Management Accounting Systems: Cost Analysis and Budgetary Tools

This report provides a comprehensive analysis of management accounting systems, techniques, and their application within an organizational context, specifically focusing on Zylla. It explains management accounting and its essential requirements, covering job accounting, price optimizing, cost accounting, and inventory management systems. Different methods used for management accounting reporting, such as budget reports, cost reports, inventory management reports, and sales reports, are also discussed. The report evaluates the benefits of management accounting systems in reducing expenses, increasing profitability, enhancing decision-making, and improving productivity. It also explains the advantages and disadvantages of various planning tools used in budgetary control, including financial budgets, non-monetary budgets, and operational budgets, and analyzes their application for preparing and forecasting budgets. The report calculates costs using marginal and absorption costing techniques to prepare an income statement and compares how organizations adapt management accounting systems to respond to financial problems, ultimately analyzing how management accounting can lead organizations to sustainable success.

Unit 5 Management accounting
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Contents
Introduction................................................................................................................................3
P1 Explain management accounting and give the essential requirements of different types of
management accounting.............................................................................................................4
P2 Explain different methods used for management accounting reporting...............................5
M1 Evaluate the benefits of management accounting systems and their application within an
organisational context................................................................................................................6
P4 Explain the advantages and disadvantages of different types of planning tools used in
budgetary control...................................................................................................................7
M3 Analyse the use of different planning tools and their application for preparing and
forecasting budgets.............................................................................................................9
P3 Calculate costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costing....................................................................10
P5 Compare how organisations are adapting management accounting systems to respond to
financial problems....................................................................................................................13
M4 Analyse how, responding to financial problems, management accounting can lead
organisations to sustainable success.........................................................................................14
Conclusion................................................................................................................................15
References................................................................................................................................16
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Introduction:
In complex and competitive scenario, management accounting has become essential and
useful for decision making and simplifying complex situation. Zylla is an organisation, which
has gone through number of changes and the directors are of the view that the existing
systems need to go through changes and more appropriate system need to be installed which
are in accordance with the changing requirements of the system. Management accounting
systems provides large interface for keeping organisation data and designing activities in
appropriate manner. Thus, this management accounting report will make analyses of
management systems and management accounting techniques and there will also be analyses
of financial tools for responding financial issues. There will also be practical examples of
costing to show understanding about the varied accounting techniques.
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P1 Explain management accounting and give the essential requirements for different
types of management accounting.
Management accounting can be defined as a mechanism whereby data are collected,
recorded, and interpreted for relevant decision making. The origin of management accounting
was initiated from 18th century itself and with the increase in working complexities; there was
huge development in management models, theories and systems. There are large management
accounting systems such as cost accounting system, job accounting system, price optimising
system and inventory management system and their essential requirements are discussed here
below:
Job accounting system: This system is formulated with a view to estimate the costing for
specific jobs or batch systems. Different specific batches have their own costing criteria and
batches have to be costs accordingly. The most essential requirement of this system is that it
aids in assessing costing for units, it aids in inventory valuation, profitability measures and
also useful in comparing one batch costing with another batch costing(Guga, & Musa, 2015).
Price optimising system: This system can be defined as a system which is used for
estimating prices for different set of products. This system is mainly used for estimating
people reactions at different pricing and optimum pricing policy is used for estimating
product’s pricing. Optimum pricing strategy aid organisation in reaching its products to wide
range of consumers and making huge sales. Increasing sales is always one of the crucial
agenda for any organisation (Guga, & Musa, 2015).
Cost accounting system: This is a system which is used for estimating different set of costs
such as variable cost and fixed costs and other overheads costing, analyses of inventory
valuation and profitability analysis. Assigning costs to products manufactured is a critical job
which has to be done so as to assess the profitability portion and the productive capacity of a
concern.
Inventory management system: This system is implemented for analysing the inventory
level, re-order level, re-order capacity, productive capacity, EOQ level etc. Inventory can be
effectively managed through this system. For a manufacturing concern, it is highly useful that
investment in inventories is done appropriately and with due to attention so as to not invest
large funds into inventory mechanism. Thus, the major essential are that it eliminates
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excessive implementation of funds, shortage or crisis of inventory, and maintains smooth
flow of inventory into organisation processes (Guga, & Musa, 2015).
P2 Explain different methods used for management accounting reporting.
Management accounting reporting is done so that information interpreted and concluded into
systems can be recorded and analyzed thoroughly. This reporting are further used for making
communications with specific personnel and their aids them with future decision making and
relevant opportunities. The different methods used for management accounting reporting are
a budget report, cost report, inventory management report, sales report etc.
