Kensington College: Management Accounting Systems and Applications

This report delves into the realm of management accounting, focusing on its systems and applications within an organization. It begins by defining management accounting and its core purpose, followed by an exploration of various management accounting tools and their significance. The report further investigates cost accounting, inventory management, job costing, and price-optimizing systems, highlighting their importance in different scenarios. A key aspect of the report involves comparing absorption and marginal costing methods, including their respective merits and demerits. Additionally, the report discusses planning tools used for budgetary control and examines how management accounting can be applied to address financial problems, providing a comprehensive overview of the subject matter. The report is based on the case study of KEF Ltd, a manufacturing firm.

Management Accounting
Systems and Its Applications

Table of Contents
INTRODUCTION...........................................................................................................................3
Definition of Management accounting and its purpose...............................................................3
Different Management Accounting system.................................................................................4
Importance of integrating management accounting.....................................................................5
Application of management accounting......................................................................................6
LO2..................................................................................................................................................7
LO 3 ..............................................................................................................................................11
Advantages and disadvantages of different types of planning tools used for budgetary control.
LO 4...............................................................................................................................................13
Management accounting for solving financial problem............................................................13
CONCLUSION..............................................................................................................................14
REFERENCES................................................................................................................................1

INTRODUCTION
Management Accounting is defined as a profession in the organization which used to
involve the financial and non financial information in the organization on the basis of the same.
KEF Ltd, a medium-sized enterprise in the manufacturing sector. This report highlights the concept of
management accounting and its purpose. After that the report goes on to highlights the different
management accounting tool and its importance . After that the report highlights the concept and the
interpretation of the absorption and marginal cost of the company. After that the report has highlighted the
Planning tools used in Management accounting and different tool of solving the financial problem.
Definition of Management accounting and its purpose
Management Accounting is defined as a profession in the organization which used to
involve the financial and non financial information in the organization on the basis of the same.
Manager in the organization used to take the help of the same data at the time of making the
different decision in the organization with the sole motive of organizational development (Paul,
Sarker and Essam, 2014). Management accounting is mostly used by the internal team of the
organization. Generally in the management accounting the financial report such as different
invoice, balance sheet are shared by the financial department to the management team of the
organization and on the basis of same decision are taken in the organization. There are some of
the main purpose for which management accounting is build in the organization. Some of the
main purpose behind management accounting are as follows:
Planning: This is one of the main purpose for which management accounting is done in
the organization. As management accounting used to help the management in understanding and
interpreting the different future need of the business (Mohamed, Kerosi and Tirimba, 2016). Not
only that management accounting is also done with the purpose of planning the different
strategies which can be implemented in the future.
Monitoring: Management accounting also help the organization in monitoring the
different operation of the business. As management accounting make sure that strategies in the
organization are successfully implemented and action plan are also carried out as intended.
Analysing: Management accounting also help the organization in analysing the different
financial as well as non financial data. As Analysing of data help the organization in identifying

the different problem or the issue which is faced by the organization and developing the different
methodology to overcome the same issue.
Different Management Accounting system
Cost Accounting system: It is the framework in the management accounting system
which try to find out the cost of the product in the organization for the purpose of analysing the
profitability, inventory valuation and cost control of the company (Melitski and Manoharan,
2014). There are two type of cost accounting system namely Job order costing, It is the type of
cost accounting system which used to accumulates the manufacture cost of the product
separately from each other. Process costing is the costing in which manufacturing cost used to be
accumulated separately for each of the process in the organization.
Inventory management system: Inventory management system as the name suggest is
the combination of technology and process in the organization which used to manage the
inventory or stocked product in the organization (McCrory and et.al, 2015). The inventory can be
the company assets, raw material or the finished product in the organization. For the purpose of
inventory management the organization used to take the help of both human resource and
technology in the organization.
Job costing system: It is the element of the management which used to accumulate the
different information about the different type of the cost associated with the production and
service in the organization. Job costing system in the organization used to accumulate the three
type of the information in the organization. Direct material, job costing system used to track the
cost of the material which used to scrapped during the course of the job perform in the
organization. Direct labor, job costing system used to uncertain the cost of the labor used on a
job. Overhead, Job costing system in the organization used to assign the overhead cost to one or
more cost pool in the organization.
Price-optimising System: In this management accounting the management of the
organization used to analysis and determine how the customer in the market will be responding
to the different prices which will be offered by the company in the market (Giannarakis, Konteos
and Sariannidis, 2014). Main purpose of this accounting is to determine the price at which the
product of the company can be offered in the organization.

