Understanding of Managerial Accounting System

This report provides an understanding of the managerial accounting system and its benefits. It discusses different techniques and tools used in management accounting, such as cost accounting, price optimization, inventory management, and job costing. The report also explores the relevance of management accounting reports and the use of planning tools in solving financial problems. The subject of the report is management accounting, and it is applicable to the course code XYZ123 in the College/University of ABC.

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
P1) Understanding of managerial accounting system with their benefits....................................3
P2) Relevance of management accounting reports......................................................................5
TASK2.............................................................................................................................................7
P3) Brief explanation regarding management accounting techniques.........................................7
TASK3.............................................................................................................................................9
P4) Explanation of benefits and drawbacks of planning tools.....................................................9
TASK4...........................................................................................................................................12
P5) Explanation regarding use of management accounting tools for solve financial problems.
....................................................................................................................................................12
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15
APPENDIX....................................................................................................................................16

INTRODUCTION
Management accounting is tool of accounting which help in assist management
department to formulate better plan and control over the business organization. To understand
this concept Rio Tinto has been taken. It is manufacturing organization which is incorporate as
Anglo Australian corporation it is famous for run its business activities in mining sector and
provides metals products. This report has been formulated to define the use of management
accounting system relevance of management reports with theses system and how accounting
technique useful for determine value of business transactions. It also measure the benefits and
drawbacks of applying various planning tools and relevance of theses tools to solve financial
problems with using benchmarking. Key performance indicator and relevant tools of managerial
accounting.
TASK 1
P1)Understanding of managerial accounting system.
Management accounting: The term management accounting is refer as a system which
business entities apply for recording transaction and collect information , represent theses data in
effective way. Main purpose of apply this system is take relevant decision. This approach is also
know as managerial or decision making accounting (Messner, 2016). Following are different
kinds of managerial accounting system which Rio Tinto can apply are define below:
Cost accounting systematic: Organizations implement approach of cost accounting
system through which they can identify value of their profit by recognizing or calculate cost of
running business activities. Various technique has been apply for identifying cost value which
include, marginal costing, absorption as well as standard costing method. This system is useful to
calculate the value of purchasing raw material, process of running or acquiring assets and all
theses activities which help in convert raw materiel in to finished goods (Kostyukova and
er.al.2018). Cost value of theses activities has been determine
Essential requirements: This system is use by cost department of Rio Tinto. They use
this system to determine the cost value of each department. By using information from cost
management system manager of Rio Tinto able to take decision regarding cost of purchasing raw
materiel from those suppler who can provides quality of raw material at minimum cost. As well

as on the basis of this information manager can compare their budget cost with actual cost incur
and formulate policies which beneficial or their internal users.
Price optimization system: There are various types of pricing strategies which
organization can be adopt. By using price optimization system manager take decision which
pricing strategy beneficial for their business entity which help in attaining business gain. In
competitive business market organization use price skimming, price discounting, premium, and
price penetration strategy ((Bedford, and Speklé, 2018). Every strategy is useful according to the
stage of business life cycle thus by using management accounting price statement Rio Tinto able
to take decision which pricing policy useful for selling metal products.
Essential requirements:Price optimization system is used by sales manager of Rio
Tinto. On the basis of information collected by internal source, their sale manager choose the
price penetration strategy accounting to the stage of business life cycle. This strategy is
beneficial for organization as it will provides satisfaction to customers as well as useful for attain
profits. Shareholders also took their decision on the basis of recognize demand and preference of
their target market customers.
Inventory management system: Stock is consider as essential or valid element of every
organization. Managing stock help in controlling cost and useful for identify the requirement of
maximum or minimum number of order require for particular time period. Manager of Rio Tinto
by using ABC analysis, inventory management technique, help in determine level of stock. By
applying theses technique manager recognize cost of storing as well as time taken to fulfil the
order of customer. Stock management system is useful in determiner the value of inventory for
particular period of time .
Essential requirements:Information collected form inventory management system is
useful for production department of Rio Tinto. As it is the largest manufacturing organization
and to manage and control the materiel and stack of metal in efficient manner. This information
is reliable for internal department by using essential data from using various system of inventory
manager can present information in systematic manner which useful for further business
activities. Manger of Rio Tinto on the basis of identifying cost of each stock can able to divided
each segment of cost.
Job costing system: By using job costing system manger could recognize the value or
cost arising for fulfil demand of each customer. This system is separate and useful for calculate

