or
transit, and managers can keep an eye on the inventory.
 Performance reports: As the name describes these reports show performance of
business, employees and reaction of customers. Managers use these reports to make
strategic decision that results in the success of the company. These reports are prepared in
Ovation Systems Ltd to evaluate the market performance of the business as well as the
performance of employees in various activities. This report is very beneficial for the
company because it helps to get the idea of the current situation of the company and take
decision according to the situation. The role of these reports for Ovation Systems Ltd is
to keep accurate measure of its strategy towards its mission and goal (Hilton and Platt,
2013).
Above mentioned four reports are very helpful for Ovation Systems Ltd to prepare the
budgets with accurate figures that help to improve its productivity and increase profitability. It
also provide information of current performance of the company that helps to make the decision
according to the market trends.
M1 Benefits of management accounting system
From the above described management accounting system it has been observed that there
are various benefit in the context of Ovation system Ltd. Each system has its own importance
that make an organisation to work in effective manner so that profit could be increased and
company is able to attain the competitive advantages. The following benefits of accounting
system are described below:
Management accounting system Benefits
Cost accounting system  It provides the exact idea of manufacturing cost
to the managers of Ovation system Ltd.
 Management of respective company make
efficient use of available resources so that cost
on production could be reduced.
Price optimisation system  It support the manager of company to fix the
price of the product by knowing consumer
perception.
4

 Ovation manager are beneficial to analyse
customer's reaction toward price change.
Inventory management system  It support the management team of company so
that they keep a track record of inventory.
 Helps to improve the accuracy of inventory
orders.
Job costing system  Used to evaluate the cost of each job while
operating in Ovation system Ltd.
 Helps the managers to calculate profits earned on
individual jobs.
D1 Management accounting system and its reporting are integrated within organisational process
Management accounting system and its reporting help Ovation Systems Ltd to earn
maximum profits by providing various kinds of informations such as performance analysis,
market trends, inventory informations etc. These informations help managers in strategic
decision making process. Management of Ovation Systems Ltd use it while forming various
policies to reduce the risk of loss. It also help to achieve organisational goals by evaluating
performance of business. Managers make such decisions that helps to attract the customers and
reduce the cost involve in the production process. It combines basic content and intentions of
intrigue and discovering techniques goes along with them to settle on a sensible conclusion for
primary authority. Accounting structure mainly related to the examination of cash related
information which is used by managers to run the organisation smoothly.
5

TASK 2
P3 Calculation of cost using an appropriate techniques
Cost: It is a value that is used to manufacture a product and to run a business and execute
its operations. This is a amount that has to be paid by the buyer to the seller of the product. The
cost is the monetary resources that are involved in the production process of a product. A
customer who is willing to but a product want to know the cost of the product before buying. It is
suggested to the companies to set such cost that is bearable by the customers and they are able to
pay the amount. Ovation Systems Ltd set an appropriate price of its products so that it can attract
them and provide them products with lower prices as compare to others (Kotas, 2014).
Marginal costing: This method help to get the idea of the cost of additional unit.
Marginal cost is a variable cost that is charged on the additive units of production. Ovation
Systems Ltd use this method to evaluate the additional variable cost.
Absorption costing: This method is used to recover all the cost that are incurred in the
production from the sales of the same products. This technique is used by Ovation Systems Ltd
to identify standard cost that is involved in manufacturing process.
Calculation of net profit by using marginal costing method:
Particulars Amount
Sales revenue = (selling price * no. of goods sold = 55 * 600) 33000
Marginal Cost of goods sold: 9600
Production = (units produced * marginal cost per unit = 800 * 16) 12800
closing stock = (closing stock units * marginal cost per unit = 200 *
16) 320
Contribution 23400
Fixed cost ( 3200 + 1200 + 1500 ) 5900
Net profit 17500
Computation of net income by using absorption costing method:
Particulars Amount
Sales = (selling price * no. of units sold = 55 * 600) 33000
Cost of goods sold = (total expenses per unit * actual sales = 23.375 * 600) 14025
Gross profit 18975
6

Selling & Administrative expenses = (variable sales overhead * actual sales +
selling and administrative cost = 1 * 600 + 2700) 3300
Net profit/ operating income 15675
Break even analysis: It is point where company's total cost is equal to its profits. It
assist the managers of Ovation Systems Ltd in determining the state of no profit or loss. In this
analysis the company is in such situation where the cost is recovered but the company is not
earning any profit (Lavia López and Hiebl, 2014).
A. Total number of product sold
Sales per unit 40
Variable costs VC = DM + DL 28
Contribution 12
Fixed costs 6000
BEP in units 500
B. Calculation of breakeven point in accordance to sales revenue
Sales per unit 40
Variable costs VC = DM + DL 28
Contribution 12
Fixed costs 6000
Profit volume ratio PVR = Contribution / sales * 100 30.00%
BEP in sales 20000
C. Calculation for getting desire profit of 10,000
Profit 10000
Fixed costs 6000
Contribution 16000
Contribution per unit 12
Sales 1333.33
Margin of safety: It is the situation when a buyer will only buy product when its market
value is lower then internal value. It is the different between actual sales and budgeted sales. It
shows that how much sales level can decrease before a business reaches to its break even point.
D. The margin of safety, if 800 products are sold
Actual sales in units 800
7

