Management Accounting and its Essential Requirement in Organisation

This document provides an overview of management accounting and its essential requirement in organisations. It discusses different methods used in management accounting reports and explains how to calculate costs using appropriate cost analysis. It also explores the advantages and disadvantages of planning tools in budgetary control.

Unit 5 – Management
Accounting

Table of Contents
Table of Contents.............................................................................................................................1
INTRODUCTION...........................................................................................................................2
Task 1...............................................................................................................................................2
P1 Management accounting and its essential requirement in organisation.................................2
P2 Different methods that uses in management accounting report.............................................3
M1 Benefits of management accounting system and their application.......................................4
Task 2...............................................................................................................................................5
P3 Calculation of cost by using appropriate cost analysis...........................................................5
M2 Techniques of management accounting for preparing financial accounting reports..........11
Task 3.............................................................................................................................................12
P4 Advantages and disadvantages of different planning tools uses in budgetary control.........12
M3 Application of planning tools by preparing budgets and forecast.......................................13
Task 4.............................................................................................................................................14
P5 How organisations are adopting management accounting system to respond the financial
problems....................................................................................................................................14
M4. Responding of financial problems leads to sustain success through managerial book-
keeping.......................................................................................................................................16
CONCLUSION..............................................................................................................................16
REFERENCE................................................................................................................................17
1

INTRODUCTION
A business can be operated by person who has knowledge about accounting principles and
practices by maintaining good performance. To run a business accounting concept and principles
are used by accountants who make right business decision. Management accounting is the study
of financial information by involving and preparing income statement, trial balance and balance
sheet that states how much an organisation is earning profits. In other words, financial
accounting is the presentation and recording of information for the betterment of organisation
and shareholders by increasing profits (Aini, Alwiyah and Putri, 2019) . To understand about this
Creams Ltd has been chosen that is an active company situated in Greater London. This
organisation offers different types of desserts and drinks as per customers demand. The present
report cover understand about type of management accounting system, report and management
accounting tools which are used to maintain a business appropriately. Furthermore, this report
covers system of managerial accounting that respond towards financial problems.
Task 1
P1 Management accounting and its essential requirement in organisation
Management accounting – This is the application of knowledge and skills which is
required to prepare the financial information and maintaining business activities properly. To run
a business and making right business decision management accounting is playing an important
role as it helps to understand the needs of organisation and fill the requirement by filling all
needs. Every organisation is required to focus on management accounting and its application that
can helps to manage a business and control the business activities. In other words, management
accounting is important for management that consider planning, organising, directing and
controlling the business activities for improving organisational performance. Cream Ltd is small
size organisation that is operating business by managing proper accounting system that are as
followed:
Cost accounting system – This is a system that covers all information about cost of
products and services which are going to provide by company. A cost accounting system is uses
to keep record of production activities that helps to maintain the good functions. For all
companies it is important that to use cost accounting system that can help to know the cost and
maintaining the activities effectively. Cream Ltd is using cost accounting system to track the cost
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which have incurred in organisation and go through the production stage. This is essential
required in Cream Ltd to managing the cost and running a business by organising activities
effectively (Mahajan and Deobagkar, 2020).
Inventory management system – The system of management accounting is related to
inventory management where raw material and finished goods are managed properly. This
system mainly used to track the inventory level and placing order accordingly. In organisation
inventory management is important that helps to continue business and attracting customers by
offering variety of products. This has essential requirement in Cream Ltd to track inventory
which they are dealing and store them appropriately so a business can be maintain effectively
(Hilorme and et. al., 2019).
Price optimisation system – Such system is important for business firms to optimise the
organisational effectiveness by setting the prices of their products and services. This is consider
as mathematical software that determine the fluctuation of demand in prices of products. With
the help of price optimisation system managers of Cream Ltd are setting the prices of their
product in which they are dealing that helps to improve the organisational effectiveness. It is
essential for managers to use price optimisation system for dealing or setting the prices of their
products so customers can attracted and encourage to buy the products.
P2 Different methods that uses in management accounting report
Accounting reports are the document of business which is prepared by management in
order to run business and maintaining proper records. If a person is going to run a business
whether small and large it should prepare management accounting reports that contains all
records and information to run a business and increase the organisational profitability.
