Unit 5: Management Accounting

2800 word

Unit 5
Management Accounting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
P1 Management accounting and its system............................................................................3
P2 Management Accounting Reporting:................................................................................4
M1 Benefits of Management Accounting Systems:...............................................................5
D1 Integration of management accounting system and management accounting reporting in
organizational processes:........................................................................................................6
TASK 2............................................................................................................................................6
P3 Calculation of cost using management accounting techniques:........................................6
D2 Interpretation of the data:.................................................................................................9
TASK 3............................................................................................................................................9
P4 Different types of planning tools used for budgetary control:..........................................9
M3 Use of planning tools and their application in forecasting budgets:..............................13
TASK 4..........................................................................................................................................13
P5 Management accounting techniques used to identify financial problems:.....................13
M4 Analysis of how management accounting can lead an organisation to sustainable success:
..............................................................................................................................................15
D3 Planning tools respond appropriately to solving financial problems to lead organisations to
sustainable success:..............................................................................................................16
CONCLUSION..............................................................................................................................16
REFERENCES..............................................................................................................................17

INTRODUCTION
In today's economically changing world, the organizations have financial management
system that only provides the information and assistance of external organizational factors hence
the entrepreneurs are feeling the need of a system that can avail the information and manage the
internal activities and factors of an organization. For this purpose, the method which is evolved
is known as management or managerial accounting. Management accounting process was
followed at the beginning of 19th century and it differs from financial accounting in so many
aspects such as users of information and statements, format, legal aspects and others.
For the optimistic knowledge of management accounting process and its utilization, a
trainee management accountant of KEF LTD., which is the medium sized enterprise in the
manufacture sector. The company is preparing a report which explains the management
accounting, its systems, reporting process and various financial problems and their solutions with
the help of management accounting techniques. The report also includes some costing data and
information which help the management to better understanding of these managerial accounting
techniques.
TASK 1
P1 Management accounting and its system.
Management Accounting: The term management accounting can be defined as a
complete cycle that includes the process of collecting, recording, classifying, summarising,
preparing, presenting, reporting and controlling the financial and non-financial data in such a
manner so that it can help the management of the organization in order to measure the efficiency
and performance of the personnel as well as the operations and activities, planning the strategies
for achieving the objectives and making effective decisions to increase the profitability of the
company (Cuzzocrea and et.al, 2018).
Management Accounting System:
The management of KEF LTD follows various managerial accounting systems so that it
can impressively manage an effective business strategy. Some of them are elaborated below: Price Optimisation System: Price optimisation system is a mathematical analysis
technique that provides the information and material data about how the demand of a
product or service vary by the variation in price. It also analyse the behaviour and
reaction of the customers toward different price set for the same products in different

situations (Eckardt, Selen and Wynder, 2015). It records and classifies the information
and then apply it on cost of production of inventory to help the administration in opting
out the best price that improves the profit and customer satisfaction as well. For
collecting the information and observing costumer behaviour on different pricing, various
channels are used by KEF LTD. The company proposed different sets of prices to its all
age brackets' consumers and decide optimistic price according to them.
 Inventory Management System: Inventory management system is a framework that
includes the structure and process of maintaining and supervising the inventory of the
organization. Inventory is an essential asset for the company and it is necessary to
maintain record of it (Fullerton, Kennedy and Widener, 2014). It is crucial for an
establishment to manage and keep a proper record of the inventory whether it is raw
material, work in progress, finished stock in warehouse and showrooms, goods sent on
consignment or goods dispatched for delivery to vendors or customers. For tracking its
inventory, KEF LTD uses software which helps the company to solve the queries of the
customers on time and also guides to maintain the quality of the juice products.
P2 Management Accounting Reporting:
Management Accounting Reports: These reports are basically the result statements
which contain the variances between estimations, forecasts and actual outcomes related to
different activities and operations and are prepared and presented by management accountants to
help the management in controlling and planning appropriate guidelines and strategies for
betterment of the employees as well as the procedures. Performance Report: Performance report can be defined as a report card which is
provided to any person, activity or process so that the effectiveness of their efforts and
efficiency of performance can be measured in order to achieve their objectives. An
establishment uses this kind of reports to analyse the potential of its employees, strategies
and management as well (Giannarakis, Konteos and Sariannidis, 2014). This report
reveals the variance between the efforts done by the employees and efforts they supposed
to do. The receiver of this report is liable to perform the remedial activities to improve
the performance if required. KEF LTD. management prepares performance reports for
employees and activities so that they may be rewarded, trained or change accordingly.