value of each transaction. Cost department of Rio Tinto us information collected from job
costing system.
Essential requirements: By collecting essential information from using job costing
system manager of Rio Tinto able to take decision regarding which activities which may become
the reason of arising high rate of cash outflow as well as useful for collect information which
help in attain business profit. Job costing system help in manage profits and control cost .This is
relevant for internal user for organization.
Differences between marginal coasting and Absorption costing
Marginal costing Absorption costing
In this only variable cost are consider by
organizations during the time of calculate
profit.
In this fixed as well as variable both cost are
considers.
In this fixed cost are considers as period cost.
And profit volume ratio has been calculated by
judging the difference of profitably.
Each cost are charged according to their
department. Every cost bear particular share of
fixed cost.
During the time of calculating marginal costing
the rate of cost per unit remain constant or
same.
In this method of costing cost per unit has been
reduce due to the impact of reduction in fixed
cost.
P2) Managerial reports
Report: This is relevant term for every business organization. It is mandatory document
which have all the essential information regarding business activities. The main purpose of
preparing report is to provide direction for running business activities. Following are the report
has been formulated by Rio Tinto
Cost report: This document has been prepared to summarise information regarding each
cost element or activities which incurred cost. All the information has been collected or
communicated through using cost accounting system. By formulating cost accounting
report , ,manager of Performance report: can able to easily find out the value of their each
business activities as well as cost required for fulfilling demand of customer. This report define

summery of each transaction and activities which may cause of generating higher business
revenue. Cost report has been formulated for identifying each transaction cost which beneficial
for internal as well as external business stockholder (Samuel, 2018).
Performance report: Management department of Rio Tinto formulated this report to
recognize performance of each department. In every organization, sales, marketing, research,
manufacturing and finance all department are categories. In case of Rio Tinto this organization is
run business in manufacturing sector thus their main focus of formulating performance report is
to analysis whether production department is able to fulfilled budgeted quality criteria. They also
measure that wherever department attain the quality or not. On the basis of recognizing
performance report manager able to compare their financial performance with other
organizations as well as they can able to take decision regarding providing reward business
policies.
Budget report: This report is the summery of all the report formulated by Rio Tinto.
Budget report define future expected profit as well as values of business activities. All these are
project on the basis of data collected from difference management accounting reports. This
report useful for Rio Tinto to recognize the value of future business asset and impact of decision
they take at present time period. On the basis of finding out budgeted value of each business
transactions manager took their decision and change further business policies which useful to
attain business gains.
Account receivable report: This is consider as essential business report. Rio Tinto done
their most of transaction on credit thus it is really difficult for them to manage their cash assets.
By formulating report of account receivables organization can able to manage and collect
essential information regarding their debtors. On the basis of collecting essential or reliable
business information regarding position of debtors manager could able to find out number of
debtors which may be consider or treated as doubtful debtors as well as those debtors which are
not given their debt amount or many consider as non performing assets. Manager of Rio Tinto
took decision and implement those policies and offer which help in control the number of bed
debts by providing attractive offer and cash discount. They also formulate policies which can be
control the cash outflow activities and increase cash inflow business activities.
Management accounting system is play vital role following are the benefits which Rio
Tinto gain by implementing of theses system:

Management accounting system Benefits
Cost accounting systematic Cost accounting system useful in determine
cost required for each business activities by
applying tools of management accounting. Rio
Tinto use cost accounting system m for collect
information to their internal source..They use
this information to formulate strategies which
cut cost of running irrelevant business
activities and optimize use of resource (Tan,
2019).
Price optimization system By cussing strategies of price optimization
system organization able to determine their
value of products and on the basis of that Rio
Tinto use price penetration strategy. They
select this strategy on the basis of analysing
market environment condition. This will useful
for sales department. Organization able to
attain business profits by determine price of
various products .
Inventory management system This system is useful in control and manage
cost of inventory. Manager of Rio Tinto use
technique of managing inventory which help in
control and manage cost of stock and manage
time of ordering and providing service and
product to customers (Johnstone, 2018).
Job costing system Rio Tinto use this system for their internal cost
department. On the basis of using techniques of
job costing manager able to recognize value of
customer's each order and on the basis of that
they can manage cost required to complete

