Management Accounting: Principles, Role, and Systems

This article provides an overview of management accounting, including its principles and role in decision-making. It also discusses different management accounting systems, such as cost accounting, inventory management, job costing, and price optimization. Learn how these systems can benefit your business and improve financial performance.

Management Accounting

Contents
Contents......................................................................................................................................................2
INTRODUCTION.....................................................................................................................................3
MAIN BODY.............................................................................................................................................3
Part 1..........................................................................................................................................................3
Part 2........................................................................................................................................................13
REFERENCES........................................................................................................................................18

INTRODUCTION
Accounting is a process which mainly deals with all the financial transactions for which
there are some accounting approaches such as management accounting which focuses on each
and every sort of transactions. It has been said that management accounting refers to the
accounting approaches which is responsible for tracking all the financial as well as non-financial
records. It is said that MA is designed for all the managerial aspects so that they can take
corrective steps associated with monetary as well as non-monetary resource (Amir, Rehman and
Khan, 2020). In the present report, chosen organization is Innocent drinks limited where it is a
client of a business entity AJ and sons which provides consultancy services associated with
accounting. This is the report which is divided into two main sections where first includes
information linked with MA systems & reports. Whereas, in second part information related to
the contribution related to planning tools & MA systems are included.
MAIN BODY
Part 1
Principles of management accounting
Designing and Compiling- It ensures that the management accounting system is set up in such a
manner that the appropriate documentation is viewed (Agrawal, 2018). If this is the case, a
specific issue must be resolved. Furthermore, accounting data may be updated and implemented
to suit the needs of management.
Management by Exception- The real result is evaluated to a pre-determined one in order to
distinguish anomalies. The undesirable variations alone are assessed and managed as the source
of the issue. If this is the case, management has invested less time reading and studying the data
and more time acting on it.
Accounting for Inflation- A benefit cannot be deemed gained until the money is held in actual
terms. It indicates that the worth of money is not constant. As a result, revaluation accounting is
expected to determine the worth of capital contributed by the company concern's shareholders in
terms of actual value of money. In this way, the rate of inflation is taken into consideration when
determining the true performance of a company.

Role of management accounting
Management Accounting- It refers to an effective accounting which is mainly targeted in order to
gather as well as assess all the required information which has been occurred during the financial
year. It is the process which is conducted in order to develop internal accounting reports which
plays very essential role in the growth and success of a business entity.
Purpose of Management Accounting- It is said that the main purpose is to acts as one of
the most essential and effective element for the internal stakeholders which assist them in order
to take decisions in a well define manner (Balstad and Berg, 2020). This is the accounting
process which act as framework which enhance the overall performance of the business entity in
an effective manner. In addition to this, it has also been said that this is the process which acts as
a controlling mechanism for business entities which leads towards the improved performance of
the business entity.
Distinction between management accounting and financial accounting:
Base for
comparison
MA Financial accounting
Users This is the accounting process
which is designed for all the
internal stakeholders.
This method is used by internal as well as
external stakeholders both.
Regulations I order to prepare this sort of
accounting no rules as well as
regulations are going to be used.
This sort of the accounting system which
contains different type of regulations
needs to be considered by the accountant
while preparing the report.
Type of
company
It is the type of accounting which
can be implemented in any kind of
a business entity (Bhimani, 2020).
Whereas this the accounting system
which requires special organizations
which are usually listed in stock
exchange.
Types of Management Accounting systems:

Management accounting is one of the most effective accounting system which are almost
linked with each segment of a business entity. This as a result creates ample number of
management accounting systems going to be explained in the present report as follows: Cost accounting system- This is the accounting system which is developed with a
procedure of tracking as well as controlling all the expenses which might arise in the
business entity within an accounting cycle. This is the system where each and every item
cost is recorded as well as compared with the standardized cost which will make it easier
to identify the efficiency & progress of various tasks in context of their expenses. In the
present context of Innocent drinks limited, the finance managers of the company can gain
key information with the help of this accounting system related to cost of various
activities as well as the variance (Căpușneanu and et. al., 2020).
Essential requirement- The requirement of the accounting system is to effectively control all the
unwanted expenses which as a result increases the revenues of the business entity. In reference to
the Innocent drinks limited, this is the accounting system which help in reducing the additional
expense as well as cost of all the unwanted activities. Inventory management system- This is the type of accounting system which usually
associated with managing all kind of stocks of a business entity. This can effectively be
done with the help of recording each and every stocks on a daily basis which consist of
consumption of all the raw material, semi-finished stock, prepared stock and so on. Along
with this, it is the system where stock is being used by the managers by considering all
LIFO, FIFO method. In the present chosen company, it has been said that the managers
adopt inventory management system with the aim of better consumption of all the
available raw materials (Endenich and Trapp, 2020).
Essential requirement- This is the sort of accounting system which is quite necessary for the
business entities in order to effectively use all the available stock in an effective manner. In
reference to the Innocent drinks limited, it has been said that this is one of the most important
element which assist in order to manage all the raw material in an effective manner so that they
will be able to gain positive results according to their requirements.

