Principles and Practice of Management Accounting

This report provides information about the essential requirements of varied management accounting systems that available to the firm. It also sheds light on the extent to which reports aid in managerial decision making.

PRINCIPLES AND PRACTICE
OF MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
LO1..................................................................................................................................................1
P1 Management accounting and requirement of different types of management accounting
systems.........................................................................................................................................1
P2 Different methods used for management accounting reporting.............................................1
Benefits and application of management accounting system......................................................2
LO2..................................................................................................................................................2
P3 Calculating costs under different management accounting techniques..................................2
LO3..................................................................................................................................................7
P4 Advantages and disadvantages of different types of budgetary planning tools......................7
LO4................................................................................................................................................10
P5 Comparing how management accounting is used by organisations for responding to
financial statements. ..................................................................................................................10
CONCLUSION .............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Management accounting implies for the presentation of accounting information which in
turn aid in the formulation of management policies that associated with daily activities. In the
context of business unit, management accounting is highly significant as it helps facilitates
planning, co-ordination and financial control to a great extent. By employing this firm can do
effectual evaluation of efficiency and effectiveness of different policies. Along with this, with
the help of management team can do proper forecast about future and thereby would become
able to make optimum use of monetary resources. This report is based on the case scenario of
medium sized organization namely Alpha Ltd which in turn involved in offering pizza to all age
groups. In this, report will furnish information about the essential requirements of varied
management accounting systems that available to the firm. Besides this, it will also shed light on
the extent to which reports aid in managerial decision making.
Report will also develop understanding about the concept of costing methods in relation
to absorption and marginal. Further, report also entails how effectual planning can be done in
monetary terms by referring management accounting tools. It will also provide deeper insight
about the techniques which assist in addressing financial problems prominently. The present
report will be providing the understanding about the requirements of different type of
management accounting systems. It will be providing information about the different methods
that are use in management accounting and reporting. It will also provide for different techniques
under which income statements are prepared by the organisation. Report will also provide for
the tools that are used in management accounting. It will be giving detailed understanding about
the management accounting.
LO1
P1 Management accounting and requirement of different types of management accounting
systems.
Management accounting places emphasis on analysing and evaluating business
transactions which in turn contributes in business decision making. There are several tools which
can be employed by Alpha Ltd for ensuring smooth functioning of the business operations and
functions. Management accounting refers to the process of making management accounts and
reports for providing timely and accurately financial as well as statistical information’s to
managers for making decisions for the business. The accounting is used by organisations to
1

identify, measure, analyse, and interpret and to communicate information for enabling the
organisation to achieve their desired objectives. The accounting is different from that of the
financials accounting. Financial accounting is for internal users and external users for making
decisions (Management Accounting, 2019). Management accounting provides information for
internal management of the company for framing strategies that would be enhancing the
performance of company (Nielsen, Mitchell and Nørreklit, 2015). Management accounting helps
the organisations to forecast about the future.
By doing assessment, it has identified that significant difference takes place between
management and financial accounting in the following manner:
Basis of difference Management accounting Financial accounting
Meaning It furnishes appropriate
information to the managers
which can be used for the
purpose of developing plans,
policies and strategies.
It focuses on the preparation
of final accounts with the
motive serve suitable
information to the relevant
parties.
Objective The main motive to assists
manager in decision making
by providing useful
information about internal
matters.
Company’s motive is to serve
information to the outsiders.
Time period As per the needs managerial
accounting reports are drafted.
Accounts are prepared at the
end of financial year.
Users or stakeholders Only internal parties Both internal (management,
employees and external
(investors, government etc.)
parties s
Format No specific format is followed Financial reports are prepared
by using the format mentioned
in IFRS
Compliance requirement in
relation to publishing and
No Yes
2

auditing
Specifically, there are four MA systems which Alpha Ltd can use such as:
Job costing system
In the context of manufacturing organizations, job costing system is highly significant as
it helps in assessing cost associated with each job. Thus, by undertaking this performance of each
job can be tracked easily.
Advantages Disadvantages
 Facilitates identification of profitability
that associated with each job
 Helps in estimating the cost of similar
jobs
 Increases clerical work
 Costs are assessed on historical basis
Cost accounting system
By using this framework Alpha Ltd can do estimation about cost of its products or
services. By adding direct and indirect expenses (fixed as well as variable) cost related to
production can be determined. Thus, by adding mark-up in unit cost price can be determined
effectually.
Unit cost: Direct + indirect expense / number of units produced
Price = unit cost + (unit cost * mark-up%)
Advantages Disadvantages
 Helps in reducing cost level and
maximizes profitability
 Facilitates price fixation and gives
input for cost control (Advantages of
Cost Accounting, 2019)
 Assists in taking decision whether
company should make or buy
 It focuses on previous aspects whereas
management is taking decision about
future
 This system leads problems pertaining
to over or under absorption of overhead
(Advantages and Disadvantages of Cost
Accounting, 2019)
Inventory management system
With regard to Alpha Ltd it is highly significant which ensures effective management of
3

