Management Accounting for Business Success

This assignment delves into the importance of management accounting for businesses. It examines various tools and techniques such as variance analysis, marginal and absorption costing, and zero-base budgeting. The report emphasizes how understanding these concepts can help a business like R.L. Maynard develop effective financial strategies and achieve success.

UNIT 5
MANAGEMENT
ACCOUNTING

Illustration Index
Illustration 1: Income statement on absorption costing basis..........................................................9

Index of Tables
Table 1: Income statement on the basis of marginal costing...........................................................9

INTRODUCTION
Management accounting is a discipline of accounts which reflects professional side, just the
internal one and has a greater significance in decision making. Management accounting helps
in making decisions related with business after planning so that a systematic procedure of
identifying, measuring, analysing, interpreting and communicating can be followed. In a
business enterprise, there are different times when management must take decisions regarding
daily business as well as some essential works.
For this purpose, they must revise and go through various reports that can impact their
decisions (Kaplan and Atkinson, 2015). Hence, management accounting report presents the
accurate information to the management so that they can come to a decision. The present
report demonstrates significance of management accounting in business environment. For
this purpose, R.L. Maynard company of UK has been chosen as a referred organisation. This
is a construction based company whose strength is 24 workers. The report contains
information about different types of income statements that a company uses along with its
benefits and drawbacks. In addition to this, various issues related to management accounting
will be addressed.
LO 1: Demonstrate an understanding of management accounting systems
P1 Explain management accounting and give the essential requirements of different types
of management accounting systems
The management accounting system is a tool which helps the organisation to keep an eye on
various types of costs and expenses that can be incurred in the production of goods and
services (Macintosh and Quattrone, 2010). In context of R.L. Maynard, the organisation has
several expenses which are necessary to be tracked so that they can have better information
regarding different costs. This will also be helpful in keeping a track of business so that they
can manage their day to day works the management accounting has the more importance in
field of business as it includes various branches of finance as well as management because of
which business enterprises can have an overall control on activities of production.

This contains wide and accurate information which makes it easier for owner of business to
have a control over business activities and take effective decisions as well. In context of cited
organisation, the top management which consists of various managers, owners and board of
directors need reports on management accounting so that they can have an overview of
different types of expenses and revenues so that they can reach to a proper decision
(Baldvinsdottir, Mitchell and Nørreklit, 2010). The management accounting report contains
different amounts discussion like cash available, sales revenues, purchases, etc. which helps
in making decisions related to the organisation. The cost accounting and the financial
accounting reports are used as a base to make the management accounting reports.
In addition to above the importance of management accounting, attempts to study those costs
which are related to the production of products and services. As per this, there are some
systems which are used under management accounting systems.
These systems are as follows:
 Traditional cost accounting: This is the conventional method of accounting which
had a lot of different procedures as compared to modern accounting system. This
system is generally adopted by companies who are engaged in production sectors. For
keeping tracks related to costs, management uses job order process or costing
methods. These methods are mainly based on determining allocation of costs (Lukka
and Modell, 2010). About said firm, these allocations include different costs like
direct materials, direct labour and manufacturing expenses. The job orders are mainly
used by companies for large size projects so that wide number of expenses and
different costs related to each factor can be traced back easily. Apart from this, the
process costing refers to various costs that are related with procedures that are
undertaken to produce similar goods and services. The costs involved in this process
are difficult to identify as they are run in a continuous way.
 Lean accounting: The Lean accounting is a modern concept in management
accounting which presents a very wider view in terms of considering costs. It is
evident that different accounting systems which are used in management system only
considers various costs and their calculations (Garrison and et.al., 2010). While Lean
accounting presents a different view where after taking into consideration about costs,
it also presents ways that can help in minimising costs which can lead to eliminating
wastages from production. In stated business entity, the finance department gives
financial information to the top management so that they can take decisions by

