Management Accounting Techniques and Systems Report

This report provides a comprehensive overview of management accounting, focusing on its application in financial planning and analysis. It begins with an introduction to the concept of management accounting, highlighting its role in business decision-making and the importance of accountability. The report then delves into the essential requirements of different management accounting systems, including cost accounting, job costing, batch costing, inventory management, and price optimization. It further explores various methods used for management accounting reporting, such as financial planning, and the preparation of income statements using marginal and absorption costing. The report also examines the use of different planning tools, such as budgeting, for budgetary control, along with the advantages and disadvantages of each tool. Finally, the report discusses the process organizations should follow to leverage management accounting in addressing financial problems and adapting to changing economic conditions. The report emphasizes the role of management accounting in maximizing profit and wealth, providing a detailed analysis of cost management and revenue generation strategies. The report concludes by highlighting the importance of management accounting in the current global economic environment.

Assignment
Management Accounting
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Table of Contents
Introduction.................................................................................................................................3
Task 1...........................................................................................................................................3
LO1: Explanation of the management accounting system.....................................................3
P1: Essential requirements of the different types of management accounting system.............3
P2: Methods of management accounting system......................................................................6
Task 2...........................................................................................................................................8
LO2: Application of the Management accounting techniques...............................................8
P3: Preparation of the income statement by using the marginal and absorption costs.............8
Task 3.........................................................................................................................................13
LO3: Use of different planning tools in the management accounting system....................13
P4: Explanation of the advantages and disadvantages of using the different types of planning
tools used for budgetary control..............................................................................................13
LO4: The process that should be followed by organisations to use the management
accounting system to respond the financial problems.........................................................14
P5: The process that should be followed by the organisation to adapt management
accounting system to resolve the financial problems..............................................................14
Conclusion.................................................................................................................................17
Bibliography..............................................................................................................................17
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Introduction
Accountability is a vital part of the business organisations. Organisations do different
business activities to survive in the industry. Therefore, organisations have to invest a
lot of money to do the business activities in an efficient manner. Organisations also
have to adopt an accountability process to calculate the expenses made in the business
activities and keep the record of expenses that will be used by the auditor to prepare
the financial statement of the company (Fullerton et al. 2014, p. 420). Organisations
have to calculate the cost of the business activities in an efficient manner to minimize
the cost of the organisations and maximize the profit of the organisation. Organisation
basically does their business activities for achieving different objectives but wealth and
profit maximization. Organisations can easily achieve the profit maximization objectives
by using the management accounting. Organisations prepare the budget for the
business activities by using past experiences and techniques of the management
accounting. The preparation of budgets provide organisations a detail information about
the cost and income of a particular business activity in the organisation. The following
study will discuss about the application of management accounting in the organisation
to prepare such budgets for the business activities in the organisations and the role of
management accounting behind the success of the organisations.
Task 1
LO1: Explanation of the management accounting system
P1: Essential requirements of the different types of management accounting system
Management accounting system played a vital role in the financial management
department of the organisations. Management accounting is a process by which
organisations prepare the sources of the capital to invest in the business activity,
analyze the cost areas of the business activity in which organisations have to invest the
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resources properly and communicate different ideas that help the decision makers of
the organisation to makes some effective decisions towards the different aspects
business activities (Otley and Emmanuel, 2013, p. 225). Management accounting
system is a combination of accounting, finance and management therefore, this system
provide relevant information associated with such activities in the organisation. The
skills and techniques of the management accountant not only keep the account of the
different business activities but also provide advice to the managers of about the
implication of different financial measures in the activities, take some major decisions in
the activity, formulation of different business strategies in the organisation to monitoring
the risk and maintain a sustainable success of the organisations. Organisations have to
understand the scope of the management accounting system to understand the
requirements of this system in the organization (Cooper et al. 2017, p. 455).
A) Management accounting system provide some relevant information about the status
of national and global economy that help the organisation not only to prepare some
effective financial strategy to finance the activities but also help to prepare the
marketing and resource management strategies to run the business activities of
organisation successfully.
B) Management accounting system also help the organisation to manage the
performance of the business activities by providing some relevant information
associated with the performance of the business activities. Management accounting
measure the performance of the activities based on the financial performance therefore,
organisation can get a clear vision about the financial performance of different aspects
of the business activities in details (Ax, and Greve, 2017, p.65).
C) As management accounting provides different information about the national and
global economy therefore, the organisation can get a clear view about the risk
associated with such business activities. Management accounting also provide some
tools and techniques to manage such risk associated with the business activities.
 Cost accounting system- The system under which firm able to analyse about
costing level which incurred in various process of business. In this,
administrative, marketing, production, employee etc. related costs are recorded
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properly in the books of account. Basic requirement of this kind of management
accounting system within business entity is to assess overall costs and expenses
of the products and services. Apart from this, to determine selling price of goods
and services are to be taken by management with the help of cost accounting.
