Management Accounting Systems: Application for Sustainable Growth

This report provides a comprehensive analysis of management accounting principles, systems, and techniques, emphasizing their role in supporting business growth and success. It covers various management accounting systems, including inventory management, cost accounting, price optimization, and job costing, illustrating their application within organizations like Lotus Cars. The report also delves into techniques such as financial statement analysis, product costing, cash flow statements, constraint analysis, and inventory turnover analysis. Furthermore, it evaluates the integration of management accounting within organizations through budgeting, capital budgeting, and standard costing techniques. The document concludes with a comparative analysis of planning tools and their effectiveness in addressing and preventing financial problems, offering recommendations for achieving sustainable business success.

Management
Accounting

Contents
INTRODUCTION...........................................................................................................................3
Part 1 ..............................................................................................................................................3
An explanation of the principles of management accounting................................................3
Different types of management accounting systems..............................................................4
The role of management accounting and management accounting systems..........................4
The use of techniques and methods used in management accounting by presenting
calculations for an income statement using variable costings to show how these financial
reporting and statements support business growth and success.............................................5
Evaluation of how management accounting is integrated within the organisation................6
The benefits of the function to the organisation.....................................................................7
D1.Integration of different MAS and managerial accounting reporting within an entity's
business processes:.................................................................................................................8
Conclusions that critically reflect the application of management accounting......................8
Part 2................................................................................................................................................9
Compare and contrast three planning tools used in management accounting, indicating how
effective you judge each to be and why. Your judgements should be supported by examples to
demonstrate advantages and disadvantages............................................................................9
Using specific case studies as examples, compare ways in which management accounting is
applied, the effectiveness of management accounting in dealing with financial problems and
preventing financial problems in organisations....................................................................11
M3. Use of planning tools and applications in preparing and forecasting budgets:.............14
Provide conclusions and recommendations to the organisation on which methods to apply in
order to achieve sustainable business success, based on your findings and evidence provided.
..............................................................................................................................................16
REFERENCES..............................................................................................................................17

INTRODUCTION
Management accounting is the process of preparing reports that will help managers in
taking long term and short term decisions. It is helpful in determining the current financial
position n of the company. In this Lotus Cars company is taken to use management techniques
and solve the financial issues. In this file management accounting and its tools and techniques
are covered.
Part 1
An explanation of the principles of management accounting.
Management accounting is a method of accounting in which documents, reports and
statements are prepared that help managers identify the current financial position of the company
and plan a future corporate strategy. It focuses on analysing the statements with the objective to
find out the deviation between actual and standards results. It is used by the top level managers
for various decision making purposes and to boost the revenue of the organisation. In relation to
this, Lotus Cars Limited is using this accounting method to help the internal management of the
company in order to take fruitful decisions. It is an automotive company incorporated in 1948
and has headquarter in England, UK. It manufactures sports cars and racing cars which are
known for their light weight and fine handling features. Its chairman is Colin Chapman who
started this business 73 years ago. So, these accounting techniques are used to enhance the future
growth of the organisation.
It is important for the organisation to use these management accounting techniques for
various reasons. For instance, it provides the financial information to the management. The main
goal of management is to evaluate the data properly and frame the future strategies of the
business. These reports, documents gives the manager an outlook of the current business
happenings. Additionally, using these tools and techniques has no fix guidelines, conventions,
rules so, this gives flexibility to analyse the activities as per the current situations. On the other
hand, it helps mangers to use the historical data to realise the target, to generate revenue and curb
the losses of the business. Moreover, this will enhance the performance because of the detailed
analysis of the financial reports done by the top level management. This will be helpful for
strengthening the business as it give insights into the overall performance and forecasting the
future health of the organisation. So, it is helpful for the business to grow.