measuring the profitability. However, they also make efforts which can aid in
elimination of costs that are proving to be of wastes by using given information.
 Throughput accounting: Generally, the throughput accounting system is not seen as
individual accounting process and taken into traditional system. The major purpose of
this system is to determine different constraints that are acting as a barrier in
production system of company (What are the different types of management
accounting systems? 2017). In cited organisation, this system is used at a broad level
so that deficiency of any material, labour or other facilities can be ascertained as early
as possible. This helps in reduction of these constraints so that they can be removed
and throughputs can be increased for enhancing production capacity. This results in
reduction of costs of product.
 Transfer pricing: The transfer pricing method includes various costs which are added
because of movement of good through each department and process. Thus, on each
stage, small portion of costs are added to the products which eventually gives benefit
to the organisation (Van der Stede, 2011). The calculation of transfer pricing is done
by including the expenditures that incurred for transferring the goods.
P2 Explain different methods used for management accounting reporting.
 Job cost reports: The job costs report is a significant accounting report which are
maintained by organisation so that they can have an information about position of
firm in context of profits and losses. In addition to this, it is an internal report which
are required by the top management so that they can take decisions regarding
modifications. These decisions regarding alterations are taken based on present
condition of firm as expenses and revenues can be adjusted in efficient manner. These
reports also act as a monitoring work in which each job's cost is studied and further
planning is done accordingly.
 Sales report: The sales report gives information about the sales of company as per a
specific time. This report is essential in taking a decision for top level management as
any increase or decrease in the sales units can have a considerable impact (Pipan and
Czarniawska, 2010). The sales report gives a detailed information regarding the
increase or decrease in organisation's sales for a period along with its causes. Any
positive changes in the sales are studied and continued for maintaining the current

level. While the decrease in a sales and productions are studied so that necessary
improvements can be done. By having a report on sales figures, the company can
match its revenues earned in that specific time so that a right status of organisation
can be determined.
 Cost accounting: The cost accounting presents a report which consists of various
types of costs that are incurred by said company. This report helps in making various
decisions which are useful in making changes in the cost structures. These changes
can help in attaining minimum cost of operations for company. This accounting report
also gives information about the company's performance as well as transfer pricing,
variance and standard costing which are used by internal management to take
significant information related to firm (Weißenberger and Angelkort, 2011).
 Budgetary report: The budgets are the basic requirement for any firm which includes
information about planning that is done by companies for allocation of funds. The
budgetary report includes planning in which management makes the standards for
performance as well as determine targets that are to be achieved by employees in a
particular period. Thus, the management takes decision after comparing the actual
results with planned ones based on which action plans are made if required. The
deviations occurring in results are attempted to remove with the help of corrective
measures. The budgets made in initial stages also help in keeping the cash outflow of
firm in control as due to strict budget, any unproductive investments can be avoided.

LO 2: Apply a range of management accounting techniques
P3: Calculate costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costs.
The income statement of an organisation states the performance of a firm in financial terms
which is based on a fixed period. In this statement, management attempts to demonstrate the
activities of a business which has resulted in creation of revenues or expenses (Pipan and
Czarniawska, 2010).
There are two methods per which income statement of a company can be prepared which are
Marginal and Absorption costing method. As per the given situation, statement in both ways
can be made in following way:
Illustration 1 : Income statement on marginal costing basis - change the table its not
marginal costing ( for marginal costing its not gross profit etc) make the interpretation of
the table after changing
The marginal costing method refers to a method in which either increment or decrement
regarding total cost of production incurred for making one extra unit is calculated.
Particulars Amount in £ Total in £
Sales 21000
Less: Variable costs and expenses
Cost of goods sold 6600
Variable production overhead 1200

Variable sales overhead 600
Total 8400
Costs 12600 £
Table 1: Income statement on the basis of marginal costing
Illustration 1: Income statement on absorption costing basis
The two methods of preparing the income statements have been presented in the
above figures. In the first table where calculation done through marginal costing method, it
shows that R.L. Maynard company has the cost of £12600 at the end of period. While in
second table, where calculation has been done through absorption method, has shown that
company has made a profit of £ 9300. in both methods, it is evident that organisation has
successfully made a profit (Shah, Malik and Malik, 2011.). While, it is significant to consider
here that amounts of profit gained in both methods are different. This difference is a result of

major point in which both calculations use to differ. The income statement based on marginal
costing which has shown profit of £12600 is depicting greater profits as it considers only
variable costs. Thus, the amount of total expenses in in this statement is £ 1800. While in case
of Absorption costing method, amount of profit is less as it considers both variable as well as
fixed expenses which are incurred by company because of production. Thus, both methods
have their own procedures of making calculations per which the amount of profit and loss can
be different.
In practical business situations, it is evident that Absorption costing method is better
to apply by companies. Said method of accounting takes into consideration both types of
expenses either it is fixed or variable (Harris and Durden, 2012). Thus, it is helpful in getting
more viable and right information about financial position of a firm. Contrary to it, the
marginal costing method only considers variable expenses. Thus, it does not give a true
picture of financial position. Therefore, most of the business firms use to adopt absorption
costing method. The absorption costing is better as it makes adjustments on the basis of
different operating expenses so that cost of company can be kept in control. In addition to
this, it also assist in ascertainment of the total cost so that profitability from that task can be
determined in advance.
Difference between two methods of management accounting techniques
There are several differences between both methods of marginal and absorption costing
methods which can be stated in below mentioned manner.
Basis of difference Marginal costing Absorption costing
Meaning The marginal costing is a tool
which is used for measuring the
cost of production considering
only variable expenses incurred by
a firm.
Absorption costing method is a
technique of measuring the total
cost of production including all
types of expenses incurred for it
(Kaplan and Atkinson, 2015).
Recognition of cost It considers only variables
expenses; hence it takes the
variables expenses as cost of
product.
Both types of fixed and variable
expenses are considered under cost
of product.

