UNIT 5 - Management Accounting System Assignment

UNIT 5: MANAGEMENT ACCOUNTING
STUDENT ID CCL-019-023

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1 ...........................................................................................................................................1
P1.Management accounting systems and its various types:...................................................1
P2.Methods used for management accounting reporting:......................................................4
M1.Benefits of management accounting system: ..................................................................5
D1.Integration of Management accounting system with accounting reports:........................5
TASK 2............................................................................................................................................6
M2.Different techniques of management accounting system:...............................................9
TASK 3..........................................................................................................................................10
P4.Different types of planning tools for budgetary control:.................................................10
TASK 4..........................................................................................................................................12
P5.Adapting management accounting systems to respond to financial problems:..............12
M3.Use of different planning tools:.....................................................................................14
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................16

INTRODUCTION
Management accounting is a process of application of professional knowledge and skill
in the preparation of accounting information to assist the managerial personnel in planning,
implementation, control and monitor the operations of an undertakings. In this, Management
accountants use various information relating to cost of a particular product and provides
assistance to reduce the cost. To understanding the management accounting, a company named
Thirdway Group Plc is chosen, which is engaged in furniture, architecture work and other
company is given in this report named as Nero Ltd. This report is divided into four task, the
first task talks about the management accounting system, its various types and methods used for
management accounting reporting. Second task explains the different cost techniques for
analysis of cost and for preparation of income statements using marginal and absorption costing.
Third task provides the details about various planning tools used for budgetary control and their
advantages and disadvantages whereas forth task describes the ways for adopting management
accounting systems to respond the financial problems.
TASK 1
P1.Management accounting systems and its various types:
Management accounting is the process to prepare different types reports regarding to
internal activities then present in front of top management. In present time every organisation
want to maintain and control their internal system in effective manner so they can apply
management accounting system.
Management accounting system is the collection of activities relating to the monetary
aspects of an company which are necessary for recording of these transactions for future
perspective. It gives a systematic view of transactions and helps in smooth functioning of the
business operations. By the help of this, a summarised financial statements is prepared at year
end which includes balance sheet, profit and loss account, cash flow statements and so on. The
Thirdway Group Plc uses the various types of management accounting systems which are as
follows:
 Inventory management system: This system is very important in any organisation
because it tracks record of all the inventory chain in an organisation. It covers everything
from production to retail, warehousing to shipping and all movements of stocks since the

stage it purchased (Bennett and James, 2017). In an inventory management system,
various sub system exist which is essential part of this system such as warehousing
inventory management, retail inventory management etc. For this, various valuation
method are used like FIFO, LIFO and weighted average method for valuation of
inventories.
 Cost accounting system: It is also called product costing system and costing system also.
This system is a framework used by Thirdway Group Plc to estimate the cost of their
products and services for calculating the actual profits of the company. It is essential to
have this system in an organisation because by the help of this it can value its raw
materials, work in progress and finished goods and as a result, may easily find out that
which product is profitable and which one is not. Cost accounting system has mainly two
types, which are job order costing and process costing.
 Price optimisation system: This system is very useful in an organisation because it is
helpful in determining a preferred set of prices so that an organisation like Thirdway
Group Plc can increase its profitability for the interest of its stakeholders. It is
mathematical function that helps the organisation to determine in what way customer
react in different pricing situations for its products and services (Burritt and Tingey-
Holyoak, 2012).
 Job costing: In job costing system, cost is determined for a particular job or assignment
which is given to perform to a particular person. This helps the Thirdway Group in
establishing the workers performance relating to particular job and cost incurred related
to same job.
Distinction between management and financial accounting:
There are number of differences between financial accounting and management
accounting, some of these are as follows:
 Aggregation: Financial accounting is helpful in reporting the entire business activities
relating to finance which focuses only on the monetary items but management
accounting also focuses on the non monetary items and it provides more detailed report
related to product line, geographical region and so on.
 Efficiency: Financial accounting focuses more on achieving efficiency in profitability of
business whereas other is more engaged in proving efficiency in employees working.

