Management Accounting Systems and Techniques

This report discusses the different types of management accounting systems, their benefits, and their integration with the reporting process. It also explores the application of marginal and absorption costing in income statements. The report focuses on Connect Catering Service as a case study.

Unit 5 – Management
Accounting
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Table of Contents
Introduction......................................................................................................................................3
Task 1...............................................................................................................................................3
P1 Different types of management accounting system..........................................................3
P2 Management accounting reporting....................................................................................4
M1 Benefits of management accounting systems..................................................................6
D1 Integration of management accounting system and reporting process.............................6
Task 2...............................................................................................................................................7
P3 Income statements using marginal and absorption costing...............................................7
M2 Application of range of management accounting techniques..........................................8
D2 Financial reports to apply and interpret data for a range of business activities..............11
Task 3.............................................................................................................................................11
P4 Advantages and disadvantages of using planning tools for budgetary controlling.........11
M3 Analysis of use of different planning tools and their application for preparing budgets and
forecasts................................................................................................................................12
Task 4.............................................................................................................................................13
P5 Response of management accounting systems to financial problems.............................13
M4 Analysis of response of management accounting to financial problems lead to sustainable
success..................................................................................................................................14
D3 Evaluation of responses of planning tools to appropriately solve financial problems...15
Conclusion.....................................................................................................................................15
References......................................................................................................................................16
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Introduction
Management accounting is one of the forms of accounting which aims to satisfy the
requirement of only internal users i.e., information in the reports generated in the management
accounting systems are to be used for strategical decision-making by management of the
organisation only. Unlike financial accounting, it considers both financial and non-financial
factors in consideration for final decision-making. Analysis made out of these information serves
as the basis for identification of courses that can lead the organisation to the course of growth
and development (Bedford and Speklé, 2018). Also, they serve as the basis for developing
possible solutions for business problems and their solution.
This report is aimed at assessing and analysing different practices related to management
accounting taking Connect Catering Service as the context. It is a family owned and run catering
service based in Oxfordshire, UK. In the first part of report, management accounting and its
different types are discussed to evaluate the benefits that they bring on-board. Different
management accounting reports are then discussed to evaluate their integration within the
operational processes of the Connect Catering Service. In the next part of report, practical
illustration has been demonstrated to calculate cost and prepare an income statement using
marginal and absorption costing. In the further part, different types of planning tools for
budgetary control and their advantages and disadvantages are discussed to analyse their use in
preparing budgets and forecasts. In the final part of report, management accounting systems and
planning tools are evaluated and compared in two organisational contexts to analyse their
effectiveness in responding to financial problems and lead organisations to sustainable success.
Task 1
P1 Different types of management accounting system
According to studies, management accounting is well known for creating organization
goals by measuring, interpreting, identifying, analysing, conveying information to the managers
is call managerial accounting and management (Maas, Schaltegger and Crutzen, 2016). Connect
catering service uses information associated with cost of product and services purchased by the
company. Connect catering service informs whole management about the operational business
metrics. They use performance reports to note differences between actual results from budgets.
Difference between financial accounting and management accounting is seen as financial
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accounting is which prepares financial statement of an organization to provide the data to the
interested parties whereas management accounting, they provide important information to the
managers to make plans, policies, strategies for running the business effectively. Connect
catering service has many strategies on which it operates in the long run. It also use management
accounting to make strategic management decision or taking decisions which are necessary for
the achievement of goals of the organization (Mazarak and Fomina, 2016). Principles of
accounting management are influence, value and relevance. The implementation of management
accounting can develop decision-making in companies. Influence is described as communication
presents insight which is very important and influential. Relevance is that in which information
is relevant. Value- influence on value is analysed. Management accounting is the process of
measurement, gathering, examination, preparation, and information that could help managers in
decision-making or achieving its goals, this is the procedure of making management reports or
information which are needed by the managers to make day-to -day decisions for the profit of
company. Internal management accounting system is that which gives critical information to
management to be used in operational business decision making. These systems are used by the
companies to help in the managing and coasting their processes. Different management
accounting systems are product costing and valuation it deals with to find total cost which
involved in the production of a good and service, cost is divided into two categories, such as
fixed, variable, direct or indirect costs. Marginal costing is also referred as cost volume profit
analysis, it is the influence on the cost of a product, if one additional unit is added into
production. It is quite useful for short term economic decisions.
