Management Accounting Systems: Costing, Budgeting, and Reporting

This management accounting report, prepared in the context of Zylla, a medium-scale manufacturing company, compares and defines the roles and benefits of management accounting functions and systems in enhancing company performance and providing information for decision-making. ...Read More

Unit 5 - Management accounting
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Contents
Introduction:....................................................................................................................................3
P1.Explain management accounting and give the essential requirements for different types of
management accounting...............................................................................................................4
P2: Explain different methods used for management accounting reporting................................7
M1: You should evaluate the benefits of management accounting systems and their
application within an organisational context............................................................................8
D1: You should provide a critical evaluation of how management accounting systems and
management accounting reporting are integrated within organisational processes.................9
P3. Calculate costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costing......................................................................10
M2: You should apply a range of management accounting techniques and produce
appropriate financial reporting documents.............................................................................11
D2: You should produce financial reports that accurately apply and interpret data for a range
of business activities...............................................................................................................14
P4: Explain the advantages and disadvantages of different types of planning tools used in
budgetary control.......................................................................................................................15
M3 you should analyse the use of different planning tools and their application for preparing
and forecasting budgets..........................................................................................................16
P5: Compare how organisations are adapting management accounting systems to respond to
financial problems......................................................................................................................17
M4: You should analyse how, in responding to financial problems, management accounting
can lead organisations to sustainable success (D3)................................................................17
Conclusion.....................................................................................................................................18
References:....................................................................................................................................19
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Introduction:
The management accounting report has been prepared in context of an organisation Zylla which
is a medium scale company operating and manufacturing the goods in the wider business
environment. The report will be prepared to compare and define the roles and benefits that
management accounting functions and systems will play in improving the performance of
company and assisting in providing the adequate information to the management for decision
making purposes. The various methods of costing will be used in this report for producing the
financial reports that will be used by management for preparing the income statement and talking
critical decision about the company. The report will also include the definition and roles that the
planning tools of management accounting will play in forecasting and making budgets of the
company. This will help the company in recognizing the importance of management accounting
tool in solving financial problems and resulting in sustainable success.
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P1.Explain management accounting and give the essential requirements for different types
of management accounting.
In the modern business environment the term management accounting can be defined as the
system of accounting which assist the management in identifying and obtaining the required and
necessary information which are critical for decision making and planning the future course of
actions in this regard. The process will include developing the system which will enhance the
productivity of extracting the information and analyzing and interpreting the same for improving
the organisational performance as a whole (Johnston, 2018).
Evolution of management accounting:
The evolution of management can be related with the development of the industrial revolution in
late 1990 as if before there were no proper set of system to provide managers with the
information about the company financial performance and position in competitive aspect. But
with the evolution of the industrial revolution the system of management accounting has
developed as a source of producing the value added and real time reports which can provide the
users with the information as if they require for decision making purposes. Thus it can be
established that with the development in changing technologies and wider business competition
there was a need to recognize one system that can fulfil the information requirement of the
management and the management accounting function has been serving the same form that
period only (Coast, 2015).
Different kinds of management accounting systems and the essential requirements:
Cost accounting system – The cost accounting system is the system which helps in extracting
and recording the information related with expenditures that have been incurred in the company
during the period and helps in preparing and presenting the income statement of the company by
using all the cost information.
Essentials:
 The alignment of this system with the financial accounting system is necessary to obtain
better results.
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 The vouchers and invoices must be properly named and dated in order to keep check on
the cost information.
Price optimization system – The management accounting system refers to the process of
optimising and obtaining a suitable pricing policy for the company and its products and services
in order maximise and enhance the profitability in this regard. The system helps in estimating the
sound selling price that can help in obtaining the desired profitability (Johnston, 2018).
Essentials:
 The consideration of the demand and supply curve related with the customer data is
crucial for this system.
 The cost accounting system and revenue system of the company have to be considered
while operating this system.