 Standards: Financial accounting system is required to comply with various accounting
standards whereas there is no requirement of compliance in case of management
accounting.
 Timing: In financial accounting, financial statements are required to be issued at year
end but in management accounting, reports is prepared much more frequently for
shorter period.
 Valuation: Financial accounting involves valuation of asset and liabilities including
revaluation, impairment adjustments and so on. But in management accounting, there is
no requirement of such valuation.
 Systems: Financial accounting pays no attention to the overall business systems that are
responsible for generation of profits. But management accounting is interested in the
location of bottleneck operations that are ultimately responsible for enhancement of
profits of the company.
Origin of management accounting:
Management accounting is first emerged during early industrial revolution in leading
industries. It is arise after financial accounting hence it trace its origins and double entry book
keeping had been used for more than 300 years as provided by some researches.
Role of management accounting:
Forecasting: Management accounting helps the company in forecasting its future business
operations and required arrangements which helps the company to plan its work accordingly.
Decision making: Management accounting also helps the managers of company in taking
important business related decisions.
Cash flow: A cash flow problem may be solve by implementing the management accounting
which provides details in what portion funds is required in various operations.
Performance variances: it assist the mangers in evaluating and monitor the performances of
various employees in the company.
Rate of return: Management accounting provides the details about the required rate of return to
shareholders. Therefore, mangers may act according to this to achieve such point.
The role of the management accountant is to perform a series of tasks to ensure their
company's financial security, handling essentially all financial matters and thus helping to drive
the business's overall management and strategy.

Principles of management accounting:
Four globally accepted principles includes influence, relevance and value trust which
provides guidelines to the companies.
P2.Methods used for management accounting reporting:
In an organisation, management accounting reports is made for providing overall
overview of the management practices, policies and procedures to the top level management. In
order to carry out the reporting, similar formats are required to be used in all types of reports to
maintain integrity and avoidance of any mistakes in reporting. These reports can also be helpful
to understand of nature, size, complexity of various key matters for various stakeholders.
Thirdway Group Plc shall include the following reports that prepared in in different methods
which are as follows:
 Budget Report: This report is prepared by the management accountant and in this
reports, company forecast its business operations for some future period and instruct the
working staff company to work to achieve the figures as given in the budget report. If
there is any variances from budget report, then company shall require to find the reasons
for this and take corrective actions and measures to achieve desired results.
 Performance report: This report is prepared by an organisation for evaluating
performance of the business operations which is done by company's personnel. This is
prepared by the managers of the company to evaluate the efficiency and effectiveness of
the employees and taking appropriate action in case of performance is not up-to the
target standard and in case, performance of employees is greater that target performance
then providing incentives to the employees is good practice motivation of employees.
 Accounts receivable report: It is report which provides information about customer of
the companies who purchase the company's product on credit in chronological date
format. This is prepared by the manager to know how much money is receivable from
the customers and assist in taking appropriate action in case of non payment of money
by the debtors in pre-determined period. This report is also useful for maintaining a
requite amount of funds in cash for working capital requirements.
 Inventory management report: These types of report help in tracking inventory record
from the stage of buying the raw materials and to the stage of manufacturing of the

finished goods. It is advantageous for the company to prepare this report because it helps
the company in reducing the chances of stock out condition.
M1.Benefits of management accounting system:
There are tremendous advantages to the organisation when it uses management
accounting system, it helps the company to effectively and efficiently mange the operations of
the company smoothly without any interruption. (Maas, Schaltegger and Crutzen, 2016).
System Benefits
Inventory management
system
It can track record to stock at various stages of manufacturing and
evaluate that how to use material. It can help to reduce wastages
in effective manner.
Price optimization system The benefit of particular system to set effective price structure to
different types of products and understand the thoughts of the
several types of customers.
Job costing system It provides help to understand of specific role in order to manage
of direct labour, material and overhead.
Cost accounting system The particular system beneficial for the manager of Third way plc
in order to analysis different activities and track the record of
inventory.
Disadvantages
Costly It requires huge money in some time in some are of management
accounting
More time required For successful implementation of management accounting, there
is more time required. Therefore, it is not suitable where time is
the main constraint.
D1.Integration of Management accounting system with accounting reports:
Management accounting is an branch of accounting in which company's is prepare
reports for its activities which is done by the management staff, its employees etc. Management