P2 Management accounting reporting
According to management accounting, managerial accounting is also known as
management or cost accounting, which emphasizes the internal information or data and achieved
through financial accounting (Quattrone, 2016). The reports are used for decision, regulating,
planning, and measuring performance. Looking at the requirements these reports are constantly
generated throughout the bookkeeping period and accounting, these reports should be carefully
crafted because some critical decisions depend on these reports.
 Budget reports - These reports are created for small business, large organization and
department-wise, they are very critical for evaluating company performance. Even
though overall budget is made by every company to realise the grand scheme of their
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company. A company Budget is mangers to find out defaulters and identify issues in the
company collection process, if there is such kind of issues arising then tighter policies
must be implemented because cash flow is very critical to the operation of any business.
All the bad debit needs to be written off. In this way account receivable reports are very
vital.
 Cost managerial accounting reports- In this report managerial accounting calculates the
cost of every articles which is manufactured. For e.g., catering service evaluates, each
raw material costs, labour, overhead, and any other additional costs are counted into
deliberation. Then the catering service divides the totals by the amount of products
produced (Wang and Wang, 2016). All the summary information is reported in this report
and this report gives authority to the managers to recognize the price for every item.
Profit margins are always calculated and monitored through these reports, and clear – cut
pictures of these costs goes into the production always calculated on behalf of previous
experiences, there is chances of unexpected circumstances might develop which is given
by the large budget. A company always list down all the sources of earning and
expending. An organization put their complete efforts to attain their goals and missions
while being in budgeted amount.
 Account receivable aging reports – If there are any defaulters in the company or breaking
down of the client’s particular periods allows mangers to find out defaulters and identify
issues in the company collection process, if there is such kind of issues arising then
tighter policies must be implemented because cash flow is very critical to the operation of
any business. All the bad debit needs to be written off. In this way account receivable
reports are very vital.
 Cost managerial accounting reports- In this report managerial accounting calculates the
cost of every articles which is manufactured. For e.g., catering service evaluates, each
raw material costs, labour, overhead, and any other additional costs are counted into
deliberation (Wilkerson and Bassani, 2020). Then the catering service divides the totals
by the number of products produced. All the summary information is reported in this
report and this report gives authority to the managers to recognize the price for every
item. Profit margins are always calculated and monitored through these reports, and clear
– cut pictures of these costs goes into the production.
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M1 Benefits of management accounting systems
As per studies management accounting is very essential in business because this has ability to
make changes or change the business performance or financial position.
 Increase efficiency- Every step is taken in management accounting with a scientific
system or logically for e.g., evaluating and comparing the performance of the company,
with the help of this we can find deviations. Every employee is appreciated and rewarded
because of their better performance and favourable performance therefore management
accounting increases the efficiency of the company (Saeidi and et.al., 2018).
 Maximizing the profitability- With the help of management accounting's capital
budgeting tool and budgetary control easily company can reduce capital expenditures
then company will cut down its prices consequently, company will receive high range of
profits.
 Simplify the financial statements- This statement contains various managerial decisions
and it gives technical reports with simple interpretations and with simple facts of
financial statements, so in this way company understand about the financial statements
and how they can use it for the company's progress.
 Control of business's cash flow – This statement is used for controlling of business's cash
flow it is the most important advantage of management accounting system. The
management accountant carefully studies all the facts of money, then examining the
misuse of money will surely control the cash flow.
