Type of Management Accounting Systems

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
P1. - Management accounting and essential requirements of various type of management
accounting systems:................................................................................................................3
P2. - Different kind of methods used in respect of management accounting reporting:........5
TASK 2............................................................................................................................................8
P3. - Computation of costs applying appropriate cost analysis techniques to formulate income
statement applying absorption and marginal costing:............................................................8
TASK 3..........................................................................................................................................14
Advantages and disadvantages of different types of planning tools used for budgetary control:
..............................................................................................................................................14
Comparison of business entities applying management accounting systems for responding
different financial problems:...............................................................................................16
CONCLSUION..............................................................................................................................18
REFERENCES..............................................................................................................................19

INTRODUCTION
The term ‘Management Accounting’ can be defined as that field of accounting which is
mainly concerned with the preparation of reports and other relevant books that facilitate
decision-making across all organisational levels. Such decision-making activities can be
attributed to the planning, controlling, coordinating as well as organising functions of a
business(Bargate, 2012). Such functions ensure that the business is able to align itself
strategically so as to deliver on its short-term and long-term goals competitively as well as
achieve its mission and vision. This report aims to provide a comprehensive account on the
various management accounting systems as well as report. In addition to this, the report also
entails costing techniques along with their implications on net profit earned by a company. Also,
different planning tools used for budgetary control, financial governance, Benchmarking and
Key Performance Indicators have been discussed so as to give a view about development of
budgets, identification of financial issues as well as their resolution. For this purpose, KEF Ltd, a
medium sized manufacturing company has been taken into account that mainly operates in the
Manufacturing Sector.
TASK 1
P1. - Management accounting and essential requirements of various type of management
accounting systems:
Management or Managerial Accounting can be defined as a discipline which
encompasses different types of processes and systems that are relevant in the production,
presentation as well as communication of financial reports that cater to the needs of different
stakeholders. It also aids in determining the strength of credit as well as inventory management
policies implemented by the top management so as to ensure that relations with creditors and
debtors are maintained effectively.
It is important to note that every management accounting system has a unique set of
requirements that make it essential for the business to assess before actually adopting and
implementing them across all enterprise levels. The main function of all these systems is to
generate accurate data regarding the processes they entail to be implemented in. Either directly
or indirectly, this information derived by utilising such systems helps the management to know
key strength as well as weak areas internal and external to the organisation (Bouwman, 2014). In

the context of given case scenario, KEF Ltd. is a manufacturing enterprise which comprises a
diverse set of functional departments such as Human Resources, Purchases, Finance and
Production among others. For this purpose it requires a wide array of highly customized
Managerial Accounting Systems that help in not only providing comparability based on past and
present performance but also help in forecasting of future possible strategies to improve KEF’s
competitive advantage. Mainly, these systems can be classified as under:
 Cost Accounting System:
This system facilitates profitability as well as optimality analysis. By Profitability
Analysis one means that by implementing relevant cost accounting systems one can
ascertain whether or not the cost incurred on production of goods and services has been
able to generate substantial revenues for the company. This is mainly done by preparation
of budgets regarding each cost centre. This way the business managers are able to
determine how profitable each cost centre has been in contributing to the bottom line
earnings of the company. On the other hand, these systems also help in measuring the
optimality by enabling the management to know whether the available resources have
been used with minimum wastage or not. For KEF Ltd., a cost accounting system will be
required to record production activities using Perpetual or Periodic Inventory System,
depending on the method it follows. This would enable the business managers to keep a
track of raw materials bought and used in the production of finished goods.
 Price Optimisation System:
It is important for a business to price its goods and services in a manner that depict
competitiveness as well as profitability in the external business environment. A Price
Optimisation System, thus, enables the business managers to determine the most optimal
price for their product offering which not only minimises cost but also maximises profit
for the company. One of the main benefits of this system is the availability of alternative
scenarios (Din, 2014). A business Manager of KEF Ltd. does not need to waste time
contemplating what are the possible contingencies and fallouts that may hinder the
profitability of the company. They can utilise this system to know the best as well as
worst case scenario and price their product offerings accordingly. Hence, the most
essential requirement of this system is to be aware of the up and down supply chain in