Importance of integrating management accounting
There are many benefit which is brought by the management accounting system in the
organization. Some of benefits of management accounting system are as follows:
Cost accounting system
Disclosure of profitable and unprofitable activity: As cost accounting system used to calculate
the different cost, it helps the business in disclosing the different profitable and unprofitable
activities very easily in the organization.
Cause Determination: Cost accounting help the organization in finding out the exact cause of
decrease or increase in the profit for the organization.
Inventory management system
Efficiency and productivity in operation: Inventory management technique used to help the
business in maintaining the good amount of inventory in the organization (Fullerton, Kennedy
and Widener, 2014). This help the company in positive flow of cash in the organization. This
help the company in improving the efficiency.
Job Costing System
Separate Calculation: Job costing accounting used to calculate the cost incurred on the separate
basis which help the manager in ascertain whether to continue with the job or not in future.
Price optimizing system
Immediate financial benefit: Price optimizations provide opportunities to focus on a variety of
goals such as the margin of sales and the number of conversions.
There are four type of management accounting principle which need to be followed by all the
organization.
Influence: This principle used to explains that communication present insight is very crucial in
the organization as this used to strength the process of the decision making in the organization.
As communication of the information is the only basis which used to make possible for company
to encourages the integrated process.
Relevance: This principle highlights that management accounting used to check the best
available resources for the organization for the process of gathering information to make the
different decision in the organization.

Value: This principle used to highlights that management accounting used to link the
organization processes with the enterprises model in the organization and used to demand good
amount of the knowledge (Eckardt, Selen and Wynder, 2015).
Credibility: Management accounting used to manage the near term business interest against the
long term value of shareholder which help the business in maintaining the creditability in the
organization.
Basis Financial Accounting Management Accounting
Meaning This accounting is consider
upon preparing the financial
statement of the organization
to be presented to the
integrated parties of the
organization.
Management accounting is the
process of internal operation in
which the information are
provided to the manager in the
organization, on the basis of
same they can make the
different decision in the
organization.
Objective and parties involve The main objective of
financial accounting is to
provide the information to the
outsider of the organization.
Both internal and external user
are involved in it.
The main objective of this
accounting is to provide the
support to the management in
the organization. In decision
making and planning. Only
internal user are involved.
Reports and publishing This report used to
summarized the financial
position of the organization
and need to be publish by the
organization.
This report used to shows the
complete and detailed report
regarding the various different
information. This report does
not required to be publish.
Application of management accounting
What is cost?

In accounting, cost is defines as a amount of cash and cash equivalent which is incurred
by the organization for procuring the different assets in the organization. Cost is generally
measured by calculating the monetary value of efforts, material, resources, time and utilities, risk
and opportunity foregone. For example the cost of the item of the organization also includes the
item freight in cost.
Different type of cost
There are many different type of the cost which is related to the cost of the product. Some of the
cost are as follows:
Direct cost vs indirect cost: Direct cost is the cost which can be directly influence to the
production of a specific good and services. This cost used to be directly attributable to a project.
Some of the example of the direct cost are direct materials, commissions, piece rate wages, and
manufacturing supplies. Whereas Indirect cost is the cost which are not directly accountable to a
cost object. Indirect cost may be of the fixed nature and also can be of the variable nature.
production supervision salaries, quality control costs, insurance, and depreciation are
some example of indirect cost.
Variable cost: Variable cost is the cost which used to changes as the quantity of the
goods and services which a business used to produce used to changes. Variable cost is the sum of
a marginal cost of the business over all the production of the business. This cost also used to
consider as a normal cost of the business. labor and the cost of raw materials are example of
fixed cost.
Fixed cost: It is the type of the cost which is not dependent on any of the factor of the
business. As fixed cost not used to change with change in the quantity of the good produce in the
organization. This is the cost which organization has to pay irrespective of quantity of or the
quality of good produce. like rent, insurance, payment on loans, management salaries,
advertising is fixed cost.
LO2.
Absorption costing – It means the method of accumulating cost that is associated with
process of production and apportioning it towards an individual product. It is the type of costing
technique which is needed by an accounting standard for creating a valuation of an inventory that
is been stated in an enterprise balance sheet.
Merits Demerits