Budget report: This budget report is formulated for making budgeting figures regarding
sales, production, financial budget etc. These reports are formulated with a view to make a
thorough interpretation of the budgeted figures. Budget reports are made for production,
sales, inventories, cash budget, financial budget etc. The budget report makes analyses about
the effectiveness of budgeting figures and budgeting assumptions (Isaac, et. al.,2015).
Inventory management report: This report considers inventory valuation and analyses the
level at which inventory must be purchased and keep a complete record of maintenance of
inventory level. This report is quite essential as it defines the blockage of funds into
inventories and also about the inventory level which must be maintained so as to make the
uninterrupted flow of inventories channel.
Sales report: this report defines the number of units and recognizes the revenue. This report
is prepared on the basis of a different set of periods i.e. quarterly, monthly, yearly etc. This
report will provide answer related to existing sales and sales forecasting as well. Varied
operational tools are implemented over the sales figures for making a further interpretation to
be used for future reference (Isaac, et. al., 2015).
Cost report: This report defines costing calculation of a different set of products produced by
companies. It is a useful report which provides a guide for future costing, profitability
analysis, and ascertaining liquidity of the company. Costing directly affects various factors
such as expenses, revenues, administration, profitability etc. and thus, is useful for the
organization productivity.
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M1 Evaluate the benefits of management accounting systems and their application
within an organisational context.
Management accounting systems are highly beneficial in relation to resolving financial issues
and resolving decision-making issues. The following are the benefits of management
accounting systems:
 Reduces expenses: Management systems are used for the purpose of reducing expenses.
These systems are produced with a view to eliminating duplication of activities, controls
costing, evaluate profitability etc. Thus, systems are produced with a view to eliminating
any form of costing (Legaspi, 2014).
 Increases profitability: These systems are evaluated with a view to collect and interpret
data at one place. All the data are collected at a single place and are used for increasing
profitability for all.
 Decision-making processing: Managers requires a large set of information for different
decision processes. Costing and pricing systems are used for interpreting different
information and or evaluating costing and pricing of products (Legaspi, 2014).
 Enhances productivity: the management systems techniques are also highly useful for
enhancing organization productivity. The management processes get improvised through
management systems as it measures the most effective process and measures variances
accordingly (Aduda, and Ndaita, 2017).
In an organization context and specifically in a manufacturing concern like Zylla, various
manufacturing processes continue which can take the benefits of management systems. The
systems would be useful in estimating costs for different batches and analyses the
profitability accordingly. The inventory management also analyses the costs of inventory
level and estimate cost of products, accordingly. Thus, all the systems are highly useful and
beneficial.
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P4 Explain the advantages and disadvantages of different types of planning tools used in
the budgetary control.
The budget is made so that the income and expenses in the organization can be analyzed and
evaluated. The budgetary control is used to evaluate the figures of two years or more than
two years. This evaluated the difference between the figures hence decisions are being taken
for the future course of action. Below is various budgetary control systems explained in detail
with the help of table (Hassan and Siraj, 2015):
S.NO. Budgetary methods Description
1. Financial budget The financial budget is a method which helps in managing the budget
and taking actions accordingly. The financial budget helps in analyzing
the expenses and incomes relate to the monetary terms. In financial
budget various financial methods are being chosen such as capital
project budget, cash budget etc. the cash budget helps to analyse the cash
expenses and income did in the form of incomes (Isaac, et. al., 2015).
These expenses are being considered for a particular time period to be
calculated. His also tells about the shortage and excess of the cash in the
Zylla Company.
2. Non-monetary budgets The Non- monetary budgets are the calculated with the help of non-
sales. The shortage of the profit leads to the measurement of the non-
sales activities. On the other hand, the revenue evaluation is also done
with the help of Non-monetary budgets generated in the organization
Zylla.
3. Operational budget The operational budget helps in evaluating the income and expenses
earned by the operational activities. The sales and expenses budgets are
measured with the sales being done and expense is made by the
organization Zylla within a specified period of time. The sales are
calculated with the help of analyzing the number of units being sold and
income being made. On the other hand, activities are calculated to know
about the expenses done on them. Furthermore, decisions are made for
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future by analyzing the expenses and income at a specifies amount of
time
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M3 Analyse the use of different planning tools and their application for preparing and
forecasting budgets.
Planning tools helps in making planning about various budgets in the organization Zylla. The
planning tools help in preparing for the future and implementing those decisions. Various
budgets are used as a tool such as capital budgets, cash budgets, and operational budgets etc.
(De Toni, et. al., 2017).
