Comprehensive Analysis of Management Accounting Systems and Techniques

This report delves into the realm of management accounting, exploring its crucial role in organizational decision-making and financial reporting. Focusing on a case study of Unicorn grocery, the report examines various accounting systems such as cost accounting, inventory management, and job c...Read More

MANAGEMENT
ACCOUNTING SYSTEMS
AND TECHNIQUES

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1 Management accounting and need of various types of accounting systems.....................1
P2 Methods used for management accounting reporting.......................................................3
M1 Benefits and applications of management accounting systems.......................................4
D1 Critical analyses of integration of accounting reporting and management accounting
system.....................................................................................................................................5
TASK 2............................................................................................................................................6
P3 Calculation of costs and net income using marginal and absorption costing....................6
M2 Types of management accounting techniques.................................................................8
D2 Interpretation of data........................................................................................................9
TASK 3............................................................................................................................................9
P4 Advantages and disadvantages of various planning tools used for budgetary control......9
M3 Applications of planning tools of budgetary control.....................................................11
TASK 4..........................................................................................................................................11
P5 Comparison on how organisations are adapting management accounting systems........11
M4 Analyses of financial problems......................................................................................13
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
Management accounting is a process of preparation of managerial accounts and records
which helps an organisation in effective decision making process. These reports and books are
also used to gain trust of related parties such as creditors, investors etc. as they reflect true and
fair position of a business entity. Unicorn grocery is a medium scale cooperative grocery
organisation which delivers numerous grocery and other general utility equipment’s.
Management accounting is used by every organisation irrespective of its nature, size or scope.
This organisation uses this system in order to prepare their income statements.
This project focuses on management accounting and its methods, techniques, reports etc.
which helps in determining future costs and profitability. Numerous significant roles and benefits
of these methods are discussed in this process (Ward, 2012). Management accounting is the key
for an organisation's success as it focuses on business growth and development by identifying
future events which can be prevented. Decision making process becomes effortless due to these
systems.
TASK 1
P1 Management accounting and need of various types of accounting systems
Management accounting is the core function of an organisation as it prepares various
managerial records and reports, these reports are different from financial accounts as they can be
prepared anytime in an accounting period according to its requirements whereas financial
accounts are prepared at the end of an accounting year.
Unicorn grocery is cooperative grocery business firm which produces and delivers
grocery and other home utility goods, they use management accounting and its systems for
efficient decision making and for the preparation of their managerial records which help them in
serving a true image of the business functions (Parker, 2012).
Types of accounting systems and their requirements:
Management accounting systems helps a business in organising and controlling their
activities by determining various costs involved in activities. These systems provide various
guidelines which leads manager to ascertaining and delivering fair image of business functions
and profitability. Some of these systems are explained below:
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 Cost accounting system – Under this system, all costs involved in various departments
like production, marketing, selling, distributing are discovered so that profitability of near
future events can be ascertained. Unicorn grocery is engaged in activities like
manufacturing, packaging and delivering which involves respective expenses which are
determined under this accounting system. Most significant role of this system is that it
helps in ascertaining future income which further can be utilised for decision making
process and for future investment decisions.
 Inventory management system – Inventory management system provides a framework
which guides a business firm in managing inventory. Here, inventory refers to the raw
material available in the business, inventory stocked in the warehouse, work in progress
stock and finished goods. Unicorn grocery deals in groceries and other home utility
appliances which results to be having ample of semi-finished and finished stock, due to
which this system is entirely appropriate for this company. Manager of Unicorn can
follow this system in order to manage all the stocks. This organisation uses methods of
ABC, EOQ, periodic and perceptual for managing their inventory (Otley and Emmanuel,
2013).
 Job costing – Job order costing is a system which determines the costs involved in each
job. Here, job refers to job order which is taken from the client to complete in a specific
given time period according to the brief provided by the customer. This system is
appropriate for the organisation which deals in customised products like Unicorn grocery,
as they get orders from various customers and try to complete manufacturing of that order
according to the brief in given time. This system helps an organisation in estimating costs
which can further be utilised in decision making about labour requirements and material
procurements. Systems which are used for job costing are batch, process, contract and
standard costing systems.
