Management Accounting and its Importance in Decision Making

This article discusses the importance of management accounting in decision making and strategic planning. It explores different management accounting systems and reports used by Excite Entertainment Ltd, a company in the leisure and entertainment industry in the UK.

Management Accounting

INTRODUCTION
Management accounting is a profession that includes in management decision making,
strategic planning and performance management and provides expertise in formulation and
implementation of an organization's strategy. It is a part of accounting which presents financial
information in front of top management (Mitter and Hiebl, 2017). On the basis of management
information, managers take effective decisions for better planning and control. Management
accounting different from cost accounting and financial accounting. In the cost accounting focus
on cost centres and cost unit and financial accounting present information to outsider of people.
Management accounting present information to internal management to present actual picture of
company.
For the better understanding of the concepts, this project report choose the Excite
Entertainment Ltd which operates in leisure and entertainment industry in the UK. The presented
report focus on several kind of management accounting system and accounting reports.
Formulation of income statement with the help of absorption costing and marginal costing
methods defined with appropriate format. Along with, different planning tools for budgetary
control are also utilised and applied in effective manner. At last, different types of management
tool used to identify financial problem and management accounting system implemented to
resolve the financial problems.
MAIN BODY
TASK 1
P1 Management accounting and their requirement
Management accounting is a continuous procedure of preparing and presenting financial
and non-financial information to the board of directors. After analysing the reports and accounts
managers take effective decision and planning for further investment.
Management accounting system – It is an internal part of an organisation which is
prepared by the manager to measuring and determining the procedure of management. It deals
with the insider people such as employees, board of directors and many others (Brierley and
Gwilliam, 2017). These systems are developed by management accountant and applied in each
section to collect financial information.
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Cost accounting system – It is defined as an accounting method that is applied by the
Excite Entertainment Company to determine the amount of total cost of production. There is
analysing input cost of manufacturing process at each level. This system includes a set of forms,
processes, controls and reports that are developed to collective and report to management
regarding to revenues, costs and profitability. There are determining the cost of design of clothes.
In this manner, the accountant of the company firstly evaluated and record cost on individually
basis. After the comparison of input aspects determine the financial performance. It will help to
an enterprise to get information regarding the contribution of the clothes in profit generation of
business (Golyagina and Valuckas, 2016).
 Direct costs: It include those expenses which are directly related to the operational
activities or increase or decrease in the cost will directly affect the production as well as
profit margin. In Excite Entertainment Ltd, managers face such costs while promoting the
concerts and festivals all around UK. Standard costing: It is the common technique which is used by the most of the
organizations. Excite Entertainment Ltd collect information and identify the factors
which provide the variation between standard and actual cost.
Inventory management system – It is important system which is mainly utilised by the
manufacturing company in order to track the level on stock, selling quantity, purchase order and
delivery place. Through this system collect information of work order, bills of material and other
manufacturing papers. It is applied by Excite Entertainment Company Ltd for manufacturing of
clothes. Through this system they track record of inventory and know that how much quantity
were produced and need to complete order. It covers everything from production to retail and
take better decision for the raw material availability and consumption. There are several types of
method of stock valuation such as LIFO, FIFO and AVCO. At present, EOQ method applied by
the company to determine the actual period of time when they have make re order of raw
material.
Price optimization system – The particular system has been utilised by the accountant of
Excite Entertainment Company limited to determine the behaviour of customer for price of their
products. This system utilised to discover the sales of clothes due to increase and decrease price.
It will help to management for ascertain the value of their products. They will take reviews from
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the customer regarding price structure after that change price structure. It will set in effective
manner to get maximum results in the context of sales revenues (Tan, 2016).
Job Costing system – The particular system utilised by the manufacturing company for
analysis the cost of several production activities and jobs. This system utilise by the accountant
for determine and track the cost and income create by particular job. It will further aid in find out
the price of revenue which is collected through effective performance of the job. It is applied by
the Excite Entertainment Company for increase the cost of particular production or service job. It
is allotted different job numbers to single items of revenues and expenditure. Through this
system get an opportunity to the management to keep track over the expenditure and take
appropriate decision for improve profit margin foe reducing in cost.
Difference between management and financial accounting:
Basis Management accounting Financial accounting
Meaning It provide relevant information to the
managers in order to develop strategies
to maximise production or profitability.
Financial accounting focus on preparing
financial statement which help the
stakeholders to make their decision
regarding future investments.
Objective Objective of management accounting is
to assist the information which required
for planning or further decision making
process. Basically it is used for internal
purpose.
Financial accounting used to provide the
financial information to the outside party
with the help of various statements such
as profit & loss account, balance sheet,
cash flow etc.
