Management Accounting and its Role for Business Entities

This article discusses the role of management accounting in business entities and its importance in effective planning, controlling, and decision making. It explores different types of management accounting systems and reports, as well as the difference between management accounting and financial accounting. The article also provides a step-by-step guide on how to prepare income statements under absorption and marginal costing.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
TASK 1............................................................................................................................................3
TASK 2............................................................................................................................................7
TASK 3 .........................................................................................................................................12
TASK 4..........................................................................................................................................13
CONCLUSION..............................................................................................................................16
REFERENCES..............................................................................................................................17
APPENDIX....................................................................................................................................18
...............................................................................................................................18

INTRODUCTION
The term management accounting (MA) is a type of accounting that is associated with
process of collection of monetary and non monetary data of business entities in order to produce
internal managerial reports (Al-Qady and El-Helbawy, 2016). In this accounting, each aspect and
element of companies are covered in a detailed manner so that management department can take
suitable steps in an effective manner. The main objective of project report is to understanding
about MA and its role for businesses. For better understanding, a manufacturing company has
been chosen that is The London Clothing Works (Sel Ltd). The company is located in London,
United Kingdom and operates in production of vital range of cloths.
The project report covers about different types of management accounting systems
(MAS), vital range of MA reports as well as budgets. In addition, financial statements are also
prepared on the basis of monetary data on assumption basis. Further part of project report covers
about role of MAS in sorting monetary issues.
MAIN BODY
TASK 1
MA and its role of business entities.
Management accounting- As above stated, the term MA is an accounting that involves in a
systematic procedure of collection of detailed information regards to various kinds of business
transactions (Wnuk-Pel, 2016). The objective of gathering this detailed information about
quantitative and qualitatitive aspects is to produce internal reports that help to managers in taking
crucial decisions in different situations. This accounting plays a significant role for companies
that are as follows:
 Helps in effective planning- This accounting plays an important role in the context of
making effective planning of different types of available resources. It becomes possible
because on the basis of gathered information, managers can analyse futuristic activities
that helps in better planning. Such as in the above London Clothing Works (Sel Ltd),
their managers of different departments make effective planning by produced internal
reports as accordance of this accounting.

 Helps in better controlling- In addition, MA is beneficial for companies in order to make
better control over different kinds of activities and operations. This is so because by
utilising key information from internal reports, managers become able to focus on those
activities that are leading lower profit or higher costs. Same as in the above London
Clothing Works (Sel Ltd), their managers control different aspects in an a better way by
help of this accounting.
 Helps in better decision making- Another benefit of this accounting is that it is useful for
better decision making (Akroyd, Biswas and Chuang, 2016). Such as in the above
London Clothing Works (Sel Ltd) company, managers take corrective actions and
decisions by help of this accounting.
Types of MAS:
 Price optimisation system- It is an accounting system that is aligned in a systematic
process of guiding companies for applying corrective pricing strategies. This becomes
possibel because under it, a proper research is done about customers' need, wants and
demand. On the basis of it, business entities become aware about what types of changes
are needed to be done in current pricing patterns. Thus, this accounting system is useful
for companies in order to set the prices at a level that can help in increasing total sales
revenues. Such as in the aspect of above London Clothing Works (Sel Ltd) company,
their sales department is using this accounting system in order to revise price of products
at a level that can help in increasing sales units.
 Inventory management system- This can be defined as an accounting system that is
assigned in the tasks of keeping track record of all types of inventories that is purchased
or sold out by companies. The objective of this accounting system is to make possible
that effective utilisation of stored material is being done by business entities. In addition,
it is essential for companies in order to keep the cost of material below estimation. This
accounting system manage all types of activitis and operations regards to inventory
management on the basis of effective technique of inventory valuation such as LIFO,
FIFO and weighted average method. In the London Clothing Works (Sel Ltd) company,
their production department make effective management of raw material like cotton, fiber
etc. in an effective manner by help of this accounting.