D1 Integration of management accounting system and reporting process
Management accountants use reports to make decisions rather than compliance aspects of
financial accounting (Hoozée and Mitchell, 2018). Management accounting creates
organizational goals by measuring, by sending information to the managers, or analysing
interpreting, identifying this is known as management accounting. The report of management
accounting explains that budget reports are made on behalf of previous experiences and
unforeseen circumstances may arise by the large budget it should be clarified in a proper way
and must be evaluated in a better way.
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Task 2
P3 Income statements using marginal and absorption costing
Marginal costing is a type of costing practice that takes into account cost incurred for
producing one extra unit. In other words, it factors only variable cost. On the other hand,
absorption costing takes into account both fixed and variable cost (Taschner and Charifzadeh,
2016). Fixed cost is the cost that does not changes in short term according to the units produced
like rental expense, insurance expense, etc. while variable cost is unit dependent and changes as
per the units produced like direct material expense, direct labour, etc.
Preparation of income statements:
Cost per unit under absorption costing-
Activity April May
Variable Manufacturing cost per unit 4 4
Fixed Manufacturing Overhead per unit 6 5
10 9
Income statement under absorption costing
Particulars April may
Sales 16000 16000
Less: Cost of sales (2000*10) (2000*9) 20000 18000
Fixed Manufacturing Overhead 15000 15000
Variable Manufacturing cost (2500*4) (3000*4) 10000 12000
Closing stock (500*10) (1500*9) 5000 13500
Opening stock (500*9) 0 5000
Gross loss -4000 -2000
Less: Fixed Non-Manufacturing Cost -4000 -4000
Net loss -8000 -6000
Cost per unit under absorption costing-
Activity April May
Variable Manufacturing cost per unit 4 4
Particulars April May
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Sales 16000 16000
Less: Marginal cost of sales 8000 8000
Variable Manufacturing cost (2500*4) (3000*4) 10000 12000
Closing stock (500*4) (1500*4) 2000 6000
Opening stock 0 2000
Contribution 8000 8000
Less: Fixed Manufacturing Overhead 15000 15000
Less: Fixed Non-Manufacturing Cost 4000 4000
Net loss -11000 -13500
Reconciliation statement:
Particulars April May
Net loss under absorption costing -8000 -6000
Less: Closing stock -3000 -7500
Net loss under marginal costing -11000 -13500
Working Notes
Marginal Cost of sales
Particulars April may
Opening Inventory 0 500
Add: Cost of production 10000 12000
Less: Closing inventory 2000 6000
8000 8000
M2 Application of range of management accounting techniques
2 a)
1. Fixed and variable costs
Fixed costs:
Activity Amount
Manager’s Salary 5000
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Rent 5000
Insurance 500
Utilities 500
Advertising cost 1000
£12000
Variable cost:
Activity Amount
Direct material costs per Pizza 3.50
Direct labour costs per Pizza 1.50
Direct overhead costs per Pizza 0.50
£5.50
2. Margin of Safety at sales of 3500 Pizzas
BEP (In units): Fixed cost/contribution per unit
Contribution per unit: Selling Price-Variable cost per unit
= 9.50-5.50
= 4.00
BEP: 12000/4
= 3000 Units
BEP (In revenues): Fixed cost/PV ratio
PV ratio: Contribution/selling price*100
= 4/9.50*100
= 42.10%
BEP (In revenues) = 12000/42.10%
= £ 28503
Margin of safety= Sales units - BEP in Units
= 3500-3000
= 500 Units
3. Effect on BEP in units and in sales value, in case of increase in manager's salary to
£6,000
If manager’s salary will increase than it will affect to fixed cost and revised fixed cost will be of
£13000.
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New BEP (In units): 13000/4
3250 Units
New BEP (In revenues): 13000/42.10%
= £30878
2 b Preparation of graph:
Activity Amount
Total Costs (12000+55000) 67000
Revenues per Unit (95000-67000)/10000 2.8 Per unit
Total Fixed CostCompanies prepare cost
budget which is used to find variance in
actual cost incurred and budgeted target. Cost
budgets shall be flexible enough to
incorporate changes in targets as and when
they arise.
