Management Accounting Techniques for Financial Problem Solving

This project report discusses various management accounting techniques used to respond to financial problems in an organization. It covers topics like benchmarking, financial governance, key performance indicators (KPIs), and balance scorecard analysis. The report also explores the importance of planning tools in solving such issues. Additionally, it provides a comparison between marginal costing and absorption costing methods, along with break-even analysis and income statement preparation using these methods.

UNIT 5 Management Accounting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
A. Management Accounting and its different types of systems.............................................1
B. Management Accounting Reports.....................................................................................2
C. Evaluation of Benefits of management accounting system...............................................3
D. Evaluation of management accounting systems and management accounting reporting. 5
TASK 2............................................................................................................................................5
A.1 Absorption Costing and Marginal Costing methods......................................................5
A.2 Preparation of income statement as marginal and absorption costing method................5
B. Calculation of Break Even Analysis..................................................................................7
C. Apply the range of management accounting techniques and produce appropriate financial
reporting documents accurately..............................................................................................8
D. Interpretation of data for business activities as shown in Task 2......................................9
TASK 3..........................................................................................................................................10
A. Advantages and Disadvantages of budgetary control......................................................10
B. Application of planning Tools.........................................................................................11
C. Management Accounting System response to financial problems..................................12
D. Analysis of Management Accounting Techniques used to respond Financial Problems13
E. Evaluation of planning tools to solve financial problems................................................14
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................17

INTRODUCTION
Management accounting field of finance lays high level of emphasis on the internal
control through the means of several tools and techniques. In simple words, it can be stated that
management accounting includes both financial and non-financial provisions which in turn helps
account managers in decision making. In the following assignment, detailed information is given
about management accounting and its systems in context of Qbic Hotel. Such small sized hotel
unit provides accommodation services to the customers at cost effective prices. This project
report contains various types of accounting reports that are used and implemented by an
organization.
Criticism will also be done on benefits of different types of accounting system with their
techniques such as marginal costing and absorption costing. Moreover, requirements and needs
are contrasted for different types of management accounting. Further, practical aspects of project
are fulfilled by preparing income statement based on calculations of cost, calculating breakeven
point, etc. Last part of project report will highlight suggestions and recommendations for
implementing management accounting techniques pertaining to respond monetary problems.
TASK 1
A. Management Accounting and its different types of systems
Management Accounting could be termed as the process of managing reports and
accounts that are used to provide accurate financial condition of firm which helps in making day
to day decisions in an organisation (Agbejule, 2011). It is also known as cost accounting, a
process of measuring, interpreting, identifying, analysing and communicating information to
managers for achieving organizational goals. This process of communicating information helps
manager of Qbic, a hotel to cope up with changes and to evaluate actual requirement of financial
and non-financial provisions that are used in making decision.
Different types of management accounting system that can be used by Qbic are as follows:
It is a framework which is used to predict the cost of services for analysing profitability,
cost control and inventory valuation. Following are some accounting system such as:
 Cost Accounting System: It is also known as product costing system, it is used by Qbic
hotel to identify the cost of their services for analysing profitability, controlling cost and

evaluating inventory. A firm focus on evaluating profitability of products by estimating
correct cost of the services and products.
 Inventory Management System: It is a system of tracking goods and services through
the whole supply chain or a portion where a business operates (Baldvinsdottir, Mitchell
and Nørreklit, 2010). In simple words, it enables Qbic hotel to see all moving parts of its
operations activity by allowing them to make better decisions and investments.
 Job Costing System: This system tracks the cost, income of job and assists in identifying
profitability in job. Qbic hotel uses this accounting system to allow number of jobs that
are assigned to every individual including items of expense and revenues.
 Price Optimization System: This accounting system uses mathematical tools to analyse
customer’s response to different prices of its products and services through different
mediums and channels. Qbic hotel use this system to determine the best methods of
achieving objectives such as profit maximisation from operations.
B. Management Accounting Reports
These reports provide hotel information for cutting down cost, rewarding high
performing employees and investment in goods that offer the best financial return from
business. Reports could be generated quarterly, half yearly, monthly or on daily basis. Following
are some types of management accounting reports that could be used by Qbic hotel:
 Budget Report: This report provides deeper insight to the management team about the
extent to which budgeted figures are met. This type of report assist management in
analysing business as well as their own department and to control cost (Lee Jr, Johnson
and Joyce, 2012). This report is important for controlling different departments of
organization and to control cost services.
 Accounting Receivable Aging: This is a type of tool for managing cash flow after
extension of credit to business customers. Management team of Qbic hotel can use this
tool to identify problems which are being faced by company's collection process. This
tool will assist hotel in solving problems related to collection process for smooth
functioning of business transactions.
 Job Cost Reports: This reports displays expenses made in finance for a specific project
by business. Qbic hotel can easily match these with the revenue to evaluate job's
profitability. From this, company can identify high earning areas of the business so that

more focus could be made on them instead wasting time and money on areas generating
low profits. This report could be important for Qbic hotel to put efforts in areas which
requires improvement.
 Inventory and Manufacturing: This managerial accounting report is used to make
manufacturing process more efficient (Lusardi and Mitchell, 2011). This is significant in
comparing different assembly lines within business to highlight areas which needs
improvement. C. Evaluation of Benefits of management accounting system
Cost Accounting System
Advantages Disadvantages
 Elimination of Wastes: A good system
eliminates wastes by fixing standards.
 Cost Reduction: Use of new and
improved production methods leads to
cost reduction.
 Identify reasons of profits and losses: A
good cost accounting system highlights
reasons for increasing and decreasing
profits.
 Advises on decisions: By gaining cost
information management could decide
whether to make or buy a product in
open market.
 Price Fixation: Total cost that is
available in the costing records is
useful in fixing up price of a product or
services.
 Decision is taken by management about
future but only past records are
available in costing records.
 Cost data are not so useful as cost of
previous is not same in the succeeding
year.
 Cost may not be accurate if capacity is
partly utilized.
 Can lead to over absorption or under
absorption of overheads.
 Cost accounting system is rigid in
nature, hence cannot serve all purposes.
Job Costing System

Advantages Disadvantages
 Accounting staff can monitor to see if
costs are posted at wrong places to
correct them on the spot rather than
waiting for job closure.
 Company can monitor cost incurred for
longer posts and can make necessary
change before they close (Macintosh
and Quattrone, 2010).
 Cost plus customers are aware in
advance about the costs incurred for
which they can prepare in advance and
pay the additional amounts.
 It pays attention towards products
rather than on departments and
activities.
 Overhead is generally allocated based
on rates that are changed about once a
year.
 It promotes use of standards overhead
rates rather than using actual or requires
adjustment on time according to the
changes.
Inventory Management System
Advantages Disadvantages
 Lowering of costs: By using this
system an organization can cut off all
extra fees to prevent stuffing up of
storage with unnecessary items.
 High Efficiency: Effective inventory
system lead to appraisal of operating
performance which results in more
productivity.
 It also assist in managing adequate
supply of services.
 Further, it reduces duplication of
services.u
 Most inventory control software cost is
very high and a small business fails to
afford those high prices.
 Catching the basic principles of
software is quite difficult and time
taking too. So if an organization fails to
do so it won't work properly.
Price Optimization System

Advantages Disadvantages
 Industry Standard: Pricing according to
the mix of cost of producing the
product is quite easy.
 Price Management : Some managers
price the product to maintain cost
effectiveness of goods and services
regardless of buyers expectations , this
lead the organization to suffer losses.
D. Evaluation of management accounting systems and management accounting reporting
From assessment, it has identified that management accouting systems and reporting is
highly integrated with each other. It is very important for Qbic hotel to translate their effects of
operations into financial information to accomplish goals in a well manner. By quantifying
effects and ramifications of stakeholder’s information, management team can get suitable data
for decision making. It is better to start computerized accounting as it is more efficient and fast
as well, this process is compact also with minimised costs (Marks, Sisirak and Heller, 2010).
Integration helps in standardizing procedures for recording transactions and disseminating
financial information. It interconnects the reporting activities of different functional areas of your
business such as point of sale, stores, back office and front office. Hence, management
accounting reports and systems are integrated to supply accurate information for taking decision.
It is important as well to integrate management accounting system, to avail accurate and specific
information which in turn results in effective decision making. It is very good for an organization
to have an effective decision making power to set standards for procedures of recording
transactions.
TASK 2
A.1 Absorption Costing and Marginal Costing methods
For determining cost and assessing profitability aspect Qbic can use one of the following
techniques such as:
Absorption Costing: Such method focuses on absorbing manufacturing costs by the units
produced. In simple words, it includes cost of finished unit in inventory inclusive of direct
materials and labours. This is also known as full, direct and variable costing as it considers both

fixed and variable expenses while determining production cost. For the determination of
production expenses company considers both fixed and variable expenses. This type of costing is
often needed for external financial reporting and beneficial for income tax purpose.
Marginal Costing (MC): It is the change in opportunity cost that is there due to
increment in one unit of it. At each level of production MC could be calculated as cost of
additional units for producing next unit . Marginal cost includes all costs that vary with level of
output.
A.2 Preparation of income statement as marginal and absorption costing method
Particulars Amount Amount
Revenue 33000 33000
material 5600
labour expenditure 4800
Production expenditure
(variable) 1600
Sales expenditure (variable) 800 12800
Less: closing balance of
inventory
Direct material 1400
Direct labour 1200
Production expenditure
(variable) 400
Sales expenditure (variable) 200 3200
Cost Of Production (per unit) 9600
Less: Fixed cost 23400
Overheads (Production) 3200

Fixed administrative
expenditure 1200
Fixed selling expenditure 1500
5900
Net income 17500
Absorption Costing
Particulars Amount Amount
Total Income 33000 33000
Direct material 5600
Direct labour 4800
Production expenditure
(variable) 1600
Sales expenditure (variable) 800 12800
Less: Closing balance of
inventory
Direct material 1400
Direct labour 1200
Sales expenditure (variable) 200
Less: Sales expenditure
(variable) 600 3400

Less: Absorption of Overheads
(Fixed)
Cost of manufacturing 9400
Per unit contribution 23600
Less: fixed cost
Overheads (production) 3200
Fixed administrative
expenditure 1200
Fixed selling expenditure 1500 5900
Net Income 17700
B. Calculation of Break Even Analysis
Break-Even analysis
Particulars Formula Figures
Selling Price (per unit) 10
Variable Cost (per unit) 13
contribution (per unit)
Fixed expense
Break Even Point (in units)
Selling price per unit
Variable price per unit
Fixed cost/ contribution per
unit
27
6000
222
Break Even Point (in value or
monetary terms)
Break Even Point (in units) * 8888.8888

selling price per unit 888889
Units need to sell for attaining desired profit margin
Particulars Formula Figures
Fixed Expenses 6000
Desired profit 10000
Contribution per unit 27
Number of units required to
sell
Fixed cost + desired profit
margin/ contribution per unit
592.59259
25926
Margin of safety Actual Sales-Break-even
point/Actual sales
0.72
C. Management accounting techniques and appropriate financial reporting documents
From- MOA
To- GM
Subject- Giving information about approving management accounting technique which are
needed to be implicated.
Sir,
With context of interpreting valuable information which could reflect high creativity and
proper allocation of costs. Marginal and absorption costing are two types of management
technique which will help system in identification of required profits for Qbic hotel. Hence, in
this case procedure of absorption costing will be proper in order to get best results because it

dwells all cost that is incurred while doing production of units. Moreover, there are many
methods which are helpful to the management accounting techniques like:
1. Cash flow statements, historical checking
2. Analysing the financial accounts
3. Financial accounting
4. Communicating the information etc.
5. Review of the accounts.
By adopting both the methods it is clear that marginal costing profit of Qbic Hotel is
relatively low as compared to absorption costing. There is a profit of 17,700 absorption costing
and 17,500 in marginal costing techniques. Hence, it can be said that use of absorption costing
is much more fruitful to organization. It is a full cost method which shows the competent net
profit (Rioux and et.al., 2010). In marginal costing, all the uncertain expenses are taken into
consideration like direct labour and production overhead direct material. In absorption costing
method all fixed as well as variables expenses are taken into account. There are various
reporting techniques which are to be implemented in the organization are as under
 cash flows
 start up costing
 Balance sheet
 Budget and forecast table.
Thank you
D. Interpretation of data for business activities as shown in Task 2
Marginal Costing
By using and utilizing this method it is assured that Qbic Hotel does not encourage much
net profit generation. The profit that is attained by them in marginal costing method is 17500
which is relatively less than other technique being used. As this method move with the operation
of variable costs only and therefore do not consider any kind of fixed expenses while calculating.
Absorption costing

Through absorption costing Qbic hotel have achieved the net profit of worth 17700 which
is much more than marginal cost. Marginal costing consists of both variable and fixed into
consideration and then focuses on triggering out profits.
Interpretation
By applying above two techniques net profits, marginal and absorption costing is
calculated (Shim, Siegel and Shim, 2011). Through the applications it could be easily seen that
absorption costing is superior then marginal costing. Moreover, while determining production
cost it places emphasis on consideration of both fixed and variable expenses. Above is given
individual interpretation of the calculation of net profits.
TASK 3
A. Advantages and Disadvantages of budgetary control
It is a process of controlling finance in any business which involves comparison between
actual financial results and budgets. In simple words budgetary control means techniques of
managing and controlling utilization of budgets to enhance or monitor costs and operations in a
given fiscal period. Main objectives of budgetary control are as follows:
 Ensure future planning by setting various and required budgets.
 To enable costs centres and departments effectively and economically.
 Waste eliminating.
 Centralization of control system.
 Anticipation of capital expenditure for future.
 Fixing up of responsibility of every individual working in organization.
Following are some tools that could be used by company to assist planning for budgetary
control.
 Zero Based Budgeting: It is a technique which encourages and links existing plan for
budget and review processes. It helps in finding out the best alternatives for optimum
utilisation of available resources. In simple words, it is a method in which all expenses
are justified for each new period. This function and process starts from Zero Base and
everything is analysed for its needs and costs.
Advantages of ZBB:

1. Documentation: Items that are too costly or are not so important could be eliminated in
this type of planning as it requires paper work and considerable number of documents
that are passed to higher officials who review and have authority to eliminate.
2. Training: Proper training is given to all the staff members or officials who are involved
in this budgeting process (Siegel and et.al., 2010.). This is done to enable process with
commitment and to work properly on it.
3. Justified spending: Spending done in this type of budgeting plan are justified and clear.
4. Optimum utilisation of resources: Resources are not over utilised or underutilised.
Disadvantages are:
1. Justification Process: It could be quite difficult for anyone to justify every detail for a
budgeted item.
2. Frequency: It is a time-consuming process and takes more time to prepare a zero based
budget as compared to an incremental budget.
3. Costly and complex: This is a complex process with involvement of high costs.
4. Lack of long term planning: Long term planning cannot be afforded by organizations
as it is so costly and planning is done on future consequences.
 Activity Based Budgeting: It is a system that records, analyses and researches activities
that leads to generation of cost for a business. It is something more than just adjusting
previous budgets for business development.
Advantages of ABB:
1. More accurate costing of services.
2. Easy to understand.
3. Utilize unit cost instead of just using total cost.
4. Incorporate well with continuous improvement programs.
5. Facilitates benchmarking.
Disadvantages are:
1. It is very difficult and costly to manage and maintain ABB system once implemented.
2. Data must be used with care as it could easily be interpreted.
3. Reports generated from this system do not facilitate or confirm GAAP.

B. Application of planning Tools
Zero Based Budgeting reviews a project from ground level on an assumption that noting
is to be done to deal with all aspects of planning budget (Tsofa, Molyneux and Goodman, 2016).
Review is done on both existing and newly proposed activities. Qbic hotel will utilize zero base
budgeting by spending better forensic visibility. By adopting a simple process Qbic hotel will
implement ZBB in the company; firstly, identification will be done to find out decision unit in
terms of responsibility centres. Meaning decision units will be justified by analysing the amount
of expenditure, scope, direction and quality of task.
Secondly, in these steps packages will be developed and prepared to take decision, as it is
a set of documents which are used to identify and describe activities in way that management can
evaluate and rank against competitors. Third, in this step Qbic hotel will have to rank decision
packages on the basis of organizational needs and availability of funds. Fourth, availability of
resources will be kept in mind to meet the required or set alternatives. After following these
steps, managers and higher officials of Qbic hotel will be able to analyse the need and
requirement of budgeting to use it at its best and to enable optimum utilization of resources.
Activity Based Budgeting Method is a type of costing method which is based on actual
costs to design, manufacture and sell a product (Tumlin, 2012). This can be implemented by
Qbic Hotel by following mentioned steps; First, the firm will identify products whose costs is to
be defined. Further, hotel will focus on, figuring out of direct cost of product which could be
directly attributed to direct materials, direct labour, manufacturing overhead, etc. In third step
cost driver rate will be computed for each activity. Lastly, application of cost of products using
appropriate cost driver rate will be derived. By focusing on these simple steps and analysing each
aspect of budgeting, Qbic can achieve ABB method of budgeting.
C. Presenting how management accounting system can be used for responding financial
problems
There is involvement of 4 factors that evolve around to respond any financial problem in
an organization and are used by Qbic Hotel, which are follows:
1. Bench Marking: It is a process of measuring company's performance, processes and
services with other business which is considered to be the best in industry. Bench
Marking aims at identifying internal opportunities for improvement (Benchmarking,
2018.). There are basically two types of improvement opportunities; continuous and

dramatic on which bench marking aims at. Continuous improvement is incremental
which involve only small adjustments and settings to gather large advances.
2. Financial Governance: It is a type of way in which company collects, monitors,
manages and controls financial information. It also includes how company track financial
transactions, control data, manage performance, etc. These are policies and procedures an
organization uses to manage business data and ensure its accuracy.
3. Key Performance Indicators: These are a set of quantifiable measures used by an
organization to review its performance over a time period. These are used to identify
progress report of company in achievement of its strategic and operational goals. Further,
it is used to compare company's finances with that of others businesses within the same
industry.
4. Balance Score Card: This is a performance metric used in strategic management of an
organization in order to identify and improve various internal functions of a business
enterprise and their outcomes (Marginal and absorption costing, 2012). Mainly, it is used
to measure and provide feedback to company. It is a semi standard structured report that
Illustration 1: Example of KPI's
(Source: Key Performance Indicators, 2018)

could be used by Qbic Hotels to keep track on the process of activities performed by their
staff through managers.
Above mentioned factors are different in adapting when compared to other organizations.
Qbic implemented these accounting system factors to respond to financial problems. Qbic
adopted balance score card and KPI methods to respond financial problems whereas, Fontain
Motors a company in motor manufacturing industrial sector gives more preference to bench
marking and financial governance in order to maintain financial transactions.
D. Analysis of Management Accounting Techniques used to respond Financial Problems
Through Financial Governance Qbic Hotel can collect, manages and controls all the
financial information. By implementing this process company can track their financial
transactions for enhancing performance and controlling data. Qbic hotel will focus on financial
governance which is poor and can lead tofraud, misappropriation, etc. To respond financial
problems effectively benchmarking can be used, as it is a standard against set performance
through which security, mutual fund could be measured. Qbic hotel could be benefited by this
factor as after completion of this process bench marking will point out changes that will make
significant difference.
There are some set quantifiable measures that Qbic uses to measure its performance over
certain time period, known as Key Performance Indicators. Qbic can use this to determine
company's progress in fulfilling and achieving strategic goals. Financial performance could also
be compared with the other competitors with the help of KPIs. For enabling actual actions
missions and vision should be translated, this could be done by taking help from business score
card which is a type of performance model (Marginal Costing Vs Absorption Costing, 2018).
When it comes to Qbic, BSC was viewed by financial perspective to respond to financial
problems.
E. Evaluation of planning tools to solve financial problems
1. Bench Marking
Advantages Disadvantage
 A main advantage of benchmarking is
that it sets standards of performance
and focus at improving
 The major disadvantage of
benchmarking is that; it remains
inadequate to measure overall

competitiveness.
 It ensures better survival of business.
 It helps organization to select and
identify best practices in key business
processes.
 It gives reason to organization in order
to improve.
effectiveness of such matrices.
 There is a danger of complacency to
develop.
 It is worthless if not accompanied by a
plan to change.
2. Financial Governance
Advantages Disadvantage
 Good financial governance ensures
financial success and economic growth.
 It lowers the cost of capital.
 Puts positive impact on the share price.
 Helps in formation of brand and
development.
 Officers, employees and directors may
have direct access to confidential or
non-public information.
 There are many ways in it to present
fake accurate information on a
financial statement to mislead
investors.
 High cost of regulation.
3. Key Performance Indicators
Advantages Disadvantage
 Helps in connecting and compare data
from various sources.
 Have flexibility to create and customise
multiple dashboards easily (Zero-Based
Budgeting - ZBB, 2018).
 They are always online ao are easy to
share with others.
 No ability to deep dive into it when
needed.
 As it is easy to create new KPIs there is
a risk of creating homeopathic
analytics.
 KPIs changes with change in business
evolution.
4. Balance Score card

Advantages Disadvantages
 It adopts balanced and comprehensive
approach for judging an organization's
performance.
 It facilitates communication and
understanding of business goals.
 Brings strategy and vision in the centre
of management focus.
 It integrates financial and non-financial
goals into one single system.
 It is bounded with 4 perspectives.
 It is a vague concept and approach of
controlling an organization.
 Bases its approaches around four
perspectives only.
CONCLUSION
This project file is a complete study of management accounting in context of Hotel Qbic.
It summed up that there are various types of accounting systems that is cost accounting, tax
accounting, financial accounting, etc. which could be used by Qbic for analysing profitability,
cost control and inventory valuation. Moreover, this project report indicates preparation of
income statement with the help of marginal and absorption costing method with calculation of
break-even analysis. It is concluded that there is involvement of 4 factors in responding to
financial problems of an organization; benchmarking, financial governance, key performance
indicators and balance score card. Analysis is also done on these accounting techniques for
responding to financial problems with evaluation of planning tools to solve such issues.