 Job costing system- Another type of accounting system is job costing system which
mainly focuses in order to track cost of the job as well as task aligned in the process of
completing the whole operation in an effective manner. It is said that the main aim of
present accounting is that they must measure cost of every unit in order to take further
decisions in an effective manner. In relation to the Innocent drinks limited, it has been
said that this is the type of accounting system which is used to identify the objectives of
task assigned which includes specific amount of cost.
Essential requirement- It is very essential for the manages to adopt this accounting which aid in
identifying the number of job and task allocated in order to finish the whole activity and measure
the cost of each and every unit. The finance manager of Innocent drinks limited adopt this
accounting system as they are having large product portfolios (Fleischman and McLean, 2020).
 Price optimization system- This method explains how demand differs at varying price
levels. It assists businesses in developing a perfect plan for what to do if the price cost of
products and services rises or falls, allowing them to maximize benefit. They will also
figure out how much their clients are able to spend based on their earnings. This method
would assist above company in determining the price they can charge for their items in
order to boost revenue and beat rivalry. It will demonstrate how many existing buyers
they have and what price will entice them to acquire new ones. This would allow them to
gain a large market by offering more products to satisfy the demand.
Essential requirement- This price management framework assists in the execution of a cost-
effective pricing plan focused on consumer demand. It allows consumers' expectations and
market profitability to be aligned. As a result, the introduction of the price optimization method
of management accounting increases the profitability and benefit generating potential of above
company.
Management Accounting reporting:

Management Accounting define as the procedure of preparing different sort of formal
written document which consist of all the information related to various segments of business
entity. It has been identified that these are the reports which are adopted by administration of the
business entities so that they can effectively take best steps in order to take decisions. These
reports are as follows: Inventory management report- This kind of document consist of all the information
associated with every kind of inventories in an effective as well as systematic manner.
Under this report, all the information related to the quantity of all the raw material,
additional materials, required material and many more. All this information is used by
managers in order to take better decisions (Frick, Birt and Waters, 2020). In relation to
Innocent drinks limited, managers of the company develop this report along with the aim
of getting required information related to the stored materials.
 Performance report- This is the another report format which includes all the data related
to the performance of all the individual and the financial position of the company. As per
this report, all the information related to loss, profit, return, cash availability and many
more. In this report, finance manager of the Innocent drinks limited opt this method
according to the requirement.
 Accounts receivable reports: By offering an analysis of market balances relating to credit,
this management accounting study plays a critical role in promoting practices aimed at
increasing an organization's efficiency. Monitoring a company's credit balances or
deferred revenue is important for creating successful credit practices that comply with
consumers' payment capabilities and the company's needs. The use of management
accounting audit planning methods tends to reduce the possibility of bad debt. This study
monitors outstanding debtor accounts over time, which assists above company in
maintaining track of consumer debts and enhancing operational performance.
Use of techniques and methods to present calculation for an income statement:

It has been analyzed that there are different types of accounting techniques adopted by the
accountants of a business entity in order to develop all the financial reports in an effective
manner. These are the techniques which are acts as the framework to their users in order to
follow well defined and systematic process so that they will be able to get desirable results
(Łada, Kozarkiewicz and Haslam, 2020). In the above section, two different techniques are going
to be used by the finance managers in order to create an income statement which are marginal as
well as absorption cost methods. Both these techniques are highly used by the business entities in
order to develop different results which are beneficial for the business entities.
Cost analysis- The term "cost analysis" refers to the process of examining costs associated with
different aspects of a market. In terms of Eastern engineering co. ltd., doing cost analysis serves
primarily two purposes: internal monitoring and external reporting. The former denotes the use
of cost accounting by an entity's corporate management committee to comprehend and evaluate
the cost of company activities. The above refers to the use of cost benefit analysis by external
market customers to assess a company's performance.
Absorption costing- It is a method of collecting costs associated with the production of a
commodity. This costing approach applies fixed costs to each production unit over a specified
period of time. It guarantees correct accounting by examining both fixed and variable costs.
Marginal Costing-It is a strategy in which variable expenses are paid against per product costs
and fixed costs are written out against the total contribution. As a result, when the amount of
output is changed by one, marginal costing measures the adjustment in relation to overall costs of
the market. In other words, it refers to the extra costs associated with the manufacture of an extra
processing unit. This costing methodology assists Eastern engineering co. ltd. managers in
assessing the required operation level by analyzing variable company costs.
Example of preparation of income statement under marginal and absorption costing-
Data to produce income statement-

Interpretation of data-
It has been said that in the above stated part two income statements has been developed which
are going to be interpreted in a detail manner as follows: With the assistance of above prepared
income statement which is developed under marginal costing, it has been identified that this
there is a net profit identified in both the months which are April (£13000) as well as May
(£22000). In addition to this, it has also been said that there is a variation in net profit due to high
sales identify in May month. Apart from this, according to the absorption costing the whole net
profit is examined £19000 & £25000 for the same duration. In addition to this, it has also been
said that the main reason behind the difference arise in the total net profit in these techniques is
the way they take their fixed as well as variable cost in the overall procedure of preparing the
income statement.
Integration of MAS and MA reports.
There are different sort of MAS as well as MA reports which assist a business entity in
order to gain success in an effective manner (Golyagina and Valuckas, 2020). In the above
report, different types of accounting systems are used which assist the finance department of the
selected company. In addition to this, Management Accounting is a reports which is mainly
associated with inventory report which is linked to the production department. This is the
integration which usually contributes in order to guide the managers so that they will be able to
take best decisions in order to remain sustainable at the marketplace.

Benefits of MAS:
MAS Benefit
Cost
accounting
system
This is the accounting system which is quite beneficial for the business
entities in order to address the areas where companies’ expenses are quite
high.
Inventory
management
system
It is one of the useful system which assist a business entity in order to
examine the best and optimum utilization of all the available stock. Finance
manager of Innocent drinks limited get benefit with this accounting system
with the help of getting all the available information associated with daily
consumption.
Job order
cost system
This accounting system is crucial in order to know information about
estimated cost of per activity or job (Lebedev, 2018). In the context of above
company, they use such accounting system to measure cost of each job which
has been aligned in order to complete any particular task or operation.
Price
optimization
system
Such accounting system is used to set price of different kinds of products and
services at a level on which number of customers can get satisfied to buy.
With rational to above company they are using such accounting system to
manage pricing of different items.
Conclusion
In accordance of above description of different kinds of management accounting functions, types
and reports this can be concluded that such accounting is a key part for each kinds of company.
This is so because each of accounting system has its own significance which is linked with
organizational efficiency. In addition to this, MA reports are also crucial for companies as this
offer guidance to managers to run a business in a significant manner.

Part 2
Various tools of planning
Budgetary control: The purpose of performing this technique is to prepare various budgets for
future by comparing actual performance with estimated values (Le and et. al., 2020). In order to
maintain all financial performance of organization, this technique will help out because it is
directly connected with all forms of business entities and helps in finding different types of
variances. In context of limited innocent drinks, leading planning tool can be implemented.
1. Capital budgeting; It can be interpreted as a kind of budgeting approach, used to
measure power of projected financial plans. This assessment of efficiency of projects is
carried out by various methods called as payback time period, net present value etc. the
aim of doing this budgeting is to guide managers to proceeds right steps to invest heavily
in any project in above limited innocent drinks, it can commendation to finance managers
to assess a wide variety of alternatives (Lepistö and et. al., 2020).
Advantage- This approach is in favor of companies. It helps to protect themselves from future
financial risk because it suggests manager to select best option among various alternatives. In
addition to it is helpful for companies to support competent control over expense deals with
investments.
Disadvantages- This technique is applicable only for large companies & big projects not for
small organization and small tasks. It measures efficiency of project which is totally based on
assumption and sometime it will lead to loss of company.
2. Cash budget- This is a form of budget which bears info related to those action which are
straight to cash outwards and cash inwards with in a particular accounting period of time.
In context of above company, this budget can be used to manage cash outflow and cash
inflows.

Advantages-According to budgeted activities, companies can assign their cash by using this
technique. As well as it helps in estimating futuristic income and expenses during a particular
time period in a significant manner.
Disadvantage- Companies performance is affected by the external factors and due to this cash
budget not provides accurate prevision of cash payments and cash receipts. They are not able to
use their cash because of predetermined plan (Napitupulu, 2020).
3. Operational budget- It includes all expenditures and sales provided by company activities
on a regular basis. It focuses on fixed costs, which include the costs of products
produced. The operating budget of above company shows estimated sales and related
costs for a potential period of time.
Advantages-This budgeting tool makes it easier to estimate projected expenditures. As a result,
preparing an annual budget requires company costs to be matched with existing operational
needs.
Disadvantages- It leads to management making static decisions, which is not an effective
strategy for achieving stability in this ever-changing competitive period. Other than that, one of
the drawbacks of an operating budget is that it is a time-consuming process.
Planning tools for forecasting budgets
It is useful for manger to prepare budgets. It is possible only when planning tool like cash
budget, capital budget provides info related to estimation of financial values and Innocent drinks
limited company uses three mentioned budgets and each contributes to their controller and
director to calculate financial values.
MAS to solve financial issues.
It is said that there are ample number of financial issues and problem faced by large
number of companies as there is lack of effective management. In addition to this, it has also

been said that this is very difficult to identify any institution who don't have any financial issues.
Some of these issues are going to be discussed as follows:
Inconsistency in the overall sales- This issue is associated with the fluctuation of sales
revenue which usually arise due to internal weakness as well as high competition. It is said that
the financial issue decline the success graph of the business entity. In case of Innocent drinks
limited, it is said that this is the issues faced by them because of their ineffective strategies of
pricing (Pedroso and Gomes, 2020).
Unwanted higher expenses- This sort of the financial issue faced by business entities
who usually fail to manage their expenses. This can be arising in the companies because of
various possible reasons like unskilled staff members, lack of knowledge, ineffective budgeting
and many more. In the present organization, Innocent drinks limited face this issue which highly
affect their overall sales.
Accounting techniques:
Bench marking- It is known as an effective approach which is used by finance
department of the company in order to make comparison between the current as well as actual
performance of the business entity. This sort of comparison is usually arising at workplace in
order to understand the gap which as a result help in adopting effective methods to get the
benefits as per the requirement. Bench marking is quite effective and beneficial for the finance
department in order to address the area which is weak and require additional efforts.
Key performance indicator- This is the kind of accounting approach where both financial
as well as non-financial aspects are going to be measured by the companies in an effective
manner. In terms of financial aspects, all the information related to the profit, loss, expenses, as
well as returns are going to be included (Taschner and Charifzadeh, 2020). Whereas, in reference
to non-financial aspects all the information associated with the turnover, working condition,
political condition is involved. This will assist in assessing the main cause of all the financial
issues arise at the workplace.
Comparison:
Base for
comparison
Innocent drinks limited George’s drinks limited

Financial
issue
This is a business entity which is
facing issues related to the sales in
their last accounting cycle which is
quite low. This as a result act as
declining in all the aspects of the
business entity (Ugalde Vásquezand
Naranjo-Gil, 2020).
In context of this company, they are
facing a problem related to the higher
cost of all the operations. This as a
result decreases the sales of the
company and lower down the net
margin of the business.
Solving of
financial
issue with
the aid of
management
accounting
Finance managers of the company
use bench marking approach so that
they can compare their financial
performance in an effective manner.
This is effective method of
management accounting which
includes the comparison of
standards with actual results so they
able to identify the issue actually
exist in their business process. The
another beneficiary step associated
with it is that aid in development of
probable solution which improves
future functioning. Application of
this help an organization ascertain
the reason and value of sales of last
accounting cycle so they can find
out the issue by comparing with
benchmark issue. Here, the main
issue identified by an organization
is improper utilization of inventory
that leads to decrement in sales.
This can be improved through
Higher authorities of the company use
KPI approach so that they can identify
the financial issues face by them. This
is usually done by focusing on
financial characteristic accompanying
to revenues, expenditure etc. This is
effective approach is respect of
identifying issues in the areas where
key performance indicators exist.
These work as standards for employees
so they can work accordingly and
improve functioning. This also
associated with the benefit of building
strategy for an organization in respect
of future so can improve overall
business process. With the application
of this method identified that high cost
of issue arises within an organization
because of improper performance of
employees. It is determined from the
comparison that they lack in skills and
uses old ways of performing functions
which leads to expense of high cost.

installation of new software’s
within an organization.
This can be resolved with the aid of
effective training of employees so they
can work with new techniques and
perform at workplace with higher
productivity.
Similarities
and
differences
in both
Similarities are many as both aid in
identifying gap and building up
appropriate solution. Difference is
that aid in benchmark is for final
result but KPI can be set for internal
outcomes.
Similitudes are numerous as both
guide in recognizing hole and
developing suitable arrangement.
Distinction is that guide in benchmark
is for end-product however KPI can be
set for inward results.
Effectivenes
s
This has lower effectiveness as
compared to KPI because only
involves improvement in final
results but there are many instances
where internal issues impacting the
overall outcome.
This has more effectiveness as
compared to benchmarking because
help in solving of internal issues. This
is effective in respect of an
organization issue also as easily can
manage the issue of high cost through
internal controls.
To figure out financial problems MA is used
Various methods of accounting systems are combined with company's process and
operations. It helps to company in resolving financial problems in a proper manner. For example,
in upper section two different financial problems have been resolved by using cost accounting
and price optimization systems. This displays the contribution of MAS is wide for handling
number of issues.
Planning tool to figure out financial problems.
It provides detailed info to director related to estimated income and expenses. To resolve
financial problems, this info can be utilized by management (Amir, Rehman and Khan, 2020).
For instance, above mentioned company shows various planning tool like capital budgeting, cash
budget etc. and these plans helps in dealing with financial barriers.

Conclusion
In accordance of above mentioned part two of project this can be concluded that planning tools
of budgetary control are essential in order to deal with financial issues as well as for forecasting
different kinds of aspects. In addition to this, further part of report articulates that management
accounting systems are essential to deal with different kinds of financial issues.

REFERENCES
Books and journal:
Amir, M., Rehman, S.A. and Khan, M.I., 2020. Mediating role of environmental management
accounting and control system between top management commitment and environmental
performance: A legitimacy theory. Journal of Management and Research, 7(1), pp.132-
160.
Balstad, M.T. and Berg, T., 2020. A long-term bibliometric analysis of journals influencing
management accounting and control research. Journal of Management Control, 30(4),
pp.357-380.
Bhimani, A., 2020. Digital data and management accounting: why we need to rethink research
methods. Journal of Management Control, pp.1-15.
Căpușneanu, S., and et. al., 2020. Management Accounting in the Digital Economy: Evolution
and Perspectives. In Improving business performance through innovation in the digital
economy (pp. 156-176). IGI Global.
Endenich, C. and Trapp, R., 2020. Ethical implications of management accounting and control:
A systematic review of the contributions from the Journal of Business Ethics. Journal of
Business Ethics, 163(2), pp.309-328.
Fleischman, R. and McLean, T., 2020. Management accounting: theory and practice. Routledge.
Frick, H., Birt, J. and Waters, J., 2020. Enhancing student engagement in large management
accounting lectures. Accounting & Finance, 60(1), pp.271-298.
Golyagina, A. and Valuckas, D., 2020. Boundary-work in management accounting: The case of
hybrid professionalism. The British Accounting Review, 52(2), p.100841.
Johnstone, L., 2020. A systematic analysis of environmental management systems in SMEs:
Possible research directions from a management accounting and control stance. Journal
of Cleaner Production, 244, p.118802.
Łada, M., Kozarkiewicz, A. and Haslam, J., 2020. Contending institutional logics, illegitimacy
risk and management accounting. Accounting, Auditing & Accountability Journal.
Le, T., and et. al., 2020. Factors affecting the application of management accounting in
Vietnamese enterprises. Uncertain Supply Chain Management, 8(2), pp.403-422.
Lepistö, S., and et. al., 2020. Controlling outsourced management accounting to build legitimacy.
Qualitative Research in Accounting & Management.
Napitupulu, I.H., 2020. Internal Control, Manager’s Competency, Management Accounting
Information Systems and Good Corporate Governance: Evidence from Rural Banks in
Indonesia. Global Business Review, p.0972150920919845.

Pedroso, E. and Gomes, C.F., 2020. The effectiveness of management accounting systems in
SMEs: a multidimensional measurement approach. Journal of Applied Accounting
Research.
Taschner, A. and Charifzadeh, M., 2020. Management accounting in supply chains–what we
know and what we teach. Journal of Accounting & Organizational Change.
Ugalde Vásquez, A.F. and Naranjo-Gil, D., 2020. Management Accounting Systems, Top
Management Teams, and Sustainable Knowledge Acquisition: Effects on Performance.
Sustainability, 12(5), p.2132.
Agrawal, R.K., 2018. Principle of Management Accounting. Educreation Publishing.
Lebedev, P., 2018. Management accounting in Russian mid-sized companies: Results of an
extended survey-based study. Economics, 10, p.11th.