Calculation of
profitability
The calculation of profits can be
measured through a definite
method of profit volume ratio.
As it considers fixed costs as well,
it results into more fluctuating
results in profitability.
Impact on unit cost The per unit cost of products are
not affected because of differences
between amounts of opening and
closing stock (Lukka and Modell,
2010).
Due to inclusion of fixed
overheads, there is a considerable
impact on per unit cost of product
if there is a variance in opening
and closing stock amounts.
Presentation In this method, contribution of
each unit is highlighted
In this method, presentation is
done based on conventional
method as it highlights net profit of
each product.
Difference in profit
amounts
In this method, amount of profit
calculated is higher as it deducts
only variable expenses (Pipan and
Czarniawska, 2010).
This method shows relatively less
profit as it does include all types of
costs in calculation.
Purpose The marginal costing method is
utilised by organisations for
reporting system of internal
management. Thus, helps in better
management and decision making
in business.
The absorption costing method is
applied for reporting system of
external management (Garrison,
and et.al., 2010). It helps in better
management as well as in
treatment of inventory available
with business.

LO3: Explain the use of planning tools used in management accounting
P4: Explain the advantages and disadvantages of different types of planning tools used
for budgetary control.
Budgetary control is a process of evaluating the actual performance with the standard or
budgeted data and taking up correcting actions on deviations arrived. It also helps in
identifying that how effectively the mangers utilize budgets, control costs and operations in a
period. It is the tool of management accounting for planning and control. Budgets must be
prepared on the basis of past accounting data and considering the future expectations.
Budgetary control is having some merits and demerits (Burritt, Schaltegger and Zvezdov,
2011).
Merits Demerits
 It coordinates each activity into and
across the departments of an
organization for increasing the
productivity.
 It converts strategic plans into
actions for the coming financial
year.
 It provides a base to the performance
level for the organization.
 It is a layout of allocation of
cost/fund for the betterment of the
organization.
 It improves allocation of resources,
as all are clarified and justified
which is beneficial for the
production department.
 It provides an option for corrective
action by reallocations (Shah, Malik
and Malik, 2011).
 When budgets are applied
mechanically and rigidly, then the
major problem occurs.
 Due to lake of participation, budget
can be the reason for the employee’s
demotivation.
 It can cause unfairness perception
into the mind of employees which
affects their performance..
 It can generate politics and the feel
of competition among employees
which affects negatively on their
performance.
 Due to a stiff budget initiative and
innovation reduces at lower level,
and making it impossible of earning
more money by new ideas (Elbashir,
Collier and Sutton, 2011).

Planning tools of Budgetary control
Budgetary control includes identifying the results of the budget which one has
implemented. The tools of budgetary control are as follows:
 Variance Analysis
 Responsibility Accounting
 Adjustments of funds Zero Base Budgeting (ZBB)
1. Variance analysis: - Variance analysis means difference between actual and standard
or the deviation of actual from budgeted or standard. Variances are of various types
such as material cost variance, labour cost variance, overhead variance (Burritt,
Schaltegger and Zvezdov, 2011). These can be favourable or unfavourable.
Advantages Disadvantages
 For taking remedial actions, the reasons
can be easily found for overall variance.
 Sub-division of variance analysis reveals
the relation between various variances
(Garrison and et.al., 2010).
 Variance analysis shows the inefficient
performances and the extent of
inefficiency.
 For controlling cost, it has been used.
 Proper profit planning can be done by top
management.
 Cost reduction can be the better result of
managerial action.
 It is time consuming activity.
 Production can be hampered due to
identifying the cost reduction process.
 Extra employee can be hired for this work
(Elbashir, Collier and Sutton, 2011).
 More unfavourable variances can lead to
demotivation.
For instance, R.L. Maynard can make the variance analysis of estimated and actual
sales in order to find the difference in the budget prepared. It will help to assess that whether
different budgets prepared for R.L. Maynard are in favourable or unfavourable condition of
the company. Suppose the budgeted sales was GBP 9000 however the actual sales came out
to be GBP 10000. The budget shows favourable conditions for R.L Maynard.
2. Responsibility Accounting: - Responsibility accounting refers to a system in which an
individual person is responsible for preparing a report that shows the routine and daily

