Management Accounting: A Framework

This assignment delves into the core principles of management accounting, emphasizing its role in strategic decision-making, performance assessment, and risk management. It explores various techniques and tools employed in management accounting, such as cash budgeting, cost analysis, and activity-based costing. The assignment aims to provide a framework for understanding how management accounting contributes to organizational success.

MANAGEMENT ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1 Management Accounting Systems.........................................................................................1
P2 Methods Used for Management Accounting Reporting........................................................3
TASK 2............................................................................................................................................4
P3 Calculation of Costs and Difference between Marginal and Absorption Costing.................4
TASK 3............................................................................................................................................9
P4 Advantages and Disadvantages of Budgets which is used for Budgetary Control................9
M3 Planning Tools & Forecasting Techniques used in Budget................................................12
P5 Ways Management Accounting can be used to respond to Financial Problems ................13
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................16

INDEX OF TABLES
Table 1: Calculation of cost of production.....................................................................................6
Table 2: Income Statement As per Marginal Costing......................................................................7
Table 3: Income Statement As per Absorption Costing..................................................................8
Table 4: Sales Budget....................................................................................................................12

ILLUSTRATION INDEX
Illustration 1: Cash budget for organisation...................................................................................11

INTRODUCTION
Management accounting is key in developing a business as a whole. When it is talked
about management accounting, there also some discussions about cost and financial accounting
because they both are the part of management accounting(Bryer, 2013). Managers need to
evaluate the performance of the particular plant considering the performance of various costs
into it then here comes the role of cost accounting in which various costs helps a mangers to
make decisions on the working of the plant. In management accounting recording, classification,
evaluation and interpretation of data take place.
Same is in the case of financial accounting as well here financial matters are discussed so
that managers can strategically use those data and then can make necessary decisions in order to
make fruitful decisions which can impact the company in a positive way. In this report various
management techniques and its implication plus how a management accounting is carried out in
the retail sector is undertaken with point of view of providing an insight on management
accounting practices in an organization(A. Hammad, Jusoh and Ghozali, 2013). The company
taken here is M & S Ltd. which is doing business in retail sector.
TASK 1
P1 Management Accounting Systems
For the purpose of study abc company here is undertaken because as world is moving fast
retail sector is developing too and thus the increase in retail industry practices in the recent times
it is important to take an analysis of the retail management techniques and how they handle the
pressure of decision making and controlling. Since they have to deal every day with lots of
inventory in order to keep attracting customers towards their retail outlets. Thus, different
aspects of management accounting for decision making regarding effective business operations
can understand through this report.
This approach is nothing but the process of evaluating the operations of business of
different departments(A. Hammad, Jusoh and Ghozali, 2013). However, it is considered as a
process for analysing, interpreting and sharing information related to business operations for
used by the managers in due course of the organizational workings. Management accounting is
combination of financial accounting and cost accounting. Though it is some what different from
both of the said accounting. That's why management accounting is more preferred over different
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types of accounting. Management accounting has wider coverage area of the organization. This
accounting technique is beneficial to generate ideas for optimum utilization of organizational
resources to support managers in their task and through it the managers wants to enhance both
the customer and shareholder value. Their are different objectives and benefits of management
accounting and they are:
 It facilitates Organizational Planning in which selection of best alternatives take place.
 M.A used to keep a monitoring and control over the organizational activities.
 Performance Measurement is the key towards achieving the vision and mission of the
organization and thus M.A helps in that(Myrelid and Olhager, 2015).
 Through management accounting a manager is able to make sound strategies and
decisions.
Management accounting Systems is kind of an information system which facilitate a
manager in making sound decisions and create value for the company. The information provided
in this is based on ad hoc and fulfill both the short-term as well long-term needs of management.
There are different systems which managers take into account for better understanding and they
are:1. Cost Accounting System: abc company have a practice of using this system very often
because in this system the cost of goods and services as well as the cost of different
departments is taken into consideration to know actually how much the expenses are.
This accounting system provides a detailed cost data which helps the management of abc
to control its operations and plan for the future(Du and Taylor, 2013). It is one of the
most effective system to creating balance between production and distribution system of
the organization adequately.2. Inventory Management System: It is one of the main source to manage inventories of the
entity and improving its liquidity position. In this regard, managers analyses all
inventories and further make decisions for its effectiveness. Including this, it also employ
and undertakes this type of system into recording to implement all action plans in proper
time.