Break even sales in units 500
Margin of safety 37.5
M2. Various types of accounting techniques:
Cost volume analysis
It help to calculate the amount of outcome of variable cost, expenses and sales on the
actual profit earned by ovation system Ltd. It assist production manager to reduce costs
effectively since the level of impact is known. On the other hand it also helps in evaluating the
level of profits required to cover all variable expenses incurred by an organization.
Capital appraisal techniques
There are different Capital appraising techniques such NPV, IRR and ARR are used by
Ovation system Ltd. NPV supply the managers with exact present value of all coming returns
that company is going to have from specific investment. IRR provide the ranks the projects in
terms of profitability that can be derived from it. The project which returns higher profits from
the investment and takes the least time tin cover initial investment is chosen. ARR id the average
rate of return earned and time me value of money is ignored by the method hence it is used less.
D2. Data interpretation
From above calculation of marginal and absorption costing technique is evaluate that
marginal costing is an appropriate technique for determining net operating profit. Ovation
Systems Ltd compare its profit by calculating from both methods and analyse a variation of
£1825 in profit. Net operating income by marginal cost is £17500 and absorption costing is
£15675. when break-even point is calculated the total BEP sales is £20000 and units sold are
500. If company wants to earn minimal profit of £10000 then Ovation Systems Ltd have to sale
1333.33 units. When its sales 800 units then margin of safety 37.5.
TASK 3
P4. Advantages and disadvantages of different planning tools used for budgetary control
Budgetary control is a process of setting financial and performance goals by comparing
actual outcomes with standards and adjust performance if needed. It compels organisation to
think about the future by controlling expenses is the most important feature of a budgetary
planning and control system. This proces includes various steps such as preparing,
communicating, measuring budget. In last again revise the budget. Ovation Systems Ltd uses
8

budgetary control as a planning tool in which its actual income and expenses are compared with
estimated. Spending in excesses have a negative impact on company's profit. Therefore this tool
helps manager in ensuring that company's outflow limits are adequate. Company follow three
types of planning tools such as forecasting, contingency and scenario for budgetary control.
These planning tools are explained below:
Forecasting tools: This techniques refers to process of making predictions for future on
the basis of past and present information. This tool helps in analysing company's trends. Ovation
Systems Ltd considered forecasting planning tool as an important part of strategy(forecasting
method, 2018). Company predict it's sales, measures market impact and understand whether they
need to grow workforce for achieving target.
Advantages Disadvantages
 This tool provides a logical basis to
Ovation Systems Ltd for preparing
plans.
 It also assist to estimate financial needs
so that company does not suffer from
inadequate or excess capital.
 Future is unpredictable and inaccurate
forecast complicate the planning
process of company.
 This tool is based on past information
that is not remain same in future so
company can't depend upon forecasting.
Contingency tools: This planning tool is used as risk management where a plan is make
for a result other than in the expected plan. Ovation Systems Ltd may faces a situation where
uncertain events will negatively impact on its operations. This tool help company in responding
to that unexpected event (Parker, 2012).
Advantages Disadvantages
 It indicate the degree of uncertainty in
future.
 It helps in minimizing the production
loss in advance.
 Plans may become outdated according
to future crises.
 Resources can be wasted in planning
for events that will never occur.
Scenario tools: This tool helps in preparing long term flexible plans with considering the
future events within the organisation. Ovation Systems Ltd evaluate effective plans and
9

strategies on the basis of this planning tool which helps management in decision making and
achieve target on time (Quinn, 2014).
Advantages Disadvantages
 This tool help in maintaining
consistency between different
departments.
 This tools helps in making favourable
management decisions.
 It reduces communication between
departments.
 This planning tool is very difficult to
introduce in small size company.
M3 Uses and applications of planning tools for preparing and forecasting budgets
Forecasting, contingency and scenario are the three planning tools that Ovation Systems
Ltd use for preparing and forecasting budgets.
Trend analysis
With the support of trend analysis manager of Ovation system Ltd is able to predict the
pattern of cost structure and expenses that may be incurred in future. It works as a budgetary
planning tool by providing the management with an expected level of incomes, costs and
expenses. This is used in preparing budgets. It analyses the past expenses made and revenues
earned by the company. This helps in making the company more proactive and prevents future
losses. It helps to plan actions and budgets are also prepared accordingly. The estimation of
expenses takes into account uncertainties and thus cost appears to be more enhanced.
Cash flow analysis
Cash flow analysis works as a budgetary planning tool since it provides the management with the
information related to required amount of funds. Budgets are then prepared according to the level
of cash available with the firm. Cash flow analysis help in understanding and evaluating the
liquidity position of the company. The amount of available cash is then evaluated to analyse
whether funds is able to cover expenses.
TASK 4
P5 Responses of management accounting system to deal with financial problems
Financial issues is a condition where shortage of money causes problem in company
working. Many organisation faces hard financial times which impact on its operations and these
10