12000
BEP point 28503
D2 Financial reports to apply and interpret data for a range of business activities
Variance refers to the deviation in the standard performance and the actual performance
(Alyousef and Mickan, 2016). Companies prepare various budgets either of static nature such as
fixed assets budget or flexible budget such as cash budget, which act as standard and are used to
find variance in actual cost incurred and budgeted target.
Variance analysis report:
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Actual units sold= 12000
Budgeted units sold= 10000
Budgeted price per unit= 9.50
Sales volume variance= (Actual units sold - Budgeted units sold) x Budgeted price per unit
= (12000-10000) *9.50
= 2000*9.50
= 19000 Favourable
Flexible budget
Items Actual Budgeted Variance
Sales price 10 9.50 .50 Favourable
Sales units 12000 10000 2000 Favourable
Revenues 120000 95000 25000 Favourable
Fixed cost 15000 12000 3000 Adverse
Variable cost 5 5.50 .50 Favourable
Task 3
P4 Advantages and disadvantages of using planning tools for budgetary controlling
Budget refers to the statement which is prepared using historical figures but is future
looking with an expectation of estimating future course of its components. An organisation
prepares various sectional budgets like cash budget, sales budget, expenses budget, capital
budget, etc. to prepare a master budget (Chiwamit, Modell and Scapens, 2017). These budgets
are not only serving as planning tools but also serve as standard for monitoring and controlling
actions. Budgetary control refers to the controlling function of the budgetary analysis in which
prepared budgets are compared against the actual performance to determine deviations. Further
course of corrective actions is determined so as to save negative impact on the profitability of the
organisation.
Advantages of planning tools for budgetary control
Organisations use planning tools like different revenue budgets such as sales budgets,
cash budgets, etc. and capital budget like budget prepared for acquiring or maintaining fixed
assets. Primary advantage of using planning tools is that it helps organisation determine a path
that it wants to follow to its road to growth and development. For example, budgets like cash
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budget will help Connect Catering Service avoid the condition of over liquidation and under
liquidation. Planning tools will help company in facilitating better coordination and utilisation of
resources. Corrective actions further help minimising uncertainties and wastage of resources
(Fleischman, Johnson and Walker, 2017).
Disadvantages of planning tools for budgetary control
Planning tools for budgetary control includes budgets which are either of financial and
operating nature like cash budget, capital expenditure budget, expenses budget, etc. or non-
monetary budgets like fixed and variable cost budgets, etc. These are prepared on the basis of
historical figures to determine course of future. This is one of the primary disadvantages of using
budgetary planning tools for controlling function. For example, Connect Catering Service
prepared expenses budget on the basis of previous data but inflationary condition in the future
changed substantially leaving the expenses management of the company ineffective (Dahal,
2018). This would then render expenses budget not suitable for being used as standard to be
measured against. Also, preparing accurate budgets are not easy and are time and cost
consuming, which is not good for the financial management of small businesses.
M3 Analysis of use of different planning tools and their application for preparing budgets and
forecasts
Forecasting refers to making predictions for the future. Budgets serve as both planning
tools as well as controlling tools for the organisation. They are future looking and has forecasting
as one of their objectives. Connect Catering Service can use below mentioned planning tools for
preparing budgets and forecasting:
 Management by Objectives (MBO) – It is a planning tool which aims to clearly define
objectives that the company aims, in agreement with management and employees. With
the help of MBO, Connect Catering Service can jointly set the goals and objectives for
the period which will serve as basis for preparation of budgets and forecasts. They can
create SMART goals and review their progress against it to make measurable success in
improving the effectiveness of their operations.
 Benchmarking – It is another planning tool which aims to improve effectiveness of both
long-term and short-term plans of the company (Alaeddin and et.al., 2019). It helps
company to evaluate its performance against average performance in industry. Connect
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Catering Services can use this tool to prepare budgets and forecast the alterations that
they would be required to make in their processes to create competitive advantage.