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3. Job-costing Systems: Under this management accounting system, costs incurred for
manufacturing of products are analysed that affects its production effectively. That means
for fulfilling requirements of all customers regarding set of product produced by entity.
Here firstly the customer makes the order as per his liking and then a company prepares
him the product(Ghasemi and et.al, 2016). It is appropriate technique to reach out
customers' expectations and satisfying them with product services provided by
organization.
4. Price-Optimizing Systems: It is best tool for optimizing price and cost effectiveness to
produce goods and services provided by entity (Hopper, 2013). In accordance to this,
several tools are applied for setting price regarding business operations also impacts on
profitability of organisation. In this system different customer groups are taken into
consideration as per their income levels so that pricing decisions can be made as per the
purchasing powers.
P2 Methods Used for Management Accounting Reporting
Management accounting reporting can be understood as the reporting of operations of the
businesses which makes or helps management of organizations to make decisions which
remains vital for the operations of the company. It is considered that preparing and maintaining
report presents different business operations which is analyzed for decision-making process
(Smith, Brännström and Jansson, 2015). The reports are of different types in management
accounting which contain different information's related to different operations and the data
collected in this reports is from financial and non-financial sources and facilitate in decision-
making. There are different reports and they are:
 Job Cost Reports: This report shows how much cost has been incurred in particular
period by the organization to carry out the operations. In this report usually the cost is
matched with an estimate of revenue to draw conclusions on the profitability of the
company. It is helpful to analyse higher earning area and costs incurred for
manufacturing of products. Therefore, preparing job cost report is analyzed for further
business operations.
 Inventory Management Reports: Preparing and maintaining this report is suitable to
manage all inventories of the organisation as well generating ideas for improving its
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liquidity. Including this, it also helps in maintaining the levels of inventory in the
situations of immediate needs(Orelli, Padovani and Katsikas, 2016). These reports
generally include items such as inventory waste, O/H costs, Labor costs, etc.
 Operating Budget Report: Operating reports will help abc to make decisions on the
performance as a whole and each department has to enable monitoring and proper control
costs of operations. Through these reports every individual employee is tracked in terms
of his performance and thus by the help of budget reports is easy for management to
calculate the incentives of employees.
 Accounts Receivable Reports: This report is vital tool which enables managers to
manage cash transactions in the organization with relation to credit it offers to customers.
The report identify the problem related to collection process and it facilitate in making
necessary regulations or rules for further operations. It also enables accounts departments
to look at old debts(Orelli, Padovani and Katsikas, 2016).
TASK 2
P3 Calculation of Costs and Difference between Marginal and Absorption Costing
Price determination is one the essential tool for cost effectiveness and proper
management of production and distribution system of the organisation. It is used to measure the
cost which is incurred in a particular period for activities that are being performed in an
organization. An inappropriate cost identification will affects abc in a negative and a major way
(Luft, 2016). There are different costs which is used in management accounting and they are:
opportunity costs, sunk costs, Direct expenses and Overheads. For price determination process,
various costing methods are used such as; marginal, absorption, activity based costing and so on.
However, in all of these methods, preparing income statement from marginal and absorption
costing can understand as below:
Marginal Costing: Under this costing method, for evaluating net profit, gross profit of
the entity is deducted with expenditures incurred on variable operations only. Therefore, it is
suitable for short term decision making process and preparing strategies for reducing issues
occur in the entity. However, proper ideas are generated for further decision making and
implementing activities for its improvement effectively. The name itself suggest that cost which
has established by incurring one additional unit of output.
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Advantages:
1. No allocation & apportionment of cost.
2. No over and under absorption of the cost.
3. Here, product cost and variable cost is equal because in marginal costing there is no fixed
cost involved(Luft, 2016).
4. In this process, profit is considered as dependent variable for selling and production
system of goods.
5. Helpful for short term decision-making process to achieve organisation's effectiveness
and managing all business operations efficiently.
6. It is useful for cost effectiveness regarding producing goods and services produced by
entity.
