Analysis of Management Accounting System and Its Application

This report provides a comprehensive overview of management accounting systems and their applications within the context of ABC Ltd., a manufacturing company. It explores the requirements of different management accounting systems, including cost accounting, inventory management, and job costing. The report details various management accounting reports, such as budget reports, account receivable aging reports, and performance reports, highlighting their benefits in decision-making and organizational control. It further analyzes the integration of management accounting systems and reports, emphasizing their role in providing crucial information for internal users. The report also delves into different costing methods, comparing marginal and absorption costing, and analyzes various planning tools used in budgetary control, forecasting, and budget preparation. Finally, the report discusses the adaptation of management accounting systems to address financial problems and strategies that can lead to organizational success, including the use of tools like the balance scorecard and benchmarking.

MANAGEMENT
ACCOUNTING SYSTEM AND ITS
APPLICATION

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1 ...........................................................................................................................................1
1. Management accounting system and requirements of different types of management
accounting system........................................................................................................................1
2. Different management accounting reports...............................................................................2
3. Benefits of management accounting system and their application with context of
organisation..................................................................................................................................3
4. Integration of managements accounting system and management accounting reports...........3
TASK 2............................................................................................................................................3
TASK 3............................................................................................................................................3
1. Advantages and disadvantages of different planning tools uses in the budgetary control......3
2. Analysing use of panning tools and their application for for casting and preparation of the
budgets.........................................................................................................................................5
TASK 4............................................................................................................................................6
1. Adaption of management accounting system in order to respond to the financial problems.. 6
And also Analysing the way through which organisation can leas to success by responding to
the financial problems..................................................................................................................6
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Management accounting system is the process of analysing the cost of business
operations, in order to prepare the financial reports and records which aid manges in decision
making which leads to the achievement of organisational goals and objectives.
the present study is based on the ABC Ltd. Company which exist in manufacturing industry
deals in production of goods and services. This is the medium sized enterprise.
The report will explain about the requirement of management accounting system and
management accounting reports which helps the internal uses in generation of essential
information which aids in decision making. The report will also explain about different
techniques of costing which generate and provide reasons for difference in the net profit of the
company.
Furthermore, the report will explain about different planing tools which can be used by
the company to forecast the budget. In addition to this some of the tools including balance score
card, benchmarking will also be explained for understanding of the tools which helps in solving
the financial problems .
TASK 1
1. Management accounting system and requirements of different types of management
accounting system
Management accounting system is the internal system of the organisation which helps
them in measuring and evaluating their processes (Kaplan and Atkinson,, 2015). This is
considered to be the process of preparing of the management reports and also the accounts which
can further help its users in making effective and efficient decision by using the financial
information generated by reports (Management Accounting – Meaning, Advantages &
Functions. 2018). These reports helps in generating in formation related to finial and statistical
data which helps mangers in making long term and short term decisions.
Management accounting is also called as managerial accounting and the cost accounting.
This is considered to be the process of analysing the cot of business operations, in order to
prepare the financial reports and records which aid manges in decision making which leads to the
achievement of organisational goals and objectives(Renz, 2016).
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Management accounting plays essential role for the mangers of ABC Ltd. for
implementing their functions of planning, organising,controlling and the decision making . Their
aim is to provide the support decision making by mangers by collecting , processing and
communicating the important information to the Internal users as these will aid them in their
decision making efficiently .
There are different types of management accounting system which helps the business
and managers in generating different information based on the requirements and needs of the
management(Maas, Schaltegger and Crutzen, 2017) .
Some types of management accounting system are as follows:
Cost accounting system
This is also called the costing system or product costing which is the framework used by
the firms in order to estimate the cost of the products for analysing their profitability, cost control
and also for the inventory valuation. ABC Ltd. Use cost accounting system so that it helps them
in ascertaining the cost of every activity in which they need to incur expenses in order to
accomplish their activies and generating income.
Inventory management system
Inventory term is generally used to represent the stock, material, goods .Inventory
management system leads to the combination of the use of desktop software, barcode printers,
barcode scanners and also the mobile devices in order to streamline the management of the
inventory(Quattrone, 2016). This system also helpful for ABC Ltd. in tracking of the goods that
is receiving and shipping of the goods. This helps in controlling the inventory and also to
ascertain the current levels of the inventory which resulting in automatically reduction in under
stock and overstock situations. There are different method of this system which includes LIFO
and FIOFO method.
LIFO is the management system which focuses on selling of the inventory which produced in the
last and the fresh stock is being sold by the company in order to attract more customers.