 Cost accounting system- It is an accounting system which is responsible for accurate
prediction and controlling of overall cost of various kinds of activities and operations
(van, Caperchione and Caruana, 2016). Under this accounting system, detailed record of
estimated cost and actual cost is included that helps to managers of companies in order to
keep cost lower of different operations. In the aspect of above London Clothing Works
(Sel Ltd) company, their finance department manage cost of various kinds of operations
and activities regards to productions by help of this accounting.
 Job costing system- This is an accounting system that is related with assigning cost of
each particular unit by help of computing total job cost. It is mostly applied by those
buiness entities wherein wide range of products are produced. This is so because by help
of this accounting, the production department become aware about which products cost is
below expected cost and which ones is not. Like the above London Clothing Works (Sel
Ltd) company, is involved in production of different types of cloths and help of this
accounting their production department assess the cost of each individual unit of
produced cloth.
Difference between management accounting and financial accounting:
Basis Management accounting Financial accounting
Purpose The key purpose of this accounting is
to do effective management of
internal perspectives.
While this accounting's objective is to
produce financial statements at the end
of accounting period.
Information Under this accounting both monetary
and non monetary information is
included.
On the other hand, in this accounting
only financial information is included.
Necessary This is not necessary to implement it
in each year.
While this is necessary to apply this
accounting for companies.

MA reports- These are kinds of reports that consists information about monetary transactions of
specific time period. The MA reports are useful for business entities in order to take corrective
steps for managing available resources. The above accountant of above London Clothing Works
(Sel Ltd) company produce below mentioned reports that are as follows:
 Accounts receivable ageing report- This a kinds of report that consists information about
total debtors whose payment is not received even after the due date (Phan, Baird, 2017).
The report keeps systematic record about date on which transaction is done, total debt
amount as well as interest rates. By help of this report, managers can easily access
information about total debt amount which is required to collect. Such as in the above
London Clothing Works (Sel Ltd) company, their finance department collects debt
amount from their customers in less time period and cost. Due to this their receivable turn
over ratio also improves.
 Stock report- It is a report, that contains information regards to quantity of all forms of
inventories such as raw material, work in progress and finished goods. Under this report,
information is included on the basis of proper valuation of inventories as accordance of
LIFO, FIFO and weighted average methods. It is beneficial for business entities in order
to control overall cost of storage. For example in the above London Clothing Works (Sel
Ltd) company, their production department utilise key information about raw material
and finished goods by help of this report.
 Performance report- This is a type of report that includes information regards to
estimated and actual outcome of different kinds of activities and operations. On the basis
of it, managers of companies take suitable action regards to improving overall
performance. In the aspect of promotion of employees, information provided by this
report plays a significant role. This is so because managers assess each individual
employees performance so that their progress can be assured. In the context of above
business London Clothing Works (Sel Ltd), their employees are promoted to upper level
on the basis of key information utilising through this report.
 Budget report- It is a report that includes information regards to estimated revenues and
expenses as well as actual outcome (Yigitbasioglu, 2017). Due to this, variance is
calculated of different activities that helps in taking corrective actions for futuristic time

period. In the aspect of above London Clothing Works (Sel Ltd) company, their
accountant produce this report with an objective of managing their financial outcomes.
As well as for better utilisation of available financial and non financial resources.
Benefits of MAS:
MAS Benefits
Price optimisation
system
This accounting system is associated with process of revising and
setting the prices at a level that can help in increasing total sales
revenues. In the aspect of London Clothing Works (Sel Ltd), their
sales managers set the price of cloths by help of this accounting.
Inventory management
system
It is linked with proper management of stored inventories in an
effective manner. In the London Clothing Works (Sel Ltd) company,
their manufacturing department implement this accounting system in
order to make better utilisation of available inventories.
Cost accounting system This accounting system is related with proper management of cost and
expenses of various kinds of activities and operations. Such as in the
above business entity, their finance department analyse key
information through this accounting system and manage overall cost
of different operations and activities.
Job costing system It is linked with process of assigning cost of job in order to calculate
cost of each individual produced output. In the aspect of above
London Clothing Works (Sel Ltd) company, their managers
implement this accounting system in order to get information regards
to cost of each produced clothing item.
Evaluation about how MAS and MA reports are integrated within organisational process.
In the MA, vital range of accounting systems and reports are included that helps in order
to effective internal management of various kinds of aspects (Talbot and Boiral, 2018). For
example in the London Clothing Works (Sel Ltd) company, they are using different types of
accounting systems such as price optimisation system, cost accounting system etc. each of these