Different types of management accounting systems.
Business concerns are using management accounting system that helps to make business
decisions efficiently. This is useful for all managers as it helps to manage all business accounts
and information correctly. It play a key role within organization as it helps managers to decides
the prices of products and services by involving all cost information, market factors and
profitability. In Lotus Car Company, accountant uses this for the purpose of determining life
cycle of current products and for the viability of new products. The managers of such company
provides key insights that helps entity's management team to make right decision. Systems
supports decision making within an organization by providing a wealth of statically and financial
information to managements (Sánchez-Matamoros, Araujo Pinzon and Alvarez-Dardet Espejo,
2014). Management accounting system are the systematic way to evaluate the process of
business activities and helps to monitor all transactions in effective manner.
The role of management accounting and management accounting systems.
The description of management accounting system and its essential requirement are given below:
Inventory management system: This is systematic approach to collecting, obtaining,
storing and getting profits from non capital assets. It is used to manage the stock in a proper
system and increase productivity. It maintains a valid records of inventory and give best results.
It is require in Lotus Car Company to get right stock, at the right times, in right place and at right
cost that attracts people and increase productivity. The manager of Lotus Car Company uses this
system to manage, Control and overseas purchase from the side of suppliers and buyers. It
includes following methods that are discussed as:
 FIFO: This method is related with flow of inventory through business industry. It states
where first item purchased then it sold at first or consumed during production.
 LIFO: This method is related with current cost of products that is purchased most
recently are sell firstly or consumed firstly (Hitomi, 2017).
 AVCO: This method of accounting is used by organization to sell the products at average
cost. It is calculated by dividing the total number of units at total cost of goods.
Cost accounting system: This system is essential for all organization as it is used for
recording, classifying, summarizing and analysing costs. It is used to ascertain the cost of the
organisation. In this various techniques are used such as standard costing, marginal costing and
others. It is helpful in determining total cost of the organisation in order to generate revenue.It

helps to make prudent business decision after analysing the cost of products and services. It is
require in Lotus Car Company to control the cost in budgetary constraints management, to
allocate limited resources for particular projects or production processes, cost computation and
cost reduction. Such as, manager of Lotus Car Company uses this system for controlling the cost
of its offering and increase productivity.
Price optimization system: This states a process which is decided by organization for
the purpose of setting the prices of products and services. In market there are different types of
manufacturing company that uses this system to fix or decide the prices of products. It is require
in Lotus Car Company to consider all cost of products then decide prices of products which is
manufacture by entity. Therefore, this is used by managers to decide the price of its price that
helps to attracts customers and increase number of customers (Modell 2014). This helps to
ascertain the prices of different product within chosen organization.
Job costing system: This system is used for the purpose of accumulation of cost with a
specific batch of products. It is mainly used for small batch size when products in each batch are
different from products created in other batches. It is method used to determine the cost of
manufacturing a product. It is used when the manufacture uses a variety of products and needs
the evaluation of each. Companies such as consulting firms, furniture manufacturer and many
more uses this method in order to enhance their performance. It ensures that incurred cost for are
reasonable when it is compared to the prices charged to customers. It is requiring in Lotus Car
Company to allocate the cost in specific batches and decide the business profits by separating
jobs. The manager of Lotus Car Company accumulates cost of its goods in special batch.
The use of techniques and methods used in management accounting by presenting calculations
for an income statement using variable costings to show how these financial reporting and
statements support business growth and success.
There are different methods which a company uses :
Financial statement analysis : This focuses on analysis of profit & loss account and
balance sheet for different time periods. This is helpful in understanding the rate with which
company grows in order to frame future corporate strategy. This analysis is done through
comparative financial statements, common size statements and ratio analysis and so on.
Product costing : It means determining the total cost of producing the goods or services.
It categorizes into three types fixed cost, variable cost, semi variable cost. It is helpful in

identifying the total cost of the organisation. There are variety of methods used to calculate the
cost such as marginal costing. It focuses on additional cost incurred on producing the additional
unit of good.
Cash flow statements : Managers perform cash flow analysis in order to determine the
cash inflows and cash outflows of the company. It is the compilation of operating, investing and
financial activities. It records all the transactions which are related to basic operations. In second
section, its investing activities, which showcases all the profits and losses from investment done.
At the last, financial decisions includes all the transactions where cash is used in the form of debt
and equity. So, it is great tool for the managers to figure out the cash inflows and outflows.
Constraint analysis : As per this, management focuses on reviewing the constraints in the
organisation. It helps to identify what all hurdles a business has and how they are impacting on
its sales and profit. Management can use this information to modify the current business
operations in order to capture large market share.
Inventory turnover analysis : It focuses on how many times a company sold out or
replaced its inventory. It is helpful for the top level managers to make decisions about pricing,
manufacturing, and marketing new inventory. It is facilitative for the company to understand
how quickly they are selling the product in the market place. There are various ratios which are
used to find out current inventory levels. A low turnover implies weak sales whereas high
turnover implies higher sales. To calculate inventory turnover company has to follow three steps
such as firstly, identifying cost of good sold secondly, by calculating average inventory and
lastly, dividing the cost of good sold by average inventory.
Evaluation of how management accounting is integrated within the organisation.
Budgets : It is a business tool which is used for the purpose of financial planning and
controlling in an organisation. It is important for the undertaking to put its goals in financial
terms. It can be done by analysing costs and estimating the revenue of organisation. The
objective behind preparing these budgets is to keep a regular track of financial performance and
improving the financial position. There are four main types of budgets which a company uses
such as : Incremental, Activity based budget, Value proposition and Zero based. It is helpful to
put a control on spending, tracking the expenses and save more money. In this organisation
prepares a standard budget and then track the actual performance with the standard one, this way

an organisation can figure out its variations and can enhance the future growth of business. This
is helpful for the management to plan the future actions of the organisation.
Capital budgeting : It is a financial management tool used to make necessary business
decisions regarding investment. It is about where to invest the money, in this management
accountants calculate net present value and internal rate of return to decide upon which projects
to invest the money in.
Standard costing technique : This technique focuses on the establishment of standard cost
then, comparing the standard with actual. With this comparison organisations find out the
variances and take appropriate actions to reduce the deviations to the minimum.
Statistical tools and techniques : As per this, company focuses on certain methods such as
least square, correlation and regression and various other quality control technique to figure out
how the business is performing and what all improvements can be done to enhance its growth.
Ratio analysis : It a another very effective way to conduct the financial analysis of the
business. These ratios are calculated to determine the solvency, liquidity and profitability of the
organisation. Managers use this data to determine company's health. These ratios will help to
give deeper insight into the company in order to have broader picture of company's health.
The benefits of the function to the organisation.
Each accounting management system has its own function in different tasks and operations.
Some of the advantages are as follows:
Management accounting
system
Benefits
Inventory management
system
This system is related to adequate management of raw material
and finished products. Likewise in company stated above i.e.
Lotus Cars company uses such to track and manage its several
types of inventories.
Price optimisation system This management accounting system may be implemented to
provide the accurate costs and prices to products of an
organisation. Lotus Cars company uses this system which help the
company in identify its product that gives more profit by
assigning the correct prices to them.

Cost accounting system The main benefits of utilising the cost accounting system is that it
gives all information regarding the costs of a manufacturing
process of an entity. Lotus Cars company implemented this
system in its business that assist it in find correct pricing of its
cost and also helps in eliminating the non value added processes
form its production process that incur some cost but not add any
value to such company.
Job costing system Benefits of using such system is that it provides the actual cost
that a job shall incurred. Lotus Cars company has an advantages
to implement this, such company can identify the performances of
different working staff to which a particular job is given along
with cost of such job.
D1.Integration of different MAS and managerial accounting reporting within an entity's business
processes:
All the management accounting system are integrated with an entity's business
operations. The above mentioned sentence is true and correct and it may be understandable by an
example. In Lotus Cars company, inventory management system is implemented within its
inventory related operations to obtained correct information related its inventories. Another
example is that Lotus Cars company integrated cost accounting system within its productions
processes to help such company in determining the correct costs of its products (Collis and
Hussey, 2017).
Conclusions that critically reflect the application of management accounting.
From the above mentioned report it has been concluded that, company also integrated
various managerial accounting reporting in its business operations. Inventory management report
is integrated with its business operation to show and maintain the effective management and
utilisation of its resources. Therefore, it may be said that both MAS and managerial accounting
reporting are meant for integration within organisational processes.