Inventory management system – The stock system of the company refers to the system in
which the information related to finished goods stock and work in progress is maintained
appropriately. The information relates to costs incurred in the form of direct and indirect
expenditures and this will help in determining the optimum carrying cost and holding cost of
inventory.
Essentials:
 The staff of the company should consider the requirement of regular stick taking and
maintaining adequate record of inventory.
 The system should help in controlling and reducing the inventory cost to an appropriate
level (Johnston, 2018).
Job costing system – The job costing system is the process in which the critical business
operations which are crucial for the company in order to determine the acceptability of the job
are identified and all the cost incurred in performing that job or processes are considered for
decision making.
Essentials:
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 The identification of job is a complex process and the crucial business operations must be
recognized on that basis.
 The customer orders should be considered for identifying the separate job which requires
separate costing arrangements (Coast, 2015).
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P2: Explain different methods used for management accounting reporting.
Cost and revenue reports – The costing reports are associated with determining the actual cost
incurred in the company and recording the corresponding revenues obtained by incurring those
costs in the company in order to prepare the year ending financial reports and financial
statements of the company (Reddy, 2018).
Budgeting reports – The budgeting reports can be defined as the system of reporting in which
various types of budgets including master budgets and different there types of budgets are
prepared in order to determine the budgeted costs that should be incurred in an company and
these budgets are compared with the actual results in order to identify the deficiencies and
variances and controlling them to improve the overall performance of the company.
Production and inventory reports – The inventory reports of the company are associated with
recording and presenting the stock records concerned with producing and maintaining the
inventory of the company in order to take reordering decisions and other decisions of the
company.
Investment appraisal reports - The system of accounting is associated with analysing and
evaluating the long term proposals before the company on the basis of their returns and amount
invested together with the time required to recover the cost associated with the proposals. The
kind of reports helps in estimating the resources required and accepting the proposal on that basis
(Kristandl, et. al., 2014).
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M1: You should evaluate the benefits of management accounting systems and their
application within an organisational context.
In order to justify the adoption of management accounting system and reporting in the company
Zylla there are some benefits presented in this report:
Benefits Use in context of Zylla Company
Enhanced performance and profitability The adoption of management accounting
techniques and reporting helps the
management in implementing the controlling
techniques in the enterprise which can improve
the current operations and determine the
opportunity for future operations of the
company in order to enhance the profitability
of the company (Reddy, 2018).
Strategic planning and budgeting The additional feature of budgeting and
planning in advance the strategic operations of
the company helps in utilizing the resources at
the best and maintaining a sustainable
performance in the long run.
Adequate information and decision making The company Zylla requires adequate reporting
and information in order to take important
decision about the expansion purposes and the
function will serve for the company.
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D1: You should provide a critical evaluation of how management accounting systems and
management accounting reporting are integrated within organisational processes.
The integration between the organisational processes and systems will require following two
functions to be effectively managed in the company:
Aligning the objectives with systems – It must be ensured that the objectives of the system must
get integrated with the organisational processes concerned with various departments and
operations.
Communicating effectively – It must be ensured that the management effectively communicate
the results from various systems of management accounting to the responsible managers and
personnel in order to provide better results (Kristandl, et. al., 2014).
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P3. Calculate costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costing.
Marginal costing – The system of costing is related with modern day accounting system in
which only variable costs which are relevant in taking decision of the company are taken into
consideration while the fixed cost are written off form the contribution acquired by the company.
Absorption costing – The absorption costing system refers to the conventional method of
costing in which variable as well as fixed costs are considered for taking the decisions and
calculating the net profits of the company. The fixed overheads incurred are distributed on the
basis of an absorption recovery rate in order to calculate the actual cost of production (McIntosh,
2017).
The preparation of various reports will require consideration of both costing system and the same
is shown below in the report.
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M2: You should apply a range of management accounting techniques and produce
appropriate financial reporting documents.
The company Bailey Plc. commenced business operation in March with one product and the cost
information is as follows:
Production units in March and April were 2000 and 3200 units however sales were 1500 and
3000 units respectively.
