Comprehensive Analysis of Management Accounting Systems and Methods

This report provides a comprehensive overview of management accounting, detailing its definition, origin, roles, principles, and systems. It explains the core functions of management accounting, including formulating financial strategies, explaining the financial consequences of decisions, monitoring expenses, and maintaining profitability. The report also explores different management accounting systems such as inventory management, cost accounting, job costing, and price optimization systems. Furthermore, it contrasts financial and management accounting, highlighting their key differences. Finally, the report discusses the importance of relevant, reliable, accurate, and timely information, as well as the need for understandable presentation in management accounting reporting. The report emphasizes the critical role of management accounting in providing internal financial reports and aiding managers' decision-making processes to achieve business goals.

Management Accounting
LO1. Demonstrate an understanding of management accounting
systems.
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Management Accounting
P1. Explain management accounting and give the essential requirement of
different types of management accounting systems.
Management Accounting
Management accounting, also called managerial accounting or cost accounting, is the process
of analyzing business costs and operations to prepare internal financial report, records, and
account to aid managers’ decision-making process in achieving business goals. In other words,
it is the act of making sense of financial and costing data and translating that data into useful
information for management and officers within an organization.
Origin
Managerial accounting has its roots in the industrial revolution of the 19th century. During this
early period, most firms were tightly controlled by a few owner-managers who borrowed based
on personal relationships and their personal assets.
Since there were no external shareholders and little unsecured debt, there was little need for
elaborate financial reports. In contrast, managerial accounting was relatively sophisticated and
provided the essential information needed to manage the early large-scale production of textile,
steel, and other products. After the turn of the century, financial accounting requirements
burgeoned because of new pressures placed on companies by capital markets, creditors,
regulatory bodies, and federal taxation of income. Johnson and Kaplan state that “many firms
needed to raise funds from increasingly widespread and detached suppliers of capital. To tap
these vast reservoirs of outside capital, firms’ managers had to supply audited financial reports.
And because outside suppliers of capital relied on audited financial statements, independent
accountants had a keen interest in establishing well defined procedures for corporate financial
reporting. The inventory costing procedure adopted by public accountants after the turn of the
century had a profound effect on management accounting. As a consequence, for many
decades, management accountants increasingly focused their efforts on ensuring that financial
accounting requirements were met and financial reports were released on time.
Roles
Formulate Financial Strategies
Management accountants can formulate financial strategies using sales forecasts, budgets and
job-costing techniques, among other managerial accounting tools. They also can incorporate
data from a company’s financial statements to develop strategies that enhance gross income,
net profit and earnings per share. Whether it’s formulating a plan to purchase capital equipment
or reduce operating costs to ensure the continued viability of a business, management
accountants serve a vital role in formulating effective financial strategies.
Explain Financial Consequences of Decisions
If senior leaders adjust their company’s capital structure, management accountants can explain
the ramifications of adding additional debt or equity financing. This is true of other decisions,
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Management Accounting
such as merging with other companies, opening new operating facilities or laying off large
numbers of employees. They can explain how decisions impact budgets and financial
statements, illustrating how decisions change a company’s profit or loss for a given period of
time. While some business decisions may sound good, it's only when digging into the numbers
that a company finds whether they truly add up or not.
Monitor Expenses
Management accountants can create static, flexible or rolling budgets, along with other types of
reports that allow senior leaders and department heads to monitor expenses. This is important,
because operating expenses have a direct impact on bottom-line profit. Management
accountants can select the optimal budgeting technique, given the specific needs of their
stakeholders, and help their company run as cost-effectively as possible. They also can create
ad-hoc reports that make it easier for their stakeholders to understand the nature of the
expenses their department or organization incur.
Maintain Profitability
There are many tools management accountants can use to keep their businesses profitable,
including performing a break-even analysis. With this type of analysis, the accountants weigh
sales against variable and fixed costs to determine the point at which a company breaks even.
Knowing this point will help management determine production levels, sales objectives and
overhead costs, among other points impacting profitability. Also, management accountants can
examine direct and indirect manufacturing costs, helping to optimize a company’s cost structure.
Principles
Designing and Compiling
Accounting information, records, reports, statements and other evidence of past, present or
future results should be designed and compiled to meet the needs of the particular business
and/or specific problem.
