Management Accounting: Principles, Benefits, and Systems

This report provides an overview of management accounting, including its principles, benefits, and different systems. It explores the application of management accounting in Tesco Plc and compares income statements under absorption costing and marginal costing.

UNIT-5 MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Scenario 1.........................................................................................................................................3
Meaning of management accounting and principles & benefits of management accounting.....3
Types of management accounting systems and their requirements ............................................4
Methods of management accounting reporting............................................................................5
Application of management accounting systems in the Tesco Plc..............................................6
Critical evaluation of integration of management accounting system and management
accounting reporting....................................................................................................................7
Interpretation of income statement under absorption costing and marginal costing...................7
Scenario 2.......................................................................................................................................10
Advantages and disadvantages of types of planning tools used for budgetary control.............10
Critical evaluation of how management accounting helps to deal with financial problems.....11
Analysis of the use of planning tools in preparing and forecasting budget...............................11
Analyses of role of management accounting systems in solving financial problems and help in
decision making.........................................................................................................................13
Evaluation of how solving financial problems using planning tools lead organization to
sustainable success.....................................................................................................................14
CONCLUSION .............................................................................................................................15
REFERENCES................................................................................................................................1

INTRODUCTION
The study of how managers create management accounting reports by following
accounting fundamentals. This report will help to understand the management accounting term
along with the requirements of types of management accounting systems to eliminate the extra
time, extra cost and enhancing the speed of the work. This report will also state the different
method used for management accounting reporting along with the financial statement report.
This report will also base on the study of the benefits of MA systems and their application on
Tesco plc of UK. These report will also critically evaluate the benefits of the integration of
management accounting systems in order to prepare reports. This report also includes the
comparison of income statement between absorption costing and marginal costing and also
interpret the best method to adopt by the company. This report also states the advantages,
disadvantages and uses of planning tools in order to control budgets. This report also compare
how company can use different accounting systems in order to achieve the goals and objectives
of the company.
MAIN BODY
Scenario 1
Meaning of management accounting and principles & benefits of management accounting
Management accounting uses the information provided by the financial accounting in
order to take decisions and help the company in achieving its goals. MA information is only
available to company's internal managements. MA systems are the systems with the help of
which the different processes of the company is get identified, measured, evaluated and
communicated (Zahid, and Vagif, 2020).
Principles of management accounting
The four management accounting principles that every organization must follow in order
to run the business in effective and efficient manner. It includes influence, relevance, value and
credibility.
 Influence: Clear communication is important in every organization for proper decision-
making. In order to achieve the targets of the organization it is significant to
communicate the vision and mission of the organization with the all staffs of the
company from top to bottom.

 Relevance: It is the most significant principles of the management accounting which
indicate that managers have to analyse and use all the relevant information in their
decision-making. They have to make a proper balance between the past, present and
future, internal, external, financial and non-financial informations.
 Value: It is a principle which enables the organization to know which value is required to
be produced by the organization to earn higher profitability and reduces the cost per
value. For this purpose, situation analysis is need to be implemented by the organization
to know the opportunities and challenges attach with each situation. It further helps in
decision-making.
 Credibility: Being responsible and credible for their decisions help in making the
decisions more purposeful and relevant. For this purpose, organizations have to get
feedback from their customers and staffs and try to solve their queries to improve the
trust and reliability of the stakeholders.
Benefits of management accounting
 Management accounting helps in creating and executing the plans for smooth operations
of the businesses.
 It also helps in controlling and minimizing the gaps between actual and planned one by
use of variance analysis.
 Management accounting helps in decision-making in order to serve the best and
improved services to the customer's.
 Management accounting also helps in increasing coordination among the departments in
order to prepare budgets.
 It also beneficial for improving the efficiency and productivity of the employees of the
organizations.
Types of management accounting systems and their requirements
The different types of management accounting systems are cost accounting, inventory
management, price optimization systems. Their requirements in the company are based on the
benefits they provide to the company. For example, Tesco Plc.
 Cost accounting systems: It is a software which helps the company to know the cost of
its product and services. The requirement of cost accounting system is in the controlling