FIFO is the inventory management system which focuses on selling of the product which
produces initially that is which ABC Ltd .have produced first are required to be sell first in order
to remove the older stock.
Job costing system
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This is the system which involve the process of the accumulating the information
regarding the cost associated with each product or each job( Hopper and Bui, 2016). This will
help ABC Ltd. In ascertaining the products which are profitable and need to expand and also
which are not profitable so that accordingly decisions can be made regarding the expansion of
the products .
2. Different management accounting reports
Management accounting reports focuses on receiving the data through using the financial
accounting . These reports generally helps in planning, controlling and decision making
regarding the organisation (Chenhall and Moers, 2015). There are different types of reports
which helps in providing different information related to their field. Some of the reports are as
follows;
Budget reports
These reports are the reports which helps the business in measuring the actual
performance with the planned performance ion order to take corrective measures to eliminate the
deviations if occurred. Budget reports helps and guide the business activities to move in the
direction of achieving the organisational goal(Ax and Greve, 2017). These reports also helps in
controlling of the activities and costs of the ABC Ltd. which leads in improving profitability and
increasing profits of the company.
Account receivable ageing reports
These are the reports which are made by the ABC Ltd. In case where they relies on
extending credit these reports helps in ascertaining the defaulters by breaking down the
remaining balance of the clients into specific time periods (van Helden and Uddin, 2016) . This
also helps in finding the issues in the company's collection process. These reports helps the
company in tightening the credit policies if they showing more defaulters.
Performance reports
ABC Ltd. Prepare these reports from reviewing the performance of the company .
Performance reports for each department is also made so that efficient management of activities
can be done and helps the company in directing the activities of employees towards achievement
of organisational goal . Performance reports helps in ascertaining, reviewing and controlling the
performances of organisation as whole(Shields, 2015). these reports helps the mangers in
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making strategic decisions and also to award the employees for their commitment in the
organisation.
3. Benefits of management accounting system and their application with context of organisation
Management accounting system helps the ABC Ltd. In different ways for fulfilling
different objectives. This systems helps the mangers in accumulating the cost of each job which
helps them in ascertaining the difference of job which is profitable or which is not in order to
decide whether to continue with the job or not (Honggowati and et.al., 2017). This system also
helps in ascertaining the cost of products, controlling cost, tracking of inventory,minimising
costs, improving profitability and also in optimum utilisation of all the resources.
Management accounting system, leads ABC Ltd. in obtaining the essential information
which can used by the internal users which aids them in decision making which lead in
achievement of organisational goals effectively and efficiently.
4. Integration of managements accounting system and management accounting reports
Management accounting system of ABC Ltd. helps in generation of the useful
information which is then presented in form of reports that is management accounting reports in
summarised form which clearly show the results of activities of organisation(Christ and Burritt,
2017). This enables the mangers in planing, decision making and controlling their further
activities, these reports are communicated to the internal users for aiding decision making and
also for achievement of the organisational goals effectively and efficiently.
TASK 2
Income statement by applying marginal and absorption cost
There are different kinds of costing methods which are discussed below:
Marginal costing :
It is a technique of costing in which only variable cost is charged to unit cost of
production. It does not consider fixed costs for the period and is entirely written off against the
contribution.
Absorption costing :
It is costing technique in which both variable and fixed costs are charged to the unit cost
of production. This means that it takes direct and indirect expenses into account for calculating
the unit price of a product.
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Cost of production (Marginal method)
Direct material 10
Direct labour 20
Variable production overhead 5
Per unit production cost 35
Total production cost :
Marginal costing :
Total units produced = 19000
Unit per cost = 35
Total cost of production = 665000
Cost of production (Absorption method)
Direct material 10
Direct labour 20
Variable production overhead 5
Production overhead 100000/19000
Per unit production cost 40.26
Total production cost:
Total units produced = 19000
Unit per cost = 40.26
Total cost of production = 764940
Total cost of sales for June month.
Absorption method
Opening stock 0
Add: purchases 18000 40.26 724680
Less: closing stock 2000 40.26 80520
Cost of Goods sold 805200
Marginal Method
Opening stock 0
Add: purchases 19000 35 665000
Less: closing stock 2000 35 70000
Cost of Goods sold 735000
Income statement for the month of June
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(Absorption costing)
Particulars
Sales 16000 50 800000
Less: COGS
Opening stock
Add: production 18000 35 630000
Less: closing stock 2000 35 70000 560000
GP/ NP 240000
(Marginal costing )
Particulars
Sales 16000 50 0 800000
Less: COGS
Opening stock
Add: purchases 18000 35 630000
Less: closing stock 2000 35 70000 560000
Contribution 240000
Less: fixed 100000
Net profit 140000
Difference Profit and loss statement for June
(For absorption cost)
Particulars
Sales 16000 50 800000
Less: COGS
Opening stock
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Add: production 19000 35 665000
Less: closing stock 3000 35 105000 560000
GP/ NP 240000
(marginal cost)
Particulars
Sales 16000 50 800000
Less: COGS
Opening stock
Add: production 19000 35 665000
Less: closing stock 3000 35 105000 560000
GP/ NP 240000
Advising company to employ other technique :
Job costing could be applied by the organisation in which costs for each job would be
collected and allotted on a project separately. This technique is preferable because job costing
facilitates managers the benefit of being able to keep record of teams and individuals
performance in the form of efficiency, cost-control and productivity.
TASK 3
1. Advantages and disadvantages of different planning tools uses in the budgetary control
There are many different types of planning tools available which can be used by ABC
Ltd. For effective and efficient planning of their business activities in order to direct all the
activities in direction of achievement of organisational goals. Some of the planning tools are
explained as follows;
Zero base budgeting
this is the method of budgeting which includes the preparation of the budget from the
zero base or the fresh evaluation of each of the item included in budget. There is no or zero base
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while preparation of the zero base budgets (Coad, Jack and Kholeif, 2015). This approach
basically drive the manges in finding the cost effective techniques to the improve the activities.
Advantages
 It helps the managers in justifying all the operating expenses.
 It leads to keep legacy expenses in check
 It helps in efficient allocation of the resources It drive the managers in finding the cost er effective techniques and ways in order to
improve the activities(Englund and Gerdin, 2018).
Disadvantages
 It can leads to rewards short term thinking
 Time consuming method as mangers needs to start with zero base
 It requires manpower for justifying all the expenses It is necessary to have special knowledge regarding preparation of zero base budget(Van
der Stede, 2017)
Operating budget
Operating budget is the budget which includes all the cost associated on operation of the
business. It helps the mangers in describing the activities which are highly capable of generating
the income which includes production, sales, inventory finished goods(Kaplan and Atkinson,,
2015). This operating budget helps the management in preparation of the income statements and
ascertaining the operating profit.
Advantages
 It helps the management in managing the current expenses of the company.
 Operating budget lead to forecast and estimate the future expenses
 it helps in building of the financial reserves(Renz, 2016) It provides benefits to the company by increasing accountability.
Disadvantages
 It is time consuming process as it required to accumulate the cost of all the activities of
production
 It requires special knowledge to prepare the operational budget
 it leads to inflexible in decision making(Maas, Schaltegger and Crutzen, 2017)
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 Requirement of Experience manager in order to introduce the budgetary slack
Incremental budget
It is the budget which is prepared on the basis of the previous year's budget or the actual
performance for basis with the incremental amounts which are added for the new budget period.
This basically includes allocation of resources on basis of the allocation of the previous year.
Advantages
 It is simple to understand and prepare as this is based on recent financial results of the
company and hence recent budget can easily be verified.
 It ensures the funding stability as programmes requires the funding form many years to
achieve the objective and incremental budget is considered to be the structure which
ensures that fund ned to keep flowing towards the program(Quattrone, 2016). this also ensure that all department operate in consistent and the stable manner for the
longer term.
Disadvantages
 This budget is considered to be incremental in nature that it only assumes and consider
the minor changes from previous period .
 It fosters the overspending ( Hopper and Bui, 2016)
 It perpetuates the allocation of resources as according to the previous year itself.
2. Analysing use of panning tools and their application for for casting and preparation of the
budgets
Incremental budget, operational budget, cash budget, sales budget, fixed and flexible
budget, Zero based budget, activity cost budgeting are some of the planning tools which are used
by the ABC Ltd. In order to preparation of the budget based on previous year or no base
depending on the tool which they are using.
These budgets helps them in accumulating the cost and income of the activities in their
organisation and will leads the company to make comparison between the actual performance
and the protected performance(Chenhall and Moers, 2015). This comparison is done in order to
take the corrective actions to eliminate the deviation if occurred between both the performances.
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This helps the organisation in achievement of organisational goals and objectives
effectively and efficiently and also to direct all the activities of the organisation towards the path
of achieving organisational goals efficiently.
Planning tools are applied in ABC Ltd. For forecasting and preparing the budgets in order
to designing the activities which they need to work and accordingly other activities could
directed. This will helps the in coma[prison between the actual and planned performance so that
deviations can be eliminated by taking corrective measures.
TASK 4
1. Adaption of management accounting system in order to respond to the financial problems.
And also Analysing the way through which organisation can leas to success by responding to the
financial problems
There are different ways through which financial problem can b solved by adapting
different tools of management accounting system as they help the ABC Ltd. In solving their
financial problems and also guide them the direction in which they are required to perform and
work for the achievement of the organisational goals effectively and efficiently.
Balance score card
Balance score card is the model used for the performance measurement or considered to
be the performance metric which is used in the strategic management in order to identify and
focusing on improving the different internal functions of the company(Ax and Greve, 2017).
This is generally used to measure the performance and to provide feedback to the organisation so
that changes can be made of the performance s not going into the right direction.
It is basically the set of the performance targets and also the result which is related to
the four dimensions that is financial, internal process, customers and the innovation(van Helden
and Uddin, 2016). It also helps in recognising that organisation is responsible for the
stakeholders group including employees, customers, suppliers, shareholder, communities, etc.
For Example
ABC Ltd. Uses balance score cards so that they can reduce their financial problems or
any financial loss. As it uses four different elements while measuring of the performances which
includes financials, customers , internal; process and the innovation so that they can make
alterations in goods and services according to the needs and wants of the customers which helps
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them in retaining the customers for long and maintaining and improving the profitability of the
company. This will leads in elimination of the financial problems of the company.
key performance indicators
It is considered to be the quantifiable measure which can be used by ABC Ltd. To
evaluate the success of the organisation, in respect to meeting and fulfilling the objective of the
organisation. ABC Ltd. Using Key performance indicators at different levels to evaluate the
success of each level in meeting their respective targets(Christ and Burritt, 2017). Higher levels
of KPI' s generally focusing on overall performance of the business whereas lower level of KPI' s
focuses on production and processes department including sales, marketing, HR and many other
and their targets.
Cash flow forecast, Account payable turnover, Gross profit margin,revenue growth rate,
inventory turnover are some of the examples of important key performance inductors for the
organisation(Shields, 2015).
For Example
ABC Ltd. used gross profit margin as their key performance indicator and in previous
year company has earned around £50000 of Gross profit margin and their past year showing
increasing trend in their gross profit margin. Due to non utilisation of resources optimally the
company earn gross profit margin of £30000 that is loss of £20000 can be ascertained with help
of KPI's and also the reason behind this difference that is underutilisation of resources in order to
make the company aware about this reason so that they can work on it and make appropriate and
optimum utilisation of all the resources to achieve the targeted goals a to eliminate this financial
loss.
Benchmarking
It is the process which helps in measuring the performance of the company's products and
services against with the another business which is considered to be the best in the
industry(Honggowati and et.al., 2017). Benchmarking point is generally used to identifying the
internal opportunities available with the organisation for further improvement.
Benchmarking is basically the practice of comparing the business process and the
performance metrics with best practices of the other companies.
For Example:
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ABC Ltd. Sets the target of increasing their sales by 20% with those of its competitors
and in case of company is not able to achieve its targets because of the lacking in their resources
than they need to work on improving their activities and performances so that they can achieve
their targeted performance in comparison of its competitors. Benchmarking helps in motivating
and encouraging the company to compare it that of other and to work efficiently which helps in
solving their financial problems or eliminating the financial loss.
variance analysis
It is the analysis of the difference between the planned amount and the actual amount.
Variance analysis is used to identify the reason for the differences between the planned and the
actual amount(Christ and Burritt, 2017). it is basically the quantitative investigation if the
difference amount between the actual and planned amounts. This any-sis generally used by
managers in the ABC Ltd. In order tom maintain and control the business activities for the
achievement of organisational goals effectively and efficiently.
For Example
If the budgeted sales by ABC Ltd. Is expected to be £12000 units and the actual sales
leads to £8000 than variance analysis helps in defining the reason for the difference of £4000 so
that organisation can prevent them from such losses in near future by controlling the business
activities .
CONCLUSION
From the above report it can be concluded that the management accounting system and
managements accounting reports plays essential role in the organisation as through reports
internal users are able to obtain the information which aids them in decision making. The
benefits of reports are widely explained in the report, Different costing techniques including
absorption and marginal costing also explained in the report which helps in understanding of the
difference in net profits .
Furthermore the report also conclude about different planning tools of budgetary control
which helps in forecasting and preparing of the budgets in addition with the tools which leads to
organisation in solving the financial problems,. These tools includes balance score card, variance
analysis, key performance indicators, etc.
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REFERENCES
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Englund, H. and Gerdin, J., 2018. Management accounting and the paradox of embedded agency:
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Online
Management Accounting – Meaning, Advantages & Functions. 2018. [ONLINE] Available
through <https://cleartax.in/s/management-accounting>
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