raw material and finished product. Hence, by undertaking EOQ, JIT system etc firm can
determine the level to which inventory need to be maintained within an organization. Along with
this, by taking into account LIFO, FIFO etc business unit ensure prominent management of stock
within an organization.
Advantages Disadvantages
 Ensures uninterrupted production
activity within an organization
 Facilitates savings in terms of time and
cost
 Dependency on internet usage limits its
significance: System crash, malicious
hack
 Reduction in the activity of physical
audit (Advantages & Disadvantages of
a Computerized Inventory Management
System, 2019)
Price optimization system
This software can be undertaken by the firm for assessing prices which will improve
profitability aspect in the near future. Moreover, it clearly shows prices that customers are ready
to pay for the company’s product’s or services. Thus, by setting suitable price company can
increase customer base and thereby profitability as well.
Advantages Disadvantages
 Helps in taking appropriate pricing
decisions
 Assists in building competitive edge
 Time consuming exercise
 High dependency on internet access
P2 Management accounting report methods
The different reporting method for accounting of management includes different types of
reports which are formulated for organization in order to manage the information relating to
company (Mata, Fialho and Eugénio, 2018). This reporting is very necessary because of the fact
that this records all the information in a systematic and clear manner which helps the manager in
taking effective decision. Thus, it is very necessary for Alpha Ltd to use these various kinds of
reporting system which are illustrated in connected points-
Report for budget- this is a type of managerial reporting under which the budget for the
4

company is prepared. The budget is defined as the estimate of the income and expenses based on
the previous budgets. This is very helpful for the company in analysing the expenses which can
be incurred in future and for this the company take measures for solving this in advance. Also,
this will help the manager in analysing the areas where they can cut the cost and where to
improve the income sources.
Performance report- this is yet another type of performance report which can be
prepared in Alpha Ltd under which the performance of the employees is recorded. Current
discussion helps the manager in evaluting the performance of the employees as well as the
business. Thus, this helps the manager in deciding that who are better employees and how they
need to be retained within the company. Thus, assist business in analysing and making ways of
improvising working ability of the employees and the overall performance of the company.
Sales report- this is a kind of format which is prepared by Alpha Ltd under which all the
sales transactions are being recorded. This helps the management of the organization in
analysing the sources of revenues and how much revenue is calculated with this source. This is
necessary because this helps the manager in deciding that whether the sales revenue is enough
for the working of company are they have to invest in other sources as well.
Job cost report- this is a type of reporting under which all the expenses which are which
are incurred for a specific project are recorded. Also, the estimation of revenue is done from this
project in order to evaluate the profitability of the project (Commerford, Hatfield and Houston,
2018). This job costing report help the company in identifying and analysing the higher earning
areas of the business. This report is prepared with the motive of analysing the good project so
that time and money is not wasted on the projects which are of low profit margins.
Benefits and application of management accounting system
The management accounting is very beneficial for the company as this helps the
company in analysing and interpreting the financial information and then taking decision and
making policies and plans to manage the business. The management accounting system are
applied in business in order to record different transaction of business, plan and control and take
decisions and formulate different policies for the betterment of the company.
5

LO2
P3 Calculating costs under different management accounting techniques.
Problem 1
Calculating Profits as per different costing techniques
Marginal Costing
Marginal Costing is a costing technique used by organisations that charges the variable
cost to the cost units and fixed costs are attribute as the period cost. Fixed are charges against the
contribution of the period. This costing is ascertainment of the marginal costs and effect on
profits of change in volumes or types by differentiating between the variable and fixed costs
(Senftlechner and Hiebl, 2015).
Income Statement as per Marginal Costing
April May June July August September
£'000 £'000 £'000 £'000 £'000 £'000
Sales 600 480 720 600 560 640
Opening Inventory 0 0 45 0 0 45
Add:Production
Cost(Variable
Only) 225 225 225 225 225 225
Less:Closing
Inventory 0 -45 0 0 -45 -15
Marginal Cost of
Sales 225 180 270 225 210 240
Contribution
Margin 375 300 450 375 350 400
Less
Fixed
Manufacturing
Cost -150 -150 -150 -150 -150 -150
6