Disadvantages:
1. Difficulty in splitting two cost incurred on variable cost and fixed expenses.
2. For net calculating net profit, gross profit is deducted with additional overhead expenses
only therefore accurate financial position of entity does not obtained.
3. Sales cost is difficult to attain because of variable and fixed cost issues .
In Order to make calculations first, we have to take out various other costs for Knowing
the profit. Thus so as a part of the process Certain workings have been taken out to make things
clear and the workings are:
Working 1
Fixed Production O/H Absorption Rate = 1,800/600
= 3/unit
Working 2
Calculation of cost of production
Table 1: Calculation of cost of production
Particulars Marginal Absorption
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Direct Material 6 6
Direct Labour 5 5
Variable O/H 2 2
Fixed Production O/H 0 3
Cost of Production/Unit 13 16
Working 3
Adjustment for over or under absorption of overheads
Actual production overhead £2,000
Absorbed production overhead (700 x 3) £2,100
Over-absorption of F.P.O. £100
The following information are also given in the question
Selling price £35
Direct materials £6
Direct Labor £5
Variable Production overhead £2
Actual production for the month 700 units
Actual sales for the month 600 units
Stock at the end of month 100 units
Income Statement As per Marginal Costing
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Table 2: Income Statement As per Marginal Costing
Particulars £ £
Sales (700 x 35) 21,000
Cost of Production (13 x 700) 9,100
Less: Closing stock (13 x 100) (1,300)
Variable cost of sale 7,800
Contribution 13,200
Less: Variable sales O/H (1 x 600) 600
Less: Fixed Costs; Production O/H 2,000
Admin cost 700
Selling cost 600 3,900
Profit 9,300
Absorption Costing: It is different from marginal costing in which net profit is
evaluated through deducting gross profit with allover the expenses incurred on variable and fixed
expenditures. Thus, it is beneficial for long term decision-making process regarding business
operations. Including this, actual financial position of entity is analyzed that affects further
business operations and its profitability. In this process, calculation for absorption costing of the
organisation can understand as follows including its advantages and limitations:
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Advantages:1. Under absorption costing method, competitive selling price is evaluated for long term
decision-making process.2. It is helpful for optimum utilization of resources and fund efficiently (Aouni, McGillis
and Abdulkarim, 2015).3. Cost is charged in an efficient manner to the product.4. This costing is emphasis for business operations for long time periodicity.
Disadvantages:
1. Cost apportionment is not easy to implement.
2. Over and under absorbed cost should be included at the year end. It should not be
included directly.
3. Profits is affected by the volumes of production.
Income Statement As per Absorption Costing
Table 3: Income Statement As per Absorption Costing
Particulars £ £
Sales (700 x 35) 21,000
Less: Cost of Production (16 x 700) 11,200
Less: Closing stock (16 x 100) (1,600)
9,600
Less: Over-absorption of F.O.H -100
Production cost of sale 9,500
Gross Profit 11,500
Less: Variable sales O/H (1 x 600) 600
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Less: Fixed Costs; Admin cost 700
Selling cost 600 1,900
Profit 9,600
TASK 3
P4 Advantages and Disadvantages of Budgets which is used for Budgetary Control
Budget is an approach for analysing actual performance of entity and preparing strategies
for future time period regarding business operations. It is helpful to use resources and fund at its
best level that impacts on productivity and profitability of entity (Aouni, McGillis and
Abdulkarim, 2015). Including this, various tools and techniques are used for improving quality
services provided by organisation. However, proper control over excess of production and
distribution of goods can be reduced effectively. In this regard, budgetary control system is
related with monitoring business activities and creating effectiveness in its operations. Therefore,
all aspects of budgetary control systems can express as below:
Incremental Budgeting: In this budgetary control system, estimation on expenses over
business operations for current financial year is created by which strategies are prepared to be
followed on. In this regard, forecasting for long term financial commitment is presented to
carrying on entity more efficiently. Further, its advantages and limitations can understand as:
Advantages:
 Easy approach to understand and followed on prepared strategies.
 Stable budget is prepared for production and distribution of goods adequately.
 Assures organisation with its prepared plan and activities for following on effectively.
Drawbacks:
 Approaches 'use it or lose it' attitudes for manager of the entity.
 Certain funding may unstable due to changes in cost for purchasing materials and
production of goods.