Managerial accounting reports – Reports are the written document which is prepared by
managers in order to run business by managing planning, organise activities and maintaining
good performance. This mainly used to inform the managers about organisation situation and
profitability that helps to run a business and increase performance. Cream Ltd, is a company that
is preparing different types of management accounting reports that are as defined:
Inventory management report – A report which contains all records about raw material
ordering, storing and other goods that are used to increase the organisational performance is
considered as inventory management report. This states the ability and capacity of organisation
to use the raw material and convert it finished good so customers get attracted in high number
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and maintain the good productivity. This report mainly used to tracking the inventory and
placing the order in case of unavailability. In Cream Ltd. Inventory report is prepared by
management who helps to keep record of good and services and influence customers effectively.
Cost accounting report – This is costing report which is prepared by managers in order
to maintain the proper re cords of cost and increasing the organisational productivity. This is
important for organisation to pre[are the cost accounting report so all expenses can be analysed
in certain period of time that helps to maintain the good performance. . In Cream Ltd, manager
are preparing cost accounting report in order to get accurate cost and profitability of business by
focusing on overall cost. This helps to examine the cost structure of their business by collecting
information in relation to cost (Spanicciati, 2019).
Account receivable report – As all knows a business depends on credits which help to
continue and maintain the organisation effectively. This provide a detailed discussion to
organisation which helps to maintain the good performance. Organisation should follow the rules
and regulation that can help to get information about credits. This tool is used to know the collect
the unpaid amount which is given by a organisation to others. Thus helps to keep proper data of
unpaid customers and maintain organisational performance. Cream Ltd, is selling its products
and services to its regular customers and other by using this report that provide a proper records
of customers who are in charge of payment. According to this report credit should be given to
people on the basis of 30 days, 60 days and 90 days which can help to make payment on certain
period of time.
Budgetary reports – This is another report which should be prepared by organisation in
order to maintain and control the budgets properly and increase the organisational effectiveness.
It helps to compare the actual budgets with budgeted budgets for the purpose of maintaining the
high profitability. Herein, accountant is playing an important role who states duty and
responsibility of managers to forecast the budgets and profits that has incurred in organisation. In
cream Ltd, budgetary report is prepared by managers by making plans and competing with other
business which has impacted on business. It has suggested to managers to make budgetary
reports so organisational performance and profitability can be maintain effectively by comparing
with others (Urkayev, and et. al.,. 2019).
M1 Benefits of management accounting system and their application
The benefits of management accounting system are as defined by applying appropriately:
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Accounting system Benefits and application within Cream Lts.
Inventory management system This method is useful in keeping and handling inventory
data properly. With the aid of this device, Cream Ltd will
reduce waste and increase output. In fact, using this method,
the client can put next order raw material that allows to
maintain the enterprise in the longterm. (DRURY, 2013).
Cost accounting system This is helpful for reducing corporate expenses and
minimizing overproduction within Cream Ltd. Managers
can estimate the cost of all expenses and decide on the cost
of all materials, along with expenses (Covaleski, 2019).
Price optimisation system It is important to assess the quality of goods and services.
Cream Ltd will gain benefit by implementing this program
in such a manner as to fix the quality of manufactured
goods that will help to improve efficiency and profitability.
Entity should therefore use this system to set realistic prices
for goods and to gain a profit margin.
Job order costing system This system gives Cream Ltd the advantage of assigning
work to staff members and managing work according to
objectives. The administrator of Cream Ltd divides the roles
and responsibilities of the organization and increases
productivity.
In context to Cream Ltd managers are applying management accounting system in order to
improve the organisational productivity. For instance by using inventory system it can get proper
track record of inventory and place order to bring raw material. The management are taking
benefits of set the cost of products which they manufactured and attracts customers. Moreover,
by using price optimisation system management of Cream Ltd can set the prices of their products
appropriately and maintain the good performance.
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Task 2
P3 Calculation of cost by using appropriate cost analysis
Marginal costing – This is costing method that uses to maintain the profits by focusing
on material cost, fixed cost and labour cost. By using this method organisation can evaluate their
profit level.
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Absorption costing – This is costing method which is used by organisation to get the
profits by absorbing all cost and expenses which have incurred in organisation. This helps to
provide the accurate profits and cost by focusing on income and expenses.
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Calculation of variances:
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M2 Techniques of management accounting for preparing financial accounting reports
From the above discussion it has defined that organisation should use different management
accounting techniques that can help to prepare the financial reports and get the profitability. This
is important for organisation to keep proper records of their income and expenses so they prepare
a financial statement such as income statement and cash flows that ststes how much profits are
getting by organisation. This also tell which method best to use to get the higher profits.
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Task 3
P4 Advantages and disadvantages of different planning tools uses in budgetary control
Planning tools are those tools which are used to run a business and maintain the expenses
properly so a business can be run optimally and improve their organisational performance. These
tools are used to setting the objects in organisation and making plans further so goals can be
attained effectively.
