Management Accounting and Different Types of Management Accounting Systems

This report discusses the concept of management accounting and different types of management accounting systems. It also explores the uses, advantages, and disadvantages of various planning tools used in management accounting.

UNIT-5 MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................3
SCENARIO 1...................................................................................................................................3
P:1 Management accounting and different types of management accounting systems and its
requirement.................................................................................................................................3
P:2 Different methods of management accounting reporting.....................................................5
P:4 Uses, advantages and disadvantages of various planning tools used in management
accounting...................................................................................................................................7
LO:4 Comparison of organisation in adapting management accounting system to respond to
financial problems.......................................................................................................................9
SCENARIO 2.................................................................................................................................11
P:3 Marginal and absorption costing........................................................................................11
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................16

INTRODUCTION
The management accounting is defined as that branch of accounting which assist the
company in dealing with the analysis of the financial information to take effective decision for
management of company (Amara and Benelifa, 2017). It helps in identifying the weaker or loss
making areas of business beforehand. Management accounting is done for internal use by the
managers and is not required to be shared with external parties. The main purpose of
management accounting is the internal management of the company by using various financial
information.
This report is based on the management accounting system and its application in the
context of Capital Joinery Ltd, a medium sized financial consulting firm headquartered in
London, UK.
This report includes different types of management accounting system and its need and
application, methods of management accounting reporting, advantages and disadvantages of
various planning tools in budgetary control and how Capital Joinery Ltd has adapted
management accounting systems in order to respond to various financial problems.
SCENARIO 1
P:1 Management accounting and different types of management accounting systems and its
requirement
Management accounting as the term itself has management is used for managerial
purposes which involves collecting financial and non-financial information, analysing the
information, applying various tools and techniques of management accounting, interpreting the
results and communicating the same for decision making, problem solving and policy
formulation. Management accounting helps in the internal management of the organization and
its outcomes remains in the business itself and is not meant for sharing with anyone outside the
organization. Also, the reports of management accounting need not be audited by the auditors.
There are some of the most important benefits and objectives of management accounting
for the fulfilment of which the management resort to management accounting. It helps in
decision making, solving financial problems, strategy formulation, effective planning,
controlling and organizing business activities and adopting the efficient business practices
(Azudin and Mansor, 2018.).

Management accounting uses various systems in order to evaluate and analyse the
operations and activities of organization for the purpose of management is termed as
management accounting system. Such systems vary with the type of industry the management is
working and accordingly the type of system to be applied has been decided. Like here in this
report we are taking the financial consultancy firm Capital Joinery Ltd, which has its own way of
doing management accounting which would be best suited to them in working efficiently and it
must be adopting one of the management accounting system for its internal evaluation. There are
certain types of management accounting systems like cost accounting system, job costing
system, inventory management system and price optimization (Cescon, Costantini and Grassetti,
2019).
Cost accounting system is the technique used by management for cost controlling, estimating
cost of various business activities, profitability measurement, inventory pricing, etc. The cost
evaluation helps in profitable business operations and helps in maintaining efficiency in
operations. Cost accounting system is of two types job order costing and process costing where
the former is based on manufacturing costs of each job in the production of products and the
latter is based on manufacturing costs of each process involves in the product manufacturing.
Here Capital Joinery Ltd also has different job and processes required in financial consultancy
and incurs cost accordingly. So to minimize the cost and maximize profits they must have proper
cost accounting system in place (Fuzi and et.al., 2019).
Advantages Disadvantages
Cost reduction
Elimination of unnecessary waste and losses
Advising on making or buying decision
Based on past performance
Cost is ascertained on basis of full utilisation
Job costing system is the type of management accounting system which helps in
knowing the cost associated with each and every job performed as per the customer’s
specifications. The system is useful in estimating the cost in order to define the price of each job
offered, so that the reasonable amount of profit can be earned.
Advantages Disadvantages
Cost is ascertained at any stage of completion
of job
There is not any standardisation of job
This is expensive