accounting system and reporting are essential aspect of integrated within other managerial
activities and processes. For intense accounting process provides basic information for
preparation of different reports in management accounting system.. Accounting system assist in
facing different issues and problems that may arise in business organisation. Beside this,
managers frames account receivable reports using price optimisation system which assist in
maintaining information effectively (Cazier, Rego and Wilson, 2015).
TASK 2
Cost: It is an monetary amount which is given by the company for performing its manufacturing
related tasks and other business operations effectively and efficiently.
Fixed cost: it may be defines as cost which is either already incurred in past or which is to be
incurred in future but determination of occurrence is already decided in past. Fixed cost is
considered irrelevant in all type of decisions.
Variable cost: It is cost which is increased as per the volume of operations but per unit cost shall
be remain constant in different volume of operations.
Indirect cost: it may be defined as cost which is incurred in production process and can not be
identified in particular product.
Absorption costing:
It is a managerial accounting cost method for calculating all costs related with In
absorption costing, an organisation consider all types of cost whether it is historical or future
cost (i.e. relevant cost, irrelevant cost or sunk cost). This costing method is used by the
enterprises when they want to find out the total cost of its regular product which it is producing
and for which, there is a demand in the market. In this costing method, company consider the
fixed cost (either avoidable fixed cost or unavoidable fixed cost) (Lavia López and Hiebl, 2014).
Marginal Costing:
In marginal costing, an organisation consider only that cost which is relevant for producing an
product (i.e. relevant cost only). This costing method is used by the enterprises when they want to find
out the minimum cost which will be incurred if company will produce that product. The product which
has no demand in existing market but it comes as an offer from new market or an offer from new
customer. In this costing method, company shall not consider fixed cost at all (Jacobs, 2012).

Actual production, sales
and stock in units for
quarters 1 and 2 are:
Quarter
1 Quarter2
opening Stock 0 12000
Production 78000 66000
Sales 66000 74000
Closing Stock 12000 4000
Profit & Loss
Statement
Production 80000
Sales 80000
Variables cost of sales 52000
Fixed cost of sales 16000
Fixed selling and
admin cost 5200
Profit 6800
Using Absorption Costing
Units "£" Qtr1 "£" Units "£" Qtr2"£"
Sales
66,000.0
0
74,000.0
0
Production cost
Variable cost 0.65
78,000.0
0
50,700.0
0 0.65
66,000.0
0
42,900.0
0
Fixed cost 0.20
78,000.0
0
15,600.0
0 0.20
66,000.0
0
13,200.0
0

66,300.0
0
56,100.0
0
Add: Opening Stock 0.85 0.00 0.00 0.85
12,000.0
0
10,200.0
0
Total stock available
for sale
66,300.0
0
66,300.0
0
Less Closing stock 0.85
12,000.0
0
10,200.0
0 0.85 4,000.00 3,400.00
56,100.0
0
62,900.0
0
Gross profit 9,900.00
11,100.0
0
Less: underabsorption
or Fixed Overhead 0.20 400.00 0.20 2,800.00
Selling & Admin
Costs 5,200.00
Selling&Ad
min Costs 5,200.00
Net Profit 4,300.00 3,100.00
Profit & Loss Statement Using Marginal Costing
Units "£" Qtr1 "£" Units "£" Qtr2"£"
Sales
66,000.0
0
74,000.0
0
Production cost
Variable cost 0.65
78,000.0
0
50,700.0
0 0.65
66,000.0
0
42,900.0
0
50,700.0
0
42,900.0
0
Add: Opening Stock 0.65 0.00 0.00 0.65 12,000.0 7,800.00

0
Total stock available
for sale
50,700.0
0
50,700.0
0
Less Closing stock 0.65
12,000.0
0 7,800.00 0.65 4,000.00 2,600.00
42,900.0
0
48,100.0
0
Gross profit
23,100.0
0
25,900.0
0
Fixed Overhead
16,000.0
0
16,000.0
0
Selling & Admin
Costs 5,200.00 5,200.00
Net Profit 1,900.00 4,700.00
Reconciliation
Profit as per
Absorption Costing 4,300.00 3,100.00
Adjustment for stock
fixed cost
Opening stock 0 12000
Closing stock 12000 4000
Defference Rate of
Fixed Cost -12000 8000
0.20 -2400 0.20 1600
1,900.00 4,700.00

Interpretation- On the basis of above mentioned numerical it can be analysed that there are two
techniques are used which are absorption and marginal costing method. In the absorption
costing net profit is of 4300 & 3100 in both quarters. While in the marginal costing net profit is
of 1900 & 4700 in both quarters. So it can be interpreted that net profit is different in both
methods.
Reasons for change in profits in absorption costing and marginal costing:
There is difference in gross profit in both marginal costing and absorption costing, this is
Normal and standard costing, activity-based costing and the role of costing in setting price.
happen due to change in procedures of calculating gross profit in the these two costing system.
In absorption costing, fixed production cost is also included while calculating the profits but in
marginal costing, only relevant costs are considered which is incurred due to production of a
product.
M2.Different techniques of management accounting system:
Different management accounting techniques are useful for business entities as they
provide assistance in classifying, analysing, controlling and defining business aspects. There are
various kind of management accounting techniques such as activity based costing system,
standard costing system etc. All these play an important role in the presentation of financial
reports. Accounting techniques help to understand the business. The managerial personnels of
Third way Ltd is applying different kind of techniques in order to formulate financial reports
which provides a fair view about company's business. It also assist in controlling various
function of business to enhance productivity.
TASK 3
P4.Different types of planning tools for budgetary control:
Budget is defined as the estimation of all the income and expenses in an organisation. It
requires planning of earnings for the future period. Thirdway Group prepares budget for
tracking of it's gains and losses over a specified period of time. For understanding the various
planning tools , some term is need to be understandable, which are as follows:

 Budgetary control: It is defined as a process that set goals and objectives for the
financial period. It compares the actual data with the budgeted figures and checks
how well an organisation is performing. It compares the data at different levels in
the entity. Thirdway Group follows budgetary control and ensures how accurate
it's staff is estimating the values by following the specified targets.
 Budgetary procedure: It refers to a process where goals are identified and
information is gathered from the financial statements. It forms different
expectations to adjust the budget. It reconcile all the data that is collected in an
estimated format. The results are verified and testing of variance occurs. A draft
is prepared with a rough idea of assigned values. The final sheet is submitted for
review by a senior till a feedback or approval is issued (Fullerton, Kennedy and
Widener, 2014).
The various planning tools used in the budgetary control by Thirdway Group Plc are as follows:
Zero based budget:
It is a process that requires justification of all expenses for every period. It is prepared
from scratch without using previous year's data. Thirdway Group makes separate notes to
accounts for every estimated figure to confirm with the zero based budget.
 Advantages: It improves effective communication among the employees. It involves
effective allocation of resources.
 Disadvantages: It is a complex process that consumes a lot of effort. The results can be
easily manipulated.
Capital budget:
It is defined as the sum total of all the small budgets that are prepared by different
divisions. It is a strategic plan for the future capital growth of the company. Thirdway Group
prepares master budget and maintains an individual estimation to identify the profitability
status.
 Advantages: It motivates the staff to plan what is to be done in advance. It gives an
estimate profit for the company.
 Disadvantages: The changes in estimation are difficult to update. It is rigid in nature.
Operating Budget:

It is defined as an estimation of income and expenses of company's revenue figure over a
period of time. It can be prepared on monthly, yearly or weekly basis. Thirdway Group makes
projection of sale and expenditure for the future with the help of operating budget.
 Advantages: It keeps in track of the entire business records. It maintains flexibility.
 Disadvantages: Sale figures can be overstated. The actual costs of running each
department may not match with the targets (Christ, 2014).
Pricing strategy: Herein, below some pricing strategies are mentioned below:
 Penetration strategy- It is a kind of strategy which is related to the minimising the prices
of products and services so that demand may increase.
 Premium pricing strategy- This is suitable for those companies who have great
reputation in market. In this companies keep the prices of their products at high level.
 Economy pricing strategy- This is similar to penetration strategy in which prices are kept
low in starting.
SWOT analysis:
It may be defined as a technique for reviewing internal and external environment at
micro level. It includes the following stages:
 Strengths: It includes positive factors that existed in internal environment which can
provide competitive advantages to the company.
 Weaknesses: these are the factors existed in internal environment in an organisation that
may cause in reducing the profits.
 Opportunities: These are the factors existed in external environment in an organisation
that provides positive strength to do better in the benefits of its stakeholders.
 Threads: These are the factors existed in external environment in an organisation that
provides some weaknesses that may lead to ineffective working and reduces the profits
of company.
PEST analysis:
It is an method for evaluating the external environment related to an manufacturing
company like Nero Ltd. and to determine the opportunities and threats, so that appropriate
action is to be taken for this. PEST analysis includes the following:
 Political: It includes Govt. policies, regulations and rules and their effect on the business.

 Economical: It includes Exchange rates, inflation rates and interest rate and their effect
on the functioning of the business operations of Nero Ltd.
 Social: It includes beliefs, culture and social values of the people resided at different
geographical location.
 Technology: It includes technological changes such as increasing use of computers and
other peripheral devices for the business.
TASK 4
P5.Adapting management accounting systems to respond to financial problems:
Financial problem: Financial problems are the arises when an organisation is not able
to meet its requirements. Many organisation may faces some significant financial difficulties
that are need to be sort out in proper way by consideration of basic accounting principles and the
concept. To overcome with these situation, management are required to formulating the various
strategies in order to process financial activities. Nero Ltd are facing some hurdles in order to
dealing with financial difficulties. Some of the financial related problem are as under:
Risk management: It is most frequent financial problem to manage by organisation.
This problem is uncertain to be handle. But there are two types of risk first, certain or good risk
is provide balance to the organisation in achieving the financial goal but uncertain risk may be
good or bad for the organisation. This strategies helps to the Nero Ltd in respect of analysing
the financial problem that occur in the organisation at any point of time.
Cash Flow management: This is the most relevant financial problem in the business
organisation it arises when company have improper money management system. Nero Ltd have
very low operating cycle period in financial management accounting. That's the reason company
is facing low cash income.
Management Accounting approaches: There are some accounting approaches in
financial management to resolve the issue related to risk and cash flow management. Nero Ltd
follows following management accounting approaches:
Benchmarking: Using this approach, comparisons are made with other organisations in
the same industry or sector for the purpose of measuring programmes, quality, strategies and

programmes to determine further improvements. This approach helps Nero Ltd to identifying
opportunities and building competitive position within the industry.
KPI: Key Performance Indicator: Key Point Indicator is an approach which is used for
measuring performance. It helps in evaluation of success of any entity towards any specific
activity. Nero Ltd uses such approach to compare and set possible standards which helps them
to resolve any financial issue related to more spending than earning.
Financial governance: This is the tools of financing accounting that controlling,
managing the financial information in term of using the various principle and concepts of
management accounting. With the help of this tools of financial governance Nero Ltd can sort
out the issue related to financial risk and good flow of cash in business.
Comparison Between Nero Ltd and Equilibrium Assets Management
Nero Ltd Equilibrium Assets Management
Problem:
The problem faced by Merlin Financial
Consultant is cash flow management. Also the
organization is unaware regarding its
competitors strategies and plans.
Problem: The problem faced by the
Equilibrium Asset Management is poor risk
management. The selected organization do not
have proper knowledge in analysing and
formulating strategies to minimize the
uncertain risk.
Approach: Management of Nero Ltd is using
approach of Key Performance Indicator which
is helping them in making comparison with
competitors. This approach helps in solving
financial issues and problems based on
management of cash flow by analysing others
as well as measuring the performance of the
organization.
Approach: The organization needs to
overcome its problems. For such apply
approach of benchmarking that helps in
preparation of benchmarking report related to
risk management. Management of working
capital also helps in performing its day to day
activities to meet financial obligations.
Skills
Effective Management accountant characteristics

 knowledge of accounting concepts- An accountant should have detailed knowledge
about accounting concepts. Due to this it will be beneficial for the organisation to have
complete record of financial transactions.
 Grasping Ability: An Accountant needs the ability to grasp facts and management
opinions to effectively.
M3.Use of different planning tools:
Planning tools are significant for business organisation as these tools assist in
preparation of budgets and in estimating figures. It provide assistance in preparation of plans for
business which assist in setting benchmarks and take organisation's decision. Organisation is
required to apply planning tools forecasting future performance of organisation. For example
manager of Third way Ltd prepares master, operating and cash budget to prepare budgets.
Different planning tool assist in forecasting figures and facts.
CONCLUSION
From the above report, it is concluded that management accounting system has a
positive impact on the functioning of the business organisation and it helps the managers in
doing their managerial work in effective manner. It is further concluded that it helps the
managers in identifying its key business areas from where it may generate more profits.
Management accounting assist the managers in other business functions of the organisation
because it various business functions of an enterprises are interrelated with each other. If
manger decides to increase the product price, then what is its effect on volume and profits of the
business can be easily identifies by application of management accounting system. There are
several planning tools as discussed in this report, which helps the organisation in preparing
proper budgets and assisting in applying good budgetary controls on various activities of the
organisation.