demand of customers.
TASK2
P3)
Marginal costing: This technique of management accounting is help in identifying profit
value by considering only variance element which used for the time of production are
distribution of goods process. Thus it is know as variable costing method. This provides base for
calculate cost volume as well as cost benefits analysis . Marginal costing useful in determine
value of organization's net profit by increment or reduction in particular units. Manager use this
approach to identify impact of units on generating business profits.
Absorption costing: In this method value of profit has been calculating on the basis of
identifying and took all relevant or essential elements for calculating value of cost by using
absorption action. In other words formulating cost statement by using absorption method require
both direct a s well as indirect variables (Horton, and de Araujo Wanderley, 2018).

Variance: Theses are also consider as essential technique of management accounting. By
calculating variance manager can easily find out reason of arising deviations. Theses are includes
material , labour and overhead variance (Gogaev and et.al 2019).
Stock management technique: Manager of Rio Tinto use LIFO as well as FIFO and
average costing method through which they can recognize level of opening as well as closing
stock (Procházka, 2017)

TASK3
P4)
Planning tools: Techniques which use to formulate plan are known as planning tool. In
other words planning tool are consider as those tools which provides direction for future business
planning. Following are various types of planning tool which Rio Tinto use
Budgetary techniques: Theses consider as those techniques which useful in formulate
budget. Theses budgets help in providing direction as well as define value of future profit.
Organizations have many choice to formulate their budget (Granlund, and Lukka, 2017). Theses
are consider as essential tool of management accounting. On the basis of formulate budget
organization able to take decision regrading business policies.
Activity based budgeting: In this type of budget, manager prepared financial statement on
the basis of recognizing allocation of activities and resources . In this type of budgeting resource
are allocated and distribute on the basis of activities run by different departments. Following are
its benefits and drawbacks
Advantage:
Activity based budget help in providing accurate business information by allocating
resource in effective way.
This tool of budgettiing help in utlized and mangge resource in effectve way.
This budget is useful in cutting unnecessary business activities.
Disadvantage
Formulate budget on the basis of allocation of activities require time.
Manager need to hire person who have great knowledge and understanding regarding
market and accounting norms.
Zero based budgeting: This is consider as modern method of formulate budget. In case
of Zero based budgeting manager prepare budget on the basis of information collected from
initial source or zero level.
Advantage:
This method is useful for motivating staff to find new ways of functioning and run
business activities.

Disadvantage
It is difficult for finance manager to justified each item cost when there will be no use of
production units (Oyewo, Ajibolade, and Obazee, 2019).
This type of method not useful for multinational organizations.
Pricing strategies: There will be various strategies are use for determine value of
product which organizations offer to their customers. By applying price penetration, discounting
or premium strategy manager formulate plan ans took decision regarding rate of profitability as
well as cost arise during their time of setting value of products. All these decision are take by
using pricing strategies.
Advantage:
Price strategies help in attain business profits by increasing value of products.
By applying pricing strategies organization able to attract more customer by achieving
higher sales target.
Disadvantage
Formulating business policies on the basis of using pricing strategies may not provides
accurate result as value of price are not rigid.
Costing techniques: Cost is essential elements ,manager of business entity by applying
technique of measuring cost can able to determine value of each product's cost. This will useful
in formulate business plan. Manager by using marginal, absorption costing can able to determine
cost of each business activities.
Advantage:
By using cost technique manager took decision regarding which plan is beneficial for future
business activities which help in generate business profits.
Cost strategies useful in find out those activities which help in controlling cost.
Disadvantage
For determine cost of each department 's working activities manager need to hire cost
accountant who has knowledge regarding accounting standard norms (Van der Stede, 2017).
calculation of cost is complex process. It is not necessary that cost statement gives correct
statements. Manager use absorption costing method thus they are not able to accurate identify the
value of profit.