system alignes with different departments. Like price optimisation system is integrated with sales
department as well as cost accounting system with finance department.
Along with the MA reports are also integrated within prcoess of above company. This is
so because accounts receivable report is linked with finance report and performance report with
human resource department. It indicates that MAS and MA reports are integrated within
organisational process of above London Clothing Works (Sel Ltd) company.
TASK 2
Preparation of income statements under absorption and marginal costing:
Absorption costing- It can be defined as a type of costing technique in which occurred cost in
completing business operations assigned in an equal manner. Such as fixed cost and non fixed
costs are assigned as cost of unit.
Marginal costing- This is a kinds of costing technique in that total occurred cost is considered in
a variant manner. Like fixed cost is considered as periodic cost and non fixed cost is taken as
cost of product (Carlsson-Wall, Kraus and Karlsson, 2017).
Profit and loss account:
Profit and loss statement under marginal costing for month of January:
Particulars DR CR

Sales revenue (13000 * 100) 1300000
Direct material (16000*35) 560000
Direct labour (16000*10) 160000
Variable cost (16000*8) 128000
Fixed production overhead 48000
Less : Closing stock (3000*53) 159000
Less: Cost of sales 737000
Profit 563000
Profit and loss statement under marginal costing for month of February
Particulars DR CR
Sales revenue (15000 * 100) 1500000
Direct material (13000*35) 455000
Direct labour (13000*10) 130000
Variable cost (13000*8) 104000
Add : Opening stock (3000*53) 159000
Fixed production overhead 39000
Less- Closing stock (1000*53) 53000
Less: Cost of sales 834000
Profit 666000
Profit and loss statement under marginal costing for month of March
Particulars DR CR

Sales revenue (13000 * 100) 1300000
Direct material (12000*35) 420000
Direct labour (12000*10) 120000
Variable cost (12000*8) 96000
Add : Opening stock (1000*53) 53000
Fixed production overhead 36000
Less: Cost of sales 725000
Profit 575000
Profit and loss account under absorption costing for month of January:
Particulars DR CR
Sales revenue (13000*100) 1300000

Variable cost:
Direct material (16000*35) 560000
Direct labour (16000*10) 160000
Less- Closing stock (3000*53) 159000
Fixed production cost (48000+2000) 50000
Less: cost of sales 611000
Profit 689000
Profit and loss account under absorption costing for month of February
Particulars DR CR
Sales revenue (15000*100) 1500000
Variable cost:
Direct material (13000*35) 455000
Direct labour (13000*10) 130000
Add- Opening stock (3000*53) 159000
Less- Closing stock (1000*53) 53000
Fixed production cost (39000+2000) 41000
Less: cost of sales 732000
Profit 768000
Profit and loss account under absorption costing for month of March
Particulars DR CR

Sales revenue (13000*100) 1300000
Variable cost:
Direct material (12000*35) 420000
Direct labour (12000*10) 120000
Add- Opening stock (1000*53) 53000
Fixed production cost (36000+2000) 38000
Less: cost of sales 631000
Profit 669000
Reconciliation statement between absorption and marginal costing:
January (in £) February (in £) March (in £)
Profit/ marginal costing 563000 666000 575000
Increase in stock level
Marginal cost/unit 737000 834000 725000
Absorption cost/unit 611000 732000 631000
Difference 126000 102000 94000
Profit/Absorption costing 689000 768000 669000
Interpretation of prepared financial statements.
On the basis of above prepared income statements, this can be analysed that value of
profit is variant in all three months. Such as under marginal costing method, the value of net
profit is of £563000, £666000 and £575000 in month of January, February and march. On the
other hand, in the absorption costing method value of profit is of £689000, £768000 and

£669000 in month of January, February and March. Though, financial data is similar in order to
produce income statements but value of net outcome is variant. This is so because of
consideration of cost in a different manner under absorption and marginal costing.
Accounting techniques to produce financial statements.
The accountants of companies prepare income statements as per absorption and marginal
costing techniques. Such as in the above London Clothing Works (Sel Ltd) company, their
accountants prepare income statements on the basis of above mentioned techniques.
Apart from these techniques, there are some other methods such as standard costing
method, activity based costing etc. In the standard costing technique cost of futuristic activities is
estimated and on the basis of it variance is calculated by comparing actual result (Goh and
Scerri, 2016). While in the activity based costing, costs are assigned as per each activity. Due to
this managers become aware about total cost as well as individual cost of each output.
TASK 3
Limitations and benefits of planning tools of budgetary control.
Budgetary control- It can be defined as a technique for management of performance in which
possible strategic outcomes are determined by help of budgets. This consists vital range of
planning tools and some of them are mentioned below in such manner:
1. Sales budget- This is a kind of budget that consists information related to expected sales units
and revenues as well as possible expenses that may occur in process of selling. On the basis of
this information managers of companies set their plans and policies in order to achieve target of
desired sales. The accountant of London Clothing Works (Sel Ltd) company prepare this budget
that helps to their production department in order to take corrective actions.
Advantages-
 This budget is beneficial for companies in order to allocate resources to various products,
sales territories etc. with an objective of realising forecasted sales.
 By help of this, companies can make financial plan for increasing total amount of sales
revenues.
 It is beneficial to beat competitors in an effective manner.
Disadvantages-

