Types of Management Accounting Systems: Doc

Management accounting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
LO1..................................................................................................................................................3
P.1 Management accounting and essential requirements of types of management accounting
system.....................................................................................................................................3
P2. Different methods used for management accounting reporting.......................................4
LO2..................................................................................................................................................6
P3 Preparing income statement using absorption and marginal costing system....................6
LO 3...............................................................................................................................................13
P4 Advantages and disadvantages of different planning tools.............................................13
Application of planning tools and their uses in the business................................................14
P 5 Comparing use of different management accounting systems by different organisations so
as to responding financial problem.......................................................................................14
CONCLUSION..............................................................................................................................16
REFERENCES..............................................................................................................................18

INTRODUCTION
Management accounting is used to provide the information to the managers for the
decision-making process, planning and organizing the activities in the organization. NISA is a
retail industry which provide various product and services to their customer like the grocery
items, food items etc. The report highlights the various management accounting system and their
uses in the organization. It explains the various methods used for the management accounting
reports and the use of marginal and absorption cost in the accounting system. It also highlights
the advantages and disadvantages of planning tools in budgetary control and the comparison of
use of management accounting system in solving the financial problems of the organization and
improve the quality of the firm.
LO1
P.1 Management accounting and essential requirements of types of management accounting
system.
Management accounting use the provision of accounting informations in order to better
inform themselves before they decide matter within their organization. Management accounting
is a managerial accounting that use by managers in Nisa organization and then make decision for
long term and short term. Following are function of management accounting:-
Provide data: - It is an important function of management accounting because it
provides data in statistical manner through income statement, cash flow and balance sheet. This
all data are evaluated by managers and make decision for long term and short term.
Analysis and interpretation :- engagement accounting analyse the data and present it
before the management in non-technical manner along with his comment and suggestion. So
owners and top personnel's in the management understand and make decision.
Types of management accounting system:-
Financial accounting system: - this system of accounting is keep books and records of
double entry books and all transaction recorded summarized and presented in financial report.
This accounting system, follow all rules and standards of accounting, at the time of auditing,
balance sheet and income statement use by auditor. It also provides financial information to
outsiders. For example :- balance sheet and cash flow statement.

Cost accounting system: - Cost accounting system is used by manufacturers to record
production cost and capture all cost that incur in production process (Otley, 2016). So this
method helps to Nisa in determine cost of production at every stage of manufacturing (Maas,
Schaltegger and Crutzen, 2016). Activity based costing also include in this system and through
this, management calculate cost according to activity. Fixed and variable cost includes in this
system. Example :- fixed cost, variable cost etc
Management accounting system :- this accounting system provides relevant
informations to managers, and they make policies, plan and strategies for running business
effectively. Managers of Nisa prepare managerial accounts and then take decision on the basis of
this accounting system. Organization has need to this system for manage and control internal
management.
Tax accounting: -tax accounting majorly focus on tax returns, payments and prepare
public financial statement. This accounting system use by individual, partnership firm,
corporations. Due to this accounting system organization fill return and give corporate tax on
profit of organization. Goods and service tax pay by organization on their production and sells of
goods and services.
P2. Different methods used for management accounting reporting.
Managerial accounting report use by small business managers and owners that they
monitor to Nisa's performance. Many types of report prepare by management of organization like
budget report, job cost, inventory etc.
Trading account: - It is a financial statement and includes all investment, securities and
cash related transaction. This account is useful for trader because through this it maintains and
keep their transactions (Chenhall and Moers, 2015). It main purpose is hold cash for financial
goal. Investors invest their money in stock, share etc.
Profit and loss account: - It is a financial statement that includes all revenues, cost and
expenses of organization. It uses by organization to analyse performance of Nisa. Organization
also make decision about payment and dividend through this account.
Cost of good sold: - Cost of good sold refers too attributable to the production of good
sold in organization. That means it includes all cost of materials used in creating good along with
lobar cost used in produce to good. This statement use by organization to evaluate selling cost of
finished good.

