Management Accounting and its Systems

This document provides an introduction to management accounting and its systems. It explains the various systems used in management accounting, such as cost accounting, inventory management, job costing, and price optimization. It also discusses the methods for management accounting reporting, including budget reports, accounts receivables aging reports, cost managerial accounting reports, and performance reports. The advantages and disadvantages of different planning tools, such as budgets, CVP analysis, and pricing strategies, are also discussed.

Management
Accounting

Contents
INTRODUCTION...........................................................................................................................................3
TASK 1..........................................................................................................................................................3
P1: Explanation of management accounting and its systems..................................................................3
P2: Methods for Management accounting reporting..............................................................................4
TASK 2..........................................................................................................................................................6
P3: Calculation of costs using appropriate techniques............................................................................6
TASK 3........................................................................................................................................................13
P4: Advantages and disadvantages of different types of planning tools...............................................13
TASK 4........................................................................................................................................................14
P5: Comparison of organizations in adoption of management accounting systems to solve financial
problems...............................................................................................................................................14
CONCLUSION.............................................................................................................................................16
REFERENCES..............................................................................................................................................17

INTRODUCTION
Management accounting refers to the provision of financial data and advice to a company
which helps its managers in taking the decisions which are for its benefit (Armitage, Webb and
Glynn, 2016). It helps the managers to better inform themselves before they take decisions on
key matters concerning the company. Thus, overall its purpose is to aid them in decision-making
process. This helps in raising the overall efficiency, effectiveness and productivity in the
organizational context. Thus if the managers of the enterprise use it effectively then it will result
in achievement of short-term and long-term goals and objectives of the organization and will also
help in raising the level of profits. This project is based on Creams Ltd., which specializes in
selling of ice-creams, waffles and doughnuts. In this report, detailed analysis will be made on
types of systems used for management accounting, application of techniques of management
accounting to calculate the costs, use of planning tools. Additionally, the ways in which different
firms make use of management accounting systems will be discussed as a part of this report.
TASK 1
P1: Explanation of management accounting and its systems
Management accounting refers to using financial data and information in such a manner
so that it helps in taking of various decisions pertaining to the organization (Bromwich and
Scapens, 2016). Managers of Creams Ltd. can use this data in order to help them grow the
enterprise and to get ahead of the competitors through effective decision-making.
The various systems in management accounting are explained in the context of Creams
Ltd. as follows-
Cost accounting system- Cost accounting system is very helpful in order to find out and
analyze the costs pertaining to an organization. It can be used the managers of Creams Ltd. to
find out their various types of costs and segregating them according to requirements. Also, this
system helps in analyzing the overheads. Management can make use of this system to analyze
the costs and to find out the excessive costs incurring in the organization. This helps in reducing
these extra costs and maximizing the level of profits.
Essential requirements-
 A good cost accounting system helps in analysis and interpretation of costs.
 A good cost accounting system identified the extra costs in various departments of the
organization and helps in reducing them so that the profits can be maximized.
Inventory management system- Inventory management system helps a lot in proper and
effective management of the inventory level in the organization. Managers of Creams
Ltd. can use it so that they can manage the stock levels effectively and efficiently. It also

identifies the problems pertaining to the inventory in the organization and takes the
essential steps to resolve them. Thus overall it is very much helpful for taking decisions
related to the inventory.
Essential requirements-
 An effective inventory management system must be able to identify the problems and
issues lying with the management of inventory level in the organization.
 An effective inventory management system should be able to properly manage the stock
level in the organization.
Job costing system- Job costing system helps in proper management of orders and other
jobs undertaken in the organization (Bui and De Villiers, 2017). It is very useful for those
enterprises which are indulged in the process of manufacturing. The managers of Creams
Ltd. can make use of this system to properly track and manage their orders. This will help
them in completion of orders on time. Also the costs associated with the jobs in the
organization can be calculated using it and can be segregated across departments. This
helps in finding out the excessive costs incurred while completing the orders which helps
in reducing them and maximizing the level of profits.
Essential requirements-
 An effective job costing system should help in properly maintaining the track of orders
received and given in the organization.
 An effective job costing system should help the managers in reducing the costs associated
with the completion of orders by identifying unnecessary costs associated with the orders.
Price optimization system- Price optimization system helps in choosing a right price by
selecting a right pricing strategy according to the conditions prevalent in the market
(Christ, Burritt and Varsei, 2016). The managers of Creams Ltd. can make use of this
system in order to set a right price which helps them in raising profits and also getting
ahead of the competitors. It ascertains the problems related with the pricing strategy of
the organization and helps in resolving them so as to effectively raise the profits.
Essential requirements-
 A good pricing optimization system should be able to find out the problems and issues
associated with the price set by the organization for its products.
 A good price optimization system must be able to raise the level of profits and must help
the firm in getting ahead of the competition by helping management in framing an
effective strategy for the price.
P2: Methods for Management accounting reporting
Management accounting reports are prepared in order to facilitate the analysis and
interpretation of performance of various departments in the organization (Cooper, Ezzamel and
Qu, 2017). The explanation of these reports in the context of Creams Ltd. is as follows-
Budget report- A budget report is prepared with the help of budgets in the company
such as cash budget, operating budget, master budget etc. They are used to generate the overall