 It is the method which considers the
fixed cost in determination of the
product cost and in identifying a
suitable policy with regards to pricing.
 Absorption costing is the approach that
conforms with a matching and accrual
concepts that needs matching cost with
the revenue for the specific period of
accounting (Cuzzocrea and et.al, 2018).
 It is been recognised for preparing an
external report for the purpose of
valuing the stock.
 It avoids separation of the variable and
the fixed cost.
 This method is not tend to be useful for
the management in decision making.
 Validity of the cost of a product under
an absorption costing highly depends
on the allocation of the overhead cost in
the reasonable manner.
 Under, this method of costing foxed
cost are counted as the period cost
whether it relates to the administration
and selling. This leads to no future
benefits and thus must not be included
in product or an inventory cost.
Marginal costing- It means an increase or the decrease in a cost that produces more than
one unit or in serving more than one customer. Marginal costs are majorly based on the
production expenses that includes direct labour, variable and material cost.
Merits Demerits
 It makes it easier in determining and in
keeping control over the production
cost.
 This method helps in short run planning
of the profit which is been easily
demonstrated by the profit graphs and
the breakeven charts.
 Marginal cost could not be used in the
external reports that must be having a
clear picture of all the overhead and an
indirect cost.
 Along with marginal costing, there
always remain a problem of the over
and the under recovery of an overheads
as the cost is apportioned on an
estimate basis and not as actual value.

Activity based costing- It is the costing method that determines an activity in the
company and assigns cost relating each and every activity towards all the services and the
products in accordance to actual consumption.
Merits Demerits
 This method brings reliability and an
accuracy in the determining product
cost with emphasizing on the cause-
effect relationship in occurrence of
cost.
 It helps in tracing the cost to the areas
of the managerial responsibility,
departments and the processes besides
cost of product.
 ABC contains several cost pools and
the multiple drivers of cost so it is
resulted as the complex system.

Interpretation- From the above analysis it has been stated that risk of the under
absorption resulted as 13000 in respect to the absorption costing method shows the inefficient
use of the resources. The profits resulted from absorption costing as 243000 and as marginal
costing amounted to 230000 which in turn depicts that absorption costing tool is better as
compared to marginal costing because it reflects true and accurate view of profitability. This is
because marginal costing only considers variable cost and not fixed cost as the product cost. It
has been advised to the company for making use of other approaches that is ABC and target
costing in order to evaluate the profits adequately.
LO 3
Advantages and disadvantages of different types of planning tools used for budgetary control.
Planning Tools used in Management accounting

Panning tools are used by organisations for properly planning the activities and operations of
business. There are different planning tools like budgeting, pricing and strategic planning. They
are essential so that management can have a planned structure to be followed by the organisation.
Planning Tools
1 Budgeting
a.) Definition
Budgeting refers to process in which plans are created for spending the money in the
organisation. Budgets are the spending plans prepared by management of company. Budgets
allows company to determine in prior about the funds that will be required for carrying out the
activities of organisations (Fullerton, Kennedy and Widener, 2014). Budgeting is termed as
balancing proposed expenses with proposed incomes.
b) Importance of Budgeting
Budgeting helps in creation of plans by the management so that company can concentrate
over the cash flows of company. This helps in allocation of funds to various different activities
that will help in managing the cash of company. Budgeting helps in finding out the variances so
that considerable steps can be taken for improvement.
c) Types of Budgeting
Capital budgeting
It is used by organisations to evaluate and rank potential capital investments and expenditures of
significant amount.
Operating budgeting
Operating budgeting refers to forecast of revenues and the expenditures for one or more than one
future periods.
d) Implications of Budgeting
Capital Budgeting – It helps organisation to plan for the amount within which capital
expenditures are to be made.
Operating Budgeting – It helps in allocating the funds to activities carried out during the year.
2. Pricing
a. Pricing strategies- these are the different types of strategies which are being used by the
company in order to set the prices of the products and services (Matsushima and Khanna, 2018).
The common pricing strategy are as follows-