 Accounts Receivable Aging Report: Accounts receivable are the receipts that an
organization has not received yet and has a right to attain it in near future. When
organization relies on credit transaction, it is vital for them to maintain a proper records
for the information about the debtors and trade receivables. Accounts receivable ageing
report is a statement that contains all the information concern with credit sales, maturity
periods, due receipts, due interest on late payments, contact details of the debtors, credit
policies, provisions for bad debts, etc. (Hirsch, Seubert and Sohn, 2015). The
management of KEF LTD maintain this report so that due amount can be received timely,
debtor turnover ratio and liquidity of the firm can be improved and credit policies can be
updated regularly.
M1 Benefits of Management Accounting Systems:
Management Accounting
System
Benefits
Price Optimisation System  This system helps in improving the quality of the juice
products according to customer requirements.
 Respective firm may fix the price to get the maximum
profit with minimum cost.
Inventory Management System  KEF LTD may improve customer satisfaction and
increase inventory turnover.
 The system controls over the cost of inventory stock
and provide a informational transparency (Yin and
et.al, 2015).
Cost Accounting System  This system assists the management in identify
unnecessary actions and fixing the product prices.
 Respective firm can reduce the manufacturing cost,
improves efficiency and saves time.
Job Costing System  This system measures the quality of the job, task or
work.
 KEF LTD may prohibit the excess costs and

duplication of work.
D1 Integration of management accounting system and management accounting reporting in
organizational processes:
Management accounting system and reporting both are the essential part of management
accounting processes. The system provides the policies, procedures and structure for the
reporting process. Without managing a proper accounting system, it is not possible for any
organization to collect and classified the data and information in such a systematic way that
management can utilize it (Wang and et.al, 2017). On the other hand, various reports provides
the variances and reasons behind them to the management which enables the administration to
co-ordinate different departments of an organization in order to create an effective system. For
example, if inventory management system will not work properly, it will be difficult to keep a
record of inventory and accurate variances cannot be measured in inventory management reports
and if reporting system will not provide accurate information to the system, management cannot
solve the queries of the customers. Hence it is must for the KEF LTD to maintain both the
system and the reporting process together in order to survive in the industry.
TASK 2
P3 Calculation of cost using management accounting techniques:
Meaning of cost: It is defined as the cash amount which is given up for an asset. This includes
all costs which are necessary to get and assets in the place and ready for use in appropriate
manner.
Different types of cost:
 Direct cost is the price which can be directly tied to the production for specific goods and
services. Indirect cost: that is not directly accountable to the cost objects on the particular project
and services, function and products.
◦ Variable cost is the corporate expenses which vary in the direct proportion to the
quantity of outputs.
◦ Fixed cost: this defined as expenses which do not change as a function of all the
activities which are relevant to the function and period.

Marginal Costing: Marginal cost refers the additional cost entangled in production of an
extra unit of product. Marginal costing is a method that assigned all the variable costs to the
value of sales while all the fixed overheads are written off from the contribution. The breakeven
point in this method is always equals to the fixed costs.
Advantages and disadvantages
Advantages Disadvantages
 This helps to make easier to determine
and control cost of production.
 This is simple to understand.
 This often problem of under or over
recovery of overhead.
 The external reporting cannot used in
external reports.
Absorption Costing: Absorption costing method is a bit rational from marginal costing method.
According to this approach, all the costs related to the production should be written off from the
sales profit (Marginal and absorption costing, 2017). In this method, all production related cost
such as direct material, labour, overheads and fixed manufacturing costs are deducted from the
sales and other fixed costs are allotted to the contribution. Advantages and disadvantages
Advantages Disadvantages
 It is compliance with GAAP and does a
better job of accurately tracking profits
than variable costing.
 This help to track profit accurately.
 This doesn't help to improve
operational efficiency.
 Not useful for comparison of product
line.
Preparing statements
Absorption
costing Marginal costing
Direct material 15 15
Direct labor 25 25
Variable Prod. OH's 10 10
Fixed Prod. OH's