performance and to check whether it matches the standards or not. The managers of Creams Ltd.
can use it for identifying whether there is a surplus or a deficit arising from the operations of the
company. Also comparison can be done by the managers using these reports as the data and
information of current year can be compared with that of the previous year. Therefore errors and
mistakes can be easily detected and the necessary steps can be taken with immediate effect to
rectify the same. This can help the management in raising the overall efficiency, effectiveness
and productivity. Thus, if used effectively budget reports will certainly help the management in
taking the right decisions in the context of the organization to help it achieve its short-term and
long-term goals and objectives.
Accounts receivables aging report- Accounts receivables aging report is prepared to
classify the different debtors in the organization. The managers of Creams Ltd. can use this
report for making a list of their debtors and segregating them according to their payment due
date. This helps in keeping a track on the debtors. Also, the potential bad debts can be easily
identified and a provision can be made for the same. The aging receivables that have not paid
their dues since a long time can also be identified. Thus overall tracking of debtors is facilitated
with this report in the organization. This report also tells the management whether it needs to
make its credit policy stricter or not. Flow of cash and liquidity position can be identified easily
by preparing it and thus it is quite useful for all the enterprises. Management can take the right
decisions by using it.
Cost managerial accounting report- Cost managerial accounting report is prepared in
order to compute the cost of articles that have been manufactured (Hall, 2016). All the raw
material, overhead, labor and any other added costs are taken into the consideration. A summary
is offered on all of this information. The managers of Creams Ltd. can make use of this report.
They can use it to identify the costs being incurred in the organization and comparing it with the
previous years to identify variances. If variances are there then they can be quickly rectified by
the use of various types of techniques. Also these reports help a lot in optimum utilization of
limited resources available in the organization. Inventory wastage, hourly labor costs and
overhead costs are all a part of this report. They provide an exact understanding of expenses
essential for optimum utilization of resources among all the departments.
Performance report- Performance report is prepared in order to find out the
performance of a company as a whole and of the workers working in different departments at the
end of the term (Honggowati and et.al., 2017). After finding out the performance a thorough
analysis, interpretation and review is done so that key strategic decisions can be taken by the
managers. The managers of Creams Ltd. can use these reports to get deep insights into the
working pattern of the organization. If by the use of this report they find out that the company is
still not performing to its full capacity then the necessary steps can be taken for improvement of
performance. Thus this report helps the managers in raising the overall efficiency, effectiveness
and productivity level in the organization which helps in attainment of several short-term and

long-term goals and objectives. Therefore the management has to make the best use of these
reports.
TASK 2
P3: Calculation of costs using appropriate techniques
Costs can be calculated by using several techniques (Hopper and Bui, 2016). The most
popular of these techniques are marginal costing and absorption costing. Explanation of these
techniques in the context of Creams Ltd. is as follows-
Marginal costing-
Marginal costing is a technique used in costing wherein variable costs are charged to the
units of cost and fixed costs are completely written off against the contribution (Horton and de
Araujo Wanderley, 2018). The managers of Creams Ltd. can make use of this technique as it will
help them in analyzing the break-even point.
Advantages-
 Marginal costing is very helpful in production planning as it shows the amount of profit
at every level of output with the help of cost-volume relationship. Break-even chart can
be used for this purpose.
 Marginal costing also helps in fixation of selling price of products and services of the
organization. Sometimes, different prices can be charged for the same article in different
markets for meeting varying degrees of competition. Thus fixation of selling price helps
in determining the profitability level of the enterprise. Any variance or deviation in the
profits can be easily identified. If a variance or deviation is found in profitability then
rectifying steps can be immediately taken by the management to correct them so that
operations and functioning of the enterprise is not affected at all. Therefore, it can be said
that this acts like an advantage in the context of the company.
Disadvantages-
 Marginal costing technique is based on certain assumptions which may not always be
true in all the situations and circumstances in the company. Practically, they may change
and therefore different results can be obtained. This can affect the level of accuracy of
results obtained in the organization.
 Marginal costing technique overcomes the problems of over and under-absorption of the
fixed overheads. However, the problems related with the absorption of variable
overheads still persist within the organization. Thus it again affects the accuracy of
calculations and can give wrong results, conclusions and judgments. Managers may take
wrong decisions if accuracy is affected.
Absorption costing-