both B2B and B2C contexts so as to rightly ascertain what price is right against the
customers’ willingness to pay for its product offerings.
 Inventory Management System:
A company can crumble into pieces if does not stay precautious in looking after its
inventory. Usually, the term inventory is mainly referred to the stocks of raw material or
work-in-progress as well as finished goods produced using such materials. This system
ensures that stock-levels are maintained in an optimal manner and promotes the practice
of cost minimisation at all enterprise levels. It is impossible to manually count and keep
track of all the inventory supplies such as spare tools, equipments and work-in-progress
among others. Through the implementation of this system, KEF Ltd. is able to ascertain
economic order quantities regarding different materials and supplies. Also, the business is
facilitated with the ascertainment of restock, safety and buffer stock levels that are crucial
for uninterrupted working of production processes (Graham, Harvey and Puri, 2013).
Thus, implementation of this system can help the business managers of KEF Ltd. in the
identification, classification, recording and monitoring of inventories to assess the actual
cost of inventories in production and manufacturing activities. Also, any excessive
inventory costs incurred can be easily traced and minimised to increase profitability
margins for the organisation.
 Job Costing System:
Usually, this system is implemented by those organisations wherein the production
processes include high customization and are order or job based. Thus, each job consists
of specifications which require assignment of resources in a definite manner. For KEF,
this system can be utilised if the products are totally different from the production line.
Additionally, the manager would be required to ascertain information on two components
viz. Direct Material and Direct Labour. This is due to the fact that each job has its unique
set of requirements to be met with. With these two components, the manager would be
able to adequately allocate the resources for different job orders and successfully meet
their promised deadlines.
P2. - Different kind of methods used in respect of management accounting reporting:
Under Management Accounting Reporting, the information regarding different processes
and systems needs to be communicated among different organisational levels so as to ensure

coordination among each department operating within the business. On the other hand, reporting
also helps in informing various internal as well as external stakeholders about the operations,
profitability, future plans as well as performance of the organisation for a given accounting
period. Hence, more than one accounting report is prepared by a business enterprise that aims to
serve a special purpose for the business management. By using such reports, the management is
able to have an overall idea about individual performance of each unit and is enabled to come up
with different strategies to improvise them on a continual basis. Thus, helping organizations to
achieve their short-term as well as long-term objectives in a sophisticated and planned manner
(Kurniawati and MeilianaIntani, 2016). In the given case scenario, KEF Ltd. also prepares a set
of managerial accounting reports which help them in ensuring information flows among various
levels of management in a smooth manner. These reports have been enumerated and discussed as
under:
 Budget Reports:
A budget helps in the controlling of resources as well as costs in an effective manner. It
also ensures that excessive production costs and wastage of resources is minimised
whereas profitability is maximised. Preparation of such reports is helpful in identifying
any kind of deviations that may occur between the budgeted results and actual results.
Thus, it is an internal report which helps in comparison of predefined projections with
actual performance in order to achieve their short-term goals set for a specific period,
usually a particular accounting period. These reports may be prepared by KEF for
quarterly, weekly, monthly or annually for individual departments or the organisation as a
whole. Some of these reports are prepared in the form of Cash Budget, Purchase & Sales
Budget and Master Budget.
 Cost Accounting Reports:
Another form of internal management accounting report, a Cost Accounting Report is
one which facilitates recording, analysis and summarization of various costs such as
variable, fixed and semi-variable among others that are mainly associated with the
process of production. This report enables the management of KEF Ltd. to know the
ascertainment and allocation of costs both direct as well as indirect. Under these reports,
the input and output costs are matched with each other to determine the financial