of cost. It is also required to know the profitability of each product, service, jobs,
departments or operations. It also required in the valuation of inventory and setting
different prices in order to cover cost. For example, standard costing, process costing,
absorption costing etc.
 Inventory management systems: It is a software which helps the company in
controlling and overseeing the stocks of raw material as well as finished goods. The
requirements of inventory management system is that it helps in placing order of raw
material and managing use and storage of raw material (Abdusalomova, 2019). It is also
required to make sales order, and managing the packaging and shipping of finished
goods. It also required to enhance the productivity of operations. For example perpetual
inventory and periodic inventory system.
 Price-optimizing systems: It is a software in which company uses different
mathematical analysis in order to know the behaviour of the customer at different level of
prices set by company. It is required to make fast decisions based on the data it provided.
It is also required to understand the market and adopt different channel to increase sales.
It is also required to eliminate the manual work as it causes lots of human error. For
example, pricing analysis, leverage analysis, behavioural analysis etc.
 Job costing systems: It is a system used by the organization in order to know the cost of
a specific job for example retail companies uses the job costing systems in order to know
how cost vary from product to product on the basis of the size of the job order. Job
costing system is required to know the direct material, direct labour and overhead cost of
the specific job in the organization. It is also required to know the profit of the particular
job or project and taking appropriate decision regarding the same.
Methods of management accounting reporting
The primary source of information for management accountant in order to make
decisions are financial information provided by financial accounting. But management
accountant does not depend only on the financial report (Schaltegger, Etxeberria, and Ortas,
2017). They also gathered information from different reports such as cost, budget and
performance reports.

 Cost reports: Cost report provides the information of all cost such as fixed cost, variable
cost, cost of production to produce a product, overheads or any other extra cost incurred
by the company. With the help of this information managers can analyse the total cost
with the selling price in order to know the profit margin. Managers also take decisions
regarding cost controlling and enhancing the sales to increase the profit margin.
 Budget report: Budget report provides the information regarding the estimated list of
revenue and expense sources. With the help of information provide by budget report,
managers manages the money effectively and efficiently (GOVDYA, and KHROMOVA,
2018). It also helps the managers to identify the problems before it actually occurs. For
this purpose, managers have take appropriate decisions in order to bring down the level
of expenditures to budgeted expense in case if actual expenditures are high.
 Performance report: Performance reports provides the information regarding the
performance gap in case if actual performance is different from planned performance of
the company. In that case, managers of the company try motivate the employees towards
companies goals to reduce performance gaps. With the help of PR, managers can plan
strategy to improve the performance of the company. In order to increase performance,
managers are always tries to take feedback from their employees regarding the
environment and culture of the company.
Application of management accounting systems in the Tesco Plc
 MA systems such as price optimization helps the managers of the company such as Tesco
Plc to understand the market and demand of their products by organizing surveys. It also
helps the mangers in cost analysis, product analysis, profit analysis etc. It helps the
company in inventory valuations and controlling the cost of the product and service of the
company. By applying management accounting systems the Tesco company analyses the
employees and customer attitude towards their company. With the help of management
accounting systems, managers of the company can easily create and execute the plan in
response to the effective operations of the company. It also helps in controlling the
performance gap in case if any arises in the company. By applying process costing
techniques Tesco company are able to evaluate and monitor the different process
involved in making the product and the cost allocation (Africano, Rodrigues, and Santos,
2019). Tesco company apply activity based costing for proper allocation of resources

among each activity of each department and proper inventory valuation. Tesco company
also apply job costing in order to know the cost related to each job order in their
company.
Critical evaluation of integration of management accounting system and management accounting
reporting
Adoption of MA systems such as ERP and CMS software help the company to prepare
management accounting report in less time because manual works are time eating. With the help
of adopting the cost accounting systems such as process, marginal, budgetary, activity based, job
and batch costing etc. the managers can easily and quickly allocate the resources between them.
The chances of error are less in case of allocating the manufacturing cost among the processes,
jobs, batches, departments etc. with the help of systems (Sledgianowski, Gomaa, and Tan, 2017).
Price-optimizing systems helps the managers to evaluate the demand of their product in the
market by setting different prices. Behaviour of the customers with different prices are analysed
in this system. It helps in enhancing the speed of the process of the company which directly
prepares the reports quickly. Because of handling all the work manually, the company has to
compromise with the speed of the work but MA systems helps in increasing the speed of the
work.
Interpretation of income statement under absorption costing and marginal costing
Sales (units) 50000
Selling price per unit 12
Opening stock of finished goods (units) 5000
Closing stock of finished goods (units) 8000
Production costs:
Variable cost per unit 5
Fixed production overheads per year £159000