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Zero-based Budgeting: It is useful approach to maintain finance and preparing certain
strategies to be followed on for organisation's effectiveness (Ahmad and Leftesi, 2014). In
addition to this, decisions are made regarding starting operations for business entity and
improving its services for increasing efficiencies at higher level.
Advantages:
 It is simple and convenient to understand all processes of budget.
 Helpful to maintain finance and funding for further operations efficiently.
Disadvantages
 Response over business activities are obtained slowly.
 Expenses to be incurred on additional operations like; advertisement etc are not
considered for preparing budget. Therefore, financial management get disturbed.
Fixed Budgeting: In this budgetary control system, prepared strategies remains constant
whether market price and distribution of goods changes. Therefore, due to changes in market
prices and expenses over business operations, decided plan get stable.
Advantages:
 Fixed and stable budget
 No changes in prices for producing goods and crevices according to competitive
strategies and fluctuations in market price.
Disadvantages:
 It is difficult to sustain in competitive market.
 Imbalanced production and distribution of goods and services.
Flexible Budgeting: In flexible budget companies are more flexible because here the
budget can be changed as per the requirements of the companies.
Advantages:
 For making place in market, price for production and distribution of goods and services
produced by entity get flexible.
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 Able to gain customer satisfaction and providing services according to their requirements.
Disadvantages:
 Inaccurate adjustments for getting changes according to situations occurred.
 Lack of information regarding market position and competitiveness.
 Quite complex and difficult to access.
There are several kinds of budgets prepared by a business entity in order to assess
financial data for the further period. Moreover, the budget section is one of the important part of
management accounting. Basic two types of budgets along with illustration are such as follows:
Cash budget- This kind of budget provides information to the management regarding to
the cash position at the end of every month. On the basis of this, company able to predetermine
that how much amount of incomes as well as expenses will be incur at the workplace. Generally
it includes two values like cash inflows and cash outflows and whatever difference comes is
considered as net cash balance. It supports to the entity in order to assess that in case of lack of
capital which source of financing will be suitable for it. Most of the firms use the cash budget
because it supports to manage as well as allocate financial resources within workplace and utilise
in optimum ways.
However, it is based on the assumptions due to which sometimes data and figures not
assumed properly which lead to make business decisions ineffectual. Along with this, highly
qualified as well as finance expertise required to prepare cash budget who create monetary
burden on the firm.
Example of the cash budget is given as below:
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Illustration 1: Cash budget for organisation
Sales budget- Another kind of budget is regarding to the sales which provides mainly
two data such as amount and units. By considering the sales budget management able to
determine that how many units needs to be sold at which pricing level in next month. In addition
to this, businessman able to derive that in next period specific amount of sales is necessary to
generate. It can be said that sales budget provides target of sales and revenue generation within
workplace which is the most beneficial for it.
Illustration of the sales budget is as below:
Table 4: Sales Budget
Particulars April May June
Selling price 12
Sales (in units) 12650 13500 15200
Sales (in GBP) 151800 162000 182400
M3 Planning Tools & Forecasting Techniques used in Budget
There are different budgeting tools used in the budget for the purpose of making decision
for the future purpose if budgets are prepared and then they will make a manger to know the
actual cost or actual activity cost or incomes which has been the results of current operations and
thus it will be easy for financial officer of a abc to make analysis of various budgets and
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comparing the standards with actual will make them take capable decisions and thus making it
more growth prospective for the firm(Ossadnik and Kaspar, 2013). There are different planning
tools which are:
Budgetary Control: Budgets formed as per the requirements of executives to make
different policies and to make the policies they need to have a different set of thinking
capabilities and the data and that data is collected from different people over the others.
Forecasting: Forecasting is also another technique of budgeting which helps in making
different decisions for the future purpose(Wickramasinghe, 2015). As the name suggest different
people. Through forecasting results are expected which are based on the latest experience and
circumstances at the hand. Therefore, on the basis of actual position of entity, predictions on
further business operations are created that affects further business operations. Forecast also
enables a manager to predict the results by adjusting their existing plans according to the at least
information. Forecasting is helpful for a company to make necessary adjustments regarding
expenses for production and distribution system.
