Explaining Management Accounting and its Types

This article provides an explanation of management accounting and its types. It discusses the different methods for management accounting report and evaluates the use, advantages, and disadvantages of planning tools linked with budgetary control. The content covers topics such as cost accounting system, inventory management system, job costing system, and more. It also includes examples and benefits of management accounting system.

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TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
LO1..................................................................................................................................................1
P1 Explaining management accounting and its types.................................................................1
P2. Explaining different methods for management accounting report.......................................4
LO2..................................................................................................................................................6
LO 3.................................................................................................................................................8
P 4. Evaluating use, advantages and disadvantages for planning tools linked with budgetary
control.........................................................................................................................................8
LO4................................................................................................................................................11
Analyzing an application of the management accounting techniques that is been made by
different company in resolving their financial problems..........................................................11
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Management accounting is referred to as the process which is very useful in examining
the financial information of the particular company. This is a strategic procedure to analyse the
operations and cost of the business. This in turn is very useful for making internal financial
reports and also aid to managerial decision making. Management accounting is very important
because it helps in analysing the cost associated with carrying out operations of the business
(Cools, Stouthuysen and Van den Abbeele, 2017). This study will demonstrate, better
understanding related with the systems of management accounting. It also helps in evaluating
various methods which has been for management accounting reporting. Furthermore, this project
will include various range which has been associated with management accounting techniques.
This study helps in determining various use, advantages and disadvantages for planning tools.
This study will also compare various ways which organization may use to effectively respond to
several financial problems.
Excite Entertainment Ltd is an internet portal which was launched in the year 1995. It
tends to provide large variety of contents associated with weather, news, meta search engine,
instant messaging, etc.
LO1
P1 Explaining management accounting and its types.
Management accounting is the provision of financial data and advice to a company for
use in organization to development of business in effective manner. On the other side, financial
accounting is specialized branch of accounting which keeps track of a company about financial
transactions (Difference Between Financial Accounting and Management Accounting, 2018).
Both are different form each other which are shows below:
Basis Management accounting Financial accounting
Legal requirements The management accounting is
not requires proper ad legal
formalities to done and
standards for managing reports
In this requires any legal
requirements because this
creates only for managing data
and work properly because this
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for work in effective manner. is audited by an independent
CPA firms.
Format of presentation Management accounting have
specific format to present
reports within Excite
entertainment LTD company
(Manyaeva, Piskunov and
Fomin, 2016).
Financial accounting not have
specified format to present
reports in company.
Area of coverage within the
organization.
This covers most important
area within the organization is
to create the best decision for
company growth.
This covers only financial
information to parties outside
the organization.
Types of data In this management is used
monetary information data
types for prepare reports
(Höglund and et.al., 2016).
Financial accounting is requires
monetary and non monetary
data types and information for
preparing reports.
There are different types of management accounting system which are as follows:
Cost accounting system:
It is the technique which is enabled for Excite entertainment in cost estimation for various
activities for determine profitability and valuation of inventory. This system is main used by
company for determine different cost of products with the production department of Excite
entertainment company (Hopper and Bui, 2016). This includes direct and indirect material,
labour cost and fixed and variable cost. This helpful and effective for company to evaluate future
cost of production.
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Direct cost is a price which can be directly tied to production of specific products and
services of company (Rikhardsson, 2017). This includes direct labour cost, material,
commission and rate of wages.Standard costing is the practice of substituting an expected cost for an actual cost in the
accounting records. This includes planning tools and controlling cost.
Inventory management system:
Inventory management system is the combination of technology and processes which are
oversees to monitoring and maintenances of stocked products. In the simple words, this involves
management of supply chain process of organization to create more effectiveness for busy
(Maas, Schaltegger and Crutzen, 2016). Inventory management system have different types of
methods which are as follows:FIFO refers first in fist out strategy. This is the assumption which the first purchase are
also the first goods sold. This method is provided the same results under either perpetual
inventory system.LIFO stands for last in first out in the most recent produced items which are recorded as a
sold first. This has a main purpose of reporting purpose which is for taxation must
financial report for company (Cleary, 2017).Weighted average is the calculation which takes into account the varying degree of
importance of numbers in data sets. This creates highly effectiveness for business to
maintain growth of Excite entertainment company.
Job costing system:
Job costing system is monitors expenses and assigns manufacturing cost of each and
every product which are produce by company. This creates more effectiveness for work to
manage reports by tracking expenses (Malina, 2018). This mainly determine manufacturing costs
by dividing them in overheads, labour cost and material cost for estimating actual values for
company. The company Excite entertainment uses this system for making the best control on
material usage, hours of labour and equipments.
Benefits of management accounting system:
3

Management accounting system is enables with Excite entertainment in planning,
controlling, managing and coordinating various business activities together for betterment and
growth of organization. This help to improve efficiency and productivity of company in effective
manner.
P2. Explaining different methods for management accounting report.
Management accounting report is the best tool which is help to determining and gaining
knowledge of business operations of an organization in accurate manner. This help to provide
relevant and proper information to manager of company for making effective strategic decision
which are related with different issues being identified in report (Mårtensson and et.al., 2016).
This creates more effectiveness for business which are as follows:
Budget report:
This is the tool which is use for evaluate performance of company at market place. This
help for comparing the actual results for company to prepare plan (Boiral, 2016). These report is
completed based on estimation of revenue and expenses of company. These turns later helps to
determine variance in performance as well.
Account receivable report:
This report is highly concerned with cash amount which is received by company form
different stakeholders. This is help to Excite entertainment company for determining credit
which is provided to customers of company (Messner, 2016). These include various information
regarding people own money for company.
Performance report:
The performance report is important report which is help to manage performance of
company at market place. This provides details for understanding company performance at
marketplace (Bromwich and Scapens, 2016). This creates higher productivity for Excite
entertainment company for improve performance and relations with stakeholders.
Methods of management accounting system:
Basis Marginal costing Absorption costing
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Meaning This refers with changes in
actual cost by adding up of
units in production.
This costing is calculate and
considers all the costs which
are involved in the process of
production. This drives direct
and indirect cost with accurate
results of work.
Advantage It is easy for determining
and help to control on
production cost
(Höglund and et.al.,
2016).
This also help to
determine production
capacity from the
available materials.
This help to make better
and effective decisions
for company which are
taken by manager.
This help to determine
accurate profits for
company by concerning
growth works.
Disadvantages It is complex for
determining the degree
of variance.
This is remains with
constant short time of
duration only.
This is not suitable for
improvement of
business operation
(Ueno and Scarbrough,
2016).
That is only concerns
with the profits of
company and is not
useful for compare
between different
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products of company.
Time production of accounting system is beneficial for both internal and external
stakeholders because this provides the proper and effective information for company which are
used by managers and stakeholders for taking best decision.Internal stakeholders are the primary users of accounting system (Hopper and Bui, 2016).
This provides proper information to owners about their profitability with overall business
performance.External stakeholders are the secondary users. This system is provided proper opportunity
to investors for investing money in company.
LO2.
Marginal costing- It means the costing technique within which the variable cost is been
charged to the units of the cost whereas fixed cost for a particular period is entirely written off
over contribution. In other words, marginal costing refers to the principle where the variable
costs are been charged directly to the unit cost and a fixed cost attributable to relevant period is
been write off wholly against contribution for a particular period. It means attainment of the
marginal cost and an effect on the profit of the changes in the type or the volume of the output
through differentiating between the variable and the fixed cost. Concept of the marginal costing
is mainly based on behavior of the cost that varies with volume of production. It is also known as
the variable costing method in which only the variable cost are been accumulated and per unit
cost is attained based on variable cost.
Absorption costing- It is the method of accumulating costs attached with the process of
production and apportioning it towards an individual products. It is the type of the costing that is
needed by an accounting standard for creating valuation of an inventory which is stated within
the balance sheet of an enterprise. A product might absorb broad range of the variable and the
fixed costs. Such costs are not been recognized as an expenses in month when an organization
pays for it. Rather, it remains in the inventory as the asset unless such time as an inventory is
been sold at this point of time, it is charged to COGS.
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Profit and loss statement as per absorption costing
Particulars Amount Cost per unit Total Amount
Operating revenue 8000 15 120000
Cost of goods sold 80000
Gross or Net profit (120000-80000) 40000
Computation of per unit cost
Particulars Amount
Prime cost 4
Variable cost of production 2
Fixed cost of production 4
Total cost of production 10
Calculation of Cost of Goods Sold-
Particulars Amount Cost per unit Total Net amount
Opening stock 500 10 5000
Production 10000 10 100000
Closing stock 2500 10 25000
Cost of goods
sold= opening
stock +
purchases-
closing stock
80000
Profit statement as per Marginal costing-
Particulars Amount Cost per unit Total Amount
Operating revenue 8000 15 120000
Variable cost 48000
Contribution
(Operating revenue-
72000
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variable cost)
Less: Fixed overhead
production cost
40000
Net profit 32000
Working note of calculation of COGS :
Particulars Amount Cost per unit Total amount
Stock at the beginning
of period.
500 6 3000
Add:
Purchases(production)
10000 6 60000
Less: Stock at the
ending of the period.
2500 6 15000
Cost of goods sold 48000
Calculating the per unit cost by employing marginal costing method-
Particulars Amount
Prime cost 4
Variable cost of production 2
Total cost of production 6
Interpretation- From the above evaluation it has viewed that, the profit resulted with an
application of absorption costing as 40000 and marginal costing as 32000. This shows that
absorption costing is the better tool as compared to marginal costing as it provides a true picture
of the profitability by considering both variable and the fixed cost.
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LO 3
P 4. Evaluating use, advantages and disadvantages for planning tools linked with budgetary
control.
Budget: It is referred to as the formal statement in order to estimate the expenditure and
income which in turn are based for future planning and objectives (Lowe, 2019). It is considered
to be as an effective document which helps management in estimating revenues and expenditures
for the set period based on the goals and objectives of the organization.
Sales budget
It is considered to be as a financial plan which helps in effectively allocating the
resources in order to attain forecasted sales (Mohamed, Kerosi and Tirimba, 2016). The key
purpose and use of the sales budget is to attain maximum utilization of the resources in order to
forecast sales.
Advantages of Sales budget
Sales budget is very useful in proper planning, execution and implementation of
particular organization budget (Shum, 2019). It helps in effectively allocating the resources to
various departments of the company which is based on forecasting sales.
Disadvantages of Sales budget
It is considered to be one of the most time consuming process because this budget plan
has to go through planning, modifying, editing, reworking, etc.
Production budget
This budgetary tool is useful in effectively calculating and predicting the number of units
that must have been produced in order to maintain optimum level of stock within the company
(Cools, Stouthuysen and Van den Abbeele, 2017). This is very useful in meeting the inventory
requirements in order to mitigate the sales demand for the products.
Advantages of Production budget
This is very beneficial in maintaining the optimum amount of proportion between
inventory position, production and sales of organization (Mallinson, 2018). This budget plan
helps in maintaining optimum level of balance between inventory position, production and sales
of company. It is very useful in reducing and controlling the production expenses.
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Disadvantages of Production budget
The major limitation with production budget plan is that, it is completely based on the
predictions, estimation and judgement of the management (Adjei, 2016). Preparation of
production budget is a very time consuming process.
Cash Flow budget
It is referred to as the estimation of cash receipts and expenditures which in turn are
expected to be occurred for the particular time period (Brusca and Labrador, 2016). It is very
useful in assessing whether the organization has enough cash balance in order to carry out
business operations.
Advantages of Cash Flow budget
The major benefit of the cash flow budget is that, it helps in avoiding debt and it is very
useful in determining the potential deficits in order to systematically carry out business
operations (Kassahun, 2019). This budgetary tool is useful in determining the financial position
of the company.
Disadvantages of Cash Flow budget
The cash flow budget plan does not take into account the external factors which in turn
affects the reliability of the particular budget (15 Cash Budget Advantages and Disadvantages,
2018). There is high degree of manipulation of the data and also results in limiting the spending
power of the company.
Budget variance and significance
Budget variance is referred to as the deviation between budgeted and actual amount of
revenue and expenses. It helps in determining the key cause of the budget variance. Budgeted
variance is useful in identifying the reasons associated with the deviation in the financial
outcomes (Cools, Stouthuysen and Van den Abbeele, 2017).
Significance
The budgeted variance is considered to be favourable when actual revenue is more than
budgeted revenue (Adjei, 2016). On the other hand, budgeted variance is considered to be
unfavourable when the actual expenses is less than budgeted revenue.
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Importance of Budget variance to the management
Budget variance is very beneficial to the management because it helps them in
controlling and take necessary actions to resolve the issues (Mohamed, Kerosi and Tirimba,
2016). It helps management in understanding the reason for fluctuations and helps in reducing
adverse variance.
LO4.
Analyzing an application of the management accounting techniques that is been made by
different company in resolving their financial problems.
Balanced scorecard- It is counted as the strategic tool that identifies and improves
several internal functions of the business and their respective resulting outcome. This is used by
an entity in measuring and facilitating the feedback to the management (Cooper, Ezzamel and
Qu, 2017). It helps the firm in resolving its financial problems that occurs relating to lack of
funds, customer demand etc y viewing all the major perspectives of the business.
Benchmarking- It referred as the practice of comparing the processes and performance of
the company with that of the performance of its rivalry in respect of the quality of product and
financial or an operational performance metrics. This tool helps an enterprise in gaining
competitive advantage against its competitors by adopting the best and the most suitable
practices (Wang and et.al., 2016). It also enables the company in solving problem with regards to
financial aspect that involves delay in delivery, improper quality and higher manufacturing cost.
Key performance indicator- This management accounting technique is the measurable
value that shows an effective way in which an entity achieves its business objectives. Firm
makes use if the KPI technique at various levels in order to evaluate its success at achieving or
reaching the targets efficiently and effectively. It helps the company in solving the financial
problem in relation to poor performance, non achievement of goals, lack of controlling etc.
Variance analysis- It is the method that reflects the quantitative investigation regarding
the difference between the planned and an actual behavior patterns. This kind of analysis is been
used by an organization for ensuring control over the business. It helps in overcoming the
financial problems relating to deviation, non meeting of the budgeted standards etc (Maskell,
Baggaley and Grasso, 2017). It assist in reviewing amount of the variance on the trend line that
in turn helps in determining sudden changes in the level of variance from one month to another
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month. It also involves investigation of such a difference so that an outcome is the difference
statement from an expectation and interpretation of the variances occurred.
Excite entertainment XYZ company
This company makes use of balanced scorecard
and benchmarking tool for resolving its
financial problems.
On the other hand, it adopts variance analysis
and key performance indicator as the tool for
overcoming financial related problems.
Calculating cost volume profit analysis-
Particulars Formula Total Amount
Selling price at per unit 40
Variable cost at per unit 10
Fixed cost 120000
Contribution in terms of per
unit
Selling price per unit –
Variable cost per unit
30
Break even analysis ( in
units)
Fixed cost/ contribution (per
unit)
4000
Break even analysis (in
amount)
Break even analysis (in
units) * selling price per unit
160000
In case the business wants to
gain profit of the amount
90000
Units required to be sold for
attaining profit of amount
90000
(Fixed cost + desired profit )/
(selling price per unit –
variable cost per unit)
7000
CONCLUSION
From the above conducted study, it has been concluded that, management accounting is
the provision of financial data which helps in examining the financial information of the
particular company. Cost accounting system is useful in predicting the cost associated to carry
out different operations within business. Job costing system helps in monitoring expenses and
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assigning manufacturing cost to each products. Furthermore, this study summarizes various
management accounting reports like budget report, account receivable report, performance
report, etc. This study also concludes that, budgeting helps management in estimating revenues
and expenditures for the set period.
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