Selling and admin. Expenses:
Variable expenses per unit 2
Fixed expenses per year £50000
Calculation of Production unit and manufacturing cost per unit under absorption costing
Particulars Units
Sales 50000
Add Closing Stock 8000
Less Opening stock -5000
Production unit 53000
Particulars Cost per unit
Variable cost 5
Add Fixed cost (159000/ 53000) 3
Manufacturing cost per unit 8
Income statement (Absorption Costing)
for the year ended....
Particulars Amounts(£)
Sales (50000 * 12) 600000
Less Cost of goods sold:
Opening inventory (5000 * 8) 40000
Add Cost of production (53000 * 8) 424000
Less Closing inventory (8000 * 8) -64000 -400000

Gross Income 200000
Less Selling and admin. Expenses:
Variable expenses (50000 * 2) 100000
Add Fixed expenses 50000 -150000
Net operating Income 50000
Income statement (Marginal costing)
for the year ended...
Particulars Amounts(£)
Sales (50000 * 12) 600000
Less Variable Cost of goods sold:
Opening inventory (5000 * 5) 25000
Add Cost of production (53000 * 5) 265000
Less Closing inventory (8000 * 5) -40000 -250000
Gross Contribution 350000
Less Variable selling and admin. Expense (50000 * 2) -100000
Contribution profit 250000
Less Fixed Expenses:
Fixed production expenses (50000 * 2) 159000
Add Fixed selling and admin. expenses 50000 -209000
Net operating Income 41000
The difference of net operating income between absorption costing and marginal costing is
£9000. Absorption costing method also considered the fixed cost while calculating the cost of
goods sold but marginal costing do not considered the same. In absorption costing method,
calculation of profit is correct as it indicates that the fixed production cost is involved in the

closing stock and only shown as expense when the stocks are actually being sold by the
company. But marginal costing method, indicates that the fixed expense will show in the same
accounting year whether stocks are sold by the company or not. Absorption costing follow the
accrual concept of basic accounting concept and conventions while on the other hand marginal
costing do not (Gonçalves, Gaio, and Silva, 2018). So by comparing the income statement under
absorption and marginal costing, we interpret that the difference of £9000 in operating income is
because of fixed manufacturing cost. When the production of the product, is higher than the sales
of the product of the company. In that case, fixed manufacturing overheads are delayed in
closing stocks of the product which causes higher operating income in absorption costing
method. AC states that there is no requirement to separate manufacturing cost into fixed and
variable as it is not an easy task. Absorption costing is also a recommended costing method
because it is used for the preparation of external reports and also helpful in case of inventory
valuations.
Scenario 2
Advantages and disadvantages of types of planning tools used for budgetary control
Budgetary control states that if the actual income and expenses are different from the
expected ones than what corrective actions company is taking to control variances. Preparing
budgets by departmental managers to know the expected revenue and income is the most
important planning tools used for budgetary control (Kishi, and et.al., 2018). The three types of
budgetary controlling tools are financial budget, operating budget and non-monetary budget.
Continuously comparing the actual cost with the budgeted amount and preparing revised budget
in case of any changes arises is also included in the process of controlling budgets.
Advantages of budgetary controlling tools:
 Budget helps the managers in achieving the budgeted target in case if they will get
reward such as promotion for the same (Akeem, 2017).
 It also motivates the employees of the company to achieve targets and company also paid
bonus and incentives to them for the same.
 With the help of budgets, the coordination among the departments is increases in order to
acquire the resources and information.
 With the help of various budgets the strategic plans comes into action.

 As budgets shows all the activities and data of the company in organized manner, it
provides excellent reports in order to make decisions.
 It also acts as a tool which help in planning, controlling and taking corrective actions in
case of difference between actuals and estimated figures.
 It also helps in proper cost allocations between each product, departments, jobs etc.
Budgets also uses the informations provided by financial forecasting reports.
Disadvantage of budgetary controlling tools:
 One of the disadvantage of budgets are that they required a lot of time to prepare and
compare the budgets.
 In case of rigid budgets, it reduces the innovative ideas of the company at some level
which further reduces the sources of taking the money from the market for their new
ideas.
 In case if managers do not involve employees in the tasks and imposed the budget in top
down structure then it may enhance the dissatisfaction attitude among the employees of
the company.
 While preparing budgets of the company, all the members involved in the preparation of
budgets have their targets.
 In order to achieve those targets it creates competitions of resources and informations
between staffs of the company.
 Any budget prepared by the managers is based on the estimated figures which do not
have any relation with the actual figures shows inaccuracy of the company.
 Because of rigid budgets, the decisions of the managers are also become rigid.
Critical evaluation of how management accounting helps to deal with financial problems
Management accounting systems such as job costing, batch costing, price-optimization
costing, inventory management costing helps the Sainsbury company in visualizing and
allocating the cost among each activity, process, job etc. By doing that Sainsbury company
improves the profitability and stability of the organization. It also helps the Sainsbury in
knowing the gaps between actual and planned one by variance analysis. On the other hand,
Tesco Plc because of not implementing management accounting systems causes lots difficulty in
decision-making. They are unable to allocate the cost among departments, job, process, activity

etc. which leads to increase in operation cost of the Tesco Plc and cause low profitability. So for
this purpose, they have to implement management accounting systems in their organizations.
Analysis of the use of planning tools in preparing and forecasting budget
The three planning tools involve in preparing, controlling and forecasting budgets are
financial budgets, operating budgets and non-monetary budgets. Financial budgets shows the
estimated cash flows, income & expenses and assets & liabilities of the company (Danzon, and
et.al., 2018). Operating budgets shows estimated sales revenue, cost of production, selling and
administrative expense and general expense. Non-monetary budgets shows the estimated figures
which are non financial in nature such as labour budget. These tools are playing vital role in
preparing the annual budgets.
1. Uses of Financial budgets:
 Financial budgets such as cash budgets, capital expenditure budgets, balance sheet
budgets helps the company to know earnings and spending criteria of the business. It is
useful to know the cash inflow and cash outflow in the company after considering all the
cash income and expenses of the company.
 It also provides the information of assets and liabilities of the company. It also helps
business to know whether the company is solvent or not.
 Financial budgets will also disclose whether the profitability of the business is stable and
continuous or not (Cools, Stouthuysen, and Van den Abbeele, 2017). With right
estimations, financial budgets help the business to achieve its goals and targets.
 In order to create annual report, monthly financial budgets play important role. It is also
useful in financial planning such as with the information provided by financial budgets
company can address the current liabilities before its debts become uncontrollable.
2. Uses of Operational budgets:
 Operating budgets such as sales budget, production budget, selling and administrative
budgets helps the company to know the income and expenses from operations.
 Company uses operational budgets in order to increase the efficiency level of the
company by analysing break even point. It also useful for tracking the entire business
activities and selecting the best level of activities.

 Monthly operating budgets shows the monthly expenses that company is in need to
produce the product. So it is the opportunity for the company to know monthly expense
and keep aside the money in order to meet those expense.
 In case, if the companies operating budgets are showing accurate figures it becomes
useful for investors to make decisions whether to invest in the company or not.
3. Uses of Non-monetary budgets:
 Non-monetary budgets such as labour budgets helps the company to know the estimated
hours in which labours are available to work for the organisations.
 It is useful in comparison between actual and budgeted and in case of difference company
can take decisions regarding offering non-monetary incentives to them.
 Monthly non-monetary budgets are helpful in preparing the annual budgets of the
company.
Analyses of role of management accounting systems in solving financial problems and help in
decision making
Nowadays, corporations are more focused towards profit and wealth maximisations of the
company along with their contribution towards the social welfare (Woodroof, and Thumann,
2021). Management accountant deals with the variety of financial problems on daily basis. In
order to deal and solve this financial problems, managers of the company uses various
accounting systems.
 To solve the problem of the company to know at what point of sales company will start
making profit, managers of the company uses break even analysis of costing systems. It
help them to take decisions regarding planning a strategy to increase the sales and reduce
the cost of the product.
 One of the financial problem faced by management accountant of every company is
choosing best investment plans in order to get higher returns and cover cost of funds. To
solve this problem, managers of the company must use the investment analysis of
management systems as a tool.
 Sometime lack of cash flows is also a financial problem faced by the company. So in that
case, it is better for the company to prepare cash budget on estimation basis to know the
sources of income and expenses and compare it with actual ones.

 To deal with the problem of lack of capital into the company and finding out the best
sources of funds. Company must use the solvency ratio analysis as a tool. Debt-equity
ratio analysis indicates that it is better for the company to raise funds from debt and
equity in the ideal ratio of 2 : 1.
 Adoption of inventory management systems, helps the company to deal with the problem
of inventory valuations. It also solve the problem to know the economic order quantity of
raw material with managing inventory storage cost and ordering cost.
 Price-optimization systems helps in solving the problem of setting a particular price of
the product by pricing analysis, behavioural analysis etc.
 In order to solve one of the financial problem such as liquidity position of the company,
managers of the company uses current ratio and quick ratio analysis. It help them to
know that how much company is able to pay its current liabilities. After this analysis,
company focus more towards maintaining ratio between quick assets and current
liabilities is 1 : 1.
 In order to know and increase the market value of the company, managers of the
company calculate earning per share using earning ratio analysis. They can also take
necessary decisions to solve the problem of their shareholders.
Evaluation of how solving financial problems using planning tools lead organization to
sustainable success
With the use of different planning tools and accounting systems, it helps the managers of
the company for example Tesco Plc. to solve financial problems. This helps the managers to take
appropriate decision regarding financial problems and overall lead organisations to sustainable
success (Kucharčíková, Mičiak, and Hitka, 2018). There are many ways in which management
accountant can guide the company towards the sustainable success of the organisations.
 The responsibility of leading the company to long term success is in the hand of board
members and senior managements.
 With the help of earning ratio analysis, company is continuously focus towards planning
and executing strategy in relation to generating and enhancing value of the stakeholders.
 They also establish the reporting strategy which covers the sustainable success matters
such as International Incorporated Reporting Frameworks.

 With proper allocation of cost between each activity using activity based costing, helps
the company to find out the efficient level of activity (Maksymenko, and Melikhova,
2017). This is further involve in increasing the profitability of the company which lead
company to sustainable success.
 In case if the liquidity position of the company shows good financial position, then it
indicates the companies potential growth and sustainability of the company.
 After considering the break even point, company focus more towards sales increment
such as by focusing on current customer, promotion, marketing etc. They must focus
towards reducing cost as well such as by applying 80/20 rule, by eliminating unnecessary
expenditure etc.
 With the use of investment appraisal techniques, managers can find out the best
investment plans (Krizanova, and et.al., 2019). But in case if company wants sustainable
success, it is recommended to the managers of the company to not do the mistake of
investing all the funds in one investment plan.
 With the help of pricing analysis, management accountant can guide the company to
increase the customer base by setting the price as per market demand.
 Behavioural analysis of customer as well as employees helps in sustainable growth of the
business. For example, by providing various discounts to the existing customer helps in
attracting the new customer towards company's product. By offering various incentives
and bonus to employees so that they can achieve the target set by the company.
This are some of the ways through which management can move the company toward the
sustainable growth.
CONCLUSION
This reports concludes that how management accounting systems help the company to
shift all their work computerized instead of doing it manually as manual works are time
consuming. This reports also concludes the meaning of management accounting and their
requirements in the organisations. This report also concludes the different methods of MA
systems and their benefit. This report also state the application of different MA systems in the

organisation to speed up their work and also to quickly achieve the targets. This report also
evaluate the integration of management accounting systems in the company to reduce the human
error. This report also compare the income statement under absorption and marginal costing and
interpret which one is better. This report also concludes the advantages and disadvantage of
planning tools, uses of different planning tools and their implementation. At the last, this reports
focus towards the analyses and evaluation of different planning tools and MA systems in solving
financial problems and lead organisation to sustainable success.

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What Is Management Accounting?. 2000-2021 [Online]. Available
through:<https://www.freshbooks.com/hub/accounting/management-accounting>
Management Accounting: Definition, Functions, Objectives, Roles. 2021 [Online]. Available
through:<https://www.iedunote.com/management-accounting>
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