These uses of different planning tool are and their applications for forecast situations and
implementing the decisions accordingly. These uses are explained below in brief:
Decision making: The planning tool helps in taking effective decisions in the organization
Zylla. The decisions must be taken by analyzing each of the factors which negatively affects
the decision. Strategies are made so that control can be made on these factors (Isaac, et. al.,
2015). Some standards are set so that evaluation of the implementation of the actions can be
done and the outcome can be received according to the planning (De Toni, et. al., 2017).
Future Forecasting: The decisions are being made in such a manner so that future can be
predicted and actions are being taken accordingly. This future forecast helps in saving the
resources and using them in an appropriate manner. Moreover, it also helps in preparing a
budget and applying the resources after evaluation of the percentage of income, expenditure,
and revenues (De Toni, et. al., 2017).
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P3 Calculate costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costing.
Cost is the summation of expenses incurred over manufacturing of a single unit. There are
different in costs, namely direct and indirect costs. The costing techniques are implemented
with the purpose of segregating costs and making analyses of profitability. The two
appropriate costing techniques are marginal costing and absorption costing which are used for
estimating prices of products (Silva, and Jayamaha, 2012).
Absorption costing: This costing technique analyses the overall production costs for a
particular batch and further, the unit per cost is calculated accordingly. This technique mainly
used for making a valuation of inventory and profitability analysis. The major components of
absorption costing are direct labor, direct materials, manufacturing overheads (including
variable and fixed cost). Absorption costing can lead to two cases, namely overhead
absorption costing or under absorption costing. Overhead absorption costing occurs when the
overhead allocated is higher than the actual amount and under absorption costing is a
criterion whereby, the costs allocated is lower than the actual amount (Legaspi, 2014).
Marginal costing: this costing technique considers only variable portion incurred over
products. The components included in the costing of products are direct labor, direct material,
direct variable overheads etc. and it does not contain any fixed overheads in it. Therefore, an
increase in sales is in the proportion to the variable cost while the fixed costs do not possess
any changes in sales volume. There is ascertainment of contribution and is calculated by
deducting variable costs from sales (Legaspi, 2014).
The following are the income statements in accordance with the marginal and absorption
costing techniques:
Marginal costing
Sales (800*20) 16000
Less: variable cost
COGS (1000*8) 8000
Less: Closing stock (200*8) 1600 6400
Contribution 9600
Less: fixed cost
Production overheads 5000
Selling costs 3000
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Net profit margin 1600
Analysis: the marginal costing is formulated through analyzing contribution after deducting
variable costs from revenues and further deducting overall fixed costs from the contribution.
Absorption costing
Sales (800*20) 16000
Less: variable cost
COGS (1000*16) 16000
Less: Closing stock (200*16) 3200 12800
Gross profits 3200
Less: Fixed selling costs 3000
Net profit 200
Analysis: The analysis is done through ascertaining gross profits by deducting COGS from
sales. Further, net profits are calculated by deducting selling costs from gross profits.
Assumptions taken from the above income statements are as follows:
 There is the production of 1000 units, of which 800 units were sold at £ 20.
 There is no opening inventory but there is a closing inventory of 200.
 The variable costs amount to £8 and fixed production overhead per unit is at £8.
 The fixed cost production is taken at £5000 and other fixed selling costs include
£3000.
Reconciliation statement is formulated for reconciling profits from both the statements:
Reconciliation statement
Net profits in absorption costs 200
Add: absorption costing 140
0
Net profits in marginal costs 160
0
The above reconciliation statement presents that there was over absorbed fixed production
overheads. The fixed production overhead was taken at £5000 while as per unit there was
taken at £8 *800 units (sold units) i.e. 6,400. Thus, it is a case of over absorption costing.
M2 apply a range of management accounting techniques and produce appropriate financial
reporting documents.
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The two techniques namely, absorption and marginal costing are implemented. Both
techniques have a different set of assumptions and produce a different set of income
statements. In the above, income statements are based on both the techniques and the
difference in their figures is due to mainly following reasons:
 The inventory valuation is different in both the concept and it is mainly due to the
ascertainment of fixed cost. The fixed cost in marginal costs is not taken into
consideration while assessing the valuable contribution and only variable component
is taken into consideration. On the other hand, in absorption costing, both the variable
and fixed component is taken into consideration.
 The difference in the net profit margins is due to over-absorption of fixed cost
element in the absorption costing by 1400 (6400 (800*8) – 5000). The actual
production costs were only £5000 while the costing was done £ 8 per unit of 800 units
sold. The reporting documents are described as above and the assumptions are made
accordingly (Aruomoaghe, & Agbo, 2013).