It is a method of accounting of costs which takes into account all the expenses and
overheads incurring within an organization (Malmi, 2016). The managers of Creams Ltd. may
make use of this technique which helps in getting accurate results within the company.
Advantages-
 It works according to the accrual and matching concept of accounting by helping to
match costs and revenues for a particular accounting period. Thus it ensures compilation
with the accounting standards set. This also helps in maintaining the accuracy in
calculations.
 It can disclose whether the overheads pertaining to various departments are being
absorbed properly or not. Thus it is very much useful for manufacturing organizations. If
the overheads are not being absorbed properly it can indicate that easily and thus the
necessary steps can be taken within the organization for the same.
Disadvantages-
 There is an argument by many accountants that fixed manufacturing, administration,
selling and distribution overheads do not produce future benefits and therefore must not
be included in the cost of the product.
 It is not helpful for preparing a flexible budget as there is no distinction made between
fixed and variable costs of the product.
From the above discussion, it can be concluded that both marginal and absorption costing
techniques can be used by a company. A company like Creams Ltd. which deals in
production process should make use of both these techniques. This will help it in
determining the costs accurately and getting the desired results. Also the efficiency and
effectiveness will improve and thus the profits can be maximized easily. The goals and
objectives related to the organization can also be achieved if both these techniques are
used in the right manner by the management by ensuring accuracy and therefore this will
reflect in the results obtained in the organization.

TASK 3
P4: Advantages and disadvantages of different types of planning tools
The planning tools which are used by the managers of Creams Ltd. are Budgets, CVP
analysis and Pricing Strategies. An explanation about them is as follows-
Budgets-
A budget refers to an estimation of revenues and expenditures over a specified future
period of time and is usually compiled and re-evaluated on a periodic basis (Budget, 2020). It can
be used by management of Creams Ltd. for forecasting of incomes and management of expenses.
Advantages-
 Preparation of budget helps in increasing the level of profitability in the organization and
therefore makes sure that the company achieves its goals and objectives in the future.
 It helps in identification of problems which may be faced within an organization and
helps in their eradication for smooth functioning.
Disadvantages-
 In budget forecasting is done which may not always be accurate and therefore wrong
results may be obtained.
 Preparation of a budget is a time-consuming as well as expensive process and therefore a
lot of time is taken to prepare it and it creates a load on financial expenditure of the firm
as well.
CVP analysis-
Cost-volume-profit analysis is a method which is used in cost accounting that looks at
impact which varying levels of costs and volume have on the operating profit (McLaren,
Appleyard and Mitchell, 2016). It helps in determination of break-even point which is
where the firms earn no profit and neither incurs a loss. Creams Ltd. can make use of this
method so that it can identify its break-even point.
Advantages-
 CVP analysis is quite helpful for the managers in taking the right decision after the
consideration of multiple factors. Use of break-even point helps in determination of
profitability required to sustain the business in the long-term.
 CVP analysis offers detailed perspectives regarding the operations of a business
enterprise which enables the managers to get to know more about their business. These
insights prove very useful in taking decisions in certain circumstances and situations.
Disadvantages-
 There are chances of making errors and mistakes while performing calculations and thus
this may impact the level of accuracy in the overall results obtained in the organization.

