Analyzing Management Accounting Systems and Techniques Report

This report provides a detailed analysis of management accounting systems and techniques, focusing on their application within the context of Zylla Company. It begins by explaining management accounting and its essential requirements, differentiating it from financial accounting. The report then explores various management accounting reporting methods, including budget preparation, production reports, inventory management reports, and cost reports. Furthermore, it applies cost analysis techniques such as marginal and absorption costing to prepare an income statement, demonstrating the differences in their impact on net profit. The use of planning tools in budgetary control is also examined, highlighting the advantages and disadvantages of operational and capital budgetary control planning tools. Finally, the report compares how organizations can adapt management accounting systems to respond to financial problems. This document is available on Desklib, a platform offering a wide range of study tools and solved assignments for students.

MANAGEMENT ACCOUNTING

Table of contents
Introduction................................................................................................................................3
Task 1 - Demonstrate an understanding of management accounting systems...........................3
P1. Explain management accounting and give the essential requirements of different types of
management accounting.............................................................................................................3
P2. Explain different methods used for management accounting reporting..............................5
Task 2 - Apply a range of management accounting techniques.................................................7
P3. Calculate costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costing......................................................................7
Task 3 - Explain the use of planning tools used in management accounting............................8
P4. Explain the advantages and disadvantages of different types of planning tools used in
budgetary control.......................................................................................................................8
Task 4 - Compare ways in which organizations could use management accounting to respond
to financial problems................................................................................................................12
P5. Compare how organizations are adapting management accounting systems to respond to
financial problems....................................................................................................................12
Conclusion................................................................................................................................12
Reference list............................................................................................................................14
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Introduction
With the introduction of globalization, a huge change has taken place in the business
environments. The business world is now more complicated and it involves higher level of
competition. Surviving in this competitive world of business is the major challenge that the
companies are facing in the current scenario (Drury, 2013). However, there is one way
through which companies especially the large multinational organizations are safeguarding
their operations from the ever increasing threats of internal and external business
environments. This way is known as management accounting. Taking care of financial and
non-financial activities, management accounting became one of the most popular
organizational systems in the recent era.
This study has completely focused on this popular organizational system that has made the
business process easier to the companies. However, the discussion is made from the point of
view of Zylla Company, which is one of the multinational organizations in UK market and
currently it is facing tremendous competition in the market. In order to safeguard the
business, the management of the company has decided to focus on the management
accounting activities and due to that this study has been carried on.
Task 1 - Demonstrate an understanding of management accounting systems
P1. Explain management accounting and give the essential requirements of different
types of management accounting
Management accounting can be defined as an on-going process that keeps the managers
updated about the activities of the business. It mainly takes care of the internal business
activities, but the results or information that it generates is useful for maintaining the
sustainability of the business. Gluhovsky et al., (2016) has explained management accounting
as a broad organizational system involving planning, organizing, co-ordinating and
controlling of the organizational activities. Management accounting is considered to be the
most important part of today’s organizations because it helps the managers developing
effective plans for the business by considering different aspects of the business like, sales,
cost, production, inventory and many others (Kamal, 2015). Therefore, from this point of
view, it can be stated that management of Zylla Company will be able to develop effective
plans for the business if they follow the management accounting techniques.
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Apart from planning, management accounting is also very useful in co-ordinating the
business activities among different departments of the organization. If the management of
Zylla Company follows the management accounting system, they will require preparing
different reports considering the results of different departments. These reports will be the
base of co-ordination. With the help of these reports, developing effective strategies will be
easier for the managers (Hopper and Bui, 2016). In this context, it is important to be noted
that management accounting is a very important element that controls the organizational
functions. This particular organizational system takes care of the costing techniques which
are the main factor in the context of controlling the business activities. Controlling the cost
level, management accounting can help Zylla Company enhancing their financial strengths.
In this context, it is important to be mentioned that management accounting is different from
the financial accounting. The differences between the two most important systems of the
organization are stated below:
Management accounting Financial accounting
Management accounting is important but not
mandatory for the organizations
Financial accounting is important as well as
mandatory for the organizations.
Management accounting develops reports
and generates information for internal
business usage.
Financial accounting develops reports and
generates information to serve the needs of
the external stakeholders.
Management accounting takes care of the
non-financial and financial both types of
activities (Bruno, 2014).
Financial accounting only takes care of the
financial activities or transactions.
Management accounting covers a broader
area of business management.
Financial accounting is very limited and it is
a small part of business management.
Management accounting does not depend on
the rules and regulations provided by the
financial boards.
Financial accounting activities are guided by
the rules and regulations provided by the
financial boards within the country
(Edmonds et al., 2016).
While discussing about management accounting, it is important to know that management
accounting involves three main systems on which the effectiveness of management
accounting depends. These three main systems are as follows:
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Cost accounting system – This is one of the key systems under the management accounting.
Cost accounting system is also known as costing system, which takes care of the cost level of
the business (Brierley, 2017). Adopting the right cost accounting technique, the managers at
Zylla Company can reduce the level of costs of organizational activities. Cost accounting
helps the managers reducing cost level by identifying the most important costs centres in the
company. There are several cost accounting systems that can help the managers of Zylla
Company in improving their financial conditions. These cost accounting techniques are –
absorption costing, marginal costing and activity-based costing.
Inventory management system – This is another major system under the management
accounting. Inventory management system is required by the organizations to maintain a
standard sale flow or revenue flow within the company. On the other hand, it can also be
stated that inventory management system is required by the organizations to maintain a
strong working capital position or liquidity position in the business (Chang, 2016). Inventory
management system can be developed based on different techniques or methods like, LIFO,
AVCO and FIFO. In the current scenario, many organizations re maintaining and managing
inventory level by following the Just-in-Time approach.
Job-costing system – This system is mainly required by the manufacturing firms like, Zylla.
The manufacturing firms that operate business at the larger scale can easily control the cost
and waste level by adopting the job-costing method or system. Under this particular system
of management accounting, the production process is divided into small jobs so that the
controlling measures can be implemented or adopted in a better way (Lanen, 2016).
Therefore, considering the overall discussion, it can be stated that management accounting
and its systems will be very useful in the coming financial years of Zylla Company.
P2. Explain different methods used for management accounting reporting
Reporting is very important activity that needs to be performed under the management
accounting system. As per the findings above, reports are the main elements those co-
ordinates the activities of various organizational departments. Under the system of
management accounting several reports are prepared by following different reporting
methods. These are discussed below:
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 Budget – Preparation of budgets is one of the reporting methods that are followed
under management accounting. Encouraging the managers for preparation of budgets,
management accounting helps to develop effective business plans, which is very
important for maintaining standard level of efficiency in the business. Budgets help
the organizations developing more logical and effective plans for the business
(Eisenberg, 2016). In order to develop budgets, the managers of Zylla Company will
require different information related to efficiency level of the employees, resource
base of the company and internal and external situations of the business.
 Production report – This is another method through which reporting can be done
under the system of management accounting. Production report preparation is the
method of reporting about the production level of the business to the higher authority
(Braun et al., 2014). Using the production report, the other departments like, sales and
marketing department can understand how their activities should be framed. It is
production report creates a co-ordination between the production department and sales
and marketing department.
 Inventory management report – This reporting method is very important for co-
ordinating among three major departments of the organization and these three
departments are – production, sales and inventory or storage. Based on the report of
inventory level of the business, the production strategies and budget are prepared and
at the same time, based on the inventory level, the sales department also prepares the
selling strategies (Ekwue, 2014). If the inventory level of the company becomes very
high, the company needs to take aggressive sales strategies.
 Cost report – This is another most important reporting technique that Zylla Company
may adopt to control the cost and waste levels in a better way. Preparing the cost
report, the higher authority of Zylla Company can understand whether the cost is at
the standard level or the cost needs to be controlled. It means the financial strategies
of the company largely depend on the cost report of the business (Boyns and
Edwards, 2013).
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Task 2 - Apply a range of management accounting techniques
P3. Calculate costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costing
It has been identified before that absorption costing and marginal costing are the two methods
that helps in controlling the cost level of the business. the main difference between the two
methods is that the absorption costing considers all costs of the business; whereas, marginal
costing considers only the variable costs of the business the application of these two methods
can be understood with the help of following example:
For example - following data is the cost structure of Zylla Company
Direct material - £10.0 per unit
Direct labour - £5.0 per unit
Variable production overhead - £3.0 per unit
Production - 3000 units
Sales - 2000 units
Selling price - £40.0 per unit
Opening inventory - Nil
Fixed overheads - £2.0 per unit
Fixed overheads for non-production - £20,000 per year
Variable overheads for non-production purposes - 10% of total revenue
Income statement of Zylla Company based on the absorption costing -
Particulars Amount (£) Amount (£)
Total revenue (£40 x 2000 units) £ 80000
Less - Production costs
Opening inventory Nil
Cost of production (3000 units x £20.0) 60,000
Closing inventory (£20.0 x 500 units) 10,000 -50,000
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Gross profit 30000
Absorption -
Overheads actually spent £ 20,000
Overheads that have been absorbed (£2 x 2000) 4000 -16000
14000
Variable overheads for non-productive (15% * 80000) 12000
Fixed overheads for non-productive 20000 32000
Net profit -18000
Income statement of Zylla Company based on the marginal costing method -
Particulars Amount (£) Amount (£)
Total revenue (£40 x 2000 units) £ 80000
Less - Production costs
Opening inventory Nil
Cost of production (3000 units x £20.0) 60,000
Closing inventory (£20.0 x 500 units) 10,000 -50000
Margin of contribution 30000
Non-production overheads -
Variable overheads for non-productive (15% * 80000) 12000 -12000
Net profit 18000
Therefore, considering the above calculations, it can be stated that the marginal costing
method will be more suitable for the business because it is showing net profit; whereas, the
absorption costing technique is showing net loss to the business.
Task 3 - Explain the use of planning tools used in management accounting
P4. Explain the advantages and disadvantages of different types of planning tools used
in budgetary control
Budgetary control is very important for controlling then cost level along with the other
organizational activities of a company. If the business process of a company like, Zylla
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Company is considered, it can be identified that there are the needs of two types of planning
tools under the budgetary control system of the company. These two types of planning tools
are – operational budgetary control planning tool and capital budgetary control planning
tools. These two types of planning tools are discussed below:
Operational budgetary control planning tools –
This type of planning tools is required by the organizations in order to improve the business
operations of a company. The tools that come under the operational budgetary control system
are as follows:
Variance analysis – This is one of the operational budgetary control tools with the help of
which the performance standard of a business can be improved in a better way. In order to
use this particular tool, the management of Zylla Company will require set some standards
for each organizational activity like, sales, production and many others. At the end of the
financial year, the managers will require comparing the actual performance with the standard
performance of the company and then identify the variances or gaps in the performance
(Ferreira et al., 2015). The negative gaps in the performance indicate the company needs
improvements. The advantages and disadvantages of variance analysis tool are stated below:
Advantages:
 Variance analysis efficiently improves the performance standards of the company by
indicating the flaws in the performance standards.
 Variance analysis is a very easy process of identifying the performance gaps of the
company (Hopper and Bui, 2016)
Disadvantages:
 Variance analysis is incapable of indicating the reasons behind the variances in the
performance of the company, which is the major loophole in the entire process.
 Variance analysis is very lengthy process. A company needs the entire year to identify
the performance gaps in the business (Narasimhan, 2017).
Responsibility accounting – This is another operating budgetary control tool that is mainly
focused on the performance improvements of the managers. Responsibility accounting
analyzes how far the managers of a company are efficient to fulfil their responsibilities
towards the business (May, 2017). Responsibility accounting is for analyzing the
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performance quality of the managers. In the current scenario of the business, responsibility
accounting is very important because in order to compete in the market, the managers must
be responsible enough towards their job role. The advantages and disadvantages of
responsibility accounting are stated below:
Advantages:
 Responsibility accounting is very important for improving managerial performance
standard within the company (Gluhovsky et al., 2016).