P2 Different Methods used for management accounting reporting
Management accounting report – It is a procedure to develop reports and received
information by the management accounting system. These reports are playing important for
every organisation that provides detailed information and helps to analysis the situation of the
company. Excite Entertainment Company Ltd developed different reports which are related to
different departments. It carries out interrelation between the functioning of departments to
achieve the desired result (Yoder and et.al, 2017).
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Budget report – This report developed by the management of Excite Entertainment
Company which predict future activities regarding revenues and expenditure. After the
preparation of the report compare the actual outcome with the estimated targets. The budget
report defined as an internal report that is used by the company for performance management
and determines the problems. It is advantageous for a company because it provides instruction to
execute all the business activities in the allotted budget. Through this report, companies can
analysing the efficiency to meet the project objectives.
Inventory management report – This type of report prepared by a manufacturing
company to track the record of materials at each level. To produce goods, it is required to keep
information of different types of raw material for manufacturing procedures. The report defined
detail information of material and define how much stock require to fulfil the requirement. It is
beneficial for Excite Entertainment Company as it helps to keep a record of material such as a
warehouse, transit and delivered to clients (Feeney and Pierce, 2016).
Cost managerial report – It is a type of management report where consist of all the
information about cost. This report consists of different types of costs like material cost, direct
cost, operational cost, etc. Eventually, this report developed by the manager of Excite
Entertainment Company with the help of a cost accounting system. Cost managerial report
prepares by a company to determine different types of cost for project activities. It is beneficial
for the company because it provides the cost of different things and helps to analysis the actual
cost of project activities.
Explanation of why information presented should be accurate, relevant to the user, reliable
up to date and timely:
The information should be accurate, relevant and reliable and up to date because of
following reasons:
Accurate – Information should be accurate because it further helps the manager in
decision making process or formulating effective strategy.
Relevant- All the accounting information should be relevant to the daily transaction of
the company, if information is not relevant then it will difficult for investors to relay on the
financial information.
Reliable- Accounting information should be reliable to use for all managers because in
the absence of this feature, companies can not take corrective actions.
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Timely – Accounting information should be presented on right time such as annually,
quarterly which help the managers as well as shareholders to make their decisions.
M1 Benefits of management accounting system
Management accounting consist of different accounting system that was applied by
Excite Entertainment Company to analysis the benefits.
 Cost accounting system – The cost accounting system is applied by the company to get
information about the different cost that occurs in different processes. Excite
Entertainment Company required to keep a track record of different costs involved in the
business operation.
 Inventory management report - The particular accounting system useful for Excite
Entertainment because it tracks the record of the movement of raw materials and finished
goods. It provides instruction to the company for proper utilisation of allocated resources
and reduce wastages.
 Price optimization System – This system beneficial for a company to set an effective
price structure as per the requirement. This system helps Excite Entertainment Company
to determine the right price of products as well as services. It will help to collect reviews
of customers regarding their products.
 Job Costing system – This system applied by the company to analyse the cost of different
activities. It is beneficial for the Excite Entertainment Company to perform activities as
per the specification of customers (Van der Stede, 2017).
D1 Critically evaluate that how management accounting system and report linked with the
organisational process
Management accounting system and reports integrated with the organisational process
because the system effectively applied by a manager. Inventory management system applied by
Excite Entertainment Company to track record of material after that inventory management
report record information of material utilisation. It will help to proper allocation of resources
efficiently, as a result, the process of organisation smoothly run. The price optimization system
applied by the company to set price structures to maximize profit and easily conduct operations
of business.
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TASK 2
P3 Calculation of cost using appropriate techniques and formulation of income statement using
marginal and absorption costing
Costing – It is the value which organization have to bear at the time of manufacturing
any product. There various types of cost which included in the business operations, so manager
have to evaluate it and make sure to reduce the cost because it further increase the profit margin.
For presentation of suitably organized data for the purposes of control and guidance of
management (Singhvi and BODHANWALA, 2018).
Marginal costing – It is a accounting system in which variable costs are charged to cost
units and fixed costs of the period of written off in full against the collective part. The main aim
of this method to determine the expenses in which have take place when produce extra units of
products. In Excite Entertainment, company applied this method to calculate cost of their
product.
Absorption Costing – It is defined as costing method that is applied by the manager of
company to determine the cost. It is connected with production activities of specific item. In the
context of Excite Entertainment Company applied this method to assure about the costs which
have taken place at the time of manufacturing. There are absorbing units from the revenues
(Guthrie and Parker, 2016).