 Price optimisation system – Under this system, prices are determined of produced
goods. Here, price optimisation is the process of price determination after charging all
costs involved in manufacturing and selling. This system is appropriate for a retail
business as they sell numerous products. Unicorn grocery exercise this method in their
pricing planning as they can allocate effective prices. Most important role of this system
is that it helps in maintaining a balance between costs of several products. If the prices of
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product are too high, it decreases the demand and supply of that commodity and if the
price of any product is too low it affects the profitability of the firm.
 Activity based costing – According to this system, costs involved in an activity is
determined. This system is identical to process costing with a slight difference, activity
based costing is appropriate for organisations which are engaged in various activities.
Unicorn grocery does not use this technique as they are a medium scale business and
variety of activities is low.
P2 Methods used for management accounting reporting
Management accounting reporting is a process of preparing reports which reflect
managerial position of an organisation. These reports are prepared using various tools and
techniques for future planning, decision making and measuring the efficiency of organisation's
performance (Renz, 2016).
The above mentioned company deals in groceries and other home utility appliances,
which has highly skilled team which prepares these reports as they consider this as most crucial
task. Manager of this company can ask for managerial reports whenever there is a situation of
performance appraisal, crises etc. these reports are used to gain trust of related parties.
Management accounting reports are the evidence of fair reflection of management which is
essential for decision making process.
Types of management accounting reports:
 Performance report – Performance report is a document which shows either individual
performance of employees or overall efficiency of an organisation. This report is
prepared by the managers and other superiors, as they analyse performances of every
worker of every department. Unicorn grocery prepares this report for the purposes of
performance appraisal and decision making.
 Inventory management report – This is the report which records all inventories which
are stocked in either factory or warehouse. Every unit of stock is transacted in this report
so that no loss or problems of theft can occur. Unicorn grocery is a retail company which
has to deal with ample of inventory due to which it’s important to maintain effective
inventory management report. This report records raw material, goods engaged in work
in progress, finished goods and warehoused stock.
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 Financial report – Financial reports are prepared under financial accounting, but to
serve accurate managerial accounts it’s important to prepare financial report under
management accounting too. These reports include all money transactions and serve
journal entries, ledger accounts, trial balance, income statements and balance sheet.
Unicorn grocery has a separate department of accounts where accountants maintain all
records.
 Cash flow report – Cash flow report is a document which records all cash inflows and
cash outflows from various activities such as operating, investing and financing in order
to identify all expenses which are incurred by the organisation in an accounting year.
Unicorn grocery prepares this report on monthly basis so that they can track their costs
and profitability (Strauss, Kristandl and Quinn, 2015).
 Account receivable report – Account receivable is the amount which company owes
from other. Under this report all those transactions are recorded and duly dated along
with recovered amount and bad debt amount. Unicorn grocery is engaged in credit sales
and maintains an account for all these transactions so that they can duly recover all the
owed amount.
 Job cost report – Job cost refers to the expenses incurred in a specific job and its
activities. Unicorn grocery prepares this report to account all expenses. This report is
important as it helps in ascertaining profit making ability.
 Sales report – Sales report includes all sales related transactions. This reports provides
an overview of sales including gross and net sales, credit sales, refunds, discounts etc.
Unicorn grocery prepares sales report so that they can look after sales revenue and future
profitability.
M1 Benefits and applications of management accounting systems
Management accounting systems are the guidelines which are universally acceptable in
order to deliver accurate managerial accounts and reports. These systems are developed for the
ease of the business organisation. Some of the benefits and applications of management
accounting systems are mentioned below:
Cost accounting system Cost accounting helps an organisation in
determining all the costs involved in various
activities and departments. This method is
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appropriate for Unicorn grocery as they are
engaged in various tasks and activities.
Inventory management system This system helps an organisation to manage
and maintain all the inventory stocked in
factory or warehouse. This system is
appropriate for Unicorn grocery as they deal in
ample of inventory (Inventory management.
2018).
Job costing Job costing is a method of ascertaining costs
involved in various job and its activities. Ideal
organisations for this system are the businesses
which manufactures customised and
personalised products.
Price optimisation system This concept is appropriate for almost all the
organisations as it helps in determining prices
of products which are either produced or
procured by the organisation. Using this
system, Unicorn grocery allocate prices to their
products so that a balance can be maintained in
demand and supply as too high prices, lowers
the demand and too low prices affects the
profitability of the organisation.
D1 Critical analyses of integration of accounting reporting and management accounting system
Management reports are the documents which reflects true and fair position of the
organisation which are prepared using management accounting systems as it provides guidelines
which helps in determining certain costs and profit making ability of the organisation. In the
process of preparing these reports, managers use the framework of these systems for a better
understanding of company's management. Inventory management report is beneficial for the
organisation as it manages opening and closing stock available in the business with the help of
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tools such as LIFO and FIFO. Account receivables report is prepared by an organisation in order
to determine the amount which needs to be collected from creditors and bad debt amount can
also be ascertained using this report (Groot and Selto, 2013).
TASK 2
P3 Calculation of costs and net income using marginal and absorption costing
Marginal costing – Marginal costing is a costing technique where all variable costs are
charged against sales revenue to determine contributed amount by the organisation in the
production and all fixed costs are charged against contribution to calculate net earned income of
the business organisation during a specific period.
Marginal costs are the variable expenses which are not certain in amount, they change
according to the situations and can be calculated by the sum of direct material, direct labour,
direct expenses and other overheads. Unicorn grocery uses this method, as profit measured under
this is higher (Callahan, Stetz and Brooks, 2011).
Formula of marginal costing: sales revenue – marginal cost of goods sold = contribution
– fixed cost = net income
Particulars Amount
Sales revenue = (selling price * no. of goods sold = 55 * 600) 33000
Marginal Cost of goods sold: 9600
Production = (units produced * marginal cost per unit = 800 * 16) 12800
closing stock = (closing stock units * marginal cost per unit = 200 *
16) 3200
Contribution 23400
Fixed cost ( 3200+1200+1500 ) 5900
Net profit 17500
Absorption costing – Absorption costing is a technique which absorbs all costs due to
which it is called full costing. According to this method, all variable and fixed manufacturing
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expenses are charged against sales revenue to determine gross profit and all selling and
distribution expenses are deducted from gross profit to calculate net income earned during a
specific year. Costs under this technique, changes according to the sold units. Profit ascertained
in this technique is relatively low as they charge all costs.
Formula of absorption costing: sales revenue – cost of goods sold = gross profit – selling
and administrative expenses = net profit
Particulars Amount
Sales = (selling price * no. of units sold = 55 * 600) 33000
Cost of goods sold = (total expenses per unit * actual sales = 23.375 * 600) 14025
Gross profit 18975
Selling & Administrative expenses = (variable sales overhead * actual sales +
selling and administrative cost = 1 * 600 + 2700) 3300
Net profit/ operating income 15675
Break-Even – Break-Even is a situation of no loss and no profit. It represents sales
amount or sales units that are required to pay all expenses and incur no loss.
a. The number of products to be sold to break even
Sales per unit 40
Variable costs VC = DM +
DL 28
Contribution 12
Fixed costs 6000
BEP in units 500
b. The break even point in terms of sales revenue
Sales per unit 40
Variable costs VC = DM + DL 28
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Contribution 12
Fixed costs 6000
Profit volume ratio PVR = Contribution /
sales * 100 30.00%
BEP in sales 20000
c. The number of products that need to be sold to make profit of 10,000
Profit 10000
Fixed costs 6000
Contribution 16000
Contribution per unit 12
Sales 1333.33
d. The margin of safety if 800 products are sold
Actual sales in units 800
Break even sales in units 500
Margin of safety 37.5
Margin of safety – MOS is the difference between actual sales and break even sales.
Ascertainment of this margin is important as they represent sales which makes profit for the
organisation.
M2 Types of management accounting techniques
Management accounting is a system which helps in preparation of managerial accounts
and reports which are used for decision making process. There are few tools and techniques
which helps in ascertaining net profit and various costs which occur during an accounting period.
Few of the management accounting techniques are described below:
Standard costing – Standard costing is the process of comparing actual costs and profits
from standard costs and income in order to ascertain differences and the reasons of the variance
so that in next accounting period those deviations can be prevented (Abdel-Kader, 2011). This
method is ideal for large scale organisations.
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 Historical cost technique – Under this technique, all past expenses are considered in
order to identify future costs. This technique helps in future planning and cost control.
This technique is appropriate for medium scale businesses like Unicorn grocery.