Task 4
P5 Response of management accounting systems to financial problems
Financial problems refer to the issues that are able to disrupt financial management of an
organisation (Kumarasiri, 2017). Financial problems can range from simple disruptions to
serious hazards that can lead to failure of organisation as well. Therefore, it is very important for
management to give serious efforts to aspects of financial management such as preparation of
budgets, decisions related to investments, source of finances, capital structure, etc.
Comparative Basis Connect Catering Services Leones Catering
Financial problem In the wake of uncertainties in
market, company is facing loss in
revenue which is decreasing their
profit margin.
Monitoring has revealed that
actual performance in all the
aspects of business has deviations
from the original planning. It has
led to disrupted financial
management of the organisation.
Tools and technique
used to recognise core
of the issue
Using key performance indicators
(KPI) – company can identify
financial and non-financial factors
that are impacting the sales. KPI
analysis revealed that non-financial
factors external factors are behind
this decline in revenue (Grishanova,
Tatarinova and Kirina, 2016).
Using financial governance tool,
company can check source of all
its monetary transactions.
Analysis of these transactions
revealed that cost of raw
materials used by organisation
are getting expensive. On the
other hand, sales are also stagnant
which has led to decrease in
operational cost of the
organisation as well.
Management
Accounting System
It was identified that changes in
marketing policies are needed to
Using cost accounting system,
business can determine the
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techniques used to
resolve problem
woo customers even in the wake of
uncertainness. It should introduce
different offers like discounts,
coupons, etc. Company can also use
price optimisation system and apply
differential pricing strategies to
regain its customers. Company
should set its price according to
ability and willingness of
customers. These combined efforts
of offer and price differential will
definitely see a positive change in
the revenue of the company.
variances and the required
changes it need to make in
budgets and in its purchase
practices to restore stability
financial management. Company
can change its suppliers or get
into some beneficial agreements
with them related to deferred
payment or discounts. It needs to
change its marketing and
customer relationship
management practices to improve
sales.
M4 Analysis of response of management accounting to financial problems lead to sustainable
success
In the course of business operations, companies often come across certain problems that
are able to lead to disruptions in their financial planning, operations and management. In general,
these problems can be divided into two types – one that increases the expenses or liabilities of
the business and another that reduces its revenue or assets (Ghasemi and et.al, 2016). For
example, it is the time when there is uncertainty in the market due to pandemic lock-down,
company might be facing decline in client orders which can result in declining graph of
profitability of the business. Also, it can come across problems due to faulty budgeting, below
standard employees' performance or use of obsolete business technology, etc. Various
management accounting systems are then employed by management to identify the cause of
financial problem and way to eliminate problem such as the cost accounting system, inventory
management system, price optimisation system, etc. Once the management develops the accurate
corrective actions, they are not only able to solve financial problems at the present times but also
develop an experience and exposure to solve such problems in future, to enlighten sustainable
path of success (Otley, 2019).
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D3 Evaluation of responses of planning tools to appropriately solve financial problems
To absolve financial problems encountered in the course of business, planning tools play
an important part. Management applies various tools and techniques to identify and resolve
financial problems. Companies use planning tools like MBO, KPI, financial governance, bench-
marking, etc. Connect Catering Services can use these tools to initiate planning functions and
assists the management in preparing budgets and trends also, that further helps taking strategical
decisions (Li, 2018). When the company will be taking appropriate strategical decisions and
following deviations to find corrective actions, it will be able to ensure proper implementation of
plans. Proper implementation of plans will reduce chances of financial problems and in case,
they arise, will help company find appropriate actions to mitigate the impact. They will also be
able to create a competitive advantage for company in the market.
Conclusion
Above report is based on the application of management accounting practices. It has been
elucidated above management accounting not only includes financial performance but also takes
into account non-financial factors affecting the business while analysing the reports and making
a decision. Further, various reports generated out of management accounting systems have been
discussed in the organisational context. Budgetary control has been discussed and the role of
planning tools in budgetary control and resolving financial problems is highlighted.
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