performance of the company. In addition to this, this report also helps in comparing the
internal costs and expenditures with industry standards.
 Account Receivables Ageing Report:
For a business it is essential to maintain healthy customer relationships. In order to
achieve this, a company may sell goods and services on credit. Such a business will
always have certain amount of accounts receivables or Debtors shown on the Asset side
of their Balance Sheet. In addition to this, the enterprise would also formulate a report
known as ‘Account Receivables Ageing Report or Schedule’ (Loughran and McDonald,
2016). This internal report helps in determining how old the debt is and whether or not
the party would be able to repay it within the stipulated period. Thus, it lists out all the
unpaid customer invoices are overdue as well as yet to be overdue which ultimately
determine the potential bad debts and create necessary provisions for it beforehand.
Being a manufacturing business, KEF Ltd. has a lot of transactions that are carried out on
credit basis. The Company management is benefitted by preparing for any unforeseen
contingency beforehand.
 Inventory Reports:
This type of management accounting report is crucial for businesses of diverse nature and
sizes. Inventory is a crucial part of any enterprise; therefore, keeping a check on its
inflow as well as outflow is paramount. They enable in determination of actual
fluctuations in terms of number and value in regards to stock, spares, tools and
equipments among others. In the context of given case scenario, Production Managers at
KEF prepare the Stock-keeping report to assess and monitor the movements of stocks
among various stages of production processes. Also, any increase in storage costs,
carrying costs and ordering costs are successfully identified and controlled in order to
eliminate any kind of wastage.
Thus, integration of the management accounting systems with the reporting practices can
help the business managers to plan, control, organise and coordinate different managerial
functions in an effective manner. As a result, the organisation is able to enhance its profitability
as well as financial performance in an effective and efficient manner.

TASK 2
P3. - Computation of costs applying appropriate cost analysis techniques to formulate income
statement applying absorption and marginal costing:
(i) Production cost per unit:
(ii)Total production cost:
Absorption costing:

(iii) Aggregate cost of sales in respect of June:
Absorption costing:

(iv) Budgeted profit and loss statements.
Marginal Costing: This costing technique is one which enables the managers of a
business to ascertain the impact of variable cost on the volume of output produced. Thus, break-
even analysis also forms a crucial part of this technique. Also, this technique keeps fixed
production overheads unchanged. While computing the marginal cost per unit fixed costs are
considered as period whereas the variable expenditure includes direct costs such as material,
labour, expenses and variable production overheads.
Absorption Costing: Contrary to the Marginal Costing technique, the method of
Absorption Costing is one which includes fixed as well as variable production overheads in order
to determine the cost of individual product (Nielsen Mitchell and Nørreklit, 2015).
Profit and loss account by absorption costing method for month of June:

Profit and loss account using marginal costing method in respect of month of June:
Preparation of final account after June
Absorption costing:

Marginal costing:

TASK 3
Advantages and disadvantages of different types of planning tools used for budgetary control:
Budget: Budget is a action plan for all estimated expenditures and revenues which may
take place in organization within a specific time period. It is a planning strategy for achieving
operational and functional goals of an organization prepared by management for various
departments and also for overall organization. Budget pays a role of standards for comparing
actual outcomes as it includes estimation of costs, expenses, receipts and profits also. It is
prepared for a specific upcoming time period and expresses all and everything in numeric or
monetary terms (Pitsis, 2013). Budget is used for both planning or decision making as well as
controlling over the process. Although budget is a management accounting tool but it provides
material information for preparation of financial accounting statements as well. It helps the
management in planning, organising, implementing and controlling activities or operations in the
firm. Operating Budget: Operating budget is an estimated list of operating expenses as well
as operating incomes regarding sales for specific time period. An operating budget helps in
deciding the price of the products or services provided by any organization for deriving desired
profit by evaluating the cost of goods sold. KEF limited may adopt the operating budget because
it provides some advantages to the firm which are:
 Operating budget helps in forecasting future plans and strategies with the help of
previous data.
 This budget helps in eliminating unproductive costs and activities which are unnecessary
burden for the organization.
 The data derives from operational budget, provides accuracy and accountability to
financial statements.
The management of respective firm may resist the operating budget because of these
disadvantages:
 Estimation of costs and revenues is time consuming and complex process.
 It is difficult to allocate some expenses between fixed and variable expenses which may
create conflicts within the various departments.
 High expectation estimations may be a burden for employees.