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M2 Application of range of management accounting techniques
There are several types of management techniques which is applied by the manager of
Excite Entertainment Company in order to determine the performance of company and the way
in which operations are carried out in suitable way or not. There is mentioned description of
techniques -
Standard costing – The particular method applied by the company in order to analysis
the variation between actual and budget sales. In Excite Entertainment Company find out the
reason of differences between current and standard costs (Pedro-Monzonís and et.al, 2016).
Historical costing – This technique defines that all the assets and liabilities are recoded
on actual amount in the accounting books. The manager of Excite Entertainment Company
record all the components in the financial statements on historical cost.
D2 Interpretation of data
After applying both methods get different result from marginal costing and absorption
costing. From the marginal costing get result of 32000 and as per the calculation of absorption
costing method get result of 40000. The company has been selected absorption costing method
due to get more profit after including fixed and variable cost.
Particulars Amount
Marginal costing method 32000
Absorption costing method 40000
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TASK 3
P4 Evaluate the planning tool along with advantages and disadvantages of it and how it is used
for budgetary control
Budget – It is a written document plan which is developed by every organisation to
analysis the performance of the company in future. Through this plan a manager handle every
business activities in suitable manner. It is beneficial for every company to analysis actual status
and predict upcoming revenues and expenditure in order to meet business objectives and goals.
Budgetary Control – It is a procedure which is applied by the managers to set
performance objectives for the business organisation. With the help of this reduce amount of
unnecessary expenses and proper utilise resources as per the plan. There are properly utilising
monetary resources by Excite Entertainment to increase profitability as well as productivity of
company. It is also defined in most effective way to handle business activities to assure about the
utilisation of resources (Kihn and Näsi, 2017).
Zero based budget – It is an approach to developing a budget from scratch, it means to
prepare this budget cannot take the previous budget as the base. It is developed from Zero and
the starting analysis of each department and collect information. In the context of Excite
Entertainment Company , through this budget justify ever expenses before adding it to the
official budget.
Advantages Disadvantages
Improve performance and operating efficiency
by challenging assumption and examining
expenditures.
To prepare of this budget required qualified
and expertise with specialize training or
prepare budget.
It is reducing traditional budgeting percentage
and provide better chances of make cost
deductions.
It is time consuming and costly method that
may harm for over all culture and also for
brand image.
Master Budget – It is defined as a sum of all budgets which is done by the various
functional sections within a company. Excite Entertainment Company develop a business
strategy for each department. It is a strategic management plan that will prepare by a company
for the future. Each aspect of business operations is charted and documented for future
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forecasting. A master budget is defined as a folder budget where consist of sales budget,
production budget, selling budget, general and administrative expenses budget, etc (Cools,
Stouthuysen and Van den Abbeele, 2017).
Advantages Disadvantages
It works as motivation for the staff members so
they can easily judge the actual performance
with the desired one and know the areas of
improvement.
The master budget difficult to update as per the
changes in the company. To add amount in this
budget required to a lot of steps to change in
the whole budget.
It helps to predict the short term as well as long
term goals of a company and acquire them
with proper transmission of the resources.
The divisional staff is constrained for the
accomplishment of the target despite having
practical problems in acquiring the same.
Capital Budget – The particular budget developed by the manager of Excite
Entertainment to analysis the investment made by the company. An organisation created a capital
budget to analysis the difference between the least and most profitable projects. Through this
project direct top-level executives for further investment and provide the best alternatives which
are available to them by determining all options (Dekker, Ding and Groot, 2016). There are
mentioned advantages and disadvantages as follows:
Advantages Disadvantages
Through this budget identified best alternatives
then invest by manager for generate higher
profits.
It is considering as most expensive method of
budgeting so it cannot afford by every
company.
It provides bird's eye view of the company to
the shareholders in which they can analysis
financial performance of company.
Capital budget is not easy to analysis due to
high level of collective information.
Comparison between master, zero and Capital budget
Master budget Zero base budget Capital Budget
Use of budgeting Master budget is the With the help of zero Capital budgeting
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central planning tool
which used by the
management team in
order to direct the
operational activity of
the company and
evaluate the business
performance as well.
based budgeting,
manager ensure that
how every spending
will generate revenue
for the company. It
further help the
manager to justify
operating expenses
consider that it is
revenue generated
area.
create the
accountability as well
metastability where
business determine
long term economic as
well as financial
profitability for the
specific project.
M3 Critically evaluate the use of planning tools along with its application which help the
organizations to preparing and forecasting budgets
The company utilised several types the planning tools such as operating budget, capital
and zero based budget. All are working efficiently and help to company to achieve success and
developments. Zero based budget used by the company to understand every department activities
and recognise their income and expenses from starting. Capital budget can help to find out best
way of investments. master budget can be formulated by the management associate to ascertain
the each budget then effectively analysis the performance of company (Suprianto and et.al,
2017).
