Role of Management Accounting in Businesses

This article discusses the role of management accounting in businesses, including its different types such as cost accounting system, inventory management system, price optimization system, and job order costing system. It also explains the difference between management accounting and financial accounting. The article further explores the different methods of management accounting reports, the benefits of management accounting systems, and the integration of MAS and MA reports with business processes. Additionally, it covers the preparation of income statements using absorption and marginal costing techniques.

MANAGEMENT
ACCOUNTING

Table of content

INTRODUCTION
Accounting is a key aspect for business entities for recording the financial transactions in
an effective manner. The MA is one of the main part of accounting (Siverbo, 2014). It is related
to process of collecting monetary and non monetary information with an aim of preparing
internal reports when needed by managers. These reports are presented only to the internal
stakeholders. The objective of project report is to analysing role of this accounting in context of
businesses. In the report Alpha limited company has been chosen that is located in United
Kingdom and operates in manufacturing of Pizzas. The report covers detailed information about
different MAS, MA reports and planning tools etc. In addition, role of different MAS in the
aspect of sorting financial issue is also mentioned in report.
MAIN BODY
TASK 1
P1. MA and its types.
MA- It is defined as a type of accounting which operates in the process of collecting quantitative
and qualitative information so that accountant can prepare internal reports. These reports provide
a detailed framework to the managers in order to take crucial internal decisions. Below some
types of MA are demonstrated such as:
 Cost accounting system- It is integrated to finance department of businesses with an aim
of making projection of futuristic expenses (Granlund and Lukka, 2017). By help of
making projection of further cost, it becomes easier for managers to take suitable action
in order to allocate funds as accordance of need so that cost can be minimised. It is
essential for businesses to track the usage of funds and total cost occurred in process of
operating different operations. In Alpha limited company, they are using this accounting
system for keeping cost lower from the estimations.
 Inventory management system – It is associated to process of tracking daily consumption
of stock value in order to produce new items. It is completely based on the stock
valuation methods such as Last and first method, First in first out method and many
more. It is essential for companies for reducing cost of storage lower as well as for
gathering information about usage of stock in completing activities regards to production.

In the aspect of above Alpha limited company, they are using this accounting system that
is helping them in order to assessing consumption of raw material, finished goods and
many more.
 Price optimisation system – This is defined as a type of accounting system which is
linked to process of setting price of products and services in an effective manner. This
becomes possible because in this sales department utilise key information regards to
customers' perception, feedback as well as market demand. On the basis of it, they set
prices of various products in relation to different market and customer segments. It is
essential for companies in order to setting prices of products in accordance of market
analysis. In Alpha limited company, their sales department set the prices of Pizzas as per
the market position and customers need.
 Job order costing system – This is a type of costing system which computes cost of each
activity in accordance of assigned number of jobs (Kastberg and Siverbo, 2016). It is
essential for companies in order to analyse and keep cost job lower as much as possible.
In Alpha limited company, they are using this costing system to provide important
information to their finance department about cost of each activity and job assigned in
completing different volume of operations.
Difference between MA and financial accounting:
Basis MA Financial accounting
Purpose This applied with an aim of internal
management of companies
This accounting is applied for
assessing monetary performance and
for publishing reports for external
stakeholders.
Information Under it, quantitative and qualitative
information is included.
While in this only monetary
information is included.
Essential This is not compulsory to apply in
organizational context.
It is essential for those companies
which are listed to prepare financial
statements.

P2. Different methods of MA reports.
MA reports- The term MA reports can be defined as those documents which contains key
information related to each and every monetary and anti monetary aspects. In the context of
above Alpha limited company, they are preparing different types of reports that are mentioned
such as:
 Inventory reports- It is a report that consists key information related to opening and
closing balance of various forms of stock including raw material, finished goods and
many more. Under it, all types of information is included as accordance of evaluating
quantity of stock under LIFO, FIFO and weighted average method. In the above Alpha
limited company, they are using this report with an aim of keep in touch about how much
quantity of material they have in the end of a particular day.
 Performance report- It is a report that includes key information related to performance of
each and every aspect in a detailed manner (Hirsch, Seubert and Sohn, 2015). It is being
used by managers of companies in order to take critical decision about progress of
employees. In the absence of this report, the actual performance of employees can be
hide. Apart from the information related to performance of employees, it includes other
information such as performance of different performed operations and activities etc. In
Alpha limited company, they are preparing this report in order to assure sustainable
growth of various aspects.
 Budget report- Under it, information about project output and actual output is included.
By help of this report, finance department becomes able to assess the variance between
actual and estimated output. In the context of above Alpha limited company, they
produce this report in order to track variances and for keeping an extra sheet of eye on
overall performance.
 Accounts receivable ageing report –It is a report which includes detailed information
about total debt amount that is required to be collect in upcoming time period. As
accordance of it, finance manager make further plans regards to need of fund to complete
different operations and activities. One of the key feature of this report is that under it,
information is recorded in a systematic manner so that managers can track easily about
debt amount. In regards to above Alpha limited company, they are using this report for
focusing on those customers whose amount is not received yet.

