Comprehensive Analysis of Management Accounting Systems & Reporting

This report provides a comprehensive overview of management accounting systems and their essential requirements, focusing on cost accounting, job order costing, process costing, and throughput accounting. It differentiates between marginal and absorption costing methods for profitability computation and discusses various planning tools used for budgetary control. The report also identifies different methods for management accounting reporting, including job cost reports, sales and profit reports, and budget reports. Furthermore, it examines how firms utilize management accounting systems to address financial problems, emphasizing the importance of variance analysis and cost control. The document concludes by highlighting the significance of efficient cost management and the increasing popularity of modern accounting systems like throughput accounting.

MANGEMENT ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION.......................................................................................................................................3
TASK 1.......................................................................................................................................................3
P1 Management accounting and essential requirements of different management accounting systems...3
P2 Identification of different methods that are used for management accounting reporting....................6
P3Profitability computation by using marginal and absorption costing method......................................7
P4 Advantage and disadvantage of different planning tools used for budgetary control..........................9
P5 Way in which firms are using management accounting systems to respond to financial problems. .11
CONCLUSION.........................................................................................................................................12
REFERENCES..........................................................................................................................................14

INTRODUCTION
Management accounting is commonly used by the firms to deal with related transaction and to manage same at the workplace.
In the current report varied systems of management accounting are explained and there essential requirements are defined. Apart from
this, in middle section of the report, marginal and absorption costing methods are differentiated and relevant calculations are
performed. Different planning tools are define and discussed in detail. At end of the report, way in which management accounting
systems are used to respond to financial problems are also explained in the report.
TASK 1
P1 Management accounting and essential requirements of different management accounting systems
From: Budgeting officer
To General manager of White elephant restaurant
Subject: Management accounting system
Management accounting branch of accounting which deals with costs and expenditures that are made in the business.
Management accounting is used to do accounting related cost and expenses as well as it are used to keep track of expenses
that are made in the business. In this way effective control is made on expenses in firm. In discussed discipline there are
many approaches like variance analysis that can be used in the business (Sánchez-Rodríguez and Spraakman, 2012).
Under variance analysis method there are some of predetermined goals and objectives and against these objectives
comparison is made in order to identify performance of the business firm which may be positive or negative. If there is
good performance on some points then there is no problem but if it is identified that on some point performance is not
good then in that case action can be taken to work on the area where performance is not good and efficiency of the
business firm can be improved. Apart from variance analysis, there are many other methods that can be used to analyze

firm business performance. Many firms in order to get more better overview of profitability make use of marginal and
absorption costing method. There is difference between both methods as they give overview of the firm profitability but
there is difference in same. In case of other approach merely unstable expenditures are considered but in respect to other
approach all sort of expenditure are cosidered. Both methods compute firm profitability in different manner and it can be
said that management accounting reveal the profit if only variable expenses are taken in to account and when both sort of
expenses are considered (Busco and Scapens, 2011). Some of MA systems are explained below.
Cost accounting system: Cost accounting system have significance for the companies and it is used by White elephant
restaurant as under this cost of entire departments is done and on basis of same per unit cost is computed. It can be
observed that under this accounting system in White elephant restaurant at each department level expenses are recorded
and then summed up to identify entire cost that is incurred in the business. This is the one of the common accounting
system that is observed in case of all sort of firms whether it is small or big in nature. This is because while doing cost it is
necessary to take in to account entire cost of departments so that actual cost can be computed. Different department heads
need to collect data related to expenses that they are made in the business during entire month. These details need to be
submitted to the chief accountant of an organization.

Figure 1Cost accounting system
(Source: Vosselman, 2014)
It is the accountant that compiles entire records that are related to different departments and on this basis overall cost for
business is computed. In cost accounting systems not only different departments cost are added but same are also
classified in to different categories like fixed, variable and semi variable expenses. It must be noted that fixed expenses are
those that remain stationary and does not altered with change in situation. On other hand, variable expenses are those that
keep on changing consistently and never remain same (Vosselman, 2014). Fixed portion cannot be controlled but variable