Non
Manufacturing
Cost -50 -50 -50 -50 -50 -50
Net Profit 175 100 250 175 150 200
Absorption Costing
Absorption Costing is the techniques used for accumulating costs associated with the
production process and than apportioning them over the individual products. In absorption
costing fixed cost that are associated with manufacturing are allocated to the product cost. Fixed
cost are not charged against contributor as like in marginal costing (Absorptions Costing, 2019).
Income Statement as per Absorption Costing
April May June July August September
£'000 £'000 £'000 £'000 £'000 £'000
Sales 600 480 720 600 560 640
Opng Inventory 0 0 75 0 0 75
Add:Prod
Cost(Variable
+FC) 375 375 375 375 425 350
Less:Clsng
Inventory 0 -75 0 0 -75 -25
Over/Under
recovery of Fix
O/H 0 0 0 0 -20 10
Cost of Sales 375 300 450 375 330 410
Gross Profit/Loss 225 180 270 225 230 230
Non Mnfctrng Cost -50 -50 -50 -50 -50 -50
Net Profit 175 130 220 175 180 180
7

2.Schedule for reconciling the net operating profit of under variable and absorption costing
Reconciliation Statement
Reconciliation Statement
April May June July August
Septembe
r
Profit as per
Absorption
costing 175 130 220 175 180 180
+ op stk @ FOH
rate at op. date 30 30
- Cl stk @ FOH
rate at cl. date 0 30 0 0 30 10
Profit as per
marginal
costing 175.00 100.00 250.00 175.00 150.00 200.00
Problem 2
A. BEP in units and in GBP
B. Contribution Margin Ratio
Calculating contribution margin ratio in case of new installation of
machine
Fixed cost 180000
Contribution per unit 12
Break even point (in
units)
Fixed cost/ contribution
per unit 15000
8

Fixed cost 180000
Contribution margin 162000
BEP (in revenues)
Fixed cost/ Contribution
margin ] 111.11%
Total revenue 540000
Variable cost 378000
Contribution margin
ratio
Total revenue- variable
cost/ Total revenue 30.00%
2 b. Calculating contribution margin ratio in case of new installation of machine
In case of new machine is installed
Fixed cost 416000
Contribution per unit 26
Break even point (in
units) Fixed cost/ contribution per unit 16000
Fixed cost 416000
Contribution margin
BEP (in revenues) Fixed cost/ Contribution margin ]
9

Total revenue 540000
Variable cost 189000
Contribution margin
ratio
Total revenue- variable cost/ Total
revenue 65.00%
2.c Company expects a sale of 20,000 units for the next month.
In case company expects for selling 20000 units for next month
Revised profit @ sales of 20000 units
Sales 20000*40 800000
Less: Variable cost 20000*28 560000
Contribution 240000
less: fixed cost 180000
profits 60000
Income statement in case of machine installed and not installed
Revised profits in case of installation
10

Sales 540000
Less: Variable cost 189000
Contribution 351000
less: fixed cost 416000
profits -65000
Revised profits in case of not installed
Sales 540000
Less: Variable cost 378000
Contribution 162000
less: fixed cost 180000
profits -18000
LO3
P4 Advantages and disadvantages of different types of budgetary planning tools
There are different planning tools which are used by organisation such as
11

Capital Budgeting
It can be defined as the process that can be used by business so that they are able to
identify which potential asset that is fixed can be purchased by company and which asset can be
declined by firm. This process is used to create a quantitative view of each proposed fixed asset
investment, thereby giving a rational basis for making a judgment. It is one of the most important
accounting tool. There are various advantages of this, it includes following:
Advantages:
 This types of budgeting helps company in knowing and understanding risk which can
affect the return of company (Kokubu and Kitada, 2015.).
 It supports company in knowing about that when investment done by them can give them
best possible outcome.
Disadvantages:
 In this operational cost of company can be increased if the investment in fixed asset is
more. So firm needs to lay special emphasis on this.
 If firm’s investment is inadequate, then it can be difficult for firm to increase its budget
and the capital aspects.
Flexible budget
This budget is basically flexible in nature; it adjusts itself with the alteration in volume or
activity. Flexible budget can be more useful than static budget. As it has been analyzed that
amount which has been put on static budget do not change or get varied. This type of budget
varies according to the needs and demands of company. So firm can be benefited while using it.
There are various advantages and dis advantages relate to it. It includes the following:
Advantages:
 Flexible budget is really useful for organization as it supports firm in identifying the
amount that needs to be produced so that firm can achieve desired level of profit. This
type of budget can be used for large purchases which can occur during any month of
sales.
 It also helps firm in knowing about the level of production, this is one of the most
important advantage of flexible budget.
 This kind of budgeting is less stressful and more fun to use. This can be use by company
12