Budgetary control – This is the process of preparing budget for future period so business
activities and functions can be operate effectively. Budgets are prepared in the basis of past data
and experience that helps to run a business and control the activities efficiently. In this, budgeted
performance are compared to actual performance which control the budget and improve
organisational effectiveness. Cream Ltd is using different types of planning tools that are as
defined:
Master Budget – It is consider as main budget which is prepared by management in
order to run business and get higher productivity by managing income and expenses. This
involves all small budgets and statement which consider financial statement, plans and budgets
to support the organisation and increase the organisational productivity (Petera and Šoljaková,
2020).
Advantages – Master budget helps to identify the problems and make plan ahead that
helps to run a business effectively. This helps to execute the business plan which helps to
maintain the good performance and increase profitability. Such budget are available in one report
and gives overall estimated profits. Cream Ltd is operating business by making master budget
which helps to maintain the good performance (Ferati, 2019).
Disadvantages – For organisations it become difficult to prepare the master budget
because there this consist all small budgets which are important that can create challenge for
organisation to make profits. In Cream Ltd. Managers are facing low profitability due to low
revenues and high expenses to keep the proper records.
Cash budget – This is a type of budget that involves estimation of cash inflow and
outflow of a business for preparing a cash budget. This budget is prepared to assess the financial
information and checking the availability of cash in organisation. Organisation should prepare
cash budget by considering all cash income and expenses that are important for organisation and
helps to generate the profits. Only cash transactions are involved in cash budget which helps to
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maintain the good performance. Cream Ltd is London based organisation in which accounting
manager prepare cash budget by considering all cash items and transactions that helps to improve
the organisational performance (Amran, 2020).
Advantages – Cash budget is prepared by avoiding the debt and other loans that helps to
prepare a business continuously and maintain the good performance. Cream Ltd is beneficiaries
that is preparing cash budget for avoiding the debts and stay in touch with reality. The manager
of such organisation are able to communicate their financial position and maintaining high
profits by keeping right calculation. This also helps to utilise the cash and minimising the cost or
expenses effectively (Islam and Managi, 2019).
Disadvantages – This does not show actual profits by focusing on activities and
considering cash related activities. Cream Ltd. Is facing the problems to maintain and prepare a
cash budget because it only focuses on cash related items. To prepare cash budget there is
required to full concentration on accounting rules and regulation which is difficult for small
organisation because manage their activities by themselves.
Activity based budget – This is a budgeting method in which budgets are prepared by
management by analysing the activity of their employees and it cover overhead cost . In Cream
Ltd, roles and responsibilities of employees are distributed after analysing their activity that
helps to perform well and encourages employees to work more.
Advantages – This helps to evaluate the each and every cost driver in Cream Ltd that helps
to perform well. This helps to save the cost in the production of goods and services. Moreover,
competitive advantages can be get by management by using activity based costing.
Disadvantages – It has drawback such as require of high level of knowledge which is
difficult for organisation. This is complex in nature which is require research and analysis of
various factors.
Zero based budget – This means a budget which does not involves any past information
to prepare a budget. This budget mainly used in small and newly established business where no
information are involved in preparing the budgets. In other words, this is a method where all
expenses for new period are calculated on the basis of actual incurred expenses.
Advantages – In Cream Ltd, management are getting actual and accurate information that
helps to maintain the good performance. This helps to allocate the resources efficiently as it does
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not involves ant historical information. With the help of this, communication and coordination
within department can be maintained properly.
Disadvantages – This is time intensive exercise for a company take to much time to
prepared budgets. To prepare zero base budget management have lack of expertise and
knowledge that can give negative outcomes.
M3 Application of planning tools by preparing budgets and forecast
In business environment different types of planning tools are used by organisation that
are important to maintain the good performance and reducing the cost. The aim behind using
planning tools is to control the excessive budget which are arising in organisation and maintain
the good performance. The manager of Cream Ltd are preparing cash budget, operating budget
and master budget that helps to consider all revenues and expenses in order to reduce the
organisational productivity. Such planning tools are uses to forecast and maintaining
performance such as:
Total quality management – Planning tools are used by management for the purpose of
utilising available capital and resources that helps to manage the organisational performance. By
using planning tool Cream Ltd can manage quality of business that helps to maintain the good
performance (Chidimma and EBERE, 2019).
Achieving goals and objectives – Planning tools are those activities which helps to control
the budgets and maintain high performance in their organisation so a business can be maintain
effectively and complete the goals and objectives effectively.
