Management Accounting System and Techniques

This document provides an introduction to management accounting and its essential requirements. It explains different methods used for management accounting reporting. It also includes a calculation of cost using appropriate techniques of cost analysis to prepare an Income Statement using Marginal and Absorption Costs. The document discusses the advantages and disadvantages of different types of planning tools used for budgetary control.

Management
Accounting System and
Techniques

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................4
P1: Explain management accounting and give the essential requirements of different types of
management accounting systems................................................................................................4
P2: Explain different methods used for management accounting reporting...............................5
TASK 2............................................................................................................................................6
P3: Calculate cost using appropriate techniques of cost analysis to prepare an Income
Statement using Marginal and Absorption Costs........................................................................6
TASK 3..........................................................................................................................................12
P4: Explain the advantages and disadvantages of different types of planning tools used for
budgetary control......................................................................................................................12
TASK 4..........................................................................................................................................14
P5: Compare how organisations are adapting management accounting systems to respond to
financial problems.....................................................................................................................14
CONCLUSION..............................................................................................................................16
REFERENCES..............................................................................................................................18

INTRODUCTION
Management accounting is a branch of accounting, that provides financial information to
the organisation so that they can make managerial decision. Management accounting is a
procedure of identifying, analysing, interpretation and communicating the information that leads
in achieving organisational goals (Campos and et. al, 2019). It uses all the functions of
management including planning, organising, staffing, direction and control. This accounting
provides information which is useful for the organisation. The objective of management
accounting is to use statistical data and take an accurate decision. Generally, it is used for
internal purpose and it is not regulated by any law.
Management Accounting helps the organisation to take important decisions related to the
functionality and management. This may include decisions like price determination, number of
units to be sold in order to earn profit or how much of a bonus can the company afford to give its
employees. This facilitates the business to run smoothly with extensive opportunities of growth
and expansion.
Management accounting is a combination of Management and Accounting, management
is an art of getting things done through people by motivating and influencing them in the right
direction on the other hand accounting is a process of identifying, recording, analysing and
presenting data in an effective way (Wen, 2020). Management accounting is accounting of such
data which can make people do the required task and take important planning decisions.
Connect Catering Services is a SME and a family owned business located at Oxfordshire.
The enterprise provides catering services. Connect Catering feels that the implementation of the
management accounting systems along with financial accounting systems would enable them to
strengthen its decision making which will help the enterprise to survive in the long run and in
this competitive market. In this report various management accounting system which are
essential while making organisational decisions. Various techniques of cost determination are
used and explained.

TASK 1
P1: Explain management accounting and give the essential requirements of different types
of management accounting systems.
Here management accounting system will be used to analyse the situation of Connect
Catering Services. Management accounting will enable Connect Catering Services to get
organisational reports and these reports will help it to make necessary changes and take required
decisions in the organisation itself and the management.
Management Accounting will provide the organisation with information about
manufacturing of services which will further help in preparing budgets which will aid in
improvement of management (VYSOCHAN and HYK, 2020).
Commonly used Management Accounting Systems are:
 Cost Accounting System: It is one of the important system of management
accounting system. This system consists of various accounting techniques by
which the business can find cost of certain tasks and projects, with this they can
compare their profits with their costs and take necessary decisions and plan
accordingly. In context to Connect Caters Services, the company uses Cost
Accounting System with which they are able to manage all their relevant cost like
that of raw material, processes and of distribution of products.
 Inventory Management System: This system has techniques that help the
management to maintain the level of stock. This system involves the process of
stocking and restocking the organisation's inventory so as to increase overall
sales as stock will be available when needed (Guo, 2019). Connect Caters
Services uses this system with its various techniques to manage inventory.
Techniques may include LIFO, FIFO, JIT and ABC analysis.
 Job Costing System: Job costing system is a type of management accounting
system which is generally used by manufacturers (of goods and services both)
because accountant can easily estimate the cost of performing a every job. This
system will help the accountant in assessment of costs of every department
separately (de Lautour, 2019). The organisation assesses the cost required for
every job and running business activities. This information is of crucial use for
the managers to formulate trading strategies.

