Management Accounting: Definition, Types, and Significance

This document provides a comprehensive guide to management accounting. It covers the definition of management accounting and how it differs from financial accounting. It also explores the different types of management accounting information, such as cost accounting, inventory management, and job costing. Additionally, it discusses the advantages and disadvantages of different budgeting techniques, including incremental budgeting and zero-based budgeting. Perfect for students studying management accounting.

Management accounting

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
a)c...........................................................................................................................................3
i. Definition of management accounting. How it differ from financial accounting...............3
ii. Significance of management accounting information........................................................5
b) Explain the different types of management accounting information.................................6
Task 3...............................................................................................................................................9
P4 Advantage and disadvantage of different types of budget................................................9
P5 Balance score card approach...........................................................................................12
Conclusion.....................................................................................................................................14
References......................................................................................................................................15

INTRODUCTION
Management accounting plays a significant role for the manufacturing Company as the
manager can effectively day to day operations. It can be used for the purpose of forward looking
through get the statistical and financial information. The research project is context to the Imda
tech limited used the management accounting information that helps them in attaining its goals
and objectives effectively. There is a mainly discussion on the definition of management
accounting and the difference among the financial accounting and management accounting.
Furthermore, the management accounting information as a decisions tool which gives various
advantages are the Make or buy decisions, Product costing and budgets etc. Thereafter, income
statement prepared on the basis of Marginal and Absorption costing techniques. There is a study
on Advantage and disadvantage of different types of budget. The end portion in which there is
description on Balance scorecard is an approach which is used by entities for measuring their
overall performance (Klychova, Faskhutdinova and Sadrieva, 2014). It evaluates the working on
the bases of four criteria such as financial, internal process, customers and learning or growth. It
evaluates the efforts of firm for the future improvement of organizations
TASK 1
a)c
i. Definition of management accounting. How it differ from financial accounting
Management accounting can be define in that it is a procedure in which the useful
information can be identifying, analyzing, measuring, interpreting and transfer data of
accounting that attain the company to reach its goal in effective manner. Thus, it can be used by
the manager of Imda tech limited to make their day to day decisions of business so, they can
carry out all the function in smoothly (Setthasakko, 2010). It is highly by the management for the
purpose of looking forward and it is used by the internal affairs. Thus, management accounting is
the important part of business units. Firms have to manage their operations well so that it can
sustain in the corporate market for longer duration. Competition is very high to survive in such
environment it is necessary to prepare a good budget. It can be prepared by looking upon income
and cost of the organization in particular fiscal year. It is highly by the management for the
purpose of looking forward and it is used by the internal affairs. Though it is difficult task but
this can help in identifying the sales volume and income of the organization. By this way

managers will be able to allocate the resources well. Zero based budgeting is effective tool, it is
not depended upon the assumptions so good results can be come out and organizations can
accomplish their objective easily. There is a vast difference among the financial and management
accounting that are described below-
Financial Accounting Management accounting
The financial accounting in which all the
financial transaction of a company through
tracking. Thus, adopting the standardized
guidelines for the purpose of record,
summarize and present a financial transaction
in a financial statement are income statement.
In the managerial accounting in that
management understand the accounting
information provisions for the concern to
inform themselves in better manner. It assists
the management to control the function and
perform better within the organisation.
It include all the type of information whether it
is financial and non- financial to the
management.
It includes only financial information
The main objective of financial accounting is
that to provide financial reports to the external
parties that are outside the organisation
The aim of managerial accounting is that to
provide the accounting information to the
internal parties or within the organisation
(Yalcin, 2012).
Financial accounting is based upon the
historical data of a company.
The management accounting is highly based
upon the looking forward.
It can be determined by the company’s
accountant through referring the financial
accounting standards (Scapens and Bromwich,
2010).
It can be computed that are reference to the
requirement of management that are use often
adopting the management information system.
In these financial accounting it generates the
reports that are relates to financial reports.
It provides the management reports that are
accurate and reliable both type of information
are financial and statistical information that are
needed by the management.
The financial reports of annual reports are
prepared at the end of accounting period for the
external stakeholders.
The management report generate on the
monthly as well as weekly basis for the chief
executive officer and department managers.