Other strategically tools: Manager by using tools of strategic management can also
formulate business plan. It consider SWOT , PESTLE and porter's 5 model. On the basis of
collecting information by using these tools manager able to formulate their plan to attain future
business target.
Advantage:
By using SWOT analysis manager able to find out strength and weakness of their
organization. Which help in formulate policies to enhance weakness.
PESTLE analysis help in collecting information regarding external environment factors.
On the basis of that manager able to determine the strategies use by competitors and trends run
preference of customer. All these are help in formulate business plan.
Disadvantage
For using strategic management tool manager require to hire expertise who have
knowledge regarding the market area.
Manager of Rio Tinto use activity based budgeting as it is manufacturing organization
and it is essential for them to allocate resource in effective manner, to manageorganization.. By
applying price penetration strategy they able to raise profits. Manager also use strategical tool
for guideline and took direction for formulate business plan.
TASK4
P5)
Financial problem: It is situation which arises due to lack of financial resource.
Organization specially small or medium size business entities. The main reason of organizations
face from these problems is that they are not able to manage their assets as well as businesses
liabilities which become the reason of cash outflow business activities. Thus organization face
from monetary business issue. Rio Tinto is facing financial issue they by observing technique
use by multinational organization can apply business policies (Setiawan, Rahmawati, Djuminah.
and Widagdo, 2019).
Mismanagement of financial assets: Nestle suffers from financial problem as they are not
able to manage their cash assets. They use policies which are not reliable for collecting cash
from debtors, moreover organization also face problem as their value of asset is comparatively
low and they are not able to control wastage business activities.

Reduction in rate of revenue: Cadbury is one to the popular brand in chocolate sector
however this organization is also face financial problem due to decrement in selling rate. They
are not utilized techniques and work in according with customer preference thus their rate of
selling has been decline.
Management
accounting
techniques
Responding to the financial issues using
management accounting systems
Nestle Cadbury
Benchmarkin
g
Benchmarking is a technique of
measuring performance of
organization on the basis of setting
benchmark. Manager set
benchmark on the basis of using
past record as well as on the basis
of finding rival industries bench
mark. Nestle use this technique for
evaluate their performance by
setting target for increase sell and
performances. On the basis of
setting benchmark they can
increase performance and cash foe
activities by improving
performance of organization 's
human resources.
This organization is face financial
problem due to the reduction in sales
unit. By using benchmark management
department of Cadbury set their sale
target and give incentive to department
on the basis of completion of set target.
This method help in increases sales as
well as inner motivation of employee.
Which influence them to work in
effective manner.
Advice for Rio Tinto to use
‘benchmarking’ technique:
Rio Tinto use benchmarking, this will help in setting target for
sales and on the basis of that management department of this
organization can raise their sales volume which help in increases
cash inflow activities. Through which organization able to
overcome their financial problems.
This is consider as quantifiable This tool is useful for setting target

KPI
(key
performance
indicator
measurement tool of management
accounting. Nestle use this tool to
track or measure performance of
organization for particular period of
time. By using this method they can
observe performance of each
department and on the basis of that
they formulate strategies which help
in control or cutting usual business
activities. Which will help in
managing business assets in effective
manner.
and on the basis of that Cadbury
resolve their financial problem. They
set key performance indicator and
measure performance criteria on the
basis of using this tool (Saeidi,
Othman, Saeidi, and Saeidi, 2018).
Organization by measuring their sell
units and asset target of can able and
use the tool of key performance
measurement.
Advice for Rio Tinto to use
KPI: COMPANY FOR
FUTURE PLANNING
Key performance indicator help in managing the performance .
By applying or set standard organization able to determine their
cause of arising financial problem. And on the basis of that they
measure performance of their business department. Theses are
useful in attaining business advantage which help in overcome
the financial problem. Key performance indicator useful in
setting performance market an on the basis of that organization
understand their problem and formulate policies which help in
overcome problem, Rio Tinto by applying key performance
indicator able to overcome from theses problems. Organization
by setting their target of selling unit can able to measure KPI
Balanced
scorecard
It is consider as tool of strategic
management. Which help in identify
or measure performance of
improvement. Nestle use this tool for
increase their employee ability by
motivating (Curry,2019).
This tool is used by Cadbury for
recognize value of external
outcomes. On the basis of that they
formulate policies and strategies
which help in attaining business
goals by improving value of revenue.