Cash Budget: Cash budget is an estimation of all the cash inflows as well as cash out
flows (Pratt, 2016). It records estimation of each and every cash transaction that may take place
within the firm over a specific time period. It includes all monetary transactions whether it is
operational or functional in nature. The management of KEF limited should prepare cash
budget for the organization because:
(iii) Cash budget helps in maintaining minimum cash in hand required to operate the
daily activities.
(iv) It helps in avoiding excess debts and loans and saves the interest cost on loans.
(v)It makes the organization more resourceful and forces to make more accurate
estimations.
Although cash budget has many benefits for the organization but it also have some limitations
which make it unwanted which are:
 Cash budget is not flexible and uses estimates which may be inaccurate.
 This budget only provides monetary information and ignore non-monetary transactions
which may be material in nature for organization.
 It can be manipulated by the upper management or managers with ulterior motives.
Master Budget: Master budget is like financial statement for management accounting. It
covers overall summary and brief regarding subsidiary departmental budgets. It is used by the
upper management of an organization because it provides help in planning and decision
making regarding key objective of organization (Shim, 2013). There are so many advantages of
master budget so that respective firm can adopt it:
 Master budget provides information about all functional budget and strategies in one
go.
 This budget provides profitability of the firm with accuracy so that it can be shown in
financial statements.
 It helps in equal or fair allocation of funds and resources among various departments.
But it also has some limitations which are:
 This budget is difficult to update or alter.