regularly.
Disadvantages:
 This type of Budget is really confusing in nature as they provide only with one figure that
needs to be remained static. This type of budget has more amount of rules which can be
really complicated.
 Also this type of budget which is flexible budget can enable cheating, by complicating
things and putting more rules and regulations in it.
Variance analysis
Variance analysis is also known as quantitative investigation, it is also known as
difference between actual and planned behaviour. There are various types of variances like for
example Purchase price variance, labour rate variance, variable overhead spending variances and
many other. It can be used by company to know about variances which occurs in price. This type
of variances can help firm in identifying the causes of different types of variances. Variance
analysis also have some advantage and disadvantage (Chiarini and Vagnoni, 2015). It includes
following:
Advantages:
 Variance analysis can be used by company to achieve the target of business, this can
support company in identifying and controlling various potential risk. So that this can
support firm in building trust among team members.
 Variance analysis supports firm in identifying the various causes of variations, it can be
related to income and it also be related to expenses.
Disadvantages:
 Variance analysis also have one of the major drawback which includes that if variances
are identified then it can get delayed by company. They might get delayed in overcoming
it.
 Also it has been analysed that if deviations are found in income and expenses and they
are lowered in nature, it might force managers to make forward looking decisions.
Operating budget
This type of budget is basically used by company to forecast revenues and expenses that
13

can be faced by organization. Operating budget is being prepared by firm in beginning of year
and this budget is mainly used to show what activity is needed to perform in entire year. This
budget can also affect the profitability aspects of company. There are various advantages and
dis-advantages which are included while making use of this budget (Soderstrom, Soderstrom
and Stewart, 2017). It includes the following:
Advantages:
 One of the most important advantage this budget provides to company is that it helps in
forecasting revenues.
Disadvantages:
 This budget can take lot of time, and also expenses are been increased during allocation.
Cash Budget
It is an estimation made by the company for the flow of cash for a specific period of time.
This budget helps the company to assess that if or not they have the sufficient cash they need to
maintain their operations.
Advantages
 It helps the company to find and increase the efficiencies with the use of other tools as
well.
 It helps to save cash by eliminating the waste from the budget of the company.
 It helps the company to make the communication easier and easily state the current
financial health of the company (Jamil, and et.al., 2015).
 It advises the company that it is better to borrow the money in order to pay the taxes
especially if they are short on cash.
Disadvantages
14

 It reduces the power of spending. Many companies and industries have started taking
payment through debit or credit card only. If the companies make a cash only budget for
renting a car or making a reservation at hotel then it will be restricted due to this factor.
 Cash can be easily loosed by anyone. Even carrying a debit card gives some protection
because if that is lost then they can block it by calling the bank.
Zero Based Budgeting
Zero based budgeting refers to the budget techniques where the budgets are propared taking base
as zero. The budgets do not involve taking previous budgets for making the budgets for the
current years. It takes zero as base for making the budgets for current year.
Advantages
This budgets starts from the initial point and therefore all the previous errors are not included in
in the present budget.
Disadvantage
It does not takes into considerations the previous budgets which may lead to repetition of same
errors.
Standard Costing
Standard costing refers to practice of substituting expected costs for the actual cost in accounting
records of company. In this costing techniques identifies the variance among the actual and
standards so that improvements can be made by the company for removing the variances.
Normal Costing
Normal costing refers to costing method used for deriving the cost of products. In this technique
actual costing data and information are used for deriving the costs of product except
manufacturing overheads.
15

Actual costing
In this type of costing system that only make use of actual cost, in this they determine actual cost
of product.
Contract costing
In this type of costing, cost are associated with specific cost and are also related to
contractors. Contract costing is used by companies that are involved in construction activities or
project that take more than one year to prepare.
SWOT Analysis
Strength: It has been analysed that Alpha Ltd. company have large number of outlets. They
have extended their business in global areas. Is has strong market base that can help it to
introdiece new products
Weakness: The weakness of company is that they are not investing much in research and
development.
Opportunities: They can extend their market in various new areas. The new laws will be
bringing tax reliefs to the manufacturing firms.
Threat: They have a huge threat from competitors.
LO4
P5 Comparing how management accounting is used by organisations for responding to financial
statements.
Management accounting is used by the management of the company for decisions
making. There are different tools and techniques which are by organisations for responding to
the financial statements of company. Financial statements of the company provide relevant
information about health and position of company. Management has to ensure whether the
16