It means that management accounting system is designed in such a way presenting the
relevant data. If so, a particular problem is to be solved. Moreover, accounting information can
be modified and adopted to meet the requirements of management.
Management by Exception
The principle of management by exception is followed when presenting information to
management. It means that budgetary control system and standard costing techniques are
followed in the management accounting system.
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In this way, the actual performance is compared with pre-determined one for finding the
deviations. The unfavorable deviations alone are informed precisely to management as what is
going wrong. If so, the management has spent less time to read and study the information and
more time to take action.
Absorption of Overhead Costs
Overhead costs are absorbed on anyone of the predetermined basis. The overhead costs are
the combination of indirect materials, indirect labour and indirect expenses. Hence, the selected
method or methods for the absorption of overheads should bring about the desired results in the
most equitable manner.
Control at Source Accounting
Costs are best controlled at the points at which they are incurred – control at source accounting.
The performance of individual workers, details of materials issues and utilization and usage of
services such as machine, power, repairs and maintenance, vehicles etc. are prepared in the
form of quantitative and qualitative information. In this way, control can be exercised over
employees, materials and service providing devices.
Accounting for Inflation
A profit cannot be said to be earned unless capital is maintained intact in real terms. It means
that money value is not stable. Hence, it is necessary to assess the value of capital contributed
by the owners of the business concern in terms of real value of money through revaluation
accounting. In this way, rate of inflation is taken into account to judge the real success of the
business concern.
Management Accounting System
Financial accounting focuses on preparing information for external parties, such as
stockholders, public regulators and lenders, in accordance with generally accepted accounting
principles. Managerial accounting, on the other hand, takes a company's financial information
and develops reports for internal and confidential use by managers for decision-making and
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identifying ways to run the company more efficiently. These reports are based on
management's informational needs and include budgeting, breakeven charts, product cost
analysis, trend charts and forecasting.
Inventory management System
Inventory management is a discipline primarily about specifying the shape and
placement of stocked goods. It is required at different locations within a facility or within
many locations of a supply network to precede the regular and planned course of
production and stock of materials.
Cost Accounting System
A cost accounting system is used by manufacturers to record production activities using
a perpetual inventory system. In other words, it’s an accounting system designed for
manufacturers that tracks the flow of inventory continually through the various stages of
production.
Job Costing System
Job cost accounting is the process of assigning the costs you incur to a specific job you
or your business is involved with. This term is widely used in the construction industry
and it refers to allocating costs to individual construction projects at a company.
Price optimization System
Price optimization is the process of finding that pricing sweet spot, or maximizing price
against the customers willingness to pay. Companies up and down the supply chain,
both in B2B and B2C settings, rightly dedicate a massive amount of time towards price
optimization to ensure that their products will sell quickly at the right price while still
making a decent profit.
The different between Financial Accounting and Management Accounting
BASIS FOR COMPARISON FINANCIAL ACCOUNTING MANAGEMENT
ACCOUNTING
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Management Accounting
Meaning Financial Accounting is an
accounting system that
focuses on the preparation
of financial statement of an
organization to provide the
financial information to the
interested parties.
The accounting system
which provides relevant
information to the managers
to make policies, plans and
strategies for running the
business effectively is
known as Management
Accounting.
Is compulsory? Yes No
Information Monetary information only Monetary and non-
monetary information
Objective To provide financial
information to outsiders.
To assist the management
in planning and decision-
making process by
providing detailed
information on various
matters.
Format Specified Not Specified
Time Frame Financial Statements are
prepared at the end of the
accounting period which is
usually one year.
The reports are prepared as
per the need and
requirements of the
organization.
User. User Internal and external
parties.
Only internal management.
Reports Summarized Reports about
the financial position of the
organization.
Complete and Detailed
reports regarding various
information.
Publishing and auditing Required to be published
and audited by statutory
auditors.
Neither published nor
audited by statutory
auditors.
P2. Explain different Methods used for management accounting reporting
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Management Accounting
Why information should be relevant to the user, reliable, up to date
and accurate.
What is Information?