P2: Explain different methods used for management accounting reporting.
Management accounting reporting will aid the accountant to represent management
accounting information in an operative form which helps in taking important strategic decisions
for the smooth working of the organisation. This helps in highlighting the profitable operations
of the business so that they are easily visible to the stakeholders. This segment has various
techniques like inventory report, budgetary report, job costs report, account receivable ageing
report.
 Budgetary Reports: Budget reports are important in measuring performance of a
company. Basically, budget reports are made for small companies but they are also used
in large-scale organisations as per the department. They are made on the basis of past
experiences and have power to give insight of future unfavourable situations. Budgets
are prepared on the basis of current expenditure and costs as compared to expected costs
and expenditure. Accounting reports that are related to budgets help managers to provide
with insight of more ways to earn profit, lowers cost and gives a chance of negotiation
with suppliers and stakeholders (Alam, Ranasinghe and Wickramasinghe, 2019). It will
enable Connect Cater Services to evaluate current performance with the expected
performance. With the budget report Connect Caters estimates the value of expected
profit and filter out activities that can become the cause of failure in achieving so. It also
helps in analysing new opportunities which are there in the market and also which will
arrive in the near future.
 Account Receivable Ageing Report: Businesses that are dependent on credit sales have
account receivable ageing reports of great significance. It helps management in
identifying those account receivables who continue turning into bad debts and also helps
in finding problems in the process of collection. If it is found that there are many
defaulters then there is a need of regulating the policies of credit sales. It will help the
management to keep surveillance on the credit period of debtors and also the cash inflow
and outflow of the business. This will aid the enterprise to take decisions like that of
increasing or decreasing the credit period. Connect Cater Services forms policies that
will enable them in collecting amount from their debtors in time and with less Bad
Debts.

 Cost Reports: Procurement of raw materials, labours, overheads are the costs for a
company. The total of these costs are divided by the amount of the produce. The cost
report has the information about the cost of items with the selling prices of the product.
Through this report companies decide upon the profit margins for their products. It will
help the manager to evaluate critical expenditure areas, and have a systematic analysis of
total costs involved in specific projects. Connect Caters' department of management
makes report to identifying the reason of excessive cash outflow or costs which are not
beneficial for the business.
 Performance Reports: These are the reports that are made to review the performance of
an organisation and the workforce of a company. In large-scale organisations
performance reports of departments are also made (Rauscher and Zielke, 2019). These
reports are made to make decisions for the future of the company. Exceptional workers
who achieve targets on time and even exceed their goals are appreciated for their
performance in the organisation and under performers are given warning and also
motivation to work effectively. Connect Cater Services form performance report to
identify departments which are not working effectively and efficiently.
TASK 2
P3: Calculate cost using appropriate techniques of cost analysis to prepare an Income
Statement using Marginal and Absorption Costs.

Preparation of income statements:
Cost per unit under absorption costing-
Activity April May
Variable Manufacturing cost per unit 4 4
Fixed Manufacturing Overhead per unit 6 5
10 9
Income statement under absorption costing
Particulars April may
Sales 16000 16000
Less: Cost of sales (2000*10) (2000*9) 20000 18000
Fixed Manufacturing Overhead 15000 15000
Variable Manufacturing cost (2500*4) (3000*4) 10000 12000
Closing stock (500*10) (1500*9) 5000 13500
Opening stock (500*9) 0 5000
Gross loss -4000 -2000
Less: Fixed Non-Manufacturing Cost -4000 -4000
Net loss -8000 -6000
Cost per unit under absorption costing-
Activity April May
Variable Manufacturing cost per unit 4 4
Particulars April May
Sales 16000 16000
Less: Marginal cost of sales 8000 8000
Variable Manufacturing cost (2500*4) (3000*4) 10000 12000
Closing stock (500*4) (1500*4) 2000 6000
Opening stock 0 2000
Contribution 8000 8000
Less: Fixed Manufacturing Overhead 15000 15000
Less: Fixed Non-Manufacturing Cost 4000 4000

Net loss -11000 -13500
Reconciliation statement:
Particulars April May
Net loss under absorption costing -8000 -6000
Less: Closing stock -3000 -7500
Net loss under marginal costing -11000 -13500
Working Notes
Marginal Cost of sales
Particulars April may
Opening Inventory 0 500
Add: Cost of production 10000 12000
Less: Closing inventory 2000 6000
8000 8000
2 a)
1. Fixed and variable costs
Fixed costs:
Activity Amount
Manager’s Salary 5000
Rent 5000
Insurance 500
Utilities 500
Advertising cost 1000
£12000
Variable cost:
Activity Amount
Direct material costs per Pizza 3.50
Direct labour costs per Pizza 1.50
Direct overhead costs per Pizza 0.50
£5.50