M1. Benefits of MAS.
Herein, below key role of MAS for businesses is mentioned that is as follows:
 Benefit of cost accounting system- In accordance of above description, this accounting
system is linked to process of controlling and minimising cost of different operations. In
Alpha limited company, they get benefit from this by managing overall expenses and
costs.
 Benefit of inventory management system- It is helpful for sales and production
department of companies in order to track consumption of goods and for calculating
opening & closing balance (Chandar, Collier and Miranti, 2012). Such as in Alpha
limited company, they get benefit from this by keeping cost of storage low.
 Benefit of price optimisation system- It is linked with sales department of companies and
for setting prices of products at an effective level. In the Alpha limited company, they
revise their pricing strategies in accordance of market situation.
 Benefit of job costing system- This is based on computing cost of various activities
separately. In the Alpha limited company, they are getting benefited from this accounting
system by tracking cost of job effectively.
D1. Integration of MAS and MA reports with business process.
It may become difficult for companies to operate different operations and activities
effectively if they fail to integrate their departments with accounting systems (Horton and de
Araujo Wanderley, 2018). Like in the Alpha limited company, their sales department is
integrated with price optimisation system and stock management system. In addition, their
production department utilise important information from stock management report and their
finance department also assess key information from account receivable ageing report.

TASK 2
P3. Preparation of income statement by help of absorption and marginal costing.
Marginal costing – This is a costing technique that is related to process of assigning cost in a
different manner (Fiondella, Maffei and Spanò, 2016). Under it, fixed cost is considered as cost
of period while variable cost is assigned as cost of product.
Absorption costing- Under it, both fixed and variable costs are taken in a similar manner. This
technique absorbs total cost whether it is fixed cost or non fixed cost.
Problem 1.
Income statement under absorption and marginal costing:
Absorption Costing Statement calculator
Unit Selling Price 8
Unit Cost (FC+VC) 5
Fixed Manufac Expenses 150
Non Manufacturing Exp 50
Budgeted Activity 75
Period 04/19 05/19 06/19 07/19 08/19 09/19
[£'000] [£'000]
[£'000
]
[£'000
]
[£'000
]
[£'000
]
Sales 75 60 90 75 70 80
Production 75 75 75 75 85 70
Opening inventory
Closing inventory 0 0 15 0 0 15
0 15 0 0 15 5
Period 04/19 05/19 06/19 07/19 08/19 09/19
[£'000] [£'000] [£'000 [£'000 [£'000 [£'000

] ] ] ]
Sales 600 480 720 600 560 640
Opening inventory 0 0 75 0 0 75
Add: Variable Cost[Prod.] 375 375 375 375 425 350
Less: Closing Inventory 0 75 0 0 75 25
Marginal Cost of Sales 375 300 450 375 350 400
Gross Profit 225 180 270 225 210 240
Adjustment for Overheads 0 0 0 0 -20 10
Less:Non Manufac Cost 50 50 50 50 50 50
Net Profits 175 130 220 175 180 180
Marginal costing:
Marginal Costing Statement calculator
Unit Selling Price 8
Unit Variable Cost 3
Fixed Manufac Expenses 150
Non Manufacturing Exp 50
Budgeted Activity 75
Period 04/19 05/19 06/19 07/19 08/19 09/19
[£'000] [£'000]
[£'000
]
[£'000
]
[£'000
]
[£'000
]
Sales 75 60 90 75 70 80
Production 75 75 75 75 85 70
Opening inventory
Closing inventory 0 0 15 0 0 15