Task 4
P5 How organisations are adopting management accounting system to respond the financial
problems
Financial problem – This means problems which is related to money and capital in an
organisation while running business. To run a business there is require high amount of capital
and resources that can help to run and increase organisational productivity. In other words,
financial problem is consider as financial pressure that is a situation where money related issues
creates a stress that need to be overcome so organisational productivity and profitability can be
maintain. Such problems arises due to various factor such as changes in business cycle, change
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in customer preference, financial pressure and external forces that arises in organisation and
affected a business negatively.
Lack of cash flow – This is one of the issue of financial problems which states that
financial problems can be arises in case of not matching cash flow. There is gap between
activities that reduces organisational productivity. A business organisation should maintain
proper records of all investing operating and financial activities so business can be perform in
good ways. Cream Ltd is preparing cash flow where it faces money related problems due to
having gaps between activities that is creating problems that influences organisational
profitability (Suranatthakul and et. al., 2020).
Unnecessary expenditures – Some organisation are facing financial problems dues to
spending money on unnecessary items and commitments that reduces organisational
productivity. This is important for organisation make investment from where they can get return
for which they have investment. If they are investing amount on unnecessary items then it many
create challenges for organisation to run their business and organise activities effectively. Cream
Ltd may also face this challenges due to spending more on oversized office, cell phones,
decorating waiting rooms and other bunch of unnecessary splurging that has impacted on
business negatively (Putra, 2019).
To solve the financial problems appropriately different approaches are used by management
that are as:
Benchmarking: An accounting approach that help organizations measure financial
performance by comparing them with other companies that are labelled the best in the economy
as a whole. It lets executives find a variety of possibilities for further development. By applying
a benchmarking strategy, the top-level officials of Cream Ltd equate their schedules, activities
and tactics with another company carrying out similar transactions in order to solve the financial
problems of late payment by customers (Yu, M., Huang and Li, 2019).
Key Performance Indicators: An method that allows to set limits in order to calculate
components. It is known to be a constructive factor that assists in encouraging financial areas to
solve problems. Organizations are using such method to measure achievement in achieving goals
when evaluating results against core criteria. High KPI focuses on total results of Cream ltd
while low KPI focuses on administrative results that impacted badly. The manager of such
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organisation evaluate their financial and non financial performance which helps to make right
decisions.
Financial governance: An ethical protection that focuses on identifying,
gathering, tracking and managing the company's core financial records that helps to remove the
finance related problems. Cream Ltd is following financial governance for the purpose of solving
their money related problems. It plays a major role in the management of financial processes,
records and company papers. It allows administrators to apply accounting rules efficiently. Using
this method, companies address business challenges and document transactions (Warrad, 2019).
Basis Cream Ltd. The Furniture Practice
Financial Such company is facing the
financial problems due to
increasing spending and
unnecessary expanses such as
promotional activities, office size,
structure, design etc. that all are
irrelevant which are increasing cost.
Furniture Practices is furniture design
company that helps in interiors and
designing of furniture to provide a
luxury look. It is affected negatively
due to increasing credit and lack of
cash flow which are creating debts.
Identification of
problem
KPI is a tool which is used by
management of Cream Ltd to
identify the problems.
Benchmarking is the tool that uses to
identify the problems by comparing
with others.
Application of
system
For solving the problems
management need to use cost
accounting system that helps to
maintain the proper record of cost
and financial activities and take
right action.
For solving the financial problem
Finance Practice Ltd should use
inventory and price optimisation
system that can help to set the prices
and goods appropriately helps to
maintain the good performance.
M4. Responding of financial problems leads to sustain success through managerial book-keeping
Management accounting offers the requisite details or knowledge to top-level administrators
in order to address challenges that serve as barriers to progress. It requires successful accounting
frameworks and approaches embraced by all companies to overcome obstacles. One of the most
powerful frameworks is financial governance, which helps to find loop holes and to devise
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strategies to resolve these holes. At around the same time, Cream Ltd and Furniture Practice
Ltd use bench marking methods as well as primary performance measures to set goals and
address challenges with a view to leading to sustainable growth.
CONCLUSION
The above study states that managing accounting is a systematic method for handling
internal company processes, operations, knowledge and records. Management accounting
involves processes, along with studies, in which accurate information is reported that is valuable
to the organization. Any of the accounting methods include the cost accounting system, the
expense system, the cost accounting system, etc. In fact, the manager, cash and operational
budget are the preparation resources for top-level fiscal management operations. Broad
application of management accounting approaches, such as corporate accountability,
benchmarking and primary performance metrics, is used to resolve corporate problems in a way
that tends to contribute to sustained results.
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