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P5 Compare how organisations are adapting management accounting systems to
respond to financial problems.
Management accounting systems have revolutionized in the past decades and number of
systems has been formulated with a view to resolves and responding a number of financial
issues. In the past decades, only a few systems namely, KPI’s, benchmarking, setting of
standards etc. These were mainly formed with the purpose of measuring deviations from the
set figures and there were no separate specifications. But with the new evolution, few more
techniques were evaluated such as KPI plus financial ratios, benchmarking, financial
governance, and compliances regarding the same (Mahal, & Hossain, 2015). These tools are
extremely useful in responding towards the financial problems and are discussed as below:
KPI metric: Key performance indicators are set indicators which are used for measuring the
differences in the actual company performance with the set standards. These are mainly used
by organisations to evaluate their success factor. Organisations use real time reporting
software for comparing their actual measures with the standard measures (Mahal, & Hossain,
2015).
Financial ratios: Financial ratios are the prescribed formulae which are used for measuring
different factors of a financial report with other factors. Different segment of financial ratios
are liquidity, operational factors, efficiency ratios and such like. These ratios are highly
useful, in context of measuring variances and analysing current financial performance of the
organisation (Mahal, & Hossain, 2015).
Benchmarking: This is ascertained for various segments in terms of quality, quantity
produced, products and other measurement etc. Benchmark figures are used for comparing
the standard figures with actual figures. Any form of variances which might have been
occurred can be analysed and further can be improved through implementing measures
(Mahal, & Hossain, 2015).
Different organisations use different set of measures for measuring the variances that might
have been occurred. Like manufacturing and construction industries uses KPI’s and financial
ratios are used for measuring differences and varied other industries uses other measures.
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M4 Analyse how, responding to financial problems, management accounting can lead
organisations to sustainable success.
Organisation faces number of financial problems such as duplication of activities, high
costing, large variations in actual figures, and reduced profitability, excessive burden
obligations, fraudulent or misappropriation of funds etc. With passage of time, different
financial issues are faced by organisation and, companies uses number of management
accounting systems for eliminating the financial issues and also for improvising financial
problems faced by the organisations (Teplicka, 2015). The following are the measures which
can be used for sustainable success:
 Management systems aids in assessing costing techniques. Costing techniques
provides information as to cost of product, cost effectiveness and selecting most
optimum costing strategy. Thus, aid in enhancing profitability.
 Inventory management system aids in allocating optimum inventory level. An
organisation has to invest large amount into inventory and hence, there must be proper
consideration with regard to inventory level and inventory pricing. Thus, excludes any
non-required expenses for manufacturing processes.
 It also aid managers in selecting most appropriate pricing strategy. The strategy aids
in assessing most appropriate pricing strategy which turns out to be most profitable
and appropriate for the organisation (Teplicka, 2015).
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Conclusion:
With this assignment, it can be concluded that management accounting systems are quite
useful for managing organisational productivity and organisation processes. There are varied
systems such as cost accounting system, job costing system, pricing optimising system and
inventory management system. These systems aid in maintaining costs, selling prices,
maintains inventory level re-order level and assigns costs accordingly. There are also
different techniques like marginal costing, absorption costing which measures the inventory
level and profit measures. Organisations also have budgetary tools like sales budget,
production budget, master budget etc. which provides a basis for planning and controlling
organisation activities. Lastly, there is also analysis of management accounting tools which
are useful for responding financial problems or issues. Overall, management systems are
highly useful for recording, compiling, interpreting and reporting of financial information.
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References:
1. Aduda, J. and Ndaita, B.S., 2017. Management Accounting Systems Changes and
PracticesAdopted by Large Manufacturing Companies in Nairobi Kenya. Orsea
Journal, 3(2).
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Evaluation: A Cost/Benefit Approach. Research Journal of Finance and Accounting.
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levels and their impact on corporate profitability. Revista de Administração (São
Paulo), 52(2), pp.120-133.
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lambert Academic Publishing.
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A Study Of Management Accounting Concepts In The Philippines Industries. LAP
LAMBERT Academic Publishing.
9. Mahal, I., &Hossain, A.M., 2015. Activity-Based Costing (ABC) – An Effective Tool
for Better Management. vol.6, no.4. Research Journal of Finance and Accounting.
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10. Silva, L.M.D. and Jayamaha, A., 2012. Budgetary process and organizational
performance of apparel industry in Sri Lanka. Journal of emerging trends in
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11. Teplicka, K., 2015. Utilization Of Variance Analysis For Managerial Decision In The
Firm.
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