 One of the drawback of sales budget is that it is completly based on past data and in some
cases this may lead to huge financial lose.
 It requires additional skills of accountant which is not possible to find out in every
accountant.
2. Production budget- This is a kind of budget that consists information related to expected
production units as well as possible expenses that may occur in process of manufacturing (West,
2018). On the basis of this information managers of companies set their plans and policies in
order to achieve target of desired units of production. The accountant of London Clothing Works
(Sel Ltd) company prepare this budget that helps to their production department in order to take
corrective actions.
Advantages-
 This budget is suitable for those business entities that are involved in process of
manufacturing vital range of products.
 It makes possible better utilisation of available monetary and anti monetary resources.
 Helps in bring efficiency under production process.
Disadvantages-
 It has some common drawbacks such as higher consumption of time, cost etc. All these
aspects make this budget not affordable for small business entities.
 This is not suitable for small business entities.
 In addition, it takes too much time to make prediction of further value of production.
3. Cash budget- This is a budget that consists information about total activities regards to cash in
and out (Höglund and Sundvik, 2016). The cash budget helps to business owners in order to
manage networking capital. In broad manner, this budget shows how much cash is taking in by
company as well as how much cash is taking out. The accountant of London Clothing Works
(Sel Ltd) company prepare this budget that helps to their finance department in order to make
effective management of activities related to cash..
Advantages-
 This budget is beneficial for companies in order to find out potential defocits in quick
time period.
 As well as business entities can predict futuristic need of cash by help of this budget.

 It helps in minimising error regards to management of working capital.
Disadvantages-
 The main drawback of this budget is that it is totally based on estimations. As well as this
can be easily lose.
 It does not provide accurate estimation of futuristic cash requirements.
 This budget consumes too much time and cost.
So these are the main planning tools of budgetary control that are being used by above London
Clothing Works (Sel Ltd) company.
Use of different planning tools and their application for preparing and forecasting budgets.
In the planning tools of budgetary control different types of budgets are included which
helps in preparation of rest of other budgets (Jefrey, 2018). Such as in the context of above
London Clothing Works (Sel Ltd) company, their accountants use different types of budgets such
as sales budget, production budget and cash budget in order to make effective prediction of
possible outputs. It becomes possible for companies because on the basis of past financial
information accountants track the estimated outcomes in for preparing rest of other types of
budgets.
TASK 4
Analysis of ways in which management accounting methods help organisation to respond to
financial problems that will have sustainable success.
Financial issue- It can be defined as a kinds of negative situation in which companies do not
have enough amount of funds in order to complete different types of operations and activities
(Aouni, McGillis and Abdulkarim, 2017). This is essential for business entities to sort out these
issues in less time period otherwise it may lead to dissolution of firms. There are various types of
monetary issues that are faced by business entities and some of them are mentioned below:
 Lack of sales revenues- This is a type of monetary issue that is related with lack of sales
revenues due to decreasing in graph of total sales units. This monetary issue becomes
cause of raising some other problems such as ineffective capital structure as well as
decreasing in fund of liquidity. Such as in the aspect of above London Clothing Works