The report shows the income statement or
balance sheet and profit and loss account.
The reports indicate the sales revenue,
available cash, account receivable, account
payable, inventory and raw material etc.
ii. Significance of management accounting information
The Imda tech limited used the management accounting information as a decisions tool
which gives various advantages that are as describe below-
 Make or buy decisions- The management accounting information used by the cited
company in which the purchase department managers can effectively make decision of
make or buy goods. It can be possible by comparing the most relevant cost which can
describe the difference among the various decision options (Tucker and Parker, 2014).
The manager can make decision in which it decides whether to purchase or make a
production parts.
 Product costing- The management accounting information which is used to measure the
cost of goods. It facilitates them in understanding the cost of products is needed to assist
the small firms. It helps them in determining the price at that they sold its products at the
break- even point. It is used by the production manager of Imda tech limited to set the
price of goods so, they know its profits before allocating resource in production.
 Budgets- The management accounting is commonly used by the small enterprise for the
purpose in preparing the budgets. It can assist the purchase department to make a plan
regard to purchase and sales of goods (Hülle, Kaspar and Möller, 2011). Apart from
this, it can also used to motivate the staff workers and direct management. The finance
manager can able to know the expected sales over the budgeting period and the sales
figure shows help them to know the costing data to measure the cash flows.
b) Explain the different types of management accounting information
The Imda tech limited used the various type of management accounting information which
is used by other departments to enhance its reports. Thus, it can be described below-
i. Cost accounting system- It is a framework that are used by the cited company to
make estimation regard to cost of its products for the purpose of inventory valuation,
profitability analysis and cost control. It assists the manufacture department to

estimate the reliable cost of products so, can able to know which products give them
profits or not (Ambe, 2016). It can be used for the preparation the financial statements
it aid them to estimate the closing value of material stock, WIP and finished stock
inventory.
ii. Inventory management system- The Company can used the inventory management
system for the purpose of maintaining the inventory or stock. It is an element of
supply chain management in which it majorly includes the elements like overseeing
and controlling ordering stock, also controlling amount of goods for sale and storage
of stock. It helps the management accountant to store the day to day operation of
business regard to maintaining the inventory (Tucker and Parker, 2014). It facilitates
them to take new orders from the clients and it able the company to keep track all of
its stock, vendors, orders and more. Thus, there are various software through which
inventory can managed its stock level and also reduce the wastage of resources.
iii. Job costing system- The cited company adopts the job costing system in which there
is a procedure of obtaining the information regard to cost and it is used in assigning
stock that are manufactured products. Thus, this system is used to track cost of
material that which are used course of job (Setthasakko, 2010). Therefore, it includes
three types of information are the direct materials, labour and overhead etc. it can be
used for the purpose of tracking the cost as well as revenues that able to produced the
standardised reports of profitability through job.
TASK 2
I) Marginal costing method
Income statement for the 1 September 2010
Particulars
Amount
(£) Amount(£)
Sales value 52500
Less: Cost of Goods sold 37500
Gross profit 15000
Less: Variable expenses
Variable production overhead 7500
Variable administration
expenses 225
Total variable expenses 7725
Net profit 29775