(130000/20000) 6.5
Total Cost 56.5 50
Marginal costing
Income statement as per marginal costing for June is enumerated below: (when production is
19000 units)
No of units. Units / £ Amount (in £) Amount (in £)
Sales 18000 70 1260000
Prime cost
Opening stock 0 50 0
Production 19000 50 950000
950000
Less: ending inventory -1000 50 50000 -900000
Contribution 360000
Less: fixed production
cost -130000
Profit 230000
Particulars Figures (in £)
Fixed overhead absorbed on 18000 units 18000 * 6.5
= 117000
Fixed production overhead 130000
Under absorbed fixed cost (13000)
Statement of profit and loss for the month of June is as follows: (when production is 22000
units)
No of units. Units / £ Amount (in £) Amount (in £)
Sales 20000 70 1400000
Prime cost
Opening stock 0 50 0

Production 22000 50 1100000
1100000
Less: ending inventory -2000 50 -100000 -100000
Contribution 400000
Less: fixed production
cost -130000
Profit 270000
Absorption costing
P&L for June is as follows: (Production is 19000 units)
Particulars No of units. Units / £ Figures (in £) Figures (in £)
Sales 18000 70 1260000
Prime cost
Opening stock 0 56.5 0
Production 19000 56.5 1073500
1073500
Less: ending inventory -1000 56.5 56500 -1017000
Profit 243000
Less: under absorption -13000
Net Profit 230000
P&L for June is as follows: (Production is 22000 units)
Particulars No of units. Units / £ Figures (in £) Figures (in £)
Sales 20000 70 1400000
Prime cost
Opening stock 0 56.5 0
Production 22000 56.5 1243000
1243000
Less: ending inventory -2000 56.5 -113000 -1130000

Profit 270000
D2 Interpretation of the data:
As it may be seen that marginal costing and absorption costing approaches are having
differences in their presentation. In income statements, profit as per marginal and absorption
costing implies for £230000 respectively when 19000 units are produced. However, in the case
where 22000 units are produced profitability implies for £270000 significantly. Considering
overall evaluation it can be presented that firm should lay focus on undertaking absorption
costing system over marginal. Moreover, it provides suitable view of cost and profitability by
taking into account both fixed as well as variable cost of production.
TASK 3
P4 Different types of planning tools used for budgetary control:
In the context of business unit, planning tools are highly important which in turn facilitates
optimum utilization of financial resources. There are several planning that can be undertaken by
the firm for getting the desired level of outcome or success.
Budget: Budget can be defined as a statement or list of forecasted and estimated incomes
as well the expenditures of an organization that may take place in a specific time period. Budget
is a crucial part of management accounting that helps the management to plan its strategies and
make effective decisions in accordance with the potential of its employees and available
resources (Hoozée and Ngo, 2018). On the other side, budgetary control is a process that is used
to find out the variances between actual and budgeted figures. Management of the organizations
are habitant to compare the actual outcomes with budgeted figures so that variances can be
detected a time before they get worse.
With regards to KEF LTD, budgeting is highly significant which in turn helps in
managing and monitoring expenses effectually. By this, firm can do comparison of existing
performance and thereby identified loopholes. In this way, it enables firm to take appropriate
actions timely and thereby attain success. Further, through using budgeting tool firm can avoid
contingent situation pertaining to the near future effectually.
Flexible Budget: Flexible budget which is also known as variable budget is an easy
approach of preparing budget as it provides the estimations for various stages of production and

easy to get moderate. The figures stated in that kind of budget flex or changes with the change in
activities (Sledgianowski, Gomaa and Tan, 2017). It doesn't mean that static values change
according to the actual outcome, it means that budget is prepared for different level of production
with the changes in variable costs and trend deltas in fixed costs.
Advantages:
 This budget is more easy and flexible than fixed budget as it can be changed or modified
according to the market situation (Ríos, Bastida and Benito, 2016). This budget is prepared on the basis of principles and knowledge unlike the fixed budget
which is based upon judgement, assumptions and estimates.
Disadvantages:
 This budget interrupt the discipline and increase the chances of cheating within the
organization as it avoid the rigidity. It may be time-consuming as it needs estimation for various levels which is a prime
factor at the time of budget preparation.
Capital Budget: Capital budget is related with the estimated revenues and expenses
which may be affected by the capital investments. All the aspects related with capital such as
long term loans, investments, share allotment and forfeiture, purchase and sale of assets, bonds
and debentures are covered in capital budget (Ismail and King, 2014). KEF LTD uses this budget
to calculate payback period, ARR, IRR, capital employed, ROI, etc.
Advantages:
 This budget helps the management in making decisions related investments and maintain
the liquidity of the company. It also assists the management to evaluate the risk factor in any decision or activity.
Disadvantages:
 Preparation of these kind of budget demands skills and professionalism which may be
expensive for the firm. All the techniques used in this budget are based on assumptions and future events are
always uncertain which increases the risk factor.
Implications: for instance KEF Ltd has two investment proposal A and B with same initial
investment but different cash flows. In this regard, by applying investment appraisal tool
decision can be taken for the selection or rejection of proposal.

Project A
Computation of NPV
Year Cash inflows (in £)
PV
factor
@
10%
Discounted
cash inflows
(in £)
1 45000 0.909 40909.09091
2 58000 0.826 47934
3 52000 0.751 39068
4 66000 0.683 45079
5 78000 0.621 48432
Total discounted cash inflow 221422
Initial investment 190000
NPV (Total discounted cash inflows - initial
investment) 31422
Project B
Computation of NPV
Year Cash inflows (in £)
PV
factor
@
10%
Discounted
cash inflows
(in £)
1 47000 0.909 42727.27273
2 62000 0.826 51240
3 58000 0.751 43576
4 72000 0.683 49177
5 84000 0.621 52157
Total discounted cash inflow 238878
Initial investment 190000
NPV (Total discounted cash inflows - initial
investment) 48878
By applying investment appraisal tool on data set it has identified that KEF Ltd should
invest funds in project B over A which in turn proves to be more beneficial for it. Moreover, as

per NPV Assessment Company will generate higher return in monetary by investing money in
project B.
In this way, capital budgeting method facilitates selection of best project out of several
alternatives available.
Pricing: For fulfilling objective pertaining to profit attainment business unit is required to set
appropriate prices for the products or services offered. Hence, by taking into account below
mentioned methods KEF LTD can set competent prices for the offerings. Cost-plus pricing: According to this, by adding mark-up in unit cost calculated price can
be determined by the firm for offerings. For instance: Unit cost of the product is £50 and
company wants to attain 15% mark-up then price will be determined in the following
manner:
Price = Unit cost + (Unit cost * profit %)
Price = 50 + (50 * 15%)
= 50 + 7.5
=£57.5 or 58 Competitive pricing: In accordance with this framework, to remain competitive at
marketplace, KEF Ltd can set prices of the products or services in line with the rivals.
Through this, firm can get enough profit by influencing decision making of customers.
 Penetration pricing: KEF LTD can set lower prices initially for attracting large number
of customers. Once, customer loyalty has been built regarding services then firm can
generate profit by increasing prices.
Along with this, pricing decisions are also highly influence from the aspects of supply and
demand. Usually, demand for the product increases when prices are lower and vice versa.
Further, in the case of low supply price tends to higher comparatively. Thus, at the time of
setting prices management team of KEF LTD should keep in mind demand and supply related
aspects.
M3 Use of planning tools and their application in forecasting budgets:
Managerial accounting process provides material data and information to the
administration so that it can make plans and decision effectively in order to achieve
organizational goals. For this purpose, it has developed some planning tools which are known as
budgets. Various kind of budgets such as cash budget, capital budget, operating budget, fixed

budgets, flexible budgets, zero-based budget, etc. assist the management for forecasting
standards appropriately so that valuable resources of the company can be used effectively (Kale
and Carroll, 2016). The management of KEF LTD follows budgetary control techniques in order
to forecast the budget figures to measure them with accurately which ultimately helps in making
adequate decisions and increase the profitability of the company.
TASK 4
P5 Management accounting techniques used to identify financial problems:
Financial Problems: Financial problems can be defined as monetary or fund related
issues (McCrory and et.al, 2015). Some of the issues which are being faced by the respective
company are presented as under:
Late payment from customers: Now a days, organizations relies on credit term business
very much and that is why they have to sell their products and services on credit basis to their
customers. Sometimes customers, intentionally or unintentionally, fail to pay their due amount
on time which is known as delayed payment from debtors. It may cause a huge issue for the
manufacturing firms such as KEF LTD if it becomes a regular practise for the customers.
Key performance indicators: Key performance indicators which are also known as KPI are the
indicators that measures the performance of the establishment. These indicators are used for
measuring the efficiency of both financial as well as non-financial operations. This planning tool
is used to focus on the high performing activities which lead toward the achievement of main
objectives of the entire firm (Melitski and Manoharan, 2014). These indicators are mostly used
by the upper management which is responsible for solving major issues such as finance. The
upper management of the KEF LTD uses these indicators to identify the financial issues such as
unforeseen expenses and economic cycle as these are the major issues for any organization. In
that company have to motivate their employees by giving support to them and also use
appropriate techniques to achieve goals. This method is important to company to achieve success
by solving problems of company in an effective manner.
Benchmarking: Benchmarking is a process of setting some measurements and guidelines for
each operation and employee as well so that the set objectives may be achieved conveniently and
on time. In benchmarking process, the management analyse the strategies and working process
of those which are the best in the industry or sector and apply the procedure and standards within
the firm (Mohamed, Kerosi and Tirimba, 2016). With the help of this technique, the

administration of KEF LTD is able to standardise its credit term policies and liquidity position
which helps in find out the problems of delayed payments from customers and weak fund
management. The bench marking policy is another important aspects which is help for solve this
problem by setting planning phase by considering research of products and services through
examining the competitors in the market place.
Balanced scorecard:
This is effective and best is a performance metric used in strategic management to
identify and improve various internal functions of a business and their resulting external
outcomes. That is used to measures and provide feedbacks to organization. This helps in future
in order to solve any issues and conditions which will faced by company. This helps to company
for build strategic planning and management system, by aligning shared vision of success and
get people working on the right things and focusing on results. This effectively provide feedback
to company for solving those problems in proper manner as per vision of company.
SWOT analysis of KEF LTD. Company:
Strength Weakness
 The strong brand image at market
place.
 The equipments state of the art
technology.
 Extensive investment and efforts in
research and development leading
technology.
 Rapidly chantging industry in terms ofd
technology.
 Higher R&D costs to keep with
industry standard.
Opportunity Threat
 Diversify into other customer electronic
to cater to the lower income groups.
 Moving into the emerging markets.
 Rapid technology changes.
 Threat from their competitors.
Financial governance:
This refers to the way a company collects, manages, monitors and controls financial
information. This help to include companies track financial transaction with manage problems

performance and control the data and operations. This help to manage this problem by using
research of market by using proper rules and regulations.
Management skills:
There are various management skills which are helpful for manage work properly in the
proper manner. Those management skills are planning, communication and decision-making.
This help to solve problems by making proper planning and communicate proper strategy in the
proper manner.
Strategic planning:
Here, is use proper and effective strategic planning which is KPIs and Benchmarking.
Those are helpful for check the mistake and make senses of work in a proper manner.
M4 Analysis of how management accounting can lead an organisation to sustainable success:
Management accounting plays an important role in solving financial difficulties and
getting and holding sustainable success and that can be understood with below given points This
accounting process renders various planning tools such as reports and budgets which aids the
administration in forecasting and planning profitable objectives for the success of whole
organization (Popesko, Papadaki and Novák, 2015).
D3 Planning tools respond appropriately to solving financial problems to lead organisations to
sustainable success:
The strategic planning tools used by managerial accountants, are very utile in
determination of financial troubles. The budgetary planning tools such as capital and cash budget
are assistive in rendering information regarding investing and financial difficulties that may grow
in the establishment within a particular period and techniques like Key Performance Indicators
technique and benchmarking method are the best ways in distinguishing external as well as
internal manageable financial factors (Paul, Sarker and Essam, 2014). With the assistance of
managerial accounting methods such as corporate and financial governance, the monetary
problems can be detected before they take place and increase hugely and effective steps such as
following accounting principles and standards, applying provisions, etc. may be taken on time so
that KEF LTD may achieve sustainable success.

CONCLUSION
With the above described report, it can be concluded that management accounting is a
process which is used by the internal stakeholders, specially the managers to generate such
material information and reports that may assist them for strategic planning and impressive
decision making. For this purpose, various tools, techniques, methods and frameworks are used
by the managerial accountants such as various accounting systems to generate reports, budgets,
budgetary control, financial governing tools like KPIs and benchmarking, etc. All of them assist
the administration to forecast future plans, prepare policies and policies, issuing guidelines,
measuring the performance and take remedial actions.

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