 This is a summary of other budgets so there is a chance of missing some material
information.
Cash budget is complex to understand. It requires expertise in and deriving informations.
TASK 4
Comparison of business entities applying management accounting systems for responding
different financial problems:
Financial problems: Financial problems are the monetary issues which gives stress to
the management in operating day to day transactions (Silviu-Virgil, 2014) (Simkin, Norman and
Rose, 2014). Organizations faces the financial issues mostly at the time of recession. These
financial hurdles may be created by both the internal and external factors. At present KEF
limited is also facing some financial problems which are as under:
Unforeseen Expenses: Unforeseen expenses are the sudden expenses which are not
estimated by management team at the time of preparing budget for specific period. These
expenses do not usually take place in the organization but may arise due to unexpected events.
Respective firm is also suffering from this problem due to the sudden change in technology and
machinery used for production of its products. Purchase of new machinery and technical
copyright has effected the budgeted structure and profit margin.
Poor Fund Management: Negligence and weak internal control create a threat of poor
fund management system. When company's fund management system doesn't perform its duties
properly, it causes a misappropriation of company's monetary resources and increases the risk of
theft (Vanderbeck, 2012). The lower management is padding the and upper management is not
aware to control this deliberate practise. The selected firm is suffering from weak fund
management system due to which the valuable resources of the firms are evaporating quickly.
There are some techniques and methods that may be used by respective firm in order to
find out the reasons behind its financial problems which are as under;
Key Performance Indicator (KPI): The key performance indicator (KPI) is the
technique that analyses about how effectively an organisation is achieving its goals. Top
management focus on highly prioritise and performing activities mostly the key objective of
organization while lower management measures the performance of different departmental or
operational objectives in order to achieve the sustainable success. KEF limited uses KPI
technique to focus on the hurdles that may take place in upcoming time and can create problems
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such as unforeseen expenses. With the help of the technique, the management of the firm is able
to view major issues and forecasting of possible situations before they take place and affect the
planning done by lower management in order to achieve overall goals.
Benchmarking: Benchmarking is a process of setting some rules, guidelines and
measurements in order to perform particular activities or tasks. These measurements are set on
the basis of experience and comparison with other competitive firms working in the same
industry and situations. The measurement or indication criteria may be cost, time, quality or
speed (Weygandt and et.al., 2018). The management of selected firm uses benchmarking
process to set the measurements for fund management team so that the quality of the information
provided by fund management team can be reliable and performance can be measured effectively
regarding set benchmarks. Quality of internal check and performance level of various operations
may be set so that leakage of funds can be prohibited.
Financial Governance: Financial governance is a way to collect, organize, implement
and control the financial information. This process further includes the analysis of financial data
in order to improve performance and control adversities taking place within the organization.
After identifying the major financial problems with the help of KPI and benchmarking
techniques the company has applied financial governance process in order to control financial
issues. With assistance of governance methods the firm has followed all accounting standards in
order to prepare its financial accounts, ensure allocation of funds fairly and make provisions for
unforeseen expenses (Zamecnik and Rajnoha, 2015).
Comparison between KEP Ltd and TPG processing:
KEF Limited TPG Processing
Company has reported problem of poor fund
management that affects company's funding
structure and liquidity position.
TPG a manufacturing company is facing
problem of poor inventory handling
management due to which company's gross
profit and net profit margin is declining
continuously.
KEF has used cost accounting system to
handle the problem of poor funding
management.
TPG has applied inventory management
system to eliminate or reduce the problem of
poor inventory handling and management.
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Cost accounting system would assist company
to recognise the main cause and factors that
are responsible for of poor fund management
and resolve them to minimise this problem.
With help of inventory management system
company can minimise their cost of inventory
and manage inventories in effective manner. It
would be also helpful for company to track
and monitor inventory's movement.
CONCLSUION
From above report it has been articulated that for achievement of overall objectives and
goals of business entity, systems of management accounting is significant. Reports generated
through processes of management accounting provides effectiveness in organisational structure.
Planning tools act as a guidance for accountants to prepare budget and controlling budgetary
structure. Management always concern about different financial problems which may create
barriers in growth of business entity. Planning tools and different management accounting
systems help managerial personnel in early recognition of numerous financial problems.
Preparation of different budgets assist companies to set their objectives and formulation of
different strategies in effective manner.
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REFERENCES
Books and Journals;
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learning in a writing intensive tutorial programme (Doctoral dissertation).
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Financ. 41. pp.283-303.
Din, N. U., 2014. Managerial Accounting.
Graham, J. R., Harvey, C. R. and Puri, M., 2013. Managerial attitudes and corporate actions.
Journal of financial economics. 109(1). pp.103-121.
Kurniawati, E. P. and MeilianaIntani, A., 2016. Effect analysis of the use of accounting
information, managerial performance and employee performance Towards SMEs.
Journal of Administrative and Business Studies. 2(3). pp.130-142.
Loughran, T. and McDonald, B., 2016. Textual analysis in accounting and finance: A survey.
Journal of Accounting Research. 54(4). pp.1187-1230.
Nielsen, L .B., Mitchell, F. and Nørreklit, H., 2015, March. Management accounting and
decision making: Two case studies of outsourcing. In Accounting Forum (Vol. 39, No.
1, pp. 66-82). Taylor & Francis.
Pitsis, T. ed., 2013. Handbook of organizational and managerial innovation. Edward Elgar
Publishing.
Pratt, J., 2016. Financial accounting in an economic context. John Wiley & Sons.
Shim, J. K., 2013. Dictionary of accounting terms. Simon and Schuster.
Silviu-Virgil, C., 2014. The importance of the accounting information for the decisional process.
THE ANNALS OF THE UNIVERSITY OF ORADEA. p.591.
Simkin, M.G., Norman, C. A. S. and Rose, J. M., 2014. Core concepts of accounting information
systems. John Wiley & Sons.
Vanderbeck, E. J., 2012. Principles of cost accounting. Cengage Learning.
Weygandt, J. J. and et.al., 2018. Managerial Accounting: Tools for Business Decision-making.
John Wiley & Sons Canada, Limited.
Zamecnik, R. and Rajnoha, R., 2015. Strategic business performance management on the base of
controlling and managerial information support. Procedia Economics and Finance. 26.
pp.769-776.
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