issues can seem impossible to overcome. Improper money management, excesses of spending or
sudden expenses, amount due with clients, inappropriate funding etc. are financial issues that
Ovation Systems Ltd are facing. Therefore for dealing with these financial issues Ovation
Systems Ltd have to follow some techniques like key performance indicators, benchmarking and
financial governance (Renz, 2016). These techniques are explained below:
Key Performance Indicators: It is a measurable value that show how effectively an
organisation is achieving it's key business objectives. There are two levels of KPI i.e. high level
where company focus on its overall performance while low level focus on employees and
processes in different departments. With the help of above levels of key performance indicators
Ovation Systems Ltd resolve its financial problem related to excesses of spending on expenses
by evaluating overall performance at various departments. Leading and lagging KPI are the two
types of key performance indicators which are explained below:
 Leading KPI: This indicators are most commonly input oriented, hard to measure but
easily influence and predict the result of process. Ovation Systems Ltd use this indicator
for looking forward with a aim to predict some feature of its future performance. For
example forecast sale for next two quarters in order to generate revenue and estimate
expenses spend until year end.
 Lagging KPI: In this KPI tool company focus on success or failure of the its activities.
They are easy to measure this is the reason many companies uses lagging KPI technique.
Determining sales revenue is a example of this indicators (Suomala, Lyly-Yrjänäinen and
Lukka, 2014).
Benchmarking: It refers to the process of comparing the company practices and
performance standards with other company within same industry. It is an ongoing process in
which companies regularly seek the improvement of their practices. Cost, quality and time are
the most common values that are measured. Ovation Systems Ltd finds benchmarking as a best
practices to improve its performance on the basis of measuring and improving its product
performance so that it attract more stakeholders. When customers and investors attract there is a
inflow of cash in the company that helps in resolving financial issue i.e. insufficiency of funds.
Company set its financing standard similiar to its competitor, by this more investors are attract in
order to increase funding.
11

Financial governance: This planning tool refers to way in which company track
financial information by collecting, manging, directing and controlling data. Ovation Systems
Ltd use financial goverance planning tool in managing its performance, control information,
operations and disclose financial information. This helps in fund management system in an
appropriate way (Merchant, 2012).
Ovation Systems Ltd Airdri
 Company creates various competitive
strategies by using Benchmarking tool.
 Financial governance helps in
management of funds which company
needed for resolving financial issues.
 Company uses key performance
indicators for estimating their expenses
and generating revenues.
 It use leading KPI tool evaluating its
performance.
 Financial governance tool managing
product information.
 It use benchmarking for maintaining its
product cost and quality.
M4 Management accounting can lead organisation to sustainable success in responding to
financial problems
Management accounting is an essential part of Ovation Systems Ltd that lead to
sustainable success in responding to financial issues such as insufficency of funds, expectated
expenses etc. Company uses key performance indicators, benchmarking and financial
governance as a financial tools taht helps in dealing with financial issues. Its uses KPI for
measuring performance of sales and expenses in order to generate incomes. It also maintain
accurate financial information with the help of financial governance. Company follow
benchmarking technique for making strategies in order to attract stakeholders.
D3 Planning tools respond appropriately to resolve financial problems
Forecasting, scenario and contingency are the three type of planning tools that Ovation
Systems Ltd uses for budgetary control ehich helps in tracking financial issues. Contingency
planning tool helps in dealing with unforeseen event that might create problem in future.
Forecasting tool assist company in making effective plans and policies regarding funds
availability for future growth. So that company manages finance requirement for future, if any.
For preparing long term flexible plans company use scenario planing tool in order to achieve
12

future profits. Above tools helps in understand market fluctuation and resolving financial issues
in future.
CONCLUSION
This report interpreted that management accounting plays an important role in Ovation
Systems Ltd by creating, controlling, monitoring plans in order to evaluate its overall
performance. Company uses management accounting systems like price optimisation, cost
accounting, inventory management and job costing system to analyse its working at different
levels of organisation. It also apply above system in order to make better reporting for tracking
performance of company. It also use several planning tools like forecasting, contingency and
scenario to deal with financial issues like excess of expenses, inappropriate funds that company
might face in future. These syetms and tools help to determine favourable decisions that are used
to improve company's performance and profitability.
13