Management Accounting Systems and Their Applications

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Management Accounting
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Contents
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Reference.........................................................................................................................................6
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P5
Management accounting is the process of managing the business with proper records for each
and every business activity that will be used in the future for any reference. It is used by the
entity to control the internal system within the organization for measuring and evaluate the
business processes for the aim of effective management accounting system. It involves preparing
and provides the information regarding financial and statistical to the key people of the company
in order to make daily basis routine decisions and also other decisions based on short term
(Otley, 2016). For the growth of a business, it is must that business consist of professional
practices. Management accounting is also known as managerial accounting. It means both terms
have the same meaning in this reference.
Following are the system of management accounting which helps in facing the issues regarding
financial.
Job Costing System:
Meaning: It is the system of management accounting and this is used by the organization when
the products are produced on order. This is used because the company wants to know the actual
cost incurred in the production process of such product and at the time of delivering goods,
required to reimburse the amount of capital which is incurred in the production of a product.
Methods: This system used the method of job costing is a cost sheet in which the cost of each
product is stated.
Merits: The advantages of this system are:
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 Able to the actual cost incurred in the production process.
 Easy to find the total cost for each product or batch.
Demerits: Following are some disadvantages of this system:
 More expensive as it required to maintain records for each customer.
 Time-consuming system.
Inventory Management System:
Meaning - Inventory is the important material for every business so it is must and mandatory for
the organization to track the flow of inventory in order to remove unused and over wastage of
inventory. Management of inventory is a difficult process or task for the large organization so it
is must for them that they should implement the proper method in order to track the inventory
inflow and outflow (Muller, 2019).
Methods – In an organization, various methods are used by the company in order to track the
inventory but below are the most commonly used method that is used in business.
 LIFO (Last In First Out). This method suggests that the company should use that inventory
which is received recently because of inventory which is received in an earlier time is may use in
further period.
 FIFO (First In First Out). This method suggests that the company should choose that inventory
which is purchased earlier instead of using recent inventory the production of goods. The reason
is earlier inventory may not useful in future if it maintains for a long time.
Merits: The advantages of this system are:
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Balance of inventory: Proper management of inventory enables management to find out how
much the exact amount of inventory is a need for further production. This will help in getting
easier to remove the chance of a shortage of inventory (Muller, 2019).
Aid in planning: This system help in prepare planning and budget so it is able to meet the future
requirement on time.
Demerits: Following are some disadvantages of this system:
 It is more difficult to group the items and order at the same time if the reordering of inventory is
in not regular.
 If the inventory is not managed properly then there is a chance of shifting its customers and
supplier because of do not have enough inventory in hand.
Costing System:
Meaning - It is used in order to monitor the cost which is incurring in the production product or
services. It is based on a set of standards, process, and control that provide information to the
management about the cost and profitability of the product or services.
Methods - To know the cost following method is used by the organization.
 ABC – It provides information about the cost of activity of the product.
 BEP – It helps in finding the point where the company can sell their product or services even at
cost without gaining any profit or loss (Otley, 2016).
Merits:
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 Aid in determines the situation of no profit no loss.
 Aid to determine the cost for each batch.
Demerits:
 Not useful in case full capacity of utilization.
 Required more time.
Price Optimization system:
Meaning: It is used by the company to identify how customers react at various level of price for
the product or services (Esther, and Kumar, 2016).
Method:
 Obtained information about price from various sources such as published books.
 Conduct research manually.
Merits:
 Enable to get back in the market after analyzing the market condition and put adopt reasonable
price.
 Encourage a healthy competition environment (Esther, and Kumar, 2016).
Demerits:
 Create a chance of unemployment in various sectors due to automation.
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 As the companies automated to increase their production efficiency, employees are
disenfranchised.
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Reference
 Esther, B.P. and Kumar, K.S., 2016. A survey on residential demand side management
architecture, approaches, optimization models and methods. Renewable and Sustainable Energy
Reviews, 59, pp.342-351.
 Muller, M., 2019. Essentials of inventory management. HarperCollins Leadership.
 Otley, D., 2016. The contingency theory of management accounting and control: 1980–
2014. Management accounting research, 31, pp.45-62.
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