2. Break-even point in units and in sales value
BEP (In units): Fixed cost/contribution per unit
Contribution per unit: Selling Price-Variable cost per unit
= 9.50-5.50
= 4.00
BEP: 12000/4
= 3000 Units
BEP (In revenues): Fixed cost/PV ratio
PV ratio: Contribution/selling price*100
= 4/9.50*100
= 42.10%
BEP (In revenues) = 12000/42.10%
= £ 28503
4. Margin of Safety at sales of 3500 Pizzas
Margin of safety= Sales units - BEP in Units
= 3500-3000
= 500 Units
5. Effect on BEP in units and in sales value, in case of increase in manager's salary to
£6,000
If manager’s salary will increase than it will affect to fixed cost and revised fixed cost will be of
£13000.
New BEP (In units): 13000/4
3250 Units
New BEP (In revenues): 13000/42.10%
= £30878
2 b Preparation of graph:
Activity Amount
Total Costs (12000+55000) 67000
Revenues per Unit (95000-67000)/10000 2.8 Per unit

Total Fixed CostCompanies prepare cost
budget which is used to find variance in
actual cost incurred and budgeted target. Cost
budgets shall be flexible enough to
incorporate changes in targets as and when
they arise.
12000
BEP point 28503
Flexible budget
Items Actual Budgeted Variance
Sales price 10 9.50 .50 Favourable
Sales units 12000 10000 2000 Favourable
Revenues 120000 95000 25000 Favourable
Fixed cost 15000 12000 3000 Adverse
Variable cost 5 5.50 .50 Favourable

0 1000 2000 3000 4000 5000 6000
-20000
-10000
0
10000
20000
30000
40000
50000
60000
Total Variable Cost
Total Fixed Cost
Total Cost
Sales
Loss/Profit
Break-Even Graph
TASK 3
P4: Explain the advantages and disadvantages of different types of planning tools used for
budgetary control.
Budget is a tool of management which helps in estimating the future expenditure and
income. Budgets are made at different levels in today's world, at corporate level, even in
households. Mainly there are three types of budgets – Surplus, Balance and Deficit (Curry,
2020).
Budgetary Control is a technique in which we compare the planned budget and the actual
results and provide suitable amendment in the policies to carry out every task smoothly without
wasting any finance. It also shows how well the management has optimized the budget.
There are multiple types of budgets, some of them are:
1. Cash Flow Budget: Cash Flow Budget compares the budgeted cash inflow and
outflow to actual cash inflow and outflow, this helps in formulating a term plan.

Advantage: Cash budgets helps the management in minimising unnecessary expenditure, so the
business is able to manage its finances and use it effectively. Cash flow budget helps predicting
seasonal fluctuations where shortage and surplus cash can be avoided.
Disadvantage: While creating cash flow budget non-financial and non-cash factors are excluded.
When the business has to choose from one of the two financial institution from where it can
incur debt; where one institution may offer low interest rate and other may offer better services.
In cash flow budget non-financial perks are not recorded.
2. Flexible Budget: It is a budget which is flexible and dynamic as per the volume
and activity. In this budget, the budgeted amount changes and varies according to
the situation. This budget is also known as variable budget because it includes
variable factors like variable factor cost rather than static ones (Giovanni and et.
al, 2019).
Advantage: It helps in assessing the efficiency of the departmental head. It control overheads and
help in revaluation of the budget at every level.
Disadvantage: This budget requires skilled workers, therefore it becomes a challenge for the
business to find skilled human resource and it requires a lot of resources. It also depends on the
accounts of the company, if the accounts went wrong the budgets will automatically be faulty.
3. Variance Analysis Report: Variance analysis report shows the difference
between actual and planned budget.
Advantage: It draws attention to areas where actual performance is different from planned
performance so that management can take necessary decisions to amend that. Furthermore it is
helpful in assessing areas where assets are not effectively utilized and areas where adjustments
are necessary.
Disadvantage: It has a major drawback; it takes a long time to examine the effect of the variance
and therefore corrective decisions and actions are delayed.
4. Operational Budget: This budget helps as a financial plan which is designed to
aid the business to meet its debt obligations and sustain growth over time
(Agustia, 2020). Operational budget provides the company with the areas where
cast is needed the most and how the company spends its resources.