Profit is earned from every job
Inventory management system refers to that system where the goods are being tracked
right from its procurement till the final supply in order to avoid both overstocking and under
stocking because both of these condition results in decrease in profits. This system can be more
beneficial if the techniques of inventory management have been applied properly.
Advantages Disadvantages
Cost saving
Time saving
It is very complex
Expensive
Price optimization is a system which involves the behaviour of demand function at
different prices, and then, this information is incorporated with the cost and inventory data in
order to define the price of the product that will generate good profits. Capital Joinery Ltd can
define its consultancy fees according to the cost they paid for hiring professionals for financial
advisory and their position in the market in terms of demand (Gibassier and Alcouffe,2018).
Advantages Disadvantages
It is time saving
There is having market transparency
It is very complex process
There is low security
P:2 Different methods of management accounting reporting
Management accounting reporting is all about preparing reports by the management for
future planning, regulating various organizational activities, timely decision making and
measuring the company's performance against the set standards. These reports are prepared on
regular basis in accordance with the requirements. Managers then critically analyse these reports
in order to introduce the required changes. Capital Joinery Ltd as a financial consultancy firm
follows management accounting reporting for analysing the reliability of its professional advice.
The different methods of management accounting reporting used by the organization are as
follows:
Account receivable aging reports involves information regarding how much credit has
been extended and how much collection has been done. This helps in avoiding bad debts because
a manager must have strived for minimizing bad debts as it will directly affect their profitability.

If the company is facing more and more defaulters, then it must redefine its credit policies as
because a reasonable amount of cash flow is necessary for business operation (Hutaibat and
Alhatabat, 2020.).
Performance reports are generated to give the deep insight over the performance of the
organization. Such reports are also prepared on departmental and individual basis where the
former gives insight into the individual contribution in the organization while the latter is based
on different departments in the organization. Performance reports helps in comparing the actual
performance with the set standards which is beneficial in devising various strategies for
achieving organizational goals. Capital Joinery Ltd prepares this report for evaluating the
performance of its professionals by analysing the investment growth and financial stability.
Job cost reports are based on evaluating costs of various job offered by the company
where each and every job are compared in terms of its costs and revenue so that the company can
focus on that particular job which generate more revenue rather than wasting time and resources
on those jobs which are less attractive and loss making. Capital Joinery Ltd can prepare this
report for analysing its professionals and expert’s capability and excellence in various financial
advisory so that they can focus more on that financial service where they can maximize their
returns (Langfield-Smith, Thorne and Hilton, 2018.).
M1
Management accounting system has many benefits for capital joinery if applied properly and it
must be helpful in decision making and internal management. If cost accounting system has been
followed by capital joinery, then they can have better control over their costs and would be
helpful in increased profit margins.
In case of job costing system where the cost of each job are ascertained and evaluated on regular
basis can help capital joinery to focus more on that job where they can generate more profits due
to lower cost.
Through inventory management system capital joinery can avoid losses due to overstocking and
under stocking because both the situation has an extra cost in terms of actual and notional costs
respectively.
D1

Both management accounting system and management accounting reporting has its important
role to play in every organization. By following the management accounting system,
management accounting reporting can be performed.
As per the view of management consultant Jim Henry, who says that if management accounting
systems and reporting are integrated properly in its processes then it will aid in decision making
and managing the internal affairs of the business efficiently. Also, the profit earning capacity can
be enhanced and the goals of the organization can be achieved successfully.
As against this, the management expertise John Gems says that not all organization can reap the
same benefits as other because it has been argued that only big organization who has a good
financial base can afford to have proper management accounting systems and reporting in place.
Also, it is regarded as a wastage of time on every small thing (Nagirikandalage and et.al., 2020).
P:4 Uses, advantages and disadvantages of various planning tools used in management
accounting
Budgetary control is the method of controlling various affairs of the organization, where a
budget is developed in advance and then the actual outcomes are compared with the budgeted
figures at the end of the period, and if any deviations are found then some corrective measures
are introduced to remove the deviations. Variances help in improving efficiency and better
decision making.
Budgetary control helps organisation in planning, controlling, coordinating and
improving performance.
Some planning tools used for budgetary control are as follows:
Operating budget controls day to day operations of the business and helps in improving
performance without delay. This budget involves control over operating expenses and makes it
easy to earn monthly targeted revenue. This budget provides smooth running of day to day
operations of the organization.
Application of operating budget in capital joinery is that they can set their target revenue and
operating expenses in the budget and at the end they can compare the actual revenue earned and
expenses incurred. This will help in avoiding past deviations by taking corrective actions on time
(Phan, Baird and Su, 2017).
Advantages of operating budget is that it helps in achieving smooth operations in day to day
business activities and capital joinery can achieve its desired revenue by controlling its costs.

Disadvantages of operating budget are that it’s a time consuming and expensive affair for such
a medium sized organization like capital joinery.
Cash budget controls the various inflows and outflows in day to day business activities. It
makes sure that the business has requires level of cash in hand to meet its day to day obligations
and also ensures that the cash has not been kept idle by investing the idle cash in short term
investment and earn profit on it.
Application of cash budget in capital joinery is that it can prepare cash budget to avoid
surplus or idle cash by making profitable investment and ensure its financial stability in meeting
its present short term obligations.
Advantages of cash budget is that it helps capital joinery in managing its inflows and
outflows of cash on weekly and monthly basis through this budget and ensures its short term
financial stability. It also helps in avoiding surplus and shortage of cash. Cash budget is one of
the indicators of financial position of the organization.
Disadvantages of cash budget are, if there is any mistake in ascertaining cash
requirement or preparing cash budget then the financial stability of the company will be affected
very much. If effective cash budget is not prepared, then there are chances of theft as well.
Sometimes limitations on spending can give negative results from losing profitable opportunity
(Quattrone, 2016.).
Zero-Based budgeting is the method of preparing budget for expenses that are going to be
incurred in the future on actual basis and not on some past trends or expenses that are already
incurred. As the name suggest that it is a zero- based which means the budget is prepared from
zero level as against the traditional way of budgeting where the previous budgets are just revised
by making alterations. For this budget re- evaluation of all business activities has been done and
each and every expense is justified before taking it into the budget.
Application of zero-based budgeting in capital joinery is that it can follow zero-based
budgeting for avoiding past mistakes in preparing budget because all the expenses that are
actually going to be incurred are considered here. This budgeting technique would be more
beneficial particularly for capital joinery because they are approaching for management
accounting consultancy for the first time, so they may not be having effective past budgets.
Advantages of zero-based budgeting is that it helps in efficient resource allocation as it
is not depended on past numbers and instead rely on actual figures which makes it more accurate

than other budgeting techniques. This budgeting helps in achieving cost efficiency by removing
non-productive activities and focusing more on productive and profitable areas.
Disadvantages of zero-based budgeting is that it is quite time consuming affair as
against traditional budgeting because here a lot of time is required for preparing budget from
zero level every time. Also, justifying each and every activity before taking into budget require
high, experienced and expertise manpower which is a very costly affair for a middle sized
organization like capital joinery.
Sales budget- this is an estimation which is made for the purpose of forecasting of the estimated
sales. This budget will assist the company Capital Joinery ltd in managing the work and
operations as per the estimates sales of the company.
Advantages
The major advantage of using this budget is that this assists the company in managing the
operations as per the estimated sales in the sales budget.
Disadvantages
On the other side the major drawback of this method is that for the business it is not static that
the future condition or the condition of the business environment is not stable.
In addition to this another major drawback of this method is that it is not at all easy for Capital
Joinery Ltd to forecast the future.
LO:4 Comparison of organisation in adapting management accounting system to respond to
financial problems.
Financial problems are referred as those circumstances where an organization has
financial instability. Such problem can arise any time in the life of the business may be due to
ineffective planning and cash flow issues. When a company is not even capable of providing for
its working capital, occurrence of unexpected expenses, capital inadequacy is some of the
financial problems faced by the organization anytime.
Some of the management accounting systems that are being used to respond such
financial problems are as follows:
Comparison of two organizations
Tools Capital joinery Clift joinery
Benchmarking Capital joinery has adapted the Clift joinery operating in the same

Tools Capital joinery Clift joinery
Benchmarking is the process
of creating a benchmark for
comparison.
benchmarking management
accounting technique for responding
to its financial problems which enable
them to compete with its competitors
in terms of profit earning, product
quality and financial position. This
competing organisation with whom
the performance has been measured
are termed as benchmark for an
organisation.
industry has also adopted this
technique for measuring their
product quality as this tool helps
Organisations for measuring its
performance in terms of products
and service quality, profit making,
production efficiency as against the
organization in the similar or other
industry serving the same or
different group of customers.
Variance Analysis
Variance analysis is the
technique of management
accounting system which
helps capital joinery in
analysing variations occurring
in its performance as against
the planned performance.
Capital Joinery has adopted this tool
of resolving problems related to
achievement of target profit to avoid
any losses and higher costs. If the
planned and actual performance are
not in the same direction, there is a
variation which can easily be detected
through variance analysis.
Clift joinery, on the other hand
apply this tool towards setting their
standards for production. And the
reason behind any variation can be
tracked and corrected without delay
(Tashakor, Appuhami and Munir,
2019.).
Key performance indicator:
Some of these indicators are
gross profit, liquidity ratios,
financial ratios. Such
indicators are varied with the
type of industry.
Capital Joinery for solving their
liquidity issues has adopted KPIs like
liquidity ratios to solve their short
term solvency problems. These
indicators for performance
measurement which helps in
monitoring the progress of business
in terms of achieving organisational
goals and financial position of the
Clift joinery who is in the same
industry as capital joinery has
adapted key performance indicator
management accounting system for
solving financial problems which
enables them to monitor its key
indicators of performance like
profit and various financial and
liquidity ratios.

Tools Capital joinery Clift joinery
company.
M4
By adopting all this management accounting system in responding to financial problems, like for
example capital joinery has adapted the benchmarking system which will help it in setting the
benchmark as its competitor. When the competitor is set as standards it would become easier to
compete in the market and leads to sustainable success through confidence and set expectations.
D3
Different planning tools like cash flow budget, operating budget are helpful in responding to
various financial problems because a budgeting is a technique which gives in advance an idea
about how many resources and fund are required and how much expense are expected to be
incurred to achieve the target. This advance knowledge helps in making timely arrangement for
the same efficiently.
SCENARIO 2
P:3 Marginal and absorption costing
Sales price/unit 250
direct Material/unit 60
Direct labor/unit 40
variable production
overhead / unit 20
May June
production 100 80
sales 100 75
fixed production overhead 2000
normal production level in
units 100
fixed selling 1000
fixed administration 3000
variable sales commission
2% of sales
revenue

Marginal costing
May June
25000 18750
12000 9600
0 0
0 600
9000
13000 9750
500 375
12500 9375
2000 2000
1000 1000
3000 3000
6500 3375
Absorption Costing
Months May June
Sales Revenue 25000 18750
less: variable costs 12000 9600
less: fixed production overhead 2000 1600
less: closing stock 700
cost of goods sold 14000 10500
Gross profit 11000 8250
less:

fixed selling 1000 1000
fixed administration 3000 3000
variable sales commission 500 375
net profit 6500 3875
Reconciliation of profit figures
profit as per absorption costing May June
6500 3875
Less: difference in unit of production* fixed overhead
per unit
0 400
profit as per marginal costing 6500 3475
Material variances
Material Cost Variance (SQ*SP-AQ*AP)
Standard Quantity (SQ) 2000
1600
Actual Quantity (AQ) 2400
Standard Price (SP) 12
Actual Price (AP) 9.33
Material Price Variance {AQ*(SP-AP)}
Actual Quantity (AQ) 2400
6400
Standard Price (SP) 12
Actual Price (AP) 9.33
Material Usage Variance (SQ-AQ)*SP
Standard Quantity (SQ) 2000
-4800
Actual Quantity (AQ) 2400
Standard Price (SP) 12
Material Mix Variance SP*(RSQ-AQ)
Standard Price (SP) 12
-6400Actual Quantity (AQ) 2400

Revised Standard Quantity (RSQ) :
AQ*AP/SP 1866.67
Material Yield Variance SP*(SQ-RSQ)
Standard Price (SP) 12
1600
Standard Quantity (SQ) 2000
Revised Standard Quantity (RSQ) :
AQ*AP/SP 1866.67
Inventory ledger for the month of May under Average cost method
Date Opening inventory purchase Issued balance
price quantity value price quantity value price quantity value price quantity value
01/06/01 35 10 350 35 10 350
01/06/09 38 15 570 36.8 25 920
01/06/15 36.8 12 441.6 36.8 13 478.4
01/06/20 32 10 320
3
4.71 23 798.4
01/06/23
3
4.713 10
3
47.13
3
4.71 13
4
51.27
01/06/27
3
4.713 3
1
04.14
3
4.71 10
3
47.13
01/06/30
3
4.713 2
6
9.43
3
4.71 8
2
77.70
Inventory ledger for the month of May under LIFO method
Date Opening inventory purchase issued balance
price quantity value price quantity value price quantity value
01/06/01 35 10 350 350
01/06/09 38 15 570 920
01/06/15 38 12 456 464
01/06/20 32 10 320 784
01/06/23 32 10 320 464
01/06/27 38 3 114 350
35 2 70 280
CONCLUSION
In this report it has been interpreted that how management accounting helps in internal
management of the organization and decision making activities. Further, in this report it has been
explained that there are management accounting systems like cost management system, job
costing system, etc. and management accounting reports like performance reports, job cost
reports which enables capital joinery in controlling, coordinating and managing various activities
of the organization. Thereafter, some planning tools like cash flow budget and operating budget

are explained along with their application, advantages and disadvantages. After this at last some
management accounting systems for solving financial problems are explained in the context of
capital joinery and its comparison with what system its competitor Clift joinery has adopted.

REFERENCES
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