0 15 0 0 15 5
Period 04/19 05/19 06/19 07/19 08/19 09/19
[£'000] [£'000]
[£'000
]
[£'000
]
[£'000
]
[£'000
]
Sales 600 480 720 600 560 640
Opening inventory 0 0 45 0 0 45
Add: Variable Cost[Prodn.] 225 225 225 225 255 210
Less: Closing Inventory 0 45 0 0 45 15
Marginal Cost of Sales 225 180 270 225 210 240
Contribution Margin 375 300 450 375 350 400
Less: Fixed Manufac Cost 150 150 150 150 150 150
Less:Non Manufac Cost 50 50 50 50 50 50
Net Profits 175 100 250 175 150 200
Reconciliation statements:
Period 04/19 05/19 06/19 07/19 08/19 09/19
[£'000 ]
[£'000
]
[£'00
0 ]
[£'00
0 ]
[£'000
] [£'000 ]
Sales 75 60 90 75 70 80
Production 75 75 75 75 75 75
Opening inventory 0 0 15 0 0 15
Closing inventory 0 15 0 0 15 5

Period 04/19 05/19 06/19 07/19 08/19 09/19
[£'000 ]
[£'000
]
[£'00
0 ]
[£'00
0 ]
[£'000
] [£'000 ]
Net Profits under Absorption Costing 175 130 220 175 180 180
ADD : Fixed Overheads in opening 0 0 30 0 0 30
LESS: Fixed Overheads in closing 0 30 0 0 30 10
Net Profits under Marginal Costing 175 100 250 175 150 200
Problem 2a
1. Calculation of followings:
(A) BEP in units and revenues-
BEP (in units)= Fixed cost / contribution per unit
= 180000/ 12
= 15000 units
BEP (in revenues)= Fixed cost/ PV ratio
= 180000/ 30*100
= £600000
Working Note:
Contribution per unit- Selling price per unit- variable cost per unit
= 40-28
= 12

PV ratio= Contribution/ sales per unit*100
= 12/40*100
= 30%
(B) Contribution margin ratio
= 12/40*100
= 30%
2b If machine is installed:
After installation of the new machine
Contribution Margin Per Unit = 40-14 = 26 Per unit
Break even point in units =
(180000+236000)/
26
Ans. 16000
Break even point in Pounds = 40x16000
Ans. 640000
P/V Ratio = (Contribution Margin per unit/ Sales Price per
unit)*100 65
BEP from P/V Ratio 640000

2 c
Scenario 1. Machine is not installed:
Without installation
Sales £5,40,000.00
(-) variable cost -£3,78,000.00
Contribution £1,62,000.00
(-) Fixed cost -£1,80,000.00
BEP -£18,000.00
Current
Sales £6,00,000.00
(-) variable cost -£4,20,000.00
Contribution £1,80,000.00
(-) Fixed cost -£1,80,000.00
BEP £0.00
Scenario 2. If machine is installed:
After installation
Sales £8,00,000.00
(-) variable cost -£2,80,000.00
Contribution £5,20,000.00
(-) Fixed cost -£4,16,000.00
Profit £1,04,000.00

Installed
Sales £6,40,000.00
(-) variable cost -£2,24,000.00
Contribution £4,16,000.00
(-) Fixed cost -£4,16,000.00
BEP £0.00
2d. Should company install machine?
As accordance of above calculation, this can be guided to above company that they
should install the machine because it is beneficial for them. In the case when they do not install
machine then there is loss of -£18,000.
M2 Accounting techniques to produce financial statements.
In the businesses, accountants use different types of techniques and methods for
preparing financial statements (Teittinen and Järvenpää, 2013). Like in above task, income
statements are produced in accordance of two costing techniques which are absorption and
marginal costing. Apart from the above techniques, there are some other techniques also which
are used by accountants to prepare financial statements like standard costing, activity based
costing etc.
D2. Interpretation of produced financial statements.
In accordance of above prepared income statements, this may be find out that the amount
of net profit is variant in both costing techniques. Such as in the absorption costing the value of
net profit is of for month of 175000, 130000, 220000, 175000, 140000 and 200000 for month of
April, May, June, July, August and September. While in marginal costing this is of 175000,
100000, 250000, 175000, 150000 and 200000. The difference in total value of profit is because
of consideration of cost in a different way.