 Responsibility accounting motivates the managers for developing their skills and
knowledge level at every time.
Disadvantages:
 Responsibility accounting is a specialized area and due to that understanding the
results of this particular budgetary control method is difficult to many people (Lanen,
2016).
 Budgetary control is a time consuming process that sometimes fails to serve the
company within the required time.
Capital budgetary control planning tools –
This types of budgetary control tool is required by the companies while many any capital
investment decision. This type of budgetary control tools help the organizations
understanding and identifying the most appropriate and suitable investment option for the
business. The tools that help in identifying the right investment options are as follows:
Payback period method – This is one of the most popular capital budgeting or budgetary
control tools that helps the managers in different companies identifying the most suitable
investment option. The payback period method recognizes the most suitable tool considering
the time lag that the investment option involves to get back the initial investment (Eisenberg,
2016). The advantages and disadvantages of this method are as follows:
Advantages:
 The payback period is very simple and no critical analysis or calculation is involved
with this method. Due to this following payback period method is easier.
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 Payback period method indicates the investors how much time the investment will
take to return the initial investment. This information makes the investment decision
easier (Bruno, 2016).
Disadvantages:
 Payback period method is less logical because it does not have any access on the
investment option after the payback period.
 Payback period method has no link with the profitability of the investment option,
which is one of the key factors that indicate the suitability of an investment option
(Drury, 2013).
Net present value method – This is one of the most logical capital budgeting or capital
budgetary control methods that the management of Zylla Company may adopt. This method
analyzes the investment options by considering the present value of future cash flows from
the investment (Kamal, 2016). The net present value method has some advantages and some
disadvantages, which have been discussed below:
Advantages:
 The net present value method considers the profitability factor involved in an
investment project. Considering the profitability, this method helps the organizations
developing better investment planning for the business (Chang, 2016).
 The net present value method considers the time value of money, which is also a
major factor that needs to be considered while deciding and analyzing a future
investment strategy.
Disadvantages:
 The net present value method is critical and it involves long calculations, which
cannot be understood by the personnel without proper knowledge over the subject
(Boyns and Edwards, 2013).
 Net present value method sometimes provides the results that are contradictory to the
results of the other capital budgeting techniques. This makes the managers confuse
regarding the investment decision.
Internal rate of return method – This method is similar to net present value method to some
extent in terms of calculations. This method also considers the future cash flows of the
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investment option while making the final decision regarding the investment (Lanen, 2016).
The major benefits and limitations of this particular method are as follows:
Benefits:
 The main benefit of the internal rate of return method is that the method considers the
profitability and time value of money, which are the two important factors in
investment decision making (Narasimhan, 2017).
 This method is capable of generating and providing logical information and decision
to the managers regarding any investment.
Limitations:
 The internal rate of return method is also very lengthy and critical method of capital
budgeting (Ferreira et al., 2015).
 The results of the internal rate of return method sometimes differ from the results
under the net present value method.
Therefore, from the above discussion, it can be stated that there are several budgetary control
tools that can be useful to the management of Zylla Company.
Task 4 - Compare ways in which organizations could use management accounting to
respond to financial problems
P5. Compare how organizations are adapting management accounting systems to
respond to financial problems
There are a wide range of benefits of management accounting and its systems within the
context of an organization. One of the biggest advantages of management accounting is that it
helps every organization in solving and preventing its financial problems. As stated by
Tricker and Tricker (2015), the financial governance helps an organization in responding to
the financial problems of the organization in an effective manner. However, the adaptation of
various management accounting systems help an organization in responding to its financial
problems in an effective manner. The analysis of the effectiveness of solving financial
problems with the adaptation of management accounting systems has changed over time.
From the table provided below, the comparison of how organizations are adapting to
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