Management Accounting Systems, Methods, and Costing Report

This report provides an in-depth analysis of management accounting principles, focusing on their application within Merlin Finance Consultancy. It explores various management accounting systems, including inventory management and cost accounting, and details different methods of management accounting reports, such as budget reports and performance reports. The report also differentiates between management and financial accounting, highlighting the benefits and applications of management accounting systems within an organization. Additionally, it includes calculations of costs using marginal and absorption costing methods, along with income statements for each. The report concludes by evaluating the link between management accounting systems, reports, and the overall organizational processes, emphasizing their importance in achieving business goals and objectives. This report is a comprehensive resource for understanding how management accounting supports financial planning, decision-making, and performance evaluation within a business context.

Management
Accounting

INTRODUCTION
Management accounting involve the information regarding financial or statistical which
help the manager to manager all the organisational work. It will include the process of analysis,
measuring, communicate with the members or interpret the information to their internal as well
as external users. It further help the business to take important decision to achieve their goals &
objectives (Ax and Greve, 2017). Management accounting use for the internal analysis so
manager of the company maintain professional accounting information which required for the
growth of organisation. To be understand better, this report choose Merlin Finance Consultant
which is medium size company consultancy company and it is established in the year 1988.
Company provide the information regarding financial planning, to protect assets and increase the
standard of living of their clients. This report include different types of management accounting
system and methods of management accounting report. Along with this, it will include the
managerial & cost accounting techniques to prepare income statement for the organisation. In
addition, advantage & disadvantage of planning tools which is used to control budget and how
organisations deal with various financial problems nu using different management accounting
system (Helden and Uddin, 2016).
P1 Management accounting and essential requirement of different type of management
accounting system
It is used for the internal analysis or it's main objective to provide effective decision in
respect of achieving business goals & vision. It will help the manager to evaluate or measure the
financial information of the Merlin Finance Consultancy and help to manage operational
activities (Bennett and James, 2017). Management accounting help the organisation to perform
their task effectively which improve the productivity as well as profitability and it further help
the manger in their decision making process.
Every organisation use different management accounting system for the better
performance or fulfil the requirement of their business. These systems help the manager to
develop different strategies in respect of achieving their objectives & goals. Manger of Merlin
Finance Consultancy follow various this system to measure the performance of employees and
corporation whether it is beneficial or not.
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Inventory management software: It is a system or software which is used by the
organisations to measure their inventory level on regular basis. It include the all functional
activities such as transportation of stock, so this system record the data regarding each
transaction. In the service sector organisation company keep the record of their clients on the
regular basis. In the Merlin Finance Consultancy, manger adopt this system to record their
customers data in their database (Boučková, 2015). Which help the business to identify their
clients or they have to satisfy them through various activities. Such as, if number of client reduce
for the regular period then it's manager's responsibility to identity the reason. So this information
available through inventory management system or software that why it is required in the
organisation to measure the inventory on continue basis.
Cost accounting system: This system help the business to identify their product cost
which is related to their operational activities. Cost accounting system used for the identification
of exact amount spend on their product & service provided by the organisation to their
consumers. In Merlin Finance Consultancy, manger follow this system to identity the cost of
their services which provided to their clients to satisfy them. It will include the time or money
spend by their advisor at the time of providing financial services to their customers. It will
provide the idea to set the price of their services which help the organisation increase their
profitability or make them able to achieve their business goals & objectives (Chiarini