Data that is accurate and timely, specific and organized for a purpose, presented within a
context that gives it meaning and relevance, and can lead to an increase in understanding and
decrease in uncertainty. Information is valuable because it can affect behavior, a decision, or an
outcome.
Relevance
Data captured should be relevant to the purposes for which it is to be used. This will require
a periodic review of requirements to reflect changing needs.
We have a duty to collect and report performance information against a wide range
of statutory indicators. These are set out in the context of the Government’s White
Paper – Strong and Prosperous Communities. Where appropriate each service will
identify reliable local performance indicators to manage performance and drive
improvement. These are reviewed on an annual basis to ensure relevance.
Reliable
Data should reflect stable and consistent data collection processes across collection points
and over time. Progress toward performance targets should reflect real changes rather than
variations in data collection approaches or methods.
Source data is clearly identified and readily available from manual, automated or other
systems and records. Protocols exist where data is provided from a third party, such as
Hertfordshire Constabulary and Hertfordshire County Council.
Accuracy
Data should be sufficiently accurate for the intended use and should be captured only once,
although it may have multiple uses. Data should be captured at the point of activity.
Data is always captured at the point of activity. Performance data is directly input into
Performance Plus by the service manager or nominated data entry staff.
Access to P+ for the purpose of data entry is restricted through secure password
controls and limited access to appropriate data entry pages. Individual passwords can
be changed by the user and which under no circumstances should be used by anyone
other than that user.
Where appropriate, base data, i.e. denominators and numerators, will be input into the
system which will then calculate the result. These have been determined in accordance
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Management Accounting
with published guidance or agreed locally. This will eliminate calculation errors at this
stage of the process, as well as provide contextual information for the reader.
Timeliness
Data should be captured as quickly as possible after the event or activity and must be
available for the intended use within a reasonable time period. Data must be available
quickly and frequently enough to support information needs and to influence service or
management decisions.
Performance data is requested to be available within one calendar month from the end
of the previous quarter and is subsequently reported to the respective Policy and
Scrutiny Panel on a quarterly basis. As a part of the ongoing development of
Performance Plus it is intended that performance information will be exported through
custom reporting and made available via the Three Rivers DC website. This will improve
access to information and eliminate delays in publishing information through traditional
methods.
Why the way in which the information is presented must be
understandable
The Understandable information must be easily to get ideas when users can be read. And this
information gives how to planning, how to control and also how to organize for the decision
making. Understanding is a brief, complete and clear explanation for the information provided in
the report. The Information relating to the relationship is essential to users in understanding
financial statements. The legitimate background of business activities represents the
understanding of the data the financial quality that can be understood from they people with
knowledge.
The main things are we consider the understandable presented information, there are:
Information must be understandable by its users.
Main two external users are Investors and Creditors.
Users are assumed to have reasonable comprehension of, and ability to study, the
accounting, business, and economic concepts needed to the underattended information.
However, by understanding its fundamental problems, each of them will not fully understand the
complex information. Instead of providing a system, the information must be published correctly.
Different types of managerial accounting reports
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Management Accounting
Managerial accounting reports help small business owners and managers monitor the
company's performance and are prepared frequently throughout accounting periods as needed.
Depending on the type of project and the time-sensitivity of the information, an owner or
manager may request reports quarterly, monthly, weekly or even daily.
Budget Report
Budget reports help small business owners analyze their company's performance and, if the
business is big enough, managers analyze their department's performance and control costs.
The estimated budget for the period is usually based on the actual expenses from prior years. If
the small business as a whole or a specific department was substantially over budget in a
previous year and cannot find feasible ways to trim costs, the budget for future years may need
to be increased to a more accurate level. Owners and managers can also use budget reports to
provide incentives to employees. In this case, some of the funds budgeted may be given out up
as bonuses to employees for meeting specific financial goals.
Accounts Receivable Aging Reports
The accounts receivable aging report is a critical tool for managing cash flow for companies that
extend credit to their customers. This report breaks down the customer balances by how long
they have been owed. Most aging reports include separate columns for invoices that are 30
days late, 60 days late and 90 days late or more. A manager can use the aging report to find
problems with the company's collections process. If a significant number of customers are
unable to pay their balances, the company may need to tighten its credit policies. Periodically
analyzing the accounts receivable aging also keeps the collections department from overlooking
old debts.