Part 2
Compare and contrast three planning tools used in management accounting, indicating how
effective you judge each to be and why. Your judgements should be supported by
examples to demonstrate advantages and disadvantages.
Income Statement under Absorption costing
Profit as Per
absorption costing
£s £s (2020) £s £s (2021)
Sales @ 95 380000 427500
Less Full cost of sales 296420 261640
Opening stock 88920 29640
Direct Material cost 59500 71400
Direct Labour cost 38500 46200
Fixed manufacturing
overhead
85000 85000
Variable
manufacturing
overhead
24500 29400
Add: Closing stock 29640 29640 16572 16572
Gross profit 113220 182432
Less Non-production
cost
11000 11000
Fixed administration
cost
11000 11000
Budgeted Profit 102220 171432

Value of stock = Direct Material cost per unit + Direct Labour cost per unit + Variable cost per
unit + Fixed production cost per unit
For 2020,
= 11+ 17+ 7+ 85000/3500
= 11+ 17+ 7+ 24.28
= £59.28
Opening stock = 59.28*1500 = £88920
closing stock = 59.28*500 = £29640
For 2021,
= 11+ 17+ 7+ 85000/4200
= 11+ 17+ 7+ 20.24
= £55.24
Value of closing stock = 300* 55.24
= £ 29640
Income Statement under Marginal costing
Profit as Per Marginal
costing
£s £s £s £s
Sales 380000 427500
Less variable cost of
sales
175000 164500
Opening stock 52500 17500
Direct Material cost 59500 71400
Direct Labour cost 38500 46200
Variable
manufacturing
overhead
24500 29400
Closing stock 17500 17500 10500 10500

Contribution 222500 273500
Less Fixed cost 96000 96000
Fixed manufacturing
overhead
85000 85000
Fixed administration
cost
11000 11000
Budgeted Profit 126500 177500
Value of stock = Direct Material cost per unit + Direct Labour cost per unit + Variable cost per
unit
= 11+ 17+ 7
= 11+ 17+ 7
= £ 35
The profits of firm have increased in year 2021 with respect to year 2020 under both the
situations. The main reason behind this increase is due to rise in the sale of products.
Management accounting technique are beneficial for organization as it helps to prepare
financial report document and maintain the cost of products in business industry. Technique such
as absorption and marginal costing defines overall cost of organization and then determine net
profit within organization. This consider responsibility to manage a variety of accounting
information and increase productivity. Both techniques are helpful for Lotus Car Company such
as accountant produce relevant management reports by evaluating income and expenses that
helps to make business decision. Moreover, it helps to increase production and sale turn in
selected manufacturing company
Using specific case studies as examples, compare ways in which management accounting is
applied, the effectiveness of management accounting in dealing with financial problems
and preventing financial problems in organisations.
Budgets : It is a statement prepared by Lotus Cars to estimate revenue and expenses over
a specific period of time. It can be prepared for person, organisation, business, government and
so on. It is used to plan future incomes and expenses and avoid any kind of future losses. It is a
comprehensive financial plan helps to achieve financial or operational goals. It is relevant for

effective financial planning. It is prepared for all type of organisations whether small or large
which helps in coordinating all the activities of the business.
Budgetary control is a practice used by the organisations to plan and control their costs. It
showcases what is to be achieved and how to achieve it. It ensures that the goals are achieved
and there are no deviations between actual and standards.
It conducts its activities in various steps such as firstly, by preparing budgets. Then,
establishing roles and responsibilities of each of them and lastly, by comparing the standards
with the actuals. These comparisons will be helpful in figuring out the variations and taking
appropriate steps to reduce its variances to the minimum and maximize its profitability.
There are various tools and techniques used for budgetary control purposes.
Variance analysis : it focuses on finding the differences in standards and actuals. In a
business budget is prepared for each and every department whether finance, production, sales
and so on. Further, comparison is done between actuals and standards to figure out the
deviations. Then, organisations categorize variations into favourable or unfavourable. This
practice is done to minimize the cost and maximize the profits.
Advantages :
 Variance analysis helps to find out all the inefficient performance of the business.
 It is helpful in keeping the track on all the expenses and revenues of the organization.
 It promotes the efficiency in business operations.
 It helps the organisation in making the future plans regarding what products to sell, which
customers to target to increase the profitability.
Disadvantages :
 Preparation of budgets is time consuming activity. It takes take time to prepare the
budget, find out the variances and communicate top level management regarding the
same.
 Sometime to conduct the analysis teams may require additional data for instance,
invoices, bills, overtime records and so on which can a daunting task to perform.
 It cannot give the accurate results if the data is badly skewed.
 Mathematical properties are not used to calculate variations due to which chances are
there, analysis may not be accurate.