Calculate cost using absorption and marginal costing
Prepare reconciliation statement.
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Profit statement under marginal costing:
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Profit statement under absorption costing:
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D2: You should produce financial reports that accurately apply and interpret data for a
range of business activities.
Analysis – The above reconciliation statement shows that the difference in profits has been
obtained due to difference in treatments of the overhead cost incurred in the company and the
same has resulted in over absorption (Karmakar, 2018).
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P4: Explain the advantages and disadvantages of different types of planning tools used in
budgetary control.
The various types of budgeting tolls are explained below in order to help the company in main
plans and forecasting the future results:
Standard costing – The performance measurement system of management accounting is a
significant tolls which can be used to evaluate the current performance of the enterprise in
context of the standards established in the company. The standards are determined after
considering the best practices adopted in the industry in this behalf (McIntosh, 2017).
Advantages:
 This is the most useful tool in budgeting control as it provides the measurement of
performance during the period.
 The various types of cost controlling activities scan are conducted in the enterprise with
the help of this planning tool.
Disadvantages:
 The system of accounting is complex and requires lot of skills.
 It is not suitable for a small organisation where the transactions are not recorded properly.
Variance analysis – The standard costing system helps in creating and establishing the standards
for performing the operations and the variable analysis tool helps in determining the variances in
performances by comparing them with actual results. This will help the company in identifying
the deficiencies (Karmakar, 2018).
Advantages:
 The advantages are associated with improving the current performance of the enterprise.
 The profitability of the company gets enhanced by reduction in cost and long term results
are efficiently achieved.
Disadvantages:
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 There is required a lot of clerical work which requires lot of efforts form the senior
managers of the company.
 The accuracy of the results is dependent on the accuracy and reliability of the results
achieved in standard costing process of the company.
Responsibility budgeting – The type of planning is concerned with establishing and identifying
the individual responsibilities of various departments and personnel in achieving the budgetary
targets of the company and helping in effective control (Ozyasa, 2018).
Advantages:
 The same has been considered most appropriate tool for controlling the resource
utilization in the company.
 This helps in establishing the accountabilities between various levels of performances in
the company.
Disadvantages:
 The employees may feel resistant and they have behavioural implications with this
planning tool.
 It requires lot of cost and skills to be implemented.
M3 you should analyse the use of different planning tools and their application for
preparing and forecasting budgets.
Planning – The planning function in the company requires adequate reporting about the current
state of performance if the company in order to evaluate the deficiencies and working out for the
solutions with establishing the future course of actions which is possible with these planning
tools (Aisha, 2016).
Forecasting – The forecasting function requires assumptions to be made in a better manner in
order to control the future course of actions and achieving the desired results and the planning
tools helps in determining the appropriate subjectivity required in this context.
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P5: Compare how organisations are adapting management accounting systems to respond
to financial problems.
Benchmarking – The benchmarking function in the company can be defined as the management
accounting tool which can be used in determining the best practices which can be adopted by the
company in order to get the best results and a competitive edge in the market. This will help the
company in operating in an effective manner in order to enhance the profitability.
KPI – The key performance indicators in the company refers to the standards set for achieving
the targeted ratios in the by the company as a whole and these can be in the form of financial as
well as non-financial KPI which can be used as required. The use of these KPI is significant in
determining the performance level and the end results which shall be achieved by the company
in order to get the desired objectives (Aisha, 2016).
Target budgeting – The target budgeting helps in establishing the standard performance levels
in the form if budgets which can be used to control the financial results of the company during
the period. The same will allow the company to ensure that the performance of the company in
financial terms in not lacking the performance levels as desired.
M4: You should analyse how, in responding to financial problems, management
accounting can lead organisations to sustainable success (D3).
Financial governance - The term financial governance is associated with maintaining the
financial performance to an appropriate level by implementing the various policies and
procedures in this regard. The same can be met by adopting various systems of management
accounting.