work performance of the company, department or section as per the requirement. The
individual may be president, functional or departmental head, supervisor, foreman etc.
it consists of some advantages and disadvantages (Gow, Ormazabal and Taylor,
2010).
These are as follows:
Advantages Disadvantages
 A sound mechanism for controlling has
established by this.
 The managers are forced by this to consider
the organizational structure and tell them
about their responsibilities and fix the
delegation of power.
 Actual achievements can be compared by
encouraging budgets. It creates the feel of doing work properly, as
it is going to be accountable (Garrison and
et.al., 2010).
 For applying responsibility accounting
system in the organization some
prerequisites must follow; (a) proper
organizational structure has to be there
so that clear identification of
responsibility centre, (b) delegation of
work and responsivity should be proper
and (c) reporting system should be
proper (Modell, 2010). If these
prerequisites are not complying, then it
is very difficult to have responsibility
accounting system.
 It becomes difficult to further analysis
of traditional way of classification of
expenses.
 In introducing this system, if
responsibility reports are different from
routine or daily reports then it is
required by the managers to having an
additional classification.
3. Adjustments of funds: - In adjustment of funds, adjustment entries are to be included
which is based on accrual based accounting.
Advantages and disadvantages of adjustments of funds are as follows:
Advantages Disadvantages By this tool error can be identified and
rectified. It helps in maintaining proper fund
calculations (Ward, 2012). With the help of this tool company can
manage its funds efficiently and
effectively. It leads to optimum utilization of funds
in the company.
 Adjustment of funds require a separate
calculation for funds.
 Separate employee is need to be hired for
calculating such kind of things.
 It requires time and cost for identifying best
possible option of adjustment of funds.

4. Zero Base Budgeting (ZBB):- Zero based budgeting is the method in which expenses
of the coming year is to be calculated on the basis of actual expenses which has been
occurred in the previous year on the incremental basis (Gow, Ormazabal and Taylor,
2010).
Advantages Disadvantages
 Accuracy-: In the regular method of
budgeting the chances of arbitrary changes
to the previous year' budget, but in the zero-
based budgeting method every department
has to look out each item of cash flow and
operation costs is to be computed
(Zimmerman and Yahya-Zadeh, 2011). So,
the accurate data has generated.
 Efficiency-: This method helps to increase
efficiency level in the company's
performance
 Reduction in redundant activities-: This
method also gives the advantage of
reduction in redundant or repeated activities
which is identification of opportunities and
more cost-effective ways.
 Budget inflation-: In zero based budget,
every line item has to be justified, that
overcomes the weakness of incremental
budgeting of budget inflation.
 Coordination and communication: It
motivates employees by coordination and
communication among the departments
through involving them in decision making
(Kaplan and Atkinson, 2015).
 Time consuming-: Zero based
budgeting is a time-consuming method
for the company or any other
government funded entries every year,
as in comparison to incremental
budgeting method which is easier.
 High manpower requirement-: For
calculating such complex method large
number of employees may require.
Many companies do not have that
much requirement of human resource
(Modell, 2010).
 Lack of expertise-: For this method
evaluating each line item with its cost
is very difficult task. And it requires
training to the managers.
R.L Maynard can use this method to develop a budget where it is prepared based on
the actual expenses that were incurred by the company in previous year. For instance, If R.L
Maynard has incurred expenses of GBP 500 in the previous year then the budget of the
current year will be based on the expenses of GBP 500 and not on the budget that has been
going with the company since years.
P5 Use of management accounting system for financial problems
 Traditional cost accounting- It is a that type of methods that help the R.L. Maynard
limited in which they assign the overheads costs and it also includes that are the direct
cost such a direct labour hours and machine hours that are need to produce any type
of products (Macintosh and Quattrone, 2010). It is a most effective methods that is
used to solve the major financial problems that aid the management to optimum

allocate the cost that are divided into various that include machine hours. Material
hours and direct labour hours. The most of the organisation follow the traditional cost
accounting to solve the financial problems and make a financial report that will help
the firm to enhance value.
Traditional cost accounting calculate the cost involved in producing the product based on
labour and machine hours. R.L. Maynard can select a cost driver, say, labour hours and based
on these labour hours, it can calculate the cost per labour hour incurred by the company. As
the company has to make tailor made construction and it becomes difficult to calculate the
correct cost because the company has invested different time for different projects.
Traditional cost accounting comes to rescue through which it becomes easy to calculate cost
per labour hour or machine hour based on the requirement of the company.
 Lean accounting- It is a that type of accounting that modify the accounting, it is also
used to control and adopt by most of the firms to take measurement and it help the
company to motivate those changes and also make the decisions that are high-
effective. The R.L Maynard limited follow the lean accounting as it help them to
solve the various financial problems that are arise in the organisation it help them to
remove the defects as well as omission that are present in the workplace (Lukka and
Modell, 2010). Along with that, it gives the organisation to make the most important
decisions fast and also make the every things in the organisation clear that are
understood by all the individuals in the organisation. Therefore, in the lean accounting
there is not necessary to make any preparation of traditional management accounting
that are included most methods in it are the financial reports, cost-plus costing,
activity-based costing and complex financial reports etc.
Being involved in construction activities, R.L. Maynard has to take care of the material being
used by the company during construction. In order to control the cost by adopting minimal
wastage during the projects. It will reduce the prices for the end customers as well. It will
help to establish cost control activities in the organisation. Due to reduction in cost, company
will experience higher profits and results in growth of the company.
 Throughput accounting- Throughput accounting is contrary approach to the
traditional approach of accounting. This new concept of accounting put focuses on the
decisions relate to the finance on an entire system and not only for the are on which
investment has made. This is to be done because not only an individual item is
involved in the cost of production but also the entire system has to be involved. This
technique of accounting totally changes the thought process of whole organization

regarding revenue recognition, costs and profitability. This does not lead to change
the legal and annual accounts. The benefits of using throughput accounting are as
follows:
1. It has more focus on the sale of products through which company can generate more
money.
2. It is beneficial for better judgement on which investment has made.
3. This is beneficial for make or buy decision which bare based on bottom line.
 Transfer pricing- In the transfer pricing if the goods are sold across the boundaries
there are some rules and regulations that are regulate by the government for the
pricing transaction of any type of goods (Weißenberger and Angelkort, 2011). The
products that include in it are the transferable properties such as any gift, equipments
and capital goods etc. Therefore, the various legislations as well as regulations that
are levied on those products by which that allow the tax authorities to adjust on price
of those goods that are transfer from one boundaries to another countries boundaries.
Along with that, it also help the management to measure the cost and also solve the
various financial problems that arise in the workplace. Thus, it also make sure that
there is an accuracy and fairness due to the various rules as well as regulations of
transfer pricing. Along with that, the another products that levied the various pricing
laws are the loans, various services and also tangible as well as tangible properties
(Van der Stede, 2011).
In addition to this, it can be said that by having an application of management accounting
values the profit can be advanced. In cost plus pricing approach, mark up or profit percentage
is added on the cost of material, labour and overhead. It is the easiest method which helps in
determining the price of product ad services in the best possible way. It also allows to have
effective consideration of working capital ratios so that financial measures can be taken into
account. It also helps in understanding the current ratio and quick ratio so that sustainable
measures can be taken into account. Along with this, it also allows business firm to have
effective understanding of KPI’s. Factors that have low cost and provide maximum output in
regard to financial statements indicates as a key performance indicators. Moreover, the
budgetary target is also dependent over management accounting. By having an understanding
of diverse measures in regard to financial terms the budget can be framed in order to have
effective application of strategies.

CONCLUSION
From the above report, it has been concluded that by taking into account the tools of
management accounting R. L. Maynard can develop suitable framework for the near future.
Besides this, it can be inferred that by conducting variance analysis business unit can assess
the deviations take place in the financial aspects. Hence, by assessing the causes of deviations
business unit can develop suitable and highly realistic budget for the near future. Along with
this, it has been articulated that marginal and absorption costing is highly differs from each
other. Hence, from evaluation it has been identified that absorption costing method is highly
effectual which in turn helps in determining suitable amount of profit. It can be revealed from
the report that zero base budgeting is the most effectual techniques which in turn helps in
developing suitable monetary plan. In this way, by using proper use of finance business unit
can achieve success in the highly strategic business environment.

REFERENCES