Income statement :- Income statement is financial statement that shows revenue and
expenses of organization. So it uses by Nisa to evaluate total expenses and revenue that helps in
making decision. Organization evaluate profit through this statement.
Balance sheet :- It is a very important financial statement of organization and through
this organization evaluate their position and financial condition. It includes assets and liabilities
of organization. It main purpose is evaluation of total assets and liability remaining in end of
financial year.
Cash flow statement :- This account includes inflow and outflow of cash that means
cash comes in organization so it called inflow and cash goes from organization so it called
outflow of cash. This statement provide helps to investors that they make decision about invest
capital in organization.
Methods used for management accounting reports :-
Inventory management system :- this system of management accounting use by Nisa to
track and evaluate levels, orders, sales and deliveries of products. It tracks flow of goods from
manufacturer to retail and warehouse to shipping. This method very useful; to track material and
keep records about inventory. LIFO and FIFO includes in it and LIFO refers that product who
produce in last so sold and first and in FIFO those material first produce and first sold. Both are
use by organization in management of inventory.
Cost accounting system :- this system of accounting use by organization to calculate
cost of good and products. It calculates cost at different level of production and record, analyse
and allocating cost of product. Management get help from this accounting because they easily
make strategy.
Job costing system: - this method of management accounting report is important because
it helps ion calculate cost of lobar according to their job (Dekker, 2016). In organization many
types of labour engage on their own job so organization use this method to calculate cost of job
separately.
Price optimization system: - through this system of accounting management of
organization easily evaluate that price of product affect to customers demand. That means price
affected to demand of customers and organization easily evaluate to affordable prices by
customers that they can pay for buy of product.

LO2
P3 Preparing income statement using absorption and marginal costing system
Case 1 & 2
Under marginal costing
Cost per unit
Direct Material ($7*5) 35
Direct Labour ($8*4) 32
Variable O/H 5
Marginal cost per unit 72
Selling price 100
-Marginal cost per unit -72
-variable selling price -4.00
Contribution per unit 24.00
January
Sales (10000*100) 1000000
Cost of sales:
Opening inventory 0
Material (12000*35) 420000
Labour (12000*32) 384000
Variable o/h (12000*5) 60000
864000
-Closing inventory (2000*72) -144000
-720000
280000
-Variable selling cost (10000*4) -40000

Contribution 240000
-Fixed Production Overheads -24000
-Fixed Selling Costs -3000
Actual Net profit/(Net Loss) 213000
February
Sales (12500*100) 1250000
Cost of sales:
Opening inventory (2000*72) 144000
Material (10500*35) 367500
Labour (10500*32) 336000
Variable o/h (10500*5) 52500
900000
-Closing inventory 0
-900000
350000
-Variable selling cost (12500*4) -50000
Contribution 300000
-Fixed costs -24000
-Fixed Selling Costs -3000
Actual Net profit/(Net Loss) 273000
Under Absorption Costing
January
sales (10000*100) 1000000
Cost of sales:
Opening inventory 0

Material (12000*35) 420000
Labour (12000*32) 384000
Fixed O/h 24000
Variable O/h (12000*5) 60000
888000
-Closing inventory (2000*72) -144000
-744000
Gross Profit/Loss 256000
-Variable selling cost (10000*4) -40000
-Fixed Selling Costs -3000
Actual Net profit/(Net Loss) 213000
February
Sales (12500*100) 1250000
Cost of sales:
Opening inventory (2000*72) 144000
Material (10500*35) 367500
Labour (10500*32) 336000
Fixed O/h 24000
Variable O/h (10500*5) 52500
924000
-Closing inventory 0
-924000
Gross Profit/Loss 326000
-Variable selling cost (12500*4) -50000
-Fixed Selling Costs -3000
Actual Net profit/(Net Loss) 273000
Cost means the monetary value of expenditures used in the production of the goods or
services. It can be raw materials, labour, factory overheads etc.

Cost Benefit Analysis is the method to estimate the benefits incurred upon the cost
charged on preparing of products or services. It is the method which company applies before
taking up certain project for the company. By applying this method company can select best
project from the available alternatives (Parker and et.al., 2017).
Cost Volume Profit analysis is the process used to determine the effect on operating
income and net income by change in company's costs and volume.
Cost Variance means difference between the cost actually incurred and the budgeted or
planned amount of cost have been incurred. This includes direct material variance, labour rate
variance, purchase price variance etc.
Fixed cost are the cost which does not change with change in the production of output
and they remain same even though the goods are produced or not. Whereas Variable cost are
those cost which varies from the production of output and applies on per unit of output produced
(Júdice and et.al., 2016).
Normal Costing is the method to derive the cost of a product. It is actual cost incurred to
produce the goods. Whereas standard costing is the method which is used to prepare the budget
on the basis of previous year budgets.
Case 3
Sales Budget
Product EC 1 Product EC 2 Product EC 3
Forecast unit sales 2000 3000 4000
*Price per unit 100 130 150
Total net sales 200000 390000 600000
Production Budget
Product EC 1 Product EC 2 Product EC 3
Forecast unit sales 2000 3000 4000
+Closing Inventory 600 1000 800
Total Production required 2600 4000 4800

-Opening Inventory 500 700 800
Units to be manufactured 2100 3300 4000
Material usage budget(wood)
Product EC 1 Product EC 2 Product EC 3
Units to be manufactured 2100 3300 4000
*Material needed kg/unit 5 3 2
Production Needs 10500 9900 8000 28400
+Closing Inventory 18000
-Opening Inventory -21000
Total raw material needed 25400
*Raw material / kg 8
value of raw material 203200
Material usage budget(Varnish)
Product EC 1 Product EC 2 Product EC 3
Units to be manufactured 2100 3300 4000
*Material needed kg/unit 2 2 1
Production Needs 4200 6600 4000 14800
+Closing Inventory 9000
-Opening Inventory -10000
Total raw material needed 13800
*Raw material / kg 4
value of raw material 55200
Labour usage budget
Product EC 1 Product EC 2 Product EC 3
Units to be manufactured 2100 3300 4000

*Hours needed Hr./ unit 4 6 8
Production Needed 8400 19800 32000
*Labour wages 3 3 3
Total labour wages 25200 59400 96000
Case 4
01/11/17 01/12/17 01/01/18 01/02/18 01/03/18
opening Cash balance 12000 36150 -7150 21600 20000
cash inflows
cash sales 30000 27000 33000 36000 39000
credit sales 70000 63000 77000
Total cash inflows 42000 63150 95850 120600 136000
cash outflow
purchases 50000 50000 70000 80000
wages 5850 7150 10400 13000 16250
3150 3850 5600 7000
overheads 10000 10000 12000 15000
Total cash outflows 5850 70300 74250 100600 118250
Closing Balance 36150 -7150 21600 20000 17750
Case 5
Flexible Budget
At 12000 units At 14000 units
Direct material 40000 46667
Direct Labour 24000 28000
Variable Overheads 13500 15750
Fixed Overheads 11000 11000
Total cost 88500 101417

Selling Price 120000 1400
Net profit 31500 38583
At 14000 units Actual Budgeted
Direct material 50000 46667
Direct Labour 27500 28000
Variable Overheads 16000 15750
Fixed Overheads 12000 11000
Total cost 105500 101417
Selling Price 142400 140000
Net profit 36900 38583
Budgeted profit 38583
-direct material -3333
+direct labour 500
-variable overheads -250
-Fixed overheads -1000
+Selling Price 2400
Actual Profit 36900
LO 3
P4 Advantages and disadvantages of different planning tools
Budgetary control is the system used to compare the actual budget from the expected
budget and find the difference to measure the performance of the NISA limited company. The
various tools are used to measure the performance of the organization such as zero base
budgeting, cash budget, incremental budget, capital and operating budget.

Budgets are being prepared by analysing the actual position of the company and
comparing it with company's goals and objectives. With the help of such comparison, managers
become able to managers become able to develop their strategies and plans for the company that
helps them in forecasting activities that are needed to be performed for achieving them.
Zero base budgeting : Zero base budgeting is start with the zero at each level of the
organization which ultimately reduces the chances of error and duplication of activities in
preparing final budget.
Application:
They can be adopted by those business organisations that have established newly, as
preparation of zero based budgets would help them in avoiding mistakes made in earlier budgets.
Advantages
 Check the legal expenses : The zero base budgeting also check the legal cost of the
organization and remove the unexpected expenses. It helps the NISA in estimating the
correct budget for the organization by adding all expected cost (Wildavsky, 2017).
 Justify operating expenses : It helps the manager to justify all the operating expenses of
the organization and consider the various areas from which revenue of the organization is
generated.
Disadvantages
 Resource intensive : Zero base budgeting involves the keen observation of each and
every activity of the organization which increases the tome and cost of the organization in
finalize the budget of NISA.
 Manipulation by manager : Zero base budgeting id passes from the various steps to
determine the budget of the company that why the chances of manipulation with the data
also increases which unnecessary increases the cost of the organization.
Incremental budgeting : It is also known as the traditional budgeting where the budget is
prepared on the basis of current period budgets. They take the current period budget as a
benchmark and compare the performance of the organization.
Application
Incremental budgets is being applied on those business units that have aim to get
competitive advantage from their performance and help the managers in comparing the
improvement in the actual performance of the company

Advantages
 Consider inflation rate : In incremental budgeting the budget is prepared on last year
expenses and income and add the inflation rate in the budget to compare the performance
of the NISA retail company.
 Simple Approach : in incremental budgeting the budget is prepared from the previous
year data with some minor changes. It is too simple to calculate the budget of the
organization because it follows simple procedure to calculate the budget.
Disadvantage
 Not show True position : The preparation of budget from the past data fails to show the
actual changes in the current year which does not show the true position of the
organization.
Cost budgeting : Cost budgeting is the tool to estimate the cost of expenses, activities, raw
material etc. for the organization (What is Budgeting?, 2019). They set the fixed budget and
manage the activities by comparing the actual budget with the estimated budget.
Application:
Cash budgets is applicable over each business units as adoption of cash budgets help the
managers in having an effective control over the cost incurred by the business which is essential
requirement of each type of business units.
Advantages
 Potential deficit : cash budget show the actual outflow and inflow of the organization
which help in estimating the actual potential deficit of the NISA limited company.
 Communicate financial position : Through the cash budgeting an organization can
easily find the cash inflow and outflow and communicate the true position of the
organization.
Disadvantage
 Limits spending power: The cash budgeting limited the spending power of the company
because most of the transaction are done through the online methods.
 Estimation of future needs : Cash budget is prepared on the basis of the last year cash
inflow and outflow which only provides the estimation to the NISA limited company.

P 5 Comparing use of different management accounting systems by different organisations so as
to responding financial problem
Management accounting system is a branch of management that is being adopted by the
businesses for the purpose of improving the efficiency of managers in developing their strategies
and plans for the business and improve its financial performance.
Financial problems:
In the given cases the net cash flow of the business is declining over the year. It may
effect the liquidity of the company. In this regard, the financial problem of the company that can
be arise in future is lack of appropriate cash and cash equivalents in the business.
Following tools can be used for the purpose of identification of financial problems:
 Key performance indicator: It is the tool that helps in evaluating the change in
efficiency of the business. NISA uses this management accounting system. This
technique enables its managers in identifying performance of various departments of the
company including their own performance (Toussaint, and et.al., 2015). In this regard, it
enables the firm in identifying both financial and non-financial problems in the business
by detecting decline in the efficiency of the department. financial problems are those that
can affect the financial performance of the company. On the other hand, non financial
information are those that does not affect the financial performance, rather they affect the
overall efficiency of the business.
 Benchmarking : Benchmarking is a system in which the managers choose some
departments and set them as target. They manage and control only those fixed
departments on the basis of which the whole performance is being analysed by them.
Managers ignore all other departments. Improvement or decline in those departments are
being considered as performance of whole business. Valeo uses this technique for the
management of both financial and non-financial activities. The problem in the business is
being detected by detection of inefficiency in any of the set benchmarks of the firm. It
reduced the burden from the managers as they need not manage each department.
Although, this technique can provide negative result in case any of the department
ignored by managers have started providing negative results to the company and resulted
in suffering loss by the business.

 Variance analysis: variance analysis is the technique used by the business enterprise for
the purpose of monitoring and controlling financial activities of the business. Virtusa has
adopted this technique of the management accounting. By using this technique, managers
analyses the current actual performance of the business and compare it with company's
budgeted performance. The financial problem in the company is being evaluating the
favourable and unfavourable variance from the comparison.
Prevention from financial problems:
For the purpose of enabling the business enterprise to respond range of financial
problems, a business organization can use various techniques of management accounting system.
Financial governance is one of the major technique use by companies in this regard. It can be
analysed as under:
Financial governance: Financial governance refers to a technique in which the managers
collects several financial information from the business showing the financial efficiency of it. By
analysing and monitoring those information’s of NISA, the managers becomes able to detect all
the financial problems that may occur in the near future.
It helps the managers in developing controlling strategies and plans for the business more
effectively through which the company could become able to respond to all the financial
problems of future (Ban, Seabrooke, and Freitas, 2016).
In this order, it can be analysed that there are several tools that can be used for the
purpose of detecting several financial and non-financial problems of the business. Key
performance indicator can be determined as the best technique in this regard, as it helps the
managers in detecting problems from each department of the business. On the other hand using
other techniques like benchmarking can result in providing negative results to the company as it
completely ignores other than fixed departments set as benchmarks of the business.
In addition to this, it can be analysed that with the help of financial governance, the
managers can develop more effective strategies for the business and enable to business to
respond several business problems that may occur in the future due to inefficiency of any
department of the Nisa.