The Company Zylla by adopting these management accounting tools and techniques can
concentrate on maintaining the high level of performance and describing the best practices which
can be helpful for the company in achieving a competitive edge in the company. The products of
the company will be better in comparison to other competitors and the customer satisfaction can
be achieved by providing high level of services while performing the business operations. Thus
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the same will allow the company to focus on long term planning and achieving sustainability in
the market in the same context (Ozyasa, 2018).
Conclusion
The above report helps in concluding that in the era of modern business processes and
arrangements there is a necessity to adopt the proper system of management accounting in order
to control the business operations and have an effective controlling system in operations in the
company. The management will be able to take important decision by utilizing the type of
information available in this system and the same will allow the company to have a competitive
edge in the market while concentrating on higher customer satisfaction. The expansion of the
company can be taken smoothly with the help of these tools and this will ensure that the
appropriate standards are met while performing the various business operations of the company.
The sustainability and the success in the long run can be ensured with this system.
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References:
 Coast, P. and Hart, Z., 2015. The Benefits of Benchmarking Building Performance.
Institute for Market Transformation.
 Dili, A., 2017. Difference Between Standard Costing and Budgetary Control | Standard
Costing vs Budgetary Control. [online] Differencebetween.com. Available at:
http://www.differencebetween.com/difference-between-standard-costing-and-vs-
budgetary-control/ [Accessed 14 Apr. 2018].
 Gartenstein, D., 2018. The Advantages of Management Accounting. [online]
Smallbusiness.chron.com. Available at: http://smallbusiness.chron.com/advantages-
management-accounting-3983.html [Accessed 14 Apr. 2018].
 Ingram, D., 2018. Advantages & Disadvantages of Job Order Costing & Process Costing.
[online] Smallbusiness.chron.com. Available at:
http://smallbusiness.chron.com/advantages-disadvantages-job-order-costing-process-
costing-3082.html [Accessed 14 Apr. 2018].
 Johnston, K., 2018. Standard Costing as a Business Strategy. [online]
Smallbusiness.chron.com. Available at: http://smallbusiness.chron.com/standard-costing-
business-strategy-77597.html [Accessed 14 Apr. 2018].
 karmakar, r., 2018. Standard Costing: Meaning, Objectives, Advantages and
Disadvantages. [online] Your Article Library. Available at:
http://www.yourarticlelibrary.com/accounting/standard-costing/standard-costing-
meaning-objectives-advantages-and-disadvantages/66374 [Accessed 14 Apr. 2018].
 Kristandl, G., Quinn, M. and Strauss, E., 2014. Management accounting and management
control‐Cloud technology effects and a research agenda.
 Matambele, K., 2014. Management accounting tools providing sustainability information
for decision-making and its influence on financial performance (Doctoral dissertation).
 McIntosh, K., 2017. Advantages & Disadvantages of Using a Standard Costing System.
[online] Bizfluent. Available at: https://bizfluent.com/info-8553460-advantages-using-
standard-costing-system.html [Accessed 14 Apr. 2018].
 Ozyasa, H., 2018. What Are the Functions of a Cost Center in a Management Accounting
System?. [online] Smallbusiness.chron.com. Available at:
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http://smallbusiness.chron.com/functions-cost-center-management-accounting-system-
76935.html [Accessed 14 Apr. 2018].
 Reddy, C., 2018. Management Accounting: Process, Advantages & Disadvantages -
WiseStep. [online] WiseStep. Available at: https://content.wisestep.com/management-
accounting-process-advantages-disadvantages/ [Accessed 14 Apr. 2018].
 VanBare, J., 2017. Types of Managerial Accounting Reports. [online] Bizfluent.
Available at: https://bizfluent.com/list-7609485-types-managerial-accounting-
reports.html [Accessed 14 Apr. 2018].
 Zaleha Abdul Rasid, S., Ruhana Isa, C. and Khairuzzaman Wan Ismail, W., 2014.
Management accounting systems, enterprise risk management and organizational
performance in financial institutions. Asian Review of Accounting, 22(2), pp.128-144.
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