Advantages: Its useful in small businesses as it allocates resources not only for short term but
also over several quarters to three years. Operational budget allows the business to manage its
cost in short run to meet its long term financial obligations.
Disadvantages: If company is of large scale or has big figures of revenue and costs the making
an operational budget becomes time-consuming and prone to errors. It also requires extensive
research to assess long term insight of financial needs of the company.
5. Overhead Budget: It is prepared to predict and assess all the costs which will be
incurred in manufacturing of goods in future. It excludes direct costs like that of
direct material cost and direct labour cost which are a part of cost of goods sold in
Master Budget (Mbali, Ngibe and Celani, 2019). This includes employee costs,
insurance costs, rent expenses, depreciation, freight, utilities etc.
Advantages: This will help the employees in knowing the limit of expenditure they can incur on
a certain task or activity, furthermore it will help in keeping control on business expenses and
getting the desired results set by the management of the organisation. It also helps in allocation
of resources in business activities effectively and efficiently.
Disadvantage: Making of overhead budget consumes a lot of time and also requires
management's time and resources. It is also based on management's judgement and assumptions
so the accurate and exact forecast of the overhead and expense is not possible.
Other majorly used budgets are: Financial budget, sales budget, production budget,
personnel budget, marketing budget, static budget, master budget etc.
TASK 4
P5: Compare how organisations are adapting management accounting systems to respond
to financial problems.
Financial Problems: Sufficient financial resources are needed for the smooth
functioning of any business or organisation. There may come many financial problems for the
business where the finance is inadequate. These problems come when decisions taken by the
management are not efficient. Commonly this is faced by small and medium-sized businesses
and organisations, because they are not able to take efficient management decisions as they do
not follow management accounting systems. Connect Cater Services is working on getting more
financial resources which can be managed by Management Accounting Systems.

Unavailability of performance measurement system: Connect Caters is a medium-
sized enterprise with best in class services. With a strong local market the company is doing
well. But it is not using any performance measurement technique or system which does not allow
identification of any shortfall or shortcoming in the performance. This further creates problems
in departments and to the employees.
Problems in recognising core competencies: Connect Caters is suffering from this
problem because they are not able to recognise and identify competencies of various
departments. It face issues related to finance and is unable to identify the weaknesses and flaws
of departments. That's why the company suffers from finance related problems.
Financial Governance: Financial governance is a feature of management accounting
system. This helps the business to run effectively and efficiently with proper ethical workings
and abiding by the law (Shapovalova, 2019). With this corruption and illegal activities in
businesses has been reduced. Financial governance helps the business to work in a systematic
manner and follow the rules of accounting and its standards.
Connect caters and Oberon Caters use management accounting systems which consists of
certain techniques which help these companies to earn more profit and be effective and efficient
in their business activities.
Below cited management accounting systems and techniques helps Connect Cater Services
and Oberon Caters to work efficiently and effectively:
Management accounting
techniques
Reverting to the financial problems by using management
accounting system
Connect Caters Oberon Caters
Benchmarking Connect Caters faced problems
in financial resource segment
because as it was unable to
measure department's
performance and its sales
were also decreasing.
Management of the company
used benchmarking, this tool
The company faced financial
problem due to their inability
to identify weaknesses and
strengths of their departments.
With the usage of key
performance indicator method,
management with the help of
indicator can identify the

helps to set bars, standards and
benchmarks. With these
standards management can
identify performance and
measure efforts and
performance of each
department. With the help of
benchmarking they can form
policies to solve problems.
department which is providing
strength to the company.
Advising to Connect Cater
Services to use technique of
benchmarking:
With the application of Key
performance indicator,
Connect Cater Services will be
able to form a plan for the
future to solve and control
problems related to finance.
By setting KPI they will be
able to control cash outflows
of business activities.
Balanced scorecard This is a technique which
helps to analyse performance
by measuring scorecard.
Connect Caters use this for
recognition of balances in
finance department.
With the use of balanced
scorecard department of
management of Oberon Caters
gives attention on departments
that do not complete target in
allotted period of time. And on
the basis of this they form
policies for future.

CONCLUSION
Management Accounting System is a major factor that determines the sustainability of
business in the industry. It helps the organisation to take important decisions related to the
functionality and management.
Connect Cater Services is taking the right step to adopt Management Accounting
Systems. This will help the company from coming out of the financial crises that has
overpowered the company's growth. Implementation of management accounting systems along
with financial accounting systems would enable them to strengthen its decision making which
will help the enterprise to survive in the long run and in this competitive market. Connect
Catering Services will be enabled to get organisational reports in time by management
accounting and these reports will help it to make necessary changes and take required decisions
in the organisation itself and the management. The company can use various techniques of the
system to get more finances and manage the existing ones. This will also help the company to
determine how much units are to be sold to earn profit and what should be the price of each unit.
Benchmarking and balanced scorecard are two tools which will help the business to stand out
among its competitors and expand its business.

REFERENCES
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