Capital Acquisition Budgets: Acquisitions of capital assets including buildings,
renovations, automobiles, software systems, furniture must be carefully planned because they
consume substantial cash reserves. The purpose is to allocate funds, control risks in decision
making, and set priorities. It aims to allocate resources and fund of the entity of entity for further
operations and improvements in its quality services (Tucker and Parker, 2014). By using this
budgeting approach, organisation remains suitable to achieve competitive advantages and further
business operations. It also enable the business plan for the acquisition of capital equipment for
expansion and/or replacement.
Cash Budgets: Cash budgets are the tools which determine the cash requirements of the
firm in the near future. It determines whether cash balances remain sufficient to fulfill regular
obligations. In accordance to this, it is useful for cost effectiveness and balancing all cash and
maintaining fund efficiently. In addition to this, cash required to operate business activities and
reducing losses are obtained through this process in a systematic manner.
P5 Ways Management Accounting can be used to respond to Financial Problems
There are different way through which by applying management accounting at the
workplace abc's financial problems can be solved up to an extent there are different techniques or
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ways through which a company can make difference in the market and thus making it more
dynamic and reliable brand in the minds of customers(Tucker and Parker, 2014). There are three
ways through which by management accounting can be used to respond to financial problems
and they are:
Key Performance Indicators: These indicators depicts or show the performance levels
of different individuals and operations of the business. In this process, competitive strategies of
all organizations and market positions are analyzed that generates ideas to make position in
market for long time period. It enables organizations to understand where the progress is being
made towards achieving strategic aims and those areas which need to be addressed. Key
performance indicators are qualitative and quantitative measures used to review the companies
progress against its goals(Zaleha Abdul Rasid and et.al, 2014). These indicators help managers in
making sound decisions which keeps reflecting a positive and good financial health of abc.
Several kinds of problems comes into existence at the workplace which lead to hamper
the smooth functioning of business and reduce its performance within industry. With the help of
key performance indicators management able to depict that which are problems arise and due to
which condition. Various KPIs used by firm are relating to the performance, costing, financial,
employees, productivity etc. Moreover, in this firm use various measurement criteria are like
quality, cost, net profit, employee efficiency etc. For example, cost of the overall production
enhance and profit reduce then entity will determine that it performing poor within industry.
Bench marking: It is comparative tool that shows market position of entity and potential
to face competition. However, actual market position is recognize by which further
improvements in quality services regarding business operations are made effectively (Adrian,
2014). For example; analysing market position of ABC with its competitive entity therefore ideas
are generated related to improving its quality services. This is a process which involves
comparing one's firm performance on a set of measurable parameters against firms known to
have achieved against firms known to achieved best performance on those indicators. Here
specific criteria and standards are settled by the management as well as external business
authorities. In this, actual data compared with the benchmark or standard value and then analyse
that whether it performs well or poor in the market segment. The company set benchmark for
further accounting year that profit must be improve by 12.5%. At the end of year if it founds that
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from previous to next period it achieves target then it has been said that performance is better.
Apart from this, as per the industry standard current ratio must be 2:1 and after completion of
year in case entity achieves the standards then it can be said that it performing well in its
respective industry.
Financial Governance: It is one of the essential decision-making tool to building up
different sets of traits regarding business operations (Adrian, 2014). Thus, financial data is so
important Dior the organization that it should be made. Governance is an important element in
mankind strategic tactical and operational decisions thus making it more reluctant. Financial
governance is small segment of the corporate governance where it has been evaluated that
business enterprise is achieving the targets or not. In this, several financial transactions are also
checked out by the financial governance which helps to assess accountable reasons of occurring
financial shortfalls.
CONCLUSION
From this report it can be concluded that management accounting has played an
important part in making an organization work smoothly and with the efficient and effective way
inn order to make the operations achieve the desired goals and objectives, Further the report
discussed the scenario of cost accounting factors which can impact the decision making of
managers in the organization and for this purpose a company taken here was abc company who
is retail sector company which has calculated the cost on two basis that is absorption costing and
marginal costing in which it is identified that in a way of the making different judgments
managers have to make use of different set of techniques. In this report it is founded that there
are various budgeting techniques from which a particular activity budget can also be made and
that are: Incremental budgeting, activity based budgeting, Zero-based budgeting and many more.
Further the financial problem evaluation of abc is done which ensures that making a move will
make difference in decision making scenario.
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