Management Accounting Theory and Practice

This assignment explores the relationship between theory and practice in management accounting. It examines different perspectives on this topic through academic articles covering areas like financialization, R&D investment, nonprofit financial ratios, organizational absorptive capacity, and strategic management accounting. The analysis includes illustrations of cost calculation methods (absorption and marginal costing).

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1 Management accounting and different types of management accounting systems...............1
P2 Different methods used for management accounting reporting.............................................3
TASK 2............................................................................................................................................5
P3 Calculation of cost through different methods.......................................................................5
TASK 3............................................................................................................................................8
P4 Advantages and disadvantages of different planning tools used in Budgetary control.........8
P5 Management accounting systems in solving financial problems.........................................10
CONCLUSION.............................................................................................................................12
REFERENCES..............................................................................................................................13

Illustration Index
Illustration 1: Calculation of cost through absorption costing.........................................................6
Illustration 2: Calculation of cost through marginal costing...........................................................6

INTRODUCTION
The management accounting is a process in which different techniques are used for
making use of various resources of the company so that managers can be aided in the function of
taking significant decisions and increase the value of customers and shareholders. The said
accounting is a technique in which through effective processes, the decisions related to financial
and non financial matters are considered. The present report is based on management accounting
in which the major focus is laid on different vital aspects of the said discipline. In business
organisation, the use of management accounting is inevitable and useful (Elbashir, Collier and
Sutton, 2011). The present report has discussed the entire management accounting on R.L.
Maynard company which is a well known restaurant in UK. The mentioned restaurant has less
than 50 employees and the annual turnover is also not more than £500,000. In the present report,
the discussion will be made on various accounting systems and that are followed by mentioned
enterprise. Besides this, it has a discussion over various methods that are used for management
accounting. In addition to this, the report will have a discussion over different costing techniques
that are used by the firm. Besides this the final section will be focussing on use of accounting
system in solving the financial problems.
TASK 1
P1 Management accounting and different types of management accounting systems
Management accounting system is a significant tool which can be referred as the
information system that generates useful information asked by the managers for managing the
resources and creating value for various stakeholders (Garrison and et.al., 2010). Further, the
accounting system act on ad hoc terms so that decision related to short and long durations can be
made. Thus, it prepares a wider information system within the firm. The R.L. Maynard company
use this system so that different crucial information can be accessed regularly as and when
required by the concerned persons. The said accounting system includes different types of
information like cost of producing goods and services, details regarding planning and control
functions and performance measurements. The major accounting systems that are used by
mentioned enterprise are as follows:
 Cost accounting system: The cost accounting system takes into consideration different
estimates regarding the cost incurred on production of goods and services (Ward, 2012).
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Besides this, it also considers the prices which of each unit working within the company
department wise. By referring the cost accounting reports, the management gets
information on cost data which is useful in controlling the operations of business in
present as well as in future. This accounting system is usually used by manufacturing
industries, retailers and service providers on wider basis. The major benefit of utilising
this system by mentioned hotel is the help provided in determination of costs due to
which the organisation can easily take decisions of marketing. Further, it becomes more
simple for the firm to determine selling prices and attain competitive advantages. Thus,
they easily analyse their profitability earned from their performance (Baldvinsdottir,
Mitchell and Nørreklit, 2010).
 Inventory management system: The inventory can be termed as all those resources which
are utilised by the enterprise in various forms of raw material, work in progress and end
products as well. The inventory management system is necessary to be monitored so that
the company can have the knowledge regarding level of stock within the organisation.
Besides this, it will also help in placing order on time for the products which are getting
finished from the stock. Thus, the enterprise can have various benefits by protecting
themselves from various types of uncertainties like scarcity of raw material or finished
goods, changes in demand patterns etc. Besides this, it will also help in getting
advantages of economies of scale in all the operations of business.
 Job costing system: The Job costing system is used by the companies for allocating the
cost for either individual or batches of products. This costing system is usually used when
manufactured goods and services are completely different from each other (Lukka and
Modell, 2010). The stated business firm utilise the job costing system as it deals in
various types of products and services that are different from each other in adequate
manner. The job costing system is best suitable in those business where entire work is
based on customers' demands and the orders are also of less duration. Thus, it aids in
planning and also in the function of cost controlling. The R.L. Maynard company has its
more utility as it depends to give services on the demands of customers and their needs.