portion can be changed. Thus, in cost accounting system all expenses are classified in to these categories. These
information help manager a lot in making decisions and it can be said that they easily identify that at what rate expenses
are increasing in the business and at which point they need to take steps to control expenses in company.
Job order costing: This approach is given due importance by the corporates due to its unique characteristics as for each
job costing is separately done. This is also used by White elephant restaurant as for each product or food item separate
costing is done. Usually, in the firms that produce customized products for different sort of orders costing is separately
done. This is because different raw materials are used in costing of products and due to this reason it becomes inevitable to
do costing of each batch individually. There are certain benefits of job order costing for the business firms. One of the
main advantages is that manager gets costing report individually for each batch and on analysis of same identifies that
which sort of expenses need to be controlled in the business so that cost of each batch can be controlled to maximum
possible extent (Talha, Raja and Seetharaman, 2010). This is the one of the major factor by considering which job costing
is used by the most of business firms that are operating in manufacturing department.
Process costing: It is another method that is commonly used by the firms at their workplace. Process costing refers to the
costing process under which entire steps that covered under process are analyzed and cost for them is computed
individually. In specific process there may be multiple steps and all of them need to be taken in to consideration to
determine overall cost of product. Usually, in this method for individual process costing is done separately and then same
are added to determine overall cost of the product in the business. This costing approach is used by most of the business
firms because in every sort of firm different process are performed whether it is related to production or service
department. It can be said that process costing is quite popular among business firms.
Throughput accounting: It is the one of the most important accounting system for the business firm and it can be said that
it is the one of the modern form of accounting system. This accounting system was designed by Israeli person and it
becomes very famous among business firms now a days. There are multiple aims and objectives behind using throughput

accounting system in the business and one of them is that cost must be controlled stiffly in the business so that maximum
profit can be earned in the business (Lukka and Vinnari, 2014). There are number of advantages of using throughput
costing system in the business and one of them is that approach of cost control and recording of records is unique in nature
and due to this reason mentioned cost accounting system is quite popular among business firms. It is very important for
the business firms to make efficient and effective use of cost in the business. With passage of time along with traditional
accounting systems throughput accounting approach is becoming quite popular and use by business firm’s at large scale. It
is very important for the firms to innovate their business operations time to time so that prudent decisions can be taken.
P2 Identification of different methods that are used for management accounting reporting
From: Budgeting officer
To General manager of White elephant restaurant
Subject: Management accounting reporting
Management accounting reporting refers to the ways in which reporting of records is done in the business. There are varied methods
of reporting that are used in the business. In these reporting’s managers receive a lots of information’s in respect to variables and on
basis of same make business decisions (Bodie, Kane and Marcus, 2014). Reporting may be related to job cost, budget, sales and
profit. These reports attract management attraction towards varied facts and according to requirement managers make business
decisions. Some of reporting methods are explained below.
Job cost report: It is the one of the most popular way of reporting as under this approach in respect to different jobs costing is done
separately. Under this reporting managers identify that in which trend costing of products is going on. Managers by viewing trends
identify direction in which cost is moving. If manger thinks that there is need to do work on specific front then initiatives is taken to

control cost in respect to job. Thus, it can be said mentioned approach have significant importance for the managers.
Sales and profit report: Sales and profit report is prepared by each and every type of business firm like Small White Elephant.
There may be different sections of the sales and profit report. Means that in section of sales classification can be done product wise
and quarter wise (Jinga and et.al., 2010). Such kind of classification ensured that managers will be able to identify that which
product line is most profitable and in which area there is need to work. Apart from this, managers can also identify sales trend that
get changed from one quarter to another. Thus, it can be said that through sales and profit report managers get a better overview of
sales that is observed in the business. Apart from this, on other hand, there is profit report which is widely used in the business. This
is because sales price remain constant but cost keeps on fluctuating at fast rate. Profit report help managers in determining whether
on quarter basis good amount of profit is earned in the business. Apart from this, profit report also helps managers in determining
whether in all products good amount of profit is earned in the business (Krishnan, Miller and Sedatole, 2011). It can be said that
there is huge significance of sales and profit report for the business firms. There are lots of facts that can be identified by using sales
and profit report in the business. Thus, it can be said that time to time sales and profit report must be prepared so that best decisions
can be taken in the business. There are many business firms that are using data visualization software in order to make business
decisions. Means that already there is reporting system in the business but it is visualization software that reflect and help managers
a lot of things in the business. In Tableau on daily basis plotting of sales and profit is done and by doing so it is identified that in
which direction firm is performing. If manager’s thing that performance is good then in that case there is no need to take any action.
However, in case if it is identified that to some extent firm failed to perform better in specific quarter or specific product line then
action must be taken immediately so that firm can be bring on track in order to achieve pre-determined targets.
Budget report: Budget report is also one of the most important methods that are used by the business firms for making decisions. In
these budget reports budgets are given and variance analysis is done which reflect whether cost remain in control in the business or
firm failed to do so. On basis of variance analysis managers come to know that in which area they need to work immediately in
order to control expenses in the business. Thus, it can be said that there is huge importance of budget report for the business firms

because it help managers in ensuring that cash is used effectively in the business and efficiently operations are performed in the
business.
P3Profitability computation by using marginal and absorption costing method
Absorption and marginal costing method is the one of the method that is used for computation of profit in the business. There
is difference between both sorts of methods as it can be seen that in case of AC method both stable and non-stable expenses
considered in the business. On other hand, there is marginal costing method and under this only variable expenses are considered by
the business firm. Hence, there is difference between both accounting approaches in respect to profitability. This is because fixed
expenses that are paid by the Small White elephant are paid out of revenue that is earned by it in its business. Hence, it can be said that
there is importance of absorption costing method because due to payment of fixed expenses profitability of business firm decline to
some extent (Kihn, 2010). Hence, it is important to include fixed expenses in computation of profit in the business. On other hand,
there is another approach of costing which is MC method and in this technique unstable expenditures are only considered by the
business firms. This approach can be considered right because every year it is not necessary that firm make fixed expenses in its
business on assets. Apart from this, fixed expenses made in the business do not have direct contribution to profitability of the business
firm. Hence, it will be better to make use of marginal costing method in the business. It depend on firm that which of method it used in
its business. However, companies can select any of the method or can use both approaches for computation of profit in the business
(Vasile and Man, 2012). By using marginal costing it can identify that after considering variable expenses what change comes in profit
and after considering both fixed and variable expenses what sort of change comes in profit off the business.

Table 1: Income statement under absorption costing

Table 1: Income statement under Marginal costing
Interpretation
It can be seen in case of above given table that in case of marginal costing method earned profit amounts at 12600 and same is
9300 in case of absorption costing method. It can be seen from table that there is less profitability in case of absorption costing method
because in it both fixed and variable expenses are taken in to account. On other hand, in case of marginal costing method only variable
expenses are taken in to account. Thus, it can be said that there is difference between both costing methods and it depend on the firm
that which of approach it used for computing profitability in the business (Albu and Albu, 2012). It will be better to use marginal
costing in the business because mainly while producing goods variable expenses are incurred in the business and due to this reason use
of marginal costing method for making business decision seem more justified then absorption costing method.
P4 Merits and demerits of varied tools in respect to budgeting
There are varied sort of planning tools and all of them have some positive and negative sides. It is very important to select one
of the best alternatives and this can be done by identifying advantages and disadvantages that are associated with planning tools that
are used for budgetary control.

 Variance analysis: Variance analysis is the one of the important method that is used for identifying whether Small White
Elephant have strict control on its expenses and measuring firm performance. Variance analysis is the approach that is used by
all sorts of firms irrespective of their size. There are lots of advantages of using variance analysis method and one of them is
that by using same performance of the firm is measured and direction is identified in which work need to be done in order to
improve firm performance. All these things lead to improvement in firm efficiency and effectiveness. Demerit of variance
analysis method is that by using same wrong analysis can also be done. If objectives are determined in wrong manner then
wrongly comparison will be made and false interpretation will be made about company performance. Ultimately, on basis of
budget decision can be taken in wrong direction. Zero based budgeting: It is a very unique approach of budgeting and under this approach department heads prepare their
department budget at their own level at Small White elephant. Top manager consider all department budgets and by using them
final budget is prepared. Interesting fact in respect to this budget is that until department heads does not prepare their own
budget no allocation is made to them (Fourie and et.al., 2015). Hence, it can be said that it is one of the important budgeting
method. There are some merits and demerits of the zero based budgeting method. One of the main merits of zero based
budgeting is that it is a systematic approach and by using same budget is prepared in proper manner. On other hand, there is
demerit of zero based budget method also and one of the main demerits is that it is very time consuming method and lots of
time is wasted in preparing zero based budget. Incremental budgeting: Incremental budgeting is one of the important approaches that are used to prepare budget but have
some loopholes. In this budget past year budget is taken in to account and increment of specific percentage is made on all
values of the specific variable. There are some of the positive and negative points of increment budgeting and one of them is
that in case of increment budget less amount of time is consumed and by assuming specific percentage at which sales may
increase all expenses are elevated. On other hand, there are some limitations of the incremental budgeting and it is that it is not

necessary that every year sales and expenses will increase as they may decrease also (Brandau and et.al., 2013). Hence, there is
possibility that by using incremental budget wrong prediction can be made in the business. Linear programming: Linear programming is the one of the important method as by using it can be identified that for
producing specific number of products in what proportion resources need to be used in the business of Small White Elephant.
There are some of the merits and demerits of linear programming. One of the main merits of this method is that by using this
method it can be identified that how much allocation of cash needs to be made in respect to different expenditures in the
business. Main demerit of this method is that calculation process and model building process is very complex in nature and
every person cannot perform linear programming in proper manner (Hülle, Kaspar and Möller, 2011). One that intends to use
this method must have technical background. Simulation: It is another technique that is used to make prediction for the future time period. Under this method modeling is
done and by assuming probability outcome is determined in specific situation. By using simulation models it can be identified
that in future time period how much money will be required to fund business activities accordingly specific amount can be
classified among varied business expenses in budget. Like other methods there are some of merits and demerits of simulation
method. Main merit of this method is that by using same approximate prediction can be made and accordingly budget can be
prepared. Demerit is that probability need be assumed and if same will be wrongly estimated then budget can be prepare in
wrong way.
P5 Way in which firms are using management accounting systems to respond to financial problems
Financial problems are usually faced by most of business firms because fund is scarcely available in the business. There are
many firms that make use of management accounting systems in order to deal with financial problems. Some of the things that
management must take in to account are as follows.
Capital budgeting tools: There are number of ways in which MA systems which is widely used to address finance related issues in the
business. Usually, in the business it is difficult to determine that what sort of money will be needed to meet working capital needs of

the project. Capital budgeting to some extent help firm in solving this problem (Suomala, Lyly-Yrjänäinen and Lukka, 2014). This is
because under this approach projections are made about cash flows and by using payback period, average rate of return, net present
value and internal rate of return method project is evaluated. It is identified that to what extent from net cash inflow amount project
can be finance and what amount of money need to be borrowed from the market in order to respond to financial problems.
Ratio analysis: By using this method condition of the company is measured by the business firm. By using ratio analysis method
liquidity condition is measured in the firm business and by using same it is identified that up to what extent firm is able to pay current
liability by using current assets in its business. By using this ratio it is identified whether there is scarcity of funds in the business and
if same happened in the business then how much amount need to be taken from the market and from which source of finance so that
cost of finance remain low in the business. It can be said that there is huge importance of ratio analysis for the business firms . In case
it is identified that value of ratio is very low then it can be said that firm need to finance its short term needs ( Harris and Durden,
2012). By using ratio analysis time which situation comes in state of out of control can be identified and immediately steps can be
taken to solve the business problem.
KPI: KPI is used to evaluate company condition and under this some parameters are set that are used to measure company condition.
Under this approach some criteria are ascertained and it is used to compute relative performance of the company. On basis of
comparison it is identified whether firm is performing good or bad in the business. In case it is identified that performance is bad then
on time action is taken to handle condition and in this way financial problem is solved.
Financial governance: Financial governance is the one of the important tool that can be used to respond to financial problems in easy
and effective manner. It can be observed that under financial governance there are some rules and regulations and for each act
someone is made responsible (Financial governance, 2017). It must be noted that in case any task get failed then there will be
someone who can be made responsible for its act and in case any problem comes in existence it is financial governance which ensured
that there will be any specific individual that will be made responsible for its act and same will take action in order to handle situation

that is related to financial problem. Hence, it can be said that there is huge importance of financial governance for the business firms.
It can be said that there must be sound structure of financial governance at the workplace.
Benchmarking: Under this business firms set some of the key parameters in their business and same is used to measure company
performance. In this approach on basis of company past performance standards are determined and same are used to make comparison
and on that basis it is identified whether company give poor or strong performance in its business.
CONCLUSION
It is identified on basis of analysis of facts and figures that firms need to develop their management accounting systems in
better manner so that performance can be measured time to time and in perfect miner. There are multiple alternative management
accounting systems that can be used by the firms at workplace by considering their requirements. It is very important for the firm to
make wise use of these tools and techniques so that in better manner situation can be handled and business performance can be
improved to maximum possible level. It is also concluded that marginal and absorption both are appropriate method of costing and it
depend on firm that which technique it use. Either management can use specific method or it can use both methods to make decisions.

REFERENCES
Books and Journals