D2 Interpretation of data
Net income calculated from marginal costing technique is relatively higher than in
absorption costing that is 17500 and 15675 as marginal costing only charges variable costs
against sales revenue. Expenses which are incurred during a accounting period are recorded as
variable and fixed costs under marginal costing whereas under absorption costing, expenses
overheads are manufacturing costs and selling costs.
After calculating BEP in unit and amount, it has been observed that if the organisation
manufactures 500 units than it they have to face no profit no loss situation. To earn a profit of
10000 they have to sold 1334 units.
TASK 3
P4 Advantages and disadvantages of various planning tools used for budgetary control
Budgetary control is a process of preparing budgets which helps an organisation in
comparing estimates from actual performances. These budgets include sales budgets, flexible
budget, cost budget, production budget etc. few of those budgets are mentioned below:
 Sales budget: The sales budget is prepared by the company in order to make an
estimation about the sales for the given period. This budget involves the expenditure that
is to be incurred in the process of sales, estimation of profitability etc.
 Cash budget: Cash budget is the prediction of future cash position of an organisation,
where all expenses and incomes are recorded which have a possibility to occur in future.
Planning is the most significant part of the business by which the organisation can make
certain decisions of the company (Gond and et. al., 2012). This will help the business
ascertaining and analysing the procedures of decision making which assists the companies in
attaining determined objectives.
Budgetary control is a method in which company can control and reduce the extra
expenses and can easily enhance their profits. They compare the actual with the previous budget
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and can take step so that they can reduce the costs and can enhance their profits. Various tools
for budgetary control used by Unicorn grocery are:
Forecasting: It is a planning tool which can directly predict the future conditions and
events which can affect the company. Through this it can create various plans in advance through
evaluating past experiences.
 Advantages: Through forecasting it can directly predict in advance regarding the
requirements of all users and hence they can easily maintain good image in country. Thus
as a result they can directly enhance their reputation in minds of all users and in industry.
This also helps the company to reduce the extra costs related to all operations and
activities and in selecting qualified staff members. Thus they can enhance their revenues.
 Disadvantages: Staff members can predict the events but these events cannot give true
picture of all situations. Thus as a result they cannot predict correct situations and can
create wrong policies.
Contingency: These are the future risk and emergencies which can affect in a drastic
manner. Through this they can easily manage all resources and thus they can easily manage the
inventory in a better and effective manner. They can easily solve all issues and problems related
to managing with the emergencies and with any other issue. Thus they can easily manage all
resources and activities in an effective manner.
Advantages: It is like a backup plan for the company. Thus firm can easily reduce the losses
which can be emerged from these contingencies and thus firm can take many steps so that they
can enhance profits. Through this it can reduce the panic of managers and they do not take any
tension and it directly increase the efficiency level in the country. It can directly reduce the
damage in company (Klychova, Faskhutdinova and Sadrieva, 2014).
 Disadvantages: If there are no emergencies which can occur in future then it can directly
lead to wastage of money and resources of the company. Thus it leads to reduction of
profits of company.
Scenario: In this tool manager can easily create various plans and policies if they
evaluate all possible scenarios and thus they can easily identify recent trends and developments.
 Advantages: In this company can easily reduce the risk which is involved in all
operations and activities. This helps the firm in taking all decisions related to all matters
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such as managing of resources and tasks in the company. Through this it directly
improves the quality of decisions and increase the efficiency level in the company.
 Disadvantages: Company has to select high skilled and competent staff members so that
they can easily evaluate all scenarios of future. This involves huge cost and time of firm
which results in reduction of revenues of company. Thus they cannot expand their
business.
M3 Applications of planning tools of budgetary control
Planning tools such as forecasting, contingency and scenario are the instruments which
are applied to prepare budgetary reports like cash flow statement and other budgets.
 Cash flow statement – Cash flow statement is a document which has all cash inflow and
outflow transactions which are incurred from activities like operating, investing and
financing.
 Budgeting – Budgeting is a process of preparing various budgets like sales and cash
budget which includes estimation of future expenses and profits in order to compare them
with actual performances (Gates, Nicolas and Walker, 2012).