Manager of Rio Tinto by using planning tools and benchmark as well as key
performance indicator tool can able to set target and on the basis of information collected from
strategic planing tool they formulate budget which help in cut throat wastage business activities.
This will useful in attaining business profits and overcome financial problem.
CONCLUSION
From the above analysis it has been concluded that business entities for maintain their
position in market economy require to manage their resource, specially financial resource. To
control and manage resource manager use management accounting approach. Which by using
system of managing cost, took price decision and control wastage of investor can able to manage
their financial resource. By using absorption as well as marginal costing and variance,
organization able to find out value of deviation,to reduce this deviation manager apply planning
tool which help in reduce rate of deviations. Manager by applying benchmarking, balance
scorecard and finance governance overcome problem and issue arise due to lack of monetary
resources.

REFERENCES
Books and journals
Kostyukova, E. I., Vakhrushina, M. A., Shirobokov, V. G. E., Feskova, M. V. and
Neshchadimova, T. A., 2018. Improvement cost management system for management
accounting. Research Journal of Pharmaceutical, Biological and Chemical Sciences,
9(2). pp.775-779.
Messner, M., 2016. Does industry matter? How industry context shapes management
accounting practice. Management Accounting Research, 31, pp.103-111.
Bedford, D. S. and Speklé, R.F., 2018. Construct validity in survey-based management
accounting and control research. Journal of Management Accounting Research, 30(2),
pp.23-58.
Samuel, S., 2018. A conceptual framework for teaching management accounting. Journal of
Accounting Education, 44, pp.25-34.
Tan, H.C., 2019. Using a structured collaborative learning approach in a case-based
management accounting course. Journal of Accounting Education, 49, p.100638.
Johnstone, L., 2018. Theorising and modelling social control in environmental management
accounting research. Social and Environmental Accountability Journal, 38(1), pp.30-48.
Horton, K.E. and de Araujo Wanderley, C., 2018. Identity conflict and the paradox of embedded
agency in the management accounting profession: Adding a new piece to the theoretical
jigsaw. Management Accounting Research, 38, pp.39-50.
Gogaev, O. K., Ostaev, G. Y., Khosiev, B. N., Kravchenko, N. A., Kondratiev, D. V. and
Nekrasova, E.V., 2019. Zootechnical and management accounting factors of beef cattle:
cost optimization Research Journal of Pharmaceutical, Biological and Chemical
Sciences, 10(2), pp.221-231.
Procházka, D., 2017. The unintended consequences of accounting harmonization in a transition
country: A case study of management accounting of private Czech companies.
Contemporary Economics, 11(4), pp.443-458.
Granlund, M. and Lukka, K., 2017. Investigating highly established research paradigms:
Reviving contextuality in contingency theory based management accounting research.
Critical Perspectives on Accounting, 45, pp.63-80.
Oyewo, B., Ajibolade, S. and Obazee, A., 2019. The influence of stakeholders on management
accounting practice. Journal of Sustainable Finance & Investment, 9(4), pp.295-324.
Van der Stede, W. A., 2017. “Global” management accounting research: some reflections.
Journal of International Accounting Research, 16(2), pp.1-8.
Setiawan, A.S., Rahmawati, R., Djuminah, D. and Widagdo, A. K., 2019. Owner power,
deliberate strategy formulation, and strategic management accounting. Opcion, 35(89),
pp.254-270.
Saeidi, S. P., Othman, M. S. H., Saeidi, P. and Saeidi, S. P., 2018. The moderating role of
environmental management accounting between environmental innovation and firm
financial performance. International Journal of Business Performance Management,
19(3), pp.326-348.
Curry, A., 2019. Across the great divide: a literature review of management accounting and
operations management at the shop floor. Management Review Quarterly, 69(1), pp.75-
119.

APPENDIX
Capital Joinery Ltd manufactures and sells a single product. The following budgeted/ actual
information is provided in relation to the production of this product: All costs are in GBP. Show all
workings very clearly.
Selling price per unit 250.00
Direct materials per unit 60.00
Direct labour per unit 40.00
Variable production overheads per unit 20.00
Details for the months of May and June 2020 are as follows:
May June
Production of Product A 100 80
Sales of Product A (units) 100 75
Fixed production overheads are budgeted at £2,000 per month and are absorbed on a unit basis. The
normal level of production is budgeted at 100 units per month.
Other costs
Fixed selling £1,000 per month
Fixed Administration £3,000 per month
Variable sales commission 2% of sales revenue
There was no opening inventory of Product A at the start of May.