 Price optimising systems: This is an effective management accounting system that aids
the business organisations in determining the price sensitivity and its impact on
customers. The mentioned entity can use this system so as to attain information about
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their consumers in relation to changes in price and its effect on them. Thus, they set a
level to be attained for gaining the profits. For setting the level of price, cited enterprise
has an option to tailor its cost on the basis of different segments of the customers
(Lazonick, 2012). Thus, it will be easier to anticipate about their possible reaction on
changes made in price. This method is best suitable if the firm is intending to make larger
profits without losing its customers. They will have a good method to fix the rates at an
optimum level. They will be able to develop a better understanding in relation to price
changes and its sensitivity on the customers. In addition to this, the enterprise will be able
to retain existing customers with all possibilities of making new ones as well.
P2 Different methods used for management accounting reporting
The management accounting reports are the special purpose reports that help the
management in providing vital decisions which have a major impact on the business. The said
reporting system collects the information from various areas of financial and non financial
aspects so that the decision making can be done in effective manner. Several types of
management accounting reports that are of major use for organisation are as follows:
 Job cost report: The Job cost report gives the information to the company about costs
incurred in a specific project. As per the estimates made by the company, job cost reports
aid in evaluating profitability from the projects. Further, the company becomes able in
identifying the areas that are helping in generating more profits and revenues in business
(Vieira and Teixeira, 2010). Thus, the mentioned organisation can use this system in
pointing out the areas of higher earning which helps in diverting the focus from the
aspects which are proving to be of waste in time and cost. Apart from this, the stated
report assist in assessing different costs at the time of work in progress because of which
the deviations and any incorrect process can be eliminated and corrected.
 Inventory management reports: The business enterprises which have more deals in
physical inventories have a special importance of inventory management reports. This
accounting report helps in ascertaining the level of stock currently organisation has along
with the information of level of stock that must be refilled. This report includes additional
information regarding wastages, labour costs and per unit overheads as well. The top
level managers and concerned authorities compare the report with assembly lines so that
areas requiring improvements can be identified and those departments which are
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performing in outstanding way can be rewarded (Hood, 2013). Thus, the cited entity can
use this report for determining inventory level and also assess the performance of
department.
 Operating budget report: The operating budget reports aid business firms in measuring
the performance level of different departments so that the cost of operating can be
monitored effectively. For this purpose, the budgets are prepared by the enterprise in
beginning so that the activities requiring different expenses and investments can be
determined in advance. On this basis, the organization can make an anticipation related to
risks that can be faced by company in situations of uncertainties. In addition to this, the
management can keep control on its various activities because of which the investments
can be made in more productive areas avoiding the investments on different unproductive
projects. Besides this, the budget reports also act as a standard report that helps in setting
a fixed level according to which the business should be managed. Thus keeping a control
over various activities and possibilities of getting diversions can be minimised. This
report can also be used by quoted firm in providing incentives to the staff by analysing
their performances (Guthrie, Olson and Humphrey, 2010).
 Accounts receivable aging report: This report is a critical tool that helps in management
of different cash flows of business along with the record of different credit purchase
made by customers. The mentioned report keeps a proper record of each customer and
their balances as well so that the company can have the information regarding due
amounts from them. The aging reports make a classification of report on the basis of time
durations in which various columns are made. For instance, 30 days late, 60 days late etc.
this report helps in identifying the issues because of which the collection procedure of
entity becomes faulty. If the left out balances are more from customers' side, it signifies
that the organisation should tighten their credit policy. This report also allows the firm in
overlooking over the debts from earlier periods.
 Performance reports: The performance reports are made to have information on the
performance of different products and services which are existing in the market (Eckerd,
2015). This report contains information on profitability analysis which is based on
different segments and also product lines. Thus, the firm has easier access on exploitation
of different advantages. Besides this, through this report, enterprise take corrective
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measures which can help in bringing efficiency by making a control on the cost of
operations. Apart from this, it also helps in monitoring over expenses so that it can be
checked that spent money has been used in proper areas of business.
TASK 2
P3 Calculation of cost through different methods
The cost is referred as that amount which is used for purchasing or attaining something.
For a business organisation, it can be termed as the sum which is spent over creation of products
and services. The costs can be of various types in the accounting which makes up a significant
part of price in the management accounting system. The major types of costs that are utilised in
the business are:
Fixed cost: The fixed costs are those which remains static and does not show any change in its
level according to the changed in production level (Kaplan and Atkinson, 2015). Thus, it remains
unaffected regardless of changes in output level, for instance rent of building.
Variable cost: The variable costs are opposite to the fixed costs as it does not remain same and
use to change as per the alterations coming in the level of output. For instance, cost of raw
materials that use to fluctuate as per the level of production.
Semi-variable costs: The semi variable costs are the mixture of both fixed and variable costs. For
instance, the telephone bills in which the charges of line rental are fixed while the charges of
additional calls are variable charges.
The Income statements in a business are prepared for knowing the financial soundness of
the company. These statements can be prepared through two types of ways to calculate costs and
determine the gross profits. There are two types of methods through which costing can be
determined by the firm:
Absorption costing: The absorption costing method is a techniques through which costs can be
calculated with the help of including all types of expenses (Smith, 2014). Thus, it depicts a
process in which all types of costs are allocated to a particular cost centre.
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Illustration 1: Calculation of cost through absorption costing
Marginal costing: The marginal costing method is a technique in which the cost is incurred that
may either go up or down when the firm produces one extra unit of goods and services.
Illustration 2: Calculation of cost through marginal costing
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The above tables of calculation through both the methods of costing has shown various
results. As per the results, it is clear that the amount of profits in both methods are different. This
difference has taken place due to the procedure followed for calculation process. As per the
absorption method of calculation, both types of expenses that is fixed and variable have been
taken into account. Thus, the calculated profit from the absorption method is £9300 while the
profit made through marginal costing method is £12600. It is clear that the profit gained through
marginal costing method is more because it considers only variable expenses incurred by the
organisation. While, absorption costing method has involved both types of expenses because of
which the amount of profits is less as compared to the marginal costing. Hence, the calculated
amount from both the methods give different results (Crosby and Henneberry, 2016). As per the
experts of finance, it is advised that the absorption method of calculating the cost is better as it
involves all types of costing. Thus, it gives more viable and exact results. The R.L. Maynard
company should also adopt this method of costing so as to get right results about the financial
position of company.
There are several differences between both types of costing methods which can be
understood from the below enlisted table:
Basis Absorption costing Marginal costing
Meaning The Absorption costing is a
method which is used for
calculating the profits by
including all types of costs
incurred by the business.
The marginal costing is a
technique ion which the cost
either increases or reduces as a
result of producing one extra
unit of goods.
Treatment In this type of costing, the
fixed expenses are taken as
product costing as it believes
that without fixed expenses,
goods can not be
manufactured.
The fixed costs are taken as
the period costs. It believes
that only variable costs are
crucial to be considered for
making decisions (Czarnitzki
and Hottenrott, 2011).
Objective The major objective of
absorption costing method is
The Marginal costing method
is used for internal
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to give report for external
management. Thus, it aids in
effective management of
overall company (Elbashir,
Collier and Sutton, 2011).
management so that decision
making can become easier.
Presentation In the absorption costing
method, the presentation is
based on traditional manner.
In this method of costing, the
presentation is done by
highlighting the contribution
of each factor.
TASK 3
P4 Advantages and disadvantages of different planning tools used in Budgetary control
The planning tools for the company are those which can help it in getting growth and
development in an effective manner. The planning tools that are used by organisations are
Budgets and various types included in it. Besides this, there are some pricing strategies as well
which also act as a planning tool for the business entities.
Budgeting and budgetary control: The budgeting is a tool which are prepared by the managers
in advance. This tool is a written statement in which managers use to develop a formalised plans
for making a plan based on future activities. Besides this, it acts as a planning and controlling
tool as it sets a standard procedure which has to be followed (Garrison and et.al., 2010). The
managers use this standard to compare the performances. The actual performance is compared
with the standard ones so as to check the real position. Any type of error or deviation is checked
and corrective actions are taken. In addition to this, it also helps in establishing a coordination
between various activities. There are different types of budgets that can be used by the R.L.
Maynard company for effective planning. Besides the above stated tools there are some other
techniques which can be utilised for gaining better efficiency and managing activities in a better
way.
There are several benefits of the budgeting which can be demonstrated in below mentioned way:
 Through Budgeting managers are forced to make plans and also clearly define various
aims and objectives of business (Ward, 2012).
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 It provides a foundation for control process so that the actual performance can be
compared with the standard ones.
 It helps in establishing an effective coordination in all the activities so that a right level of
communication and information sharing is set up. Besides all this, it also acts as a motivational tool which helps in motivating the staff for
performing in a better way.
Drawbacks
 The budgets are usually less flexible because of which the changes that have to be made
as per the changing circumstances are generally difficult (Baldvinsdottir, Mitchell and
Nørreklit, 2010).
 It is not sure that by preparing budgets, the company will get success and effective results
as expected. Sometimes, due to tight budgets, many productive and attractive investments have to be
avoided because of restrictions made on investments that have to be done according to
budget.
Budgetary control tools
There are some of the significant budgetary tools which help in getting desired results.
 Variance analysis
 Responsibility accounting
Variance analysis: The variance analysis is a very effective tool that is used for getting
information about the deviations which are occurring in the actual and standard budgets. This
analysis includes various types of cost while making an assessment about the variance like
material, cost, labour etc.
Advantages Disadvantages
 It helps in getting information about the
aspects because of which the deviations
are occurring in performance (Lukka
and Modell, 2010).
 This is an effective tools that aids in
planning about the profit enhancement
and getting more efficiency.
 The entire process of monitoring the
activity and identifying areas that are
less effective take much time. Thus, it
proves to be of more time consuming.
 For the analysis purpose, there may be
the need of extra workforce. Besides
this, sometime unfavourable variances
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 This helps in identifying the activities
which are inefficient so that cost can b
controlled and managed in a better way.
may lead to demotivation among staff
(Lazonick, 2012).
Responsibility accounting: The Responsibility accounting is a systematic procedure in which a
single person is endowed with the obligation of creating reports which contain wide range of
information upon routine works performance of organisation. This accountability can be given
to any high official like president, CEO, departmental head or any supervisor.
Merits Demerits
 It helps in establishing a systematic
procedure for having a control over
various activities.
 It gives a good opportunity for making
a comparison over the performances
(Vieira and Teixeira, 2010).
 The managers and concerned authority
performs the duty in effectual manner
as the accountability increases.
 For implementation of this process, it is
necessary that all required formalities
are done in proper failing to which may
result into adverse results.
 The concerned may have to make an
additional classification in case of
unmatched reports of daily and
responsibility reports.
P5 Management accounting systems in solving financial problems
The management accounting systems can be employed for solving various types of issues
that are faced in financial activities. There are several tools that can be used effectively so that
the companies can solve the major problems of their business. As per this, the major tools that
can be utilised as an effectual technique by R.L. Maynard for solving different problems are:
Key performance indicators: The Key Performance Indicators or KPI are those measures which
are used as an indicators depicting the progress and success benchmarks attained by the firm
(Hood, 2013). Through KPI, the company use to develop a measure against which the success
criteria can be defined. Thus, the firm can easily track performance of its organisation and easily
attain its objectives. It clearly highlights the areas which have successfully achieved the set aims
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and the remaining aspects that are required to be addressed. This can be of qualitative or
quantitative measures which help in getting right status of business. They also help in taking
better decisions and provide a great tool for devising desired improvements. The re are some
financial KPIs which can be set by the company like Return on Investment, Inventory turnovers
days, Net income before tax etc. While some of the non financial KPIs are client satisfaction,
quality of suppler, less wastages etc.
Benchmarking: This signifies a detailed process in which the organisation makes an attempt to
point out and understand the practices so that they can adopt the most superior process which can
aid the enterprise in attainment of intended objectives in ideal way (Guthrie Olson and
Humphrey, 2010). This is an effective process which always focus on attainment of continuous
improvements. Therefore, it makes the comparison of performances so that a pre determined
parameter can be established and all the practices can be set against it. Thus, it helps in attaining
one best practice out of many which is most useful for the company. Besides this, it helps in
making an identification of major strength as well as weaknesses. It provides the opportunity to
measure the present performance and brining improvements if it does not meet the set parameter.
Moreover, it gives opportunity to mark the are that needs improvement and additional
addressing.
Budgetary control process: The budgetary control process helps in setting achievable targets that
are relevant and aligned with the organisational objectives (Eckerd, 2015). This tool is used in
solving the issues of mismanagement, confusions regarding investment and expenses. This gives
an opportunity to submit reports based on short to long periods, thereby making clear about the
lines of responsibilities and accountabilities of all the concerned staff. In addition to this, it also
helps in making a comparison over the actual and standard performances. As per this, the
organisation can know the area where it is crucial to take corrective actions. Moreover, the
performance of the staff can also be tracked in easier way so that they can be given knowledge
and information regarding required actions to be taken. Further, it also gives enough flexibility
because of which the entity can make suitable adjustments as well to solve the current problems
and issues of the business.
Financial governance: The financial governance can be understood as a set of rules and
principles that must be followed for running the business in effective way (Kaplan and Atkinson,
2015). It provides the necessary guidelines regarding various responsibilities, performance
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measurements, revelation of the necessary details and also following the ethical behaviour in all
operations of the business. This will help in continuing the business activities in a better way
without facing any major issues. Besides this, different types of problems can be solved easily by
taking help of provided guidelines (Smith, 2014).
CONCLUSION
The above report has been made on the management accounting which addresses various
aspects of this crucial report of accounting the is prepared by the business firms to get significant
informations and make decisions accordingly. The above report concludes that the accounting
system act on ad hoc terms so that decision related to short and long durations can be made.
Thus, it prepares a wider information system within the firm. The selected company for
discussion purpose is R.L. Maynard which is a small restaurant of UK. The reporting systems
used in the management accounting collects the information from various areas of financial and
non financial aspects so that the decision making can be done in effective manner. The report
articulates that the planning tools are those which can help it in getting growth and development
in an effective manner. In addition to this, the report has made a discussion over the tools that are
helpful in solving the problems faced by business. These tools are KPI, benchmarking, budgetary
control etc.
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REFERENCES
Journals and Books
Baldvinsdottir, G., Mitchell, F. and Nørreklit, H., 2010. Issues in the relationship between theory
and practice in management accounting.Management Accounting Research. 21(2), pp.79-
82.
Crosby, N. and Henneberry, J., 2016. Financialisation, the valuation of investment property and
the urban built environment in the UK. Urban Studies, 53(7), pp.1424-1441.
Czarnitzki, D. and Hottenrott, H., 2011. R&D investment and financing constraints of small and
medium-sized firms. Small Business Economics. 36(1).pp. .65-83.
Eckerd, A., 2015. Two approaches to nonprofit financial ratios and the implications for
managerial incentives. Nonprofit and Voluntary Sector Quarterly. 44(3). pp. 437-456.
Elbashir, M.Z., Collier, P.A. and Sutton, S.G., 2011. The role of organizational absorptive
capacity in strategic use of business intelligence to support integrated management control
systems. The Accounting Review. 86(1). pp.155-184.
Garrison, R.H. and et.al., 2010. Managerial accounting. Issues in Accounting Education. 25(4).
pp.792-793.
Guthrie, J., Olson, O. and Humphrey, C., 2010. Debating developments in new public financial
management: the limits of global theorising and some new ways forward. Financial
Accountability & Management.15(3‐4), pp.209-228.
Hood, C., 2013. The “New Public Management” in the 1980s: variations on a theme.
Accounting, organizations and society.20(2), pp.93-109.
Kaplan, R. S. and Atkinson, A. A., 2015. Advanced management accounting. PHI Learning.
Lazonick, W., 2012. Financialization of the US Corporation: What has been Lost, and How it can
be Regained, The. Seattle UL Rev. 36. pp.857.
Lukka, K. and Modell, S., 2010. Validation in interpretive management accounting research.
Accounting, Organizations and Society. 35(4), pp.462-477.
Smith, W. K., 2014. Dynamic decision making: A model of senior leaders managing strategic
paradoxes. Academy of Management Journal. 57(6). pp.1592-1623.
Vieira, P.C. and Teixeira, A.A., 2010. Are finance, management, and marketing autonomous
fields of scientific research? An analysis based on journal citations. Scientometrics. 85(3),
pp.627-646.
Ward, K., 2012. Strategic management accounting. Routledge.
Online