 CVP analysis makes use of several approximations and estimates which may not always
be accurate enough. Thus this lack of accuracy may impact the overall results obtained
using CVP analysis and can impact their correctness. Also, this analysis can only guide
the managers through approximations and thus the decisions have to be taken by them
only after considering various factors.
Pricing strategies-
Pricing strategies refer to techniques which a firm uses to vary its prices according to the
prevailing situations in the market (Messner, 2016). It helps the firms in obtaining a
strategic edge over the competition. Creams Ltd. can make use of them so that it can
maintain its profitability in order to sustain in a highly competitive market.
Advantages-
 It enhances the decision-taking skills of the managers as they learn to change decisions
quickly according to the situations of the market. Thus these skills are developed in the
managers which facilitate their development
 It helps the firms in determining the right price according to the prevailing situation in the
market and thus to maintain the level of profitability. They can adopt a right pricing
strategy after analyzing many factors including the price charged by the competitor for
products and services which helps in taking of right decisions at the right time.
Disadvantages-
 Selection of a wrong pricing strategy can hurt a firm’s prospects badly as it profits can
slide quickly.
 The pricing strategy selected by the managers may not always prove to be successful and
thus can affect the level of profits of the firm.
TASK 4
P5: Comparison of organizations in adoption of management accounting systems to
solve financial problems
Financial problem- A financial problem refers to a situation in an organization which is
created because the firm is facing issues in managing its financial resources (Otley, 2016).
Creams Ltd. like any other organization also faces some financial problems which are explained
as follows-
 Excessive overheads- In Creams Ltd., the overheads of certain departments are
increasing which is creating a problem for its management. This also unnecessarily
increases the costs and thus the profits of the firm are reduced ultimately affecting the
achievement of goals and objectives of the organization.

 Mismanagement of orders- The orders received by Creams Ltd. is being mismanaged
due to lack of proper maintenance of record and tracking of orders given. Also the orders
are not being completed on time due to this mismanagement in the company. This
management results in lowering of revenues which directly impacts the incomes and
thereby the profitability level of the organization.
Techniques which can be used by firm to solve financial problems-
 KPIs- KPIs are referred as Key Performance Indicators. They are of two types- Financial
and Non-Financial (Quattrone, 2016). Financial KPIs measure the quantitative
performance and Non-Financial KPIs measure the qualitative performance. The managers
of Creams Ltd. can make use of KPIs so that they can solve their problem of excessive
overheads. KPIs can help in solving of this problem as comparison can be done with the
data of previous years to find out the reason behind this increase in overheads. Rectifying
actions can then be taken to resolve the issue.
 Benchmarking- Benchmarking is a process in which benchmarks are set to be followed
by the company (Järvenpää and Länsiluoto, 2016). This helps in optimizing the
performance and achieving the desired results in the organization. Creams Ltd. can make
use of this technique to resolve its problem of mismanagement of orders as benchmarks
can be set for delivering the orders within the time-limit. By using this technique the
management of the organization would be able to resolve this issue easily which will
reflect on its performance as the profits will increase due to the performance being
optimized by the use of the benchmarking technique.
Financial Governance- Financial governance refers to a process in which management
of a company organized and manages the financial data in such a manner so that a control
can be maintained on the finances and results can be optimized (Järvinen, 2016). The
managers of Creams Ltd. can use financial governance as it will help them in eradicating
both the problems of excessive overheads and mismanagement of orders. This is so
because financial governance facilitates self-governance and organizes the financial
resources which facilitate best performance within the company. Thus after the
eradication of problems goals and objectives of the company can be achieved.
Comparison between organizations on the basis of use of management accounting
systems to resolve financial problems-
Basis Creams Ltd. Tubzee Ltd.
Financial problem Creams Ltd. is facing the
problem of mismanagement
of orders.
Tubzee Ltd. is facing the
problem of excessive cost
in its operations.
Management accounting
system used
It makes use of Job Costing
System to solve this
problem.
It makes use of Cost
Accounting System to solve
this problem.

Application of the system This system can be used for
proper management of job
orders.
This system can be used for
finding and eradicating
extra costs incurred in
organization.
CONCLUSION
From the above report, it can be concluded that management accounting is a process in
which help is provided to managers for taking the right decisions by the use of several
techniques. Its systems are helpful for the organizations and any one of them can be adopted by
them depending upon their needs and requirements. If the analysis and interpretation is done
carefully by the managers using its techniques then the firm will surely attain success in the long-
term against the competition. Its reports can be prepared to constantly monitor the performance
level in the organization. Techniques like marginal costing and absorption costing are helpful for
finding out the level of profitability in the company. Planning tools like budgets, CVP analysis
and pricing strategies can be used by the managers for bringing efficiency and effectiveness in
the organization. Also, organizations are using management accounting systems to identify and
resolve their financial problems.

REFERENCES
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Hall, M., 2016. Realising the richness of psychology theory in contingency-based management
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Järvinen, J. T., 2016. Role of management accounting in applying new institutional
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Online
Budget. 2020. [Online]. Available through: <https://www.investopedia.com/terms/b/budget.asp>