 Job costing system- Within business enterprise there are different jobs are
used to produce products and services. At this condition to assess total cost of
every job there is job costing system is taken into account. This kind of
management accounting system is generally used in the construction company
where costs of different jobs is analysed. Along with this, allocation of financial
resources to specific jobs is also done effectively by the management after using
job costing system.
 Batch costing system- In the firm, different types of products as well as
services are to be manufactured in various batches. With the help of batch
costing system the company able to record costs of every batch which supports
to analyse costing of various number of batches. For instance, there is a firm
which produce toffees of three flavours like vanilla, chocolate and strawberry.
Moreover, by using batch costing system it able to know cost of all the three
kinds of toffees which helps to charge selling prices in accordance to that.
 Inventory management system- Stock is one of the major component of every
company and lower the inventory level is beneficial for it. The company requires
respective kind of system to manage and reduce the stock within firm as well as
utilise it in optimum manner. When management able to optimum utilisation of
stock then can generate high revenue and profit. Along with this, valuation of
stock is also done by firm with the support of various methods like LIFO, FOFO
as well as weighted average.
 Price optimisation system- In the business entity, pricing factor plays highly
significant role because by this it able to sale its products and services up to
consumers. With the help of price optimising system firm able to adopt specific
selling price which will be profitable for it. For example: management charge four
level of prices and particular level at which more number of users attract then it
will opt that specific selling price.
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P2: Methods of management accounting system
The all above scope of the management accounting system help the organisation to
understand the importance of the management accounting in the organisation. The
study also provides a brief information about the requirements of the management
accounting to the organisation. The importances of the management accounting system
in the organisations are as follows:
A) Management accounting system provides clear information about the different
sources of capital that can be used by the organisation to meet the requirements of
capital for doing the business activities (Wagenhofer, 2016, p.115). Management
accounting also help the organisation by preparing different financial statements that
will be used by the organisation to attract the investors for the different capital market.
Management accounting also provide some measures to the organisation that can be
used to satisfy the investors and attract more investors to increase the capital of the
organisations. Continuous flow of capital in the organisation help to do the business
activities without any interruptions for the supply of raw materials, power and other
essential resources in the business activities
B) Management accounting also help the organisation by providing relevant information
about the different aspects of cost associated with the business activities. Based on
such information management accounting system develop some budget for the
business activities of the organization (Van der Stede, 2016 p.101). Organisation gets a
clear idea about the cost of the activity and the amount of revenue generated from the
activity. Management accountant also provide some measures to minimize the cost of
the activities and maximize the revenues generated from the business activities. The
minimization of cost and the maximization of revenues help the organisation to
maximize the profit and wealth of the company.
C) Management accounting analyzes the different aspects of cost associated with the
business activities in details and tries to get some vital information about the
performance of the activities. While the performance of the business activities are not
well at this situation management accounting try to identify the problems in the system
of the activities for which the performance of the activity suffering. Management
accounting also try to create some solutions to do the business activities in an efficient
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manner. Management accountant have to communicate with the organisations for
providing all such relevant information associated with business activities and provide
some effective measures to apply the solutions in the activity to solve the problems.
D) Management accounting also analyze the different aspects associated with the
global and national environment for the organisation. The detail analysis of the
information associated with the environment provides a brief knowledge about the
changes in the economy, politically, socially and technologically (Northcott, 2014,
p.114). Such analyses help the organisation to avoid the risk associated with the
environmental factors. Management accounting is also analysis the development of
technological environment to get the information about the new cost effective
machineries and production process. Management accounting suggest the company to
install and adopt such machineries and production process in the production activity to
reduce the production cost and improve the quality of the products. The low cost of
production also provide a competitive advantages to the in the market and the company
can sale good quality products at a low price. These measures help the company to
maximize the market share in the industry (Christ and Burritt, 2013, p.165).
E) The budgets prepared by the management accounting help the organisation to
prepare some efficient strategy to manage the activities in an efficient manner.
Sometime management accounting suggests the company to announce the interim
dividend or bonus for the investors of the capital market. That increases the price of the
shares of the company in the capital market and increase the goodwill of the shares of
the company among the investors. Increment in the goodwill and price of the shares
attract more investors to buy the shares of the company that increase the capital of the
company.
The all above activities done by the management accounting system increase its
requirements in the organization (Contrafatto and Burns, 2013, p.355). In the present
global situation of the economy also increase the requirements of the management
accounting system in the organisation because it is not possible for the company to
manage the business activities in an efficient manner without management accounting
system.
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Task 2
LO2: Application of the Management accounting techniques
P3: Preparation of the income statement by using the marginal and absorption costs
Management accounting system is using different types of techniques to manage the
performance of the activities of the organisation efficiently. The techniques of
management accounting system are as follows:
Financial planning: Maximize the profit of the company is one of the major objectives
of the management accounting system. Management accounting system prepares
some appropriate plan to manage the activities of the organisation. The financial plan
prepared by the management accounting system help the company to reduce the cost
of the activity and increase the revenue generated from the activity. In this way
Company can achieve the objective of the profit maximization because the differences
between the cost and revenue present the profit of the company.