TASK 4
P5 Comparison on how organisations are adapting management accounting systems
Management accounting systems are the methods which helps an organisation in
preparation of management reports, these systems are also used to tackle various managerial
problems. Unicorn grocery and Zylla are the medium scale businesses which uses these systems
in order to dodge financial and other managerial issues. Few of these problems are mentioned
below:
 Quality of products – To maintain a positive brand image it is important to manage
quality of products which is produced or procured by the organisation. Unicorn grocery
uses inventory management system and other methods to achieve their primary objective
of customer satisfaction.
 Financial management – Unicorn grocery is a medium scale business which faces
issues like cash unavailability and unmanaged financial system due to which they use
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cost management system and price optimisation system to manage and maintain all the
accounts and financial problems.
Legal issues – Legal issues are the law and legislations which are applied on an organisation
according to their size, scope and nature. Organisations like Unicorn grocery and Zylla uses
management accounting systems in order to tackle their legal issues like minimum compensation
(Bennett, Schaltegger and Zvezdov, 2011).
 Uncertain future – Estimation of future events is a complex task to perform as there is
no assured method which can predict future without any laws. Unicorn grocery exercise
systems like budgeting to predict their future costs and profitability which can help in
preventing future crises.
 Inventory turnover – Management accounting systems such as inventory management
system helps in maintaining and managing inventory turnover. Unicorn grocery and
Zylla both deals in ample of stock due to which they need an efficient inventory system
so that they can handle their all turnover related issues.
 Unbalanced pricing system – Pricing system refers to allocating prices to various
products which are manufactured or procured by the organisation. Price optimisation
system helps Unicorn grocery in maintaining a balance between prices of several
commodities which helps in tackling issues of unbalanced pricing systems.
 Maintaining goodwill – Goodwill refers to the brand image and reputation of the
organisation which helps in achieving organisational goals and profitability.
Management accounting systems helps an organisation in maintaining their reputation
and positive brand image in the eyes of general public (Zainun, Tuanmat and Smith,
2011).
Applications for the tools used for financial issues:
 KPI: Key performing indicators which measures efficiency of an organisation in terms of
achieving business objectives and managing financial problems. There are two types of
KPI, financial and non-financial.
Financial KPI are based on financial accounts like profit and loss account and balance
sheet. They focus on numeric figures.
Non-financial KPI are the tools which are used to measure achievement of strategic
aims such as relationships between employee employer, quality etc.
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 Benchmarking: Benchmarking is a tool of setting performance standards in order to
measure actual performance from the standards. These standards are fixed from past year
performances and performances of competitor companies.
Unicorn grocery Zylla
Unicorn grocery deals in groceries and other
home utility appliances company which uses
job order costing as they are engaged in
producing personalised tailor made clothes
which has different costs and profit margins.
Unicorn grocery is a cooperative retail grocery
organisation which uses activity based costing
as there are various activities like
manufacturing, procuring, packaging etc.
which has different costs involvement.
This company uses price optimisation system
as they deal in various kinds of products which
should have different prices. This system helps
Unicorn to maintain a balance in the pricing
system.
Unicorn grocery uses inventory management
system as they are a retail grocery chain which
has a lot of inventory and maintain and manage
the stock level, they use management
accounting systems.
M4 Analyses of financial problems
It is important for every organization to maintain their financial position of company
through resolving financial issues as quickly as possible. It can be done through using different
financial tools and techniques such as KPI, Benchmarking, corporate governance etc. Therefore,
the management are liable to adopt suitable financial tools after analysing the company's
financial position. For example, KPI help in analysing the performance of employees through
comparing their actual performance with standard thus become profitable to company.
D3 Evaluation of planning tools
There are several planning tools which are used to control budget which increases the
effectiveness of budget. Such planning tools includes forecasting tools, scenario and contingency
tools. It helps management to prepare and control budget due to which the chances of incurring
wastage are minimum. For example, forecasting tool enable management to forecast the business
activities executed in near future and on the basis of which allocation of resources are made in
budget.
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CONCLUSION
From the above report, it can be concluded that management accounting is the key
function of an organisation which includes preparation of managerial reports like cash flow
statement and budgets which helps in decision making process and are used as evidence of true
image of the company for related parties like creditors and investors. These reports are prepared
using management accounting systems such as cost accounting system, inventory management
system, price optimisation system etc. In order to achieve organisational goals, companies like
Unicorn grocery uses few planning tools like scenario and contingency for budgetary planning.
In the above project report, profitability is calculated using marginal and absorption costing by
charging various costs against sales revenue.
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