I) Absorption costing method
Income statement for the 1 September 2010
Particulars
Amount
(£) Amount(£)
Sales value 52500
Less: Cost of Goods sold 37500
Gross profit 15000
Less: Variable expenses
Variable production overhead 7500
Variable administration
expenses 225
Total variable expenses 7725
Less: Fixed expenses
Fixed production overhead 15000
Fixed administration expenses 10000
Total fixed expenses 5000
Net profit 24775
Interpretation: The Imda tech limited prepared the income statement for the year 2010 in
September. It can be made on the basis of two management techniques are the marginal costing
and absorption costing. It is prepared for the purpose of provide the company its financial
position by the Net profit and loss. The cited company prepared its income statement by adopting
both marginal and absorption costing. Marginal costing which means that if there is any change
in opportunity cost by producing an extra unit. Whereas, in the absorption costing in which it is
beneficial to know the full costing as it takes all the expenses such as fixed and variable.
Therefore, from the above data and figures has been given that shows the difference among the
net profit of marginal and absorption costing techniques. Let takes Table 1 in that income
statement has been prepared through marginal costing method in which the sale net profit is
£29775. On contrast, in the table 2 there are income statement has been prepared in which there
is a net profit £24775. It has been interpret from the above data is that in which the net profit of
marginal costing is higher than the absorption costing is £29775. The main reason behind this is
that in the income statement is being prepared through marginal costing consider only variable
expenses. Thus, from the above data the cited incur a variable production overhead that is £7500
and variable administration expenses is £225 in which there is a sum total of total expenses that

is £7725. On contrast to this, the cited firm adopts the absorption costing methods in which it
consider both type of expenses are the fixed and variable expenses. Thus, from the above data
the total fixed expenses it takes that is £ and the total variable expenses £7725 for which there is
a total expenses is £5000. The main difference among net profit in the marginal costing and
absorption costing technique that are explained further. Thus, from the above data table 1 and
table 2 in that the calculation of net profit by using marginal costing in which sales revenue is
minus total variable expenses. Therefore, sales revenue is £52500 minus total variable expenses
is £7725 in which the net profit obtains from this value is £29775. On contrast to this, from the
table 2 there is a calculation of net profit is £24775 that are come from sales revenue £52500
minus total expenses is £5000.

Task 3
P4 Advantage and disadvantage of different types of budget
A) Budget is one of the important part of business operations. Proper and accurate budget
can help in gaining high profit to the organization. In the management meeting it was
discussed by Imda Tech Limited that all department managers have to be involved in
budget preparation (Rosentreter Singh and Schönbohm, 2013)
There are several types of the budget which can be used by cited firm, these are
discussed as below:
Incremental budgeting
It is one of the important tool which explains that by making small changes in existing
budget firms can prepare a new budget (Noordin, 2016)
. They have to add incremental amount in the new budget. There is no single formula for
preparing incremental budget but there is approach of assumption that can help in preparing this
financial budget. Expenses of last year will be starting point of this year.
Advantage:
 it is very simple process and easily to implement. It does not involve complex
calculations (Lay, 2016). In such type of budget managers of Imda Tech Limited need
not to do detail analyses of each activity.
 It ensures continuity of cash inflow so issues like shortage of funds do not take place. It is beneficial tool in which impact of changes are immediately seen .
Disadvantage:
 This budget is based on assumption and if assumptions are wrong then overall result will
be negative (Gibassier, 2017).
 It encourages higher spending for maintaining budget of next year.
 Budgetary slack is one of the major drawback of this budget in this company will earn
lower revenue and will spend high amount.
Zero-based budgeting
It is another type of budget which can be used by Imda Tech Limited. In this method, all
expenditures are needed to be justified for new financial year (BAHRI and REZAIE, 2016)

. It starts with zero base in which managers have to identify objectives then they have to evaluate
alternative methods and in the last phase of budget preparation they have to allocate resource
according to priorities (Klychova, Faskhutdinova and Sadrieva, 2014).
Advantage:
 Alternative analyses is major advantage of this budgeting in which manager find out
alternative ways to get profit through budget.
 In zero based budgeting managers look upon the effectiveness of activities and eliminate
non key activities (Taipaleenmäki, 2014).
 With the help of this tool redundancy can be identified by the managers so such type of
activities can be reduced. Resources are all being allocated as per the mission and objective of organization so cited
firm will be able to accomplish its goal significantly.If Imda Tech Limited uses zero
based budgeting method then it will help in reviewing the all aspects periodically
(Bebbington, Unerman and O'Dwyer, 2014)
Disadvantage:
 For preparing this budget high level of efforts are required. Because close investigation is
required for each department activities.
 Bureaucracy is another drawback of this type of budget and to manage it organization
will require additional staff members.
 For preparing zero based budgeting company will have to train its staff members which
will be time consuming.
Fixed budgeting
It is the final financial plan which cannot be changed by the entities. It is an essential tool
through which success of small firms can be measured easily (Rosentreter Singh and
Schönbohm, 2013).
Advantage:
With the help of this method company like Imda Tech Limited can measure short term and long
term profit of the organization. In this, same amount is allotted in all months thus, performance
of the company can be measured effectively (Lay, 2016).

 In this type of budgeting method, finance manager focus on reducing cost. Company
strict to its financial limits and financial discipline has to be maintained by all level
persons.
Disadvantage:
 Lack of flexibility is the major drawback of this budgeting system. Once company has set
a budget on the bases of sales volume then it cannot allocate additional resources if sales
get increased (Bebbington, Unerman and O'Dwyer, 2014).
 It is useful only such places where companies are highly predictable for its sales volume.
B) Process of preparing budget
Preparation of final budget is the crucial task for the organizations, they have to compare
the report with last year and have to make assumption for future. Process of preparing budget are
described as below:
 Gather information: It is the first step in which managers have to collect all relevant
information such as sales, cost etc. On the basis of these details final budget is prepared.
 Record all income source: In this phase Imda Tech Limited will have to look upon
income sources so that estimation of cash inflow can be done. Accordingly cited firm can
allocate resources to each activity (Gibassier, 2017).
 Create list of expenses: Once income is identified then organization will have to look
upon the expenditures which are going to incurred in this financial year.
 Breaking of expenses is the next phase in which all fixed and variable cost are to be
separated.
 Total income can expenses are assumed by the managers of Imda Tech Limited now they
have to make adjustments (BAHRI and REZAIE, 2016).
 Unnecessary expenses need to be cut down so that resources can be used effectively.
 Once it is done then managers have to review the budget monthly so that actual results
can be find out.
C) Pricing strategies
Price is the major factor that can influence mind of consumers. Effective pricing
strategies help in enhancing market share, increasing profit and gaining competitive advantage
(Taipaleenmäki, 2014).
Cost-based pricing

It is important pricing strategy in which Imda Tech Limited can include all costs and can add
company’s profit in it to get the price. By this way cited firm will be able to get desired profit
percentage. It will help in increasing profit of the firm to great extent. It long term profit earning
strategies that can help cited firm in accomplishing its goal soon (Gibassier, 2017).
Marginal cost plus pricing
It is another type of strategy which is used for short term profit earning. In this Imda Tech
Limited can offer consumers discounts or buy products on reduced price. It is less appropriate
because fixed cost can not be recovered by the organization with this strategy (Rosentreter Singh
and Schönbohm, 2013).
Competitive pricing:
In this Imda Tech Limited can use competitor prices for selling its products. If
competitors are offering same quality, size products then cited firm can use this strategy. That
would help in sustaining in competitive market for longer duration (Gibassier, 2017).
Price skimming
It is the strategy in which Imda Tech Limited can charge extra ordinary high prices with
consumers. It can be applied if cited firm offer innovative and luxury products to customers. By
this way organization will be able to recover its development expenses soon.
P5 Balance score card approach
Earlier firms were using traditional methods to evaluate their last year performances but
now there are many tools that can help in measuring performance of the organizations. Balance
scorecard is an approach which is used by entities for measuring their overall performance
(Klychova, Faskhutdinova and Sadrieva, 2014). It evaluates the working on the bases of four
criteria such as financial, internal process, customers and learning or growth. It evaluates the
efforts of firm for the future improvement of organizations.
It not only focuses on financial performance of Balance Score Card approach but also
consider the non-financial perspectives too (BAHRI and REZAIE, 2016). Financial perspective: Balance score card pay attention on cash flow, sales growth,
income, equity etc. If the cash inflow has been increased that means cited firm has earned
profit and it has performed well in the financial year (Bebbington, Unerman and
O'Dwyer, 2014).

 Customers: it is another area that helps to measure the performance of Balance Score
Card approach. It includes consumer’s satisfaction, retention, market share etc. It can be
evaluated on the bases of all these areas. For instance, in the fiscal year Balance Score
Card approach has increased number of consumers that means clients are satisfied with
the products and they will be connected with the brand for longer duration (BAHRI and
REZAIE, 2016). On the basis on this aspect it can be evaluated that cited firm is offering
quality products and services to its users and people are very satisfied. Increased retention
rate of customers show that organization is able to gain competitive advantage that would
help in sustaining in the corporate market for longer period. Internal process: It includes procurement, production etc. On the bases of these areas
performance of Balance Score Card approach can be measured.
 Learning & growth perspective: It includes employee’s satisfaction, retention rate of
workers, skills sets etc. For instance, if company is performing well then workers will
like the workplace because they will find career opportunity in the cited firm. By this way
skilled persons will stay in the organization for longer duration. That shows that company
is performing well and it can earn high profit as well (Gibassier, 2017).
Balance score card is a beneficial tool that supports Balance Score Card approach in
identifying and respond to financial problems. With the help of this techniques cited firm can
measure its performance and can identify its lacking points. By this way managers of cited firm
will be able to make effective strategies that can support in reducing economic problems of the
organization (Bebbington, Unerman and O'Dwyer, 2014). As financial performance can be
measured through sales volume, equity return, income growth etc. if sales is lower than its
expectation then organization will be able to find out the root cause of the problems and will find
suitable solution to resolve this issue. In the business planning managers of Balance Score Card
approach set long term business objectives. In order to achieve these goal management level
persons, take strategic initiatives and allocate resources. If consumers are satisfied that means
faster payment will be collected that means high income or cash inflow (Gibassier, 2017).
Customer based and internal process perspectives are important tools through which
performance of company can be measured easily. Through this cited firm can identify its
problems and managers can work to improve it. For instance, if in the Imda Tech Limited there
are high employees turn over that shows that cited firm is not treating its workers well or staff

are not getting growth opportunity in the organization (Taipaleenmäki, 2014). On other hand if
company is suffering from financial problems of cash inflow is the problems then it shows
consumers are not satisfied. By this way cited firm can make effective strategy that can support
in improving its economic condition. Management can change their pricing strategies and can
improve quality of products (Rosentreter Singh and Schönbohm, 2013). By this way more people
will get attracted towards the brand and issues of cash flow will get minimized significantly.
Conclusion
From the above report, it can be concluded that management accounting is the important
part of business units. Firms have to manage their operations well so that it can sustain in the
corporate market for longer duration. Competition is very high to survive in such environment it
is necessary to prepare a good budget. It can be prepared by looking upon income and cost of the
organization in particular fiscal year. Management accounting can be define in that it is a
procedure in which the useful information can be identifying, analyzing, measuring, interpreting
and transfer data of accounting that attain the company to reach its goal in effective manner.
Thus, it can be used by the manager of Imda tech limited to make their day to day decisions of
business so, they can carry out all the function in smoothly. It is highly by the management for
the purpose of looking forward and it is used by the internal affairs. Though it is difficult task but
this can help in identifying the sales volume and income of the organization. By this way
managers will be able to allocate the resources well. Zero based budgeting is effective tool, it is
not depended upon the assumptions so good results can be come out and organizations can
accomplish their objective easily. Report has discussed about balance score card. It can be
articulate that it is the technique through which companies can manage their operations well.
With the help of this tool problems will be identified and management will be able to make plan
to resolve such issues. It has been also analysed from the above data is that in which the net
profit of marginal costing is higher than the absorption costing is £29775. The main reason
behind this is that in the income statement is being prepared through marginal costing consider
only variable expenses.

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