(Sel Ltd) company, it can be find out that they are facing this issue. This is so because
their sales of cloths is decreasing year by year.
 Increasing in amount of total expenses- It is also an another monetary issue that is faced
by most of the companies. The reason of this issue is inside firms is the poor management
of financial resources. Because of this financial issue, companies become unable to deal
with their operations and activities.
MA methods to respond financial problems:
 Benchmarking- This can be defined as a type of method in order to identify monetary
issues in which a company's financial performance is compared with competitive
business entity (Tracy, 2016). Due to this business entities become able to know the
aspects in that their performance is weak. In the aspect of above London Clothing Works
(Sel Ltd) company, they are using this approach with an objective to find exact issue.
 Key performance indicator- This is a type of technique for controlling monetary
performance of companies in which those activities are focused whose performance is
below expectations or over the standards. Due to this financial managers of companies
become able to know the exact monetary issues. As well as on the basis of it, they find
out alternatives in order to sort out the problem. In addition, there are two main
frameworks under this which are financial and non financial. In the financial KPI
revenues, costs etc. are that helps in measuring performance. While in the non financial
KPI employee- manager relation, supplier relation etc. are included.
 Financial governance- It can be defined as a kinds of approach in that entire monetary
transactions of business entities are recorded in a systematic manner for a particular time
period. In the context of above London Clothing Works (Sel Ltd) company, their
financial manager use this approach as a monitoring strategy in order to overcome from
financial issues in an effective manner.
Activity based costing- This can be defined as a kinds of technique of cost in which each activity
is assigned a particular fund. On the basis of it, companies can become able to find out actual
value of cost of different activities.

Balance scorcard- It can be defined as a type of performance measurment framework that focus
on assessing performance of a business entity by covering all key aspects. There are mainly four
prespective under this tool which are as follows:
 Financial perspective
 Customer perspective
 Learning and growth perspective
 Internal business process perspective
All these perspective can be useful in order to manage overall performance of businesses as well
as for overcoming the issues.
Comparison of companies in order to solve financial issues by help of MAS:
Basis of difference London Clothing Works (Sel Ltd)
company
Continental clothing limited
Monetary issue This company is facing monetary
issue of lack of sales revenues due to
decreasing in number of sales units.
As a result, this can be stated that
they do not have enough amount of
funds in order to pay their creditors
and operating different activities.
This company's monetary issue is of
increasing in total expenses. As a
result their liquidity funds are
decreasing and they are not able to
pay their short and long term debts.
It is effecting their reputation too.
Accounting
technique
The manager of above company are
using benchmarking technique for
finding and solving their financial
issue. It becomes possible because
they evaluate difference between
own financial performance and
competitive company's performance.
The company's financial managers
are using KPI technique in order to
find out exact issue. This is so
because by help of it they are able to
focus on those aspects which are
leading to higher expenses.
MAS The company is using price
optimisation system in order to sort
out their monetary issues. This
Their financial issue has been sorted
out by help of applying cost
accounting system. The reason of

becomes possible because they
revised their past pricing strategies
and changed it according to need of
customers. As a result, their sales
revenues started to increase and issue
of lack of sales revenue has been
sorted out.
applying this accounting system is
that it helps in making prediction of
futuristic expenses. As well as by
help of it, managers of above
company became able to prevent
those activities which are leading as
higher cost. Thus, by help of this
accounting system their monetary
issue has been solved.
MAS to solve financial issue.
The role of MAS is too wide for business entities because each accounting system has
integration with different departments (Arunruangsirilert and Chonglerttham, 2017). Such as in
the context of above London Clothing Works (Sel Ltd) company, their monetary issue of lack of
sales revenue has been sorted by help of price optimisation system. It became possible for them
by revising their price strategies. Similar in their competitive company, their issue of increased
expenses is solved by help of cost accounting system. Thus, it can be interpreted that MAS are
useful for solving issues.
Role of budgets in planning and controlling of financial resources that may help in solving
issues.
There are a number of budgets that play a crucial role in proper projection of financial
aspects. Due to this, managers of companies allocate funds under guidance of activities of
budgets (Rodriguez-Ariza, Martínez-Ferrero and Bermejo-Sánchez, 2016). It helps in the case of
solving financial issues because due to this companies can focus on those variances that are in
adverse form. Same as in the above London Clothing Works (Sel Ltd) company, their issue can
be solved by help of different kinds of budgets such as cash budget, production budget etc.

CONCLUSION
On the basis of above project it can be articulated that MA is essential for companies in
order to proper management of various kinds of department. The report covers about wide range
of accounting systems such as price optimisation system, cost accounting system etc. As well as
different MA reports like performance report, stock report and many more are also mentioned. In
the further part of report, different kinds of budgets such as cash budget, production budget are
concluded along with their role in companies. In the end part of report importance of MAS in
context of overcome monetary issues is concluded.

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APPENDIX
Financial statements of three months from absorption and marginal costing: