Management Accounting Report

This report provides a comprehensive overview of management accounting, covering its systems, reporting methods, and planning tools for budgetary control. It analyzes the differences between marginal and absorption costing, explores the advantages and disadvantages of various budgeting techniques, and compares different approaches to address financial problems. The report emphasizes the importance of key performance indicators and other management accounting tools in enhancing business efficiency and mitigating financial risks.

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Demonstration of understanding of management accounting system.........................................1
TASK 2............................................................................................................................................4
TASK 3 ...........................................................................................................................................6
Explanation of use of various planning tools of budgetary control............................................6
TASK 4............................................................................................................................................9
Report showing comparison of Different ways to respond various financial problems.............9
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................13

INTRODUCTION
Management accounting refers to a set of tools and techniques which helps the managers
in their decision making process by providing all the relevant information of the company. The
present study includes essential requirements of various types of management accounting system
and description of methods of the management accounting reporting. It also shows the
calculation of marginal and absorption costing methods. The study also includes advantages and
disadvantages of various planning tools of budgetary control and adoption of management
accounting system to respond various financial problems.
TASK 1
Demonstration of understanding of management accounting system
Management accounting
Management accounting can be defined as a process which includes various methods,
tools and techniques, which helps the managers in detecting various important informations for
their decision making process. Reports prepared under management accounting helps the internal
users of the business to determine the position of the organisation.
Management accounting is a synonym of cost accounting. It can also be defined as a
process of determining, analysing, explaining and transferring all the informations using some
professional skills to the managers of company as to help them in performing their part of
performance i.e. decision making and development of plans and strategies for the company
(Kaplan and Atkinson, 2015). It is totally different from financial accounting, as management
accounting contains the informations which helps the managers in their decision making process.
Whereas, financial management reports helps the outsiders to know the position of the company.
Management accounting system
Management accounting system refers to a system of management which involves
professional knowledge and skills of the managerial accountant to form the managerial
accounting report in such a form so that it could transfer all the relevant and important
information to the managers in their decision making process.
Management accounting system uses all the informations included financial and non
financial informations for the purpose of preparing their reports effectively and understandable
even by a non commercial person, So that they can be easily conveyed to the managers.
Essential requirements of different types of management accounting systems
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There are many numbers of management accounting system. Each type of accounting
systems are essentially required by the company for having better control over overall business
organisation. Essential requirements of some management accounting systems are as under:
 Cost accounting system: This is the system of managerial accounting which helps the
managers in having cost control over the business. With the help of this system,
managerial accountant prepares cost reports and enables to determine cost incurred by
each department.
Requirement:
▪ This system of management accounting is required to calculate the selling price of
each product by adding set profit in the cost of the product.
▪ It helps the managers in detecting the areas containing a\wastage through which
they can develop effective strategies as to eliminate wastage from each area.
▪ It is essentially required in the fir for the purpose of having cost control in the
company.
▪ With the help of this system managers can develop plans to enhance the overall
efficiency of company.
 Inventory management system: this system of management accounting provide the
company a better control over the movement of inventory of the company within or
outside the business. In includes various methods of inventory valuation like FIFO,
LIFO, weighted average method, etc.
Requirement:
▪ Its is essentially required by those businesses which need to maintain huge
number of inventory like manufacturing concerns, etc.
▪ it provides a complete detail above each movement of the inventories within the
company.
▪ Managers can detect the wastage of insufficiency of inventory easily (Otley,
2016). With the help of which they can take effective decision to eliminate such
problems.
▪ Methods of inventory management system also helps managers in detecting
minimum requirement of the inventory in the business. It helps them in
maintaining the sufficient amount of inventory within the business.
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 Job costing system: It is another type of management accounting system which helps the
in determining the price of product when they are manufactured as per the requirement of
the customers.
Requirement
▪ It is required by the business to calculate total amount of cost incurred on each job
of the business.
▪ It is essentially required by the managers when products or services are being
manufactured in customized form.
▪ This method helps the managers in determining the cost incurred by the business
on each product or services.
In this way, it can be analysed that management accounting systems are the essential
requirements of the company.
Management accounting reporting
Management accounting reporting refers to the process of preparing financial reports in
such a way so that it could provide all the relevant information to the managers and could tranfer
all the relevant information in the actual sense.
In management accounting reporting, includes all the functional and financial
informations which are usable of internal management of the organisation for developing their
strategies and plans fir the company.
Methods of management accounting reporting:
There are various methods of preparation of management accounting reporting. Some of
them are as under:
 Budgetary reports: These reports are prepared by the managerial accountant to forecast
the future flow of funds within the organisation. These reports contain all the estimated
incomes and expenses which would be beard by the business within the specific time.
Managers prepares these reports after analysing past performance of the company and its
efficiency.
 Cost reports: These reports contains the total amount of cost incurred by the business in
manufacturing a product. Managers prepares this reports after disadvantagesidering each
cost including variable and fixed cost incurred by the company.
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 Variance analysis reports: Variance report involves information about the differences
between actual and budgeted reports. These are used for the purpose of maintaining
control over various activities of the business.
 Performance reports: This report is prepared by the managers as to evaluate
performance of the employees and overall business as well (Lin, 2017). These reports are
used by the managers for the purpose of rewarding any employee or providing appraisals
or incentives to each employees as per their performance in the company.
 Accounting reports: These reports provides all the relevant informations of the financial
statements of the company. These reports help the managers in their planning, decision
making, controlling and regulating process.
In this regard, it can be evaluate that that various managerial accounting systems helps
the managers in getting all relevant informations of the business so that they can have better
control over each activity of the company by developing different plans and strategies as per the
actual performance of the business.
On the other hand maintenance of all the management accounting reporting helps in
gaining all the relevant information of the company in easy form (Maas, K., Schaltegger, S. and
Crutzen, 2016). So that managers can get the exact sense behind the reports of the company and
take their decisions accordingly.
TASK 2
Calculation of Production cost for marginal costing
Particular
Amount
(budgeted)
Amount
(actual)
Direct material 10
Direct labour 20
Prime cost 30
Variable production overheads 5.55
Fixed production overheads 40.55
Cost of production
Calculation of Production cost for absorption costing
Particular Amount Amount
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(budgeted) (actual)
direct material 10 10
direct labour 20 20
variable production overheads 5 5
fixed production overheads 5 5.26
40 40.26
Absorption costing
Absorption costing is a method of costing which is used to determine the net profit of the
company. In this method, inventories of the business are valued at the absorption rate (Boiral,
2016). Further, fixed cost of the production are considered as the product cost.
Standard income statement using absorption costing method
Particular Amount
Sales 800000
direct material 180000
direct labour 360000
variable production overheads 90000
fixed production overheads 90000
less closing stock 80000
Net profit 160000
Actual income statement using absorption costing method
Particular Amount
sales 800000
direct material 190000
direct labour 380000
variable production overheads 95000
fixed production overheads 95000
Add: closing stock 120780
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Net profit 160780
Interpretation
From the above calculation, it can be analysed that there is a difference between standard
profit and actual profit of the company. The difference has been arisen due to change in
production units and production cost the company (Edwards, Sobel and Bonilha, 2018). The
company has produced more units of product s compare to the standard units and peer unit cost
of production has been reduced as well. It has caused in gaining more profit by the company.
Standard income statement using marginal costing method
Particular Amount
sales 800000
marginal cost of sales
direct material 180000
direct labour 360000
variable production overheads 90000
closing stock 70000
contribution 240000
fixed cost 100000
net profit 140000
Actual income statement using marginal costing method
Particular Amount
sales 800000
marginal cost of sales
direct material 190000
direct labour 380000
variable production overheads 95000
closing stock 105000
contribution 240000
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fixed cost 100000
net profit 140000
Interpretation
From the above calculation, it can be analysed that standard and actual net profit from
absorption costing are same.
Further, there has been arisen a difference between net profit from absorption costing and
marginal costing. This difference has been occurred due to difference in calculation of amount of
closing stock in both methods.
TASK 3
Explanation of use of various planning tools of budgetary control
Budgetary control
Budgetary control is a process in which managers forecasts the income and expenses
which need to be incurred by the business within the specific time period (Fisher and
Krumwiede, 2015). With the help of it managers can predict the need of funds in the future. It
helps them in making arrangement of various sources of funds in advance. In this regard,
insufficiency of funds in the business can be effectively eliminated (Budgetary Controlling
Techniques, 2018).
Planning tools of the budgetary control are those which helps the managers in
their planning process for the enhancement of the efficiency of overall business and the position
of the business in the market. Some key planning tools are as under:
 Operational budgets: operational budgets forecasts the overall operations of the
business. This budget of the company helps in determining the future debts with the help
of which managers can develop their strategies for making the business enable to meet all
the debts over the business. With the help of this budget, managers can detect the areas of
cash inflow and outflows as well.
Advantages Disadvantages
Managers can predict the future debts of the
company.
If company operates its business through this
budget, its operation would be no longer
flexible.
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It helps the manager in enabling the business in
meeting all future debts.
It is quite difficult to predict all the future
circumstances of future.
 Cash budget: Cash budget includes all the transactions which results in movement of
cash within the organisation. It provides the information relating to need of cash in the
business (Maelah and Yadzid, 2018). Further, by comparing the cash budget with actual
cash flow statement of the business, managers can effectively detect the areas where
wastage of cash is arising. It leads in eliminating the wastage of the company in more
effective way.
Advantages Disadvantages
It enables the managers in detecting the need
of cash within the specific time period.
Prediction of cash flow is quite uncertain.
Therefore, it need to be prepared frequently.
It enables managers in maintaining the
sufficient flow of cash in the company.
Cash budget may provide wrong result in case
of changer in factors influencing the value of
cash like inflation, etc.
 Sales budget: this budget is prepared to forecast the sales to be made by the business in
the future. The estimated sales shows the sales which need to be made by the company in
order to achieve the organisational goals. Managers enables to evaluate the actual
position of the business by comparing the actual income statements of the company with
sales budget.
Advantages Disadvantages
It helps in developing a short term goal which
need to be achieved by the business to achieve
the organisational goals.
Sales of the business influences by various
external factors. Therefore, it can provide
wrong result to the company.
Prediction of sales enables the company to
develop the strategies regarding the
enhancement of financial position of the
company.
Preparation of sales budget is uncertain task of
the company.
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 Activity based budgeting: This type of planning tools help managers in identification
and analysis of various activities of the business (Otley, 2015). With the help of this
system, managers also enables to determine various activities with all the sources if
business. They also enable in analysing the efficiency of various activities of the
company.
Advantages Disadvantages
Activity based budgeting helps in analysing
actual cost of production.
It is a costly planning tool of budgetary
control.
It enables the managers in analysing the
relationship between various activities of the
business with its existing sources.
Data evaluated through this tool may not be
useful for the businesses amount of overheads
spent by the business is low.
 Static budget: Static budgets are those that are required to track all the finance in the
business including incomes and expenses.
Advantages Disadvantages
Easy to be implemented in business Lack of flexibility
Can help in determination of overestimation of
underestimation of costs
Additional resources for keeping the business
up can't be allotted in this budget.
 Flexible budget: Flexible budgets are those that are prepared different for different level
of production the business.
Advantages Disadvantages
It provides better control over business. It assumes linearity in the costs.
It leads in frequently adjusting the revenues
and expenses for various level of the business.
It is highly dependent upon various
assumptions.
 Rolling budget: in this budget, budgets are continuously being updates as the passage of
time.
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Advantages Disadvantages
It provides flexibility to the business. It make the business too much dependent on
the relocation of resources.
It help the business in becoming more
responsive for the changes to be occurred in
future.
It leads in preparation of new budget
constantly.
 Zero based budget: It is the budget, all the expenses are justified in each new period.
Advantages Disadvantages
It helps the business in determining the use of
each pound.
Company can not make long term plans with
the help of this budget.
It helps in detecting each area from where
revenues can be generated.
It needs lot of time and efforts.
 Kaizen budget: This budget is prepared by expecting the improvement in the busines on
continuous basis.
Advantages Disadvantages
It is useful for manufacturing concerns. Its highly dependent upon the communication
and analysis of the business information
It helps managers in gaining overall knowledge
about business.
It may lead in cutting the costs on constant
basis.
Analysis of application of various planning tools of budgetary control
All the above planning tools helps managers in preparing budgets and forecasting the
operations of the business. Operational budget helps the managers in forecasting all the
operational activities of the business. Further, by comparing the actual operations of the business
with the previously forecasted operations, managers can identify the areas of improvement and
efficiency of the overall business as well (Kwarteng, 2018). It helps the managers in forecasting
the budgets regarding future operations of the organisation.
In addition, with the help of cost budget, managers can easily forecast the selling price of
the products or services. It provides help to the managers in forecasting the sales budget of the
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company along with forecasting the future profit that can be earned by the business within
specific time period.
In this regard, in can be analysed that all the planning tools of the budgetary control helps
the managers in preparing the budgets of the firm and forecasting its future activities as well.
Role of planning tools of budgetary control in solving financial problems
Budgetary tools predicts the future performance of the business by analysing its past
performance and efficiency of the company (Grabel, 2018). The difference between planned and
actual performance of firm in any activity helps the managers in detecting the areas of
inefficiency of the company. For example, difference in difference arisen in operational budget
and actual operational activity helps the managers in easily detecting the areas of inefficiency, fir
which they need to prepare more effective strategy (Bhandari, 2017). Further, by detecting the
inefficiency, managers can predict the problems that may arise due to the difference in planed
and actual performance of the business. It leads in developing an effective solution for the
problem before its arising.
In this regard, planning tools of budgetary control helps the business in effectively
responding to the financial problems faced by the company by developing their solutions in
advance.
TASK 4
Report showing comparison of Different ways to respond various financial problems
Each business contains various financial problems that occurs while performing the
business activities of the company. There are various management accounting tools which
prevents the firm from various financial problems and also provides solutions for the purpose of
solving those problems in an effective way.
For the purpose of solving the financial problems, there are various techniques that can
be used by the managers in detecting the problems in advance and finding there effective
solutions as well as:
Key performance indicators:
Key performance indicator helps the managers in determining the performance of overall
business. While adopting Key performance indicator technique, managers compares the overall
performance of the business from its historical performance and budgeted performance as well
(Junqueira, 2016). It enables the managers in determining the actual performance of the company
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with the help of which they can detect the area of inefficiency and develop their strategies
accordingly.
Key performance indicator measures the success of the company by comparing current
performance with the past performance of the business. For the purpose of determining
performance of the company, managers may compare various activities of the company like,
comparing profit earned by the company with the past profits, or number of unit of products or
services sold by the company, etc. (key performance indicators (KPIs), 2018). This tool of the
management accounting helps the managers in analysing overall performance of the business.
Balance score card:
While adopting this technique, managers maintains the different perspective over the
different business activities of the business (Alviniussen and Jankensgard, 2015). They
interrelate all the activities of the business and develop a balance among them as well. Further,
they also analyse the effect of one activity of the business over other activity. This technique
leads in effect of inefficiency of one activity over other. This technique enables the managers in
solving the problems in more effective way by resolving not only the problem arisen in the
business but also their effect over each business activities.
This technique creates the valuable perspective of the managers toward various activities
of the business. Further, by interrelating all the activities they get to know the value of each
activity of the business. It helps them in developing the priorities of each activity of the business.
In this regard, with the help of this technique of management accounting, managers enables to
have better and effective control over all the operations of company.
Bench marking:
In this technique, Company selects some major activities of the business which have
essential effect over the overall performance of the business. They manges only those business
activities to manage the overall performance of the business. This technique helps in reducing
the burden of the managers to manage numerous activities of the business. It enhances the
efficiency of managers due to reduction of burden over the business.
Bench marking prevents the managers from excess of work load of managing numerous
activities of the business. Rather, managers starts managing only core activities of the firm to
manage the overall performance of company (Ansoff, 2019). It enables them in detecting
problems in the core activities of the company, which have a major effect over the overall
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business performance. In this regard, they can easily detect the future problems that can be arisen
due to inefficiency in the core activities of the business and find appropriate solution for them in
advance as well.
Financial governance:
While using this technique of management accounting, managers analyses and manages
all the financial activities of the company. Managers compares the past financial position of the
business with its current position in order to determine the overall performance of the firm and
its efficiency. Detection of reduction in the financial position of the company shows the
inefficiency of the company, after which managers analyses the each financial activity of the
company (Kang, 2016). In this regard, they detect the area of improvement and develops or
innovates their strategies accordingly in order to enable the company to face all the financial
uncertainties that can be arise in the future.
Investment appraisal method: This is the method that helps the company for selectingh best
investment by providing several techniques. It includes several methods that can help the
business in deciding the best proposal for the business like:
 Accounting rats of return method: It is a non cash flow based method, that provides the
technique as to determine the amount of return that can be generated from the proposed
project
 Payback period method: This method of time value of money is cash flow based
method. It makes the company to determine the total amount required to be ijvested in the
investment proposal.
 Net present value method: It helps in calculating the present value of future cash return
from the investment.
 Discounting payback period method: It is the amount of time that is needed for gaining
the actual cost of the project equivalent to the discounted value of the estimated cash flow
from project.
 Profitability index method: this method helps the business in measurement of the
present value of profits that could be gained from the investment.
By comparing all the techniques of management accounting, it can be analysed that, key
performance indicator is the best technique that can be used by the managers for the purpose of
managing overall performance of the company. With the help of this technique, managers can
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have their eyes on each activity of the firm. Which enables them easily identifying the inefficient
areas of the company (Altenhoff, 2016). It helps theme in predicting the financial problems that
can be arisen in future due to particular inefficiency of the business. It leads in determining their
solutions of in advance and enhancing the ability of company in facing the financial problems.
Although, bench marking can also be considered as the best technique of the management
accounting system, as it enhances the efficiency of managers by reducing the burden of
managers. Further, it also leads in management of all core activities of the firm. On the other
hand, it totally ignores other activities of the business. Managers do not manage other activities
of business (Muda, Erlina and Nasution, 2018). It may result in suffering loss by the business as
due to inefficiency of other activities, business may face financial or non financial problems. It
may lead in facing a huge uncertainty by the business.
Financial problems that can be arisen due to lack of funds for investments
Problems Business
organizations
Charity Nit for profit
organisation
Semi
government
bodies
Insufficiency of raw
material
Yes No Yes Yes
Insufficient funds to pay
debts
Yes No No Yes
Insolvency Yes No No No
Lack of capital Yes Yes No Yes
Lack of cash flow Yes Yes Yes No
Bootstrapping Yes No No No
CONCLUSION
From the above assignment, it can be concluded that management accounting is a major
tool to help the managers in their decision making process. There are numerous management
accounting systems, which are essentially required in the company. The study as also concluded
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that marginal costing and absorption costing both are the methods of preparation of income
statements. Both methods provide different profits of the company. Business should use an
appropriate method which suits its business operations. Further there are various planning tools
of budgetary control and management accounting system as well. All the planning tools helps the
management in their decision making process and helps the company in responding to various
financial problems as well. Further, key performance indicator tool of the management
accounting system can be termed as the best tool that can be used by the managers in their
planning, controlling and decision making process.
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REFERENCES
Books and Journals
Altenhoff, A. M. and et.al., 2016. Standardized benchmarking in the quest for orthologs. Nature
methods. 13(5). p.425.
Alviniussen, A. and Jankensgard, H., 2015. Enterprise risk budgeting: bringing risk management
into the financial planning process.
Ansoff, H. I. and et.al., 2019. Implanting strategic management. Springer.
Bhandari, B. P., 2017. Profit Planning and Control in Agriculture Development Bank
Limited (Doctoral dissertation, Central Department of Economics Tribhuvan University
Kirtipur, Kathmandu).
Boiral, O., 2016. Accounting for the unaccountable: Biodiversity reporting and impression
management. Journal of Business Ethics. 135(4). pp.751-768.
Edwards, J. C., Sobel, R. S. and Bonilha, L., 2018. Marginal decision-making in the treatment of
refractory epilepsy. Journal of medical economics. 21(5). pp.438-442.
Fisher, J. G. and Krumwiede, K., 2015. Product costing systems: finding the right
approach. Journal of Corporate Accounting & Finance. 26(4). pp.13-21.
Grabel, I., 2018. When Things Don't Fall Apart: Global Financial Governance and
Developmental Finance in an Age of Productive Incoherence. MIT Press.
Junqueira, E. and et.al., 2016. The effect of strategic choices and management control systems on
organizational performance. Revista Contabilidade & Finanças. 27(72). pp.334-348.
Kang, N. and et.al., 2016. A Hierarchical structure of key performance indicators for operation
management and continuous improvement in production systems. International journal
of production research. 54(21). pp.6333-6350.
Kaplan, R. S. and Atkinson, A. A., 2015. Advanced management accounting. PHI Learning.
Kwarteng, A., 2018. The impact of budgetary planning on resource allocation: evidence from a
developing country. African Journal of Economic and Management Studies. 9(1).
pp.88-100.
Lin, Z., 2017. PART I: Financial accounting and reporting. In The Routledge Handbook of
Accounting in Asia (pp. 23-26). Routledge.
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