TASK 4
P5 The way in which organisations are using management accounting systems to respond
financial problems
Financial Problem: This type of problem face by the company due to lack of fund and
monetary sources. Due to arise financial problem other functions also influence. It is important
for business to develop effective strategies and take decision to resolve issues. Excite
Entertainment Company deal with some challenges such as improper cash flow management and
spending more than income.
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Different financial problems: Every organisation face difficult time and face different
financial problem. There is mentioned financial problem of Excite Entertainment Company - Improper cash flow management: The manager of the company did not focus on
business activities so create problem of improper cash flow management. Due to
improper management create problem of cash. Due to lack of cash company cannot
conduct business activities properly (Inaam and Khamoussi, 2016). Spending more than income: Many times company does not control expenditure as a
result create financial issues in the company. It become cause of low profitability and
easily does not survive business operations.
Benchmarking: It is a procedure of measuring the performance of an organization's
products and services with their competitor at the market place. Through benchmarking
recognise internal opportunities for improvement. It provides help to get competitive advantages
after analysis of the market and mark suitable changes into business policies and strategies. As a
result, it provides high-quality goods. In Excite Entertainment Company's manager analysis the
policies of other companies then make changes in the strategies as per the situation.
KPI (Key performance indicators): It is defined as a performance measurement tool that
was applied by the company to determine the success and failure of different business activities.
It is divided into two types such as financial and non-financial. Through financial indicator
analysis of financial activities of the company and non-financial indicator analysis of non-
financial activities that impact the operation of a business. In the context of Excite Entertainment
Company apply the KPI tool to identify a financial problem of spending more than income so
there is required to stop unnecessary expenses and follow budget reports.
Manager of Excite Entertainment Company applying financial governance to sort out
financial problem.
Financial governance: It is a set of rules and regulations that are utilised by the company
to respond to the issues. The financial problem has arisen in the company when the company has
not sufficient monetary sources. In Excite Entertainment Company managers identify the
problem with the help of KPI and benchmarking then sort out through financial governance. It is
dealing with the problem of improper cash flow management after record each transaction in the
books. The financial issue of spending more than earning sort out through budget procedure and
cut the number of unnecessary expenses. Due to all the records developed appropriately, that will
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help to develop budgets and face difficult situations effectively (Kumarasiri and Gunasekarage,
2017).
Comparison of Excite limited company and PC clothing limited company:
Excite limited company PC clothing limited company
The organization uses the cost accounting
system to determine material costs and type of
appropriate proposals in order to make
progress of proper management of cash flow.
The company has been applied inventory
management system to reduce problem of lack
of material. Through this method pro[per
arrange stock in company.
To sort out the financial problem of spending
more than income apply cost managerial
system to effectively analysis cost of product
effectively then spend money.
In PC clothing limited company apply price
optimization system to set effective price of
their products. As a result attract customers and
generate more income.
M4 Analyse the way how organization resolve their financial problems with the help of
accounting system and provide sustainable success
In present type different types of organisation face different financial problem that effect
on their growth & development. Excite Entertainment Company also face many financial
problem such as lower sales and higher operation cost. The manager of the company apply
different tool to recognise these financial problem and respond them. These tools are KPI,
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benchmarking and financial governance. Through these tools manager try to resolve the
challenges that faced by them after compare own policies with competitors and determine cost
with competitors that unwanted and following all the accounting principles.
D3 Evaluation of the way in which planning tools can help to resolve financial problems
Planning tools are important part of any organisation such as Capital, operating and zero
base budget has been applied to sort out financial problems. The company prepare different types
of budget that is connected with different types of departments. Through budgets, manager aware
for the problem that become big in future and barrier for the sustainability of company (van
Helden, 2016). The financial problem of lower sales and higher operating cost sort out with the
help of these planning tools in effective manner and finding ways to sort out.
CONCLUSION
From the above discussion it has been concluded that, accounting is the procedure of
developing accounts which present statistical and accurate information. A manager needs to
make day to day decisions as per the collecting information. The management accounting
consists of different types of systems and reports which is integrated with the organisational
procedure. To calculate the cost of net profit applied the costing method such as marginal costing
and absorption costing. There are applying different planning tool to smoothly run organisational
procedure and forecast business performance in advance. There are identified a different
financial problem that is identified through KPI and benchmarking then sort out through
financial governance. With the help of various accounting system, organization able to resolve
their business problems which further affect the productivity as well as profitability of the
company. Managers have to ensure that they make decision which support the operational
activity as well as improve the individual performance.
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