TASK 3
P4. Advantages and disadvantages of different planning tools of budgetary control.
Budgetary control – This is a technique which is related to process of determining financial and
non financial objectives by different kinds of budgets. The key objective of this approach is to
track and manage overall performance of different aspects in an effective manner.
Zero Base Budgeting - In a financial year, this budget is planned by the company that
does not include past data that helps to run a successful business. This budget begins at zero,
which implies that it does not have a core year, that enables to understand the earnings of the
current year. Alpha Limited 's manager can arrange a zero base budget by preserving the expense
to know the actual year's profits or costs.
Benefits- This budget allows Alpha Ltd to better distribute the budget and assets that will keep
the profits running. It is flexible and can be changed over the course of the year. By preparing
this spending plan, that also provides better coordination with the department, specific
information can be obtained.
Drawbacks- Large manpower attrition or number of staff is needed to plan this budget. It is high
time for an optimistic budget because the preparation of this plan is becoming difficult for the
company. Here is an inexperience that Alpha Limited 's director can find it hard to plan zero
budget.
Master budget -It is one of the centralized planning that is designed for all the
company's divisions (Prencipe and Dekker, 2014). It is a one-year strategy report which is used
as a development tool to define specific targets and organize resources to meet them. In Alpha
limited company, they prepare this budget for managing overall number of operations.
Benefits - The goals and priorities of the organizations are identified via the master budget
summary. It enables to provide information about a business organization's income and
expenses.
Drawback - This budget is compelled for the organization as a whole no department-specific
information is available. Because of it, performance of different types of departments can not be
tracked in an effective manner.

Cash budget - An projection of cash flows over a specific time period is a money
budget. Cash budget enables an organization recognise adequate cash accessibility to meet
current needs. If cash preparation for company is effective, all sources will be used efficiently to
meet cash requirement. Such as above Alpha limited company, they are preparing this budget in
order to make proper estimation of cash for upcoming time period.
Benefits- This budget is useful for companies in order to track the need of cash during a
particular time period.
Drawback- Apart from the above mentioned benefits, this budget has some limitations such as it
restricts spending limit of companies.
SWOT analysis of budgets:
Strength-
ZBB- Its strength is accuracy and accountability in financial projection.
Master budget- This budget can keep focus on overall aspects of businesses.
Cash budget- It is too crucial for better management of in and out flow of cash.
Weakness-
ZBB- Higher consumption of cost and time is the key weakness of this budget.
Master budget- Lack of specificity is the main weakness of this budget.
Cash budget- Inaccuracy is the main issue of this budget.
Opportunity-
Opportunity of all three types of budgets is the implementation of new and advanced techniques
so that usefulness may increase.
Threat-
The main threat for above mentioned budgets is the inaccuracy regards to making projection of
financial activities.

M3 Different planning tools for preparing budgets.
The term is a projection of monetary aspects for a particular time period. In this context
different planning tools play a key role in order to make an effective estimation of further time
period's income and expenditures (Serena Chiucchi, 2013). There are various kinds of planning
tools like capital budgeting, flexible budgeting and many more. For example in Alpha limited
company, their accountants are using multiple planning tools named as cash budgeting, zero
based budgeting etc. All these tools are benefiting them to forecasting futuristic budgets. It
becomes possible because under these planning tools a detailed information regards to possible
activities which occur in upcoming time frame.
TASK 4
P5. Role of management accounting in solving financial issues.
Monetary issue- In the aspect of business entities, there are different number of issues which
hamper their profitability and progress (Leotta, Rizza and Ruggeri, 2017). Basically, it is
essential to them to sort out monetary issue in less time period so that loss of funds can be
prevent. In simple term, the financial issues arise in companies because of ineffective
management of monetary resources. As a result, it becomes difficult for companies to satisfy
need of funds to accomplish goals.
 Decreasing in efficiency of generating revenue- It is a type of financial issue that is
occurs in companies because of decreasing in value of total sales revenues. Due to this
financial issue, it becomes difficult for companies to manage overall funds in order to
make payment of various expenses. Like in the context of above Tesco plc they face this
financial issue because their total sales revenues has been decreased in a significant
manner.
 Increasing in total expenditures- This can be defined as an issue which is faced by
companies because of ineffective control over total number of expenses (Schaltegger,
Viere and Zvezdov, 2012). It mainly impacts to business entities' profitability and
progress in a negative manner. In the Sainsburry's plc they face issue of higher
operational cost.
Methods to identify financial issues:

 Key performance indicator – This is an approach in that those aspects whose performance
is below standard or higher then standard are focused. Due to this, it becomes easier to
managers to find out actual level of deficit. Under it both financial and non financial
indicators are included. Such as the financial key financial indicator consists information
regards to cost, revenues etc. While non financial indicators include information about
employees relation, suppliers relationship and customers perception. All these
information help to companies to keep focus on monetary issues in an effective manner.
In the context of above Tesco plc, this system is being used in order to find out actual
level of issue.
 Benchmarking – This is an approach in which two business entities are compared with
each other in terms of financial aspects (Novas, 2017). The objective of making
comparison is to find out those aspects in which company's performance is weaker and
needed to improve. Like in the Sainsburry's plc they apply this approach for finding
actual financial issue. As accordance of it, they find alternatives to sort issues.
Financial governance – This is a type of technique which is related to focusing on recording
financial transaction in a systematic manner. The objective of this technique is to keep focus on
those aspects which are causing as monetary issue in companies. In the aspect of solving
monetary issues, it contributes in an effective manner because by help of this companies can
track financial deficiencies. According to this, they can become able to overcome issues.
Comparison of companies:
Basis Tesco plc Sainsburry plc
Financial issue The company is facing issue of
decreasing in efficiency of
generating sales revenues. As a
result, they are getting the problem
of having lack of funds in order to
complete different operations and
activities.
Their monetary issue is of increasing
total expenditures. As a result they do
not have sufficient amount of funds to
fulfil working capital requirement. In
addition, their efficiency of making
payment to external parties is also
decreasing in a significant manner.
MAS This company is applying price Their managers have implemented

optimisation system with an aim of
sorting their financial issue. They
have revised their pricing strategies
as accordance of different customer
segments. As a result more number
of customers made purchase after
changing the price by help of this
accounting system. Hence, the issue
of lower sales resolved as after
increasing total sales revenue.
cost accounting system in order to
keep cost of operations lower. Due to
this, total number of expenditures
have been reduced in an effective
manner. It became possible because
this accounting system track
expenditures on a regular basis. Thus,
implementation of this accounting
helped them in solving financial issue
of higher volume of expenditures.
M4. Role of MAS in order to sort monetary issues.
In this competitive environment companies who resolve their financial issue in less time
period are gaining higher revenue. In this aspect role of accounting systems is too crucial. It is so
because by implementing these systems the managers are companies become able in order to
allocate funds in an effective manner (Kober, Subraamanniam and Watson, 2012). As well as
these accounting systems guide to companies regards to finding actual level of issue and
alternatives to sort the problem in less time & cost. In Alpha limited company, they are applying
different accounting systems like cost accounting system, price optimisation system, job costing
system and many more. By help of these accounting system their various departments are
integrated with each other. In addition, above stated stores like Tesco plc and Sainsburry plc are
applying cost and price optimisation system that helped them in sorting monetary issues in an
effective manner.
D3. Planning tools to solve financial problems.
In the above part of report various types of planning tools are mentioned which can
contribute in a better way to solve financial issue. It becomes possible because different types of
planning tools consists detailed information regards to estimation of further time period's income
and expenditures. As well as these planning tools provide a framework to business entities in
order to identify monetary issues and implementing effective alternatives in order to overcome

from financial issues (Hoque, Gooneratne, 2013). Like in above Alpha limited company, this
can be find out that they are using various types of planning tools such as cash budgeting, zero
based budgeting and many more which may help in sorting financial issues.
CONCLUSION
As accordance of report this can be concluded that role of MA can not be ignored by
companies in current time period. The report concludes about multiple accounting systems such
as cost accounting system, stock management system etc. along with their role in business
entities. In addition, integration of MA reports with business process is also mentioned in report.
Further, part of report concludes about various calculations are done such as income statement,
break even analysis etc. As well as different planning tools are also covered in report for instance
cash budget, zero based budget are concluded. In end part of report, comparison is done in order
to understand role of MAS to solve monetary issues.

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