Analysis of the financial statements: Management accounting also analyze the
different financial statements prepared by the organisations such as income statements,
profit and loss statement, Balance Sheet etc. The analysis of the income statement
helps the .management accounting to calculate the value of the shares in the capital
market (Lapsley and Rekers, 2017, p.175). Management accounting also suggest the
price of the shares to the organisations to attract more investments from the capital
market. Management accountant analyze the profit and loss statements to get some
detail information about the expenditure and revenue of the company. Management
accountant analyze the balance sheet to provide detail information about the assets
and liabilities acquired by the organisation to the investors. Therefore, the investors can
get some clear perception about the redemption ability of the organisation by sale the
assets of the organisation.
Cost accounting: Management accountant also calculate the cost associated with the
different business activities in the organisations based on the product, process,
department and branch etc of the organisation. Management accountant also compare
the cost information with the budgeted cost this comparison provide a detail information
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about the performance of the activity. While the cost of the activity is higher than the
estimated cost then the management accountant tries to identify which aspects of the
activities consume more cost than the expected and try to solve the problem of the
particular aspects to control the cost (Hill et al. 2014, p.105).
Fund and cash flow analysis: Management accountant also follow the techniques of
analyzing the flow of fund and cash in the organisation. The analysis of the flow of fund
and cash in the organisation help to determine the aspects in which organisation
expense the fund and cash. Organisation can get a clear perception about the source
generation of the cash and fund in the organisation and the aspects in which
organisation expense the funds and cash.
Standard costing: Standard costing help to compare the estimated cost with the actual
cost of the business activities. The adoption of this technique by the management
accountant helps to determine the actual performance of the activity.
Marginal costing: The adoption of marginal costing by the management accountant of
the company help to determine the prices of the products determine the sales mix for
the products and help to use raw materials and other resources in the business activity
optimistically. The technique of marginal costing also help to take some relevant
decisions about the buy or make decision, expansion of the market in the other regions
or import and export decisions.
Budgetary control: Management accountant also follow the budgetary control
technique to prepare the estimated cost and revenue for the business activities of the
company. The company tries to expense the resources according to the budget and
generate revenues from the business activities according to the budget. While, business
activities cannot perform according to the budget prepared by the company than the
management accountant try to identify the issues for which activity does not perform
according to the budget and try to create some solution control the budget ( Noordin, R.,
2016, p. 365).
Revaluation Accounting: In this this technique management accountant helps the
organisation by evaluating the value of assets acquired by the company. The
continuous use of this technique provides a clear perception about the value of the
assets of the company to the investors.
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Decision making accounting: Use of these techniques by the management
accountant help the organisation to take some effective decisions about the different
business activities of the organisation. Company can choose a profitable business
activity from the alternative business activities (DRURY, 2013, p.210).
Management Information system: The technique of management information system
help the management accountant to store the relevant information associated with the
business activities of the organisation. Such information helps the management
accountant to prepare some budgets for doing such similar activities (Strumickas and
Valanciene, 2015, p. 263).
Apart from the above techniques management accountant use some other techniques
such as statistical techniques, management reporting, historical cost accounting and
ratio analysis to take some effective decisions about the business activities and use
some effective measures to improve the performance of such activities.
Preparation for the sales budget of the company:
Calculation of Net Profit using Marginal costing
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Calculation of Net Profit using Absorption costing
From the computation of the above analysis it is inferred that a difference in the overall
net profit computed by the two different methods of accounting is noticed. This
difference in the profit figures calculated through two different methods is attributed to
the treatment of ‘fixed production overheads’. For the purpose of computing net profit
through marginal costing approach, the entire amount of production overheads related
to fixed expenses is written off for the given period. On the other hand, for calculating
net profit through absorption costing ‘fixed production overheads are carried forward
between accounting periods as a component of valuing the inventory.
Explanation on the distinction between absorption costing and marginal costing
 Marginal costing is identified as one of the decision making tool or technique that
is used to ascertain the total cost involved in the process of production. On the
other hand, absorption costing is recognized as a process by which total cost is
apportioned among different cost centers with the aim of determining the total
cost of production.
 Under marginal costing, variable costs are identified as product cost whereas the
fixed cost is identified as period costs. In case of absorption costing both the
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costs namely, fixed and variable costs are identified as product cost (DRURY,
2013, p.210)..
 In marginal costing, the overheads are classified into fixed overheads and
variable overheads. In the case of absorption costing, overheads are classified in
the form of production overhead, administration overhead, selling and distribution
overhead.
 In context to marginal costing, it is observed that any kind of variation in the
opening stock and closing stock does not create any impact on per unit cost of
the output. Whereas in the case of absorption costing, it is observed that
variation in the opening stock or closing stock results in affecting per unit cost of
the output.
 In marginal costing contribution per unit is derived whereas in the case of
absorption costing net profit per unit is derived (Lapsley and Rekers, 2017,
p.328).
 Calculation of marginal cost is considered to be part of modern management
accounting techniques whereas the computation of absorption costing is
considered to be a part of traditional management accounting techniques.
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