management accounting techniques used by organisation are effectively driving business with
the desired results. If company is not able to achieve its desired results with the management
accounting tools than it may have to change its strategies. Management accounting techniques if
not effectively used by the organisations than it may affect the business (Kokubu and Kitada,
2015.). Different management accounting techniques used by different companies for analysing
the financial statement of company. The different management accounting tools used by
organisations are benchmarking , balance score card, financial governance and key performance
indicators.
Comparison of tools used by Alpha ltd and Coca Cola.
Alpha Ltd Coca Cola
Company Alpha ltd is in the the industry of
manufacturing foods and beverages.
Company is in the business from last
two decades.
The company is using various tools
for responding to the financial
statements.
Coca Cola is a rival firm from the same
industry. It is in the industry from
decades. For responding over the
financial statements of company it is
using few specific techniques of
management accounting.
Benchmarkin
g
It is refers to
the tool that is
used for
comparing the
standards
performance
of the
company with
Alpha ltd uses the benchmarking
technique in its business for
measuring the variance between the
actual and planned budgets. This
helps organisation to identify the gap
that has been left within the different
benchmarks. This helps company in
improving its performance so that it
can reach up to the required
objectives (Jamil, and et.al., 2015).
Coca Cola uses benchmarking only over
some the specific activities in the
organisation. It could be used by the
company at other levels also so that it
could identify measure its performance
in quantitative terms. It could identify
the difference between the budgeted and
actual targets achieved which will help it
in taking the improvement strategies.
17

its actual
performance.
Key
Performance
Indicators :
KPI are used
by
organisations
for monitoring
the progress
towards
achieving the
goals
Key performance indicators are used
by the organisations only in non
quantitative terms. It do not uses it
for knowing the knowing the
preprocess in quantitative terms as
the actual results are not generated
by the technique. The tool is
effective for analysing the qualitative
measure of company. Therefore
Alpha ltd do not uses this tool for
knowing the progress in
manufacturing activities
Coca Cola uses Key performance
indicators for measuring the progress
both in quantitative and qualitative
terms. This is very time consuming and
lengthy measure that do not provide
accurate results. As the it is not possible
to exactly measure the progress in
qualitative terms. Company should adopt
some other tools that provide accurate
results to the organisation.
Balance
Score Card :
It is
performance
metric used by
organisation
for identifying
and improving
the business
functions.
Alpha ltd is used for identifying the
business function that are not
providing the required results. It
helps company to frame strategies
that will help the organisation in
enhance its performance. Balance
score cards allocates scores to
different activities involved in the
manufacturing activities as well as
factors that are influencing the
business. Manager are accurately
interpreting the results drawn that is
helping the company to grow
constantly.
In the case of Coca Cola balance score
is used by organisation for recognising
the progress. It involves cost of
gathering data and analysis.
Management are require to properly
interpret the available information for
making affective processes ahead. If the
results are not interpreted by company
appropriately, it may affect the business
process. Therefore the tool is used by
organisation only over specific activities
due to the increased cost involved
(Hiebl, 2018).
Corporate
Governance
It help the managers of alpha limited
in monitoring the activities and
Coca Cola is using the corporate
governance in the process of using the
18

operations of business. manufacturing the products of company.
CONCLUSION
By summing up this report, it can be concluded that Alpha Ltd can take appropriate
decision about prices as well as operational aspects referring job, cost accounting, inventory
control and price optimization. Moreover, it clearly highlights cost associated with productive
activities and thereby helps in taking decision about pricing aspects. Along with this, it has been
articulated that managerial reports are highly integrated with MA systems. Moreover, on the
basis of evaluation reports are prepared by the managers of Alpha Ltd that can be used further
for decision making aspects. Besides this, it can be inferred from the evaluation that company
should employ modern (absorption) costing system for analysing cost as well as profitability. It
can be summarized from the evaluation that BEP analysis helps company in doing planning
about future profitability aspects. It can be seen in the report that using capital budgeting tools
Alpha can select viable and profitable investment proposal over other alternatives available.
Further, it can be stated from the evaluation that different firms employ varied tools for dealing
with financial problems take place within an organization.
Hence, at the time of selecting financial tools manager of Alpha ltd should keep in mind
benefits and drawbacks associated with it. From the above study it could be concluded that for an
organisation management accounting is plays a very significant role. Management accounting is
helping the organisation to develop the business using various management accounting tools. If
the management accounting tools are used effectively by the organisation they will help the
organisation in achieving its desired objectives and goals. There various management accounting
methods are used by organisations for recording and preparing the forecasted reports. There are
different costing techniques under which income statements are prepared.
19

REFERENCES
Books and Journals
20

21

22