Job Cost Reports
Job cost reports show expenses for a specific project. They are usually matched with an
estimate of revenue so the company can evaluate the job's profitability. This helps identify
higher-earning areas of the business so the company can focus its efforts there instead of
wasting time and money on jobs with low profit margins. Job cost reports are also used to
analyze expenses while the project is in progress so managers can correct areas of waste
before the costs escalate.
Inventory and Manufacturing
Companies with physical inventory can use managerial accounting reports to make their
manufacturing processes more efficient. These reports generally include items such as
inventory waste, hourly labor costs or per-unit overhead costs. The manager can then compare
different assembly lines within the company to see where one can improve or to offer bonuses
to the best-performing departments.
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LO2. Apply a range of management accounting techniques
P3. Calculate costs using appropriates techniques of cost analysis to
prepare an income statement using marginal and absorption costs.
A.Cost
In business and accounting, cost is the monetary value that a company has spent in order to
produce something. Cost denotes the amount of money that a company spends on the creation
or production of goods or services. It does not include the markup for profit. From a seller’s point
of view, cost is the amount of money that is spent to produce a good or product. If a producer
were to sell his products at the production price, his costs and income would break even,
meaning that he would not lose money on the sales. However, he would not make a profit. From
a buyer’s point of view the cost of a product is also known as the price. This is the amount that
the seller charges for a product, and it includes both the production cost and the mark-up, which
is added by the seller in order to make a profit.
B. Different Classification cost such as,
Fixed Cost
A periodic cost that remains more or less unchanged irrespective of the output level or sales
revenue, While in practice, all costs vary over time and no cost is a purely fixed cost, the
concept of fixed costs is necessary in short term cost accounting. Organizations with high fixed
costs are significantly different from those with high variable costs. This difference affects the
financial structure of the organization as well as its pricing and profits. The breakeven point in
such organizations (in comparison with high variable cost organizations) is typically at a much
higher level of output, and their marginal profit (rate of contribution) is also much higher.
EX- insurance, interest, rent, salaries
Variable Cost
A variable cost is a cost that varies in relation to either production volume or services provided.
If there is no production or no services are provided, then there should be no variable costs.
EX- Bonus, wage cost
Direct Cost
A direct cost is a price that can be completely attributed to the production of specific goods or
services. Some costs, such as depreciation or administrative expenses, are more difficult to
assign to a specific product and therefore are considered to be indirect costs.
EX-Direct material, Direct labour
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Indirect Cost
Indirect costs are costs that are not directly accountable to a cost object (such as a particular
project, facility, function or product). Indirect costs may be either fixed or variable, But some
overhead costs can be directly attributed to a project and are direct costs.
EX--Indirect material, Indirect labour
Material Cost
Direct materials cost the cost of direct materials which can be easily identified with the unit of
production. For example, the cost of glass is a direct materials cost in light bulb manufacturing.
The manufacture of products or goods required material as the prime element.
Labor Cost
Labor cost is wages that are incurred in order to produce specific goods or provide specific
services to customers. The total amount of labor cost is much more than wages paid. It also
includes the payroll taxes associated with those wages, plus the cost of company-paid medical
insurance, life insurance, workers' compensation insurance, any company-matched pension
contributions, and other company benefits.
Inventory Cost
Inventory cost includes the costs to order and hold inventory, as well as to administer the
related paperwork. This cost is examined by management as part of its evaluation of how much
inventory to keep on hand. This can result in changes in the order fulfillment rate for customers,
as well as variations in the production process flow.
C. Different Costing system such as,
Marginal Costing System
Marginal cost is the cost of one additional unit of output. The concept is used to determine the
optimum production quantity for a company, where it costs the least amount to produce
additional units. If a company operates within this "sweet spot," it can maximize its profits. The
concept is also used to determine product pricing when customers request the lowest possible
price for certain orders.
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Absorption Costing System
Variable costing is a methodology that only assigns variable costs to inventory. This approach
means that all overhead costs are charged to expense in the period incurred, while direct
materials and variable overhead costs are assigned to inventory. There are no uses for variable
costing in financial reporting, since the accounting frameworks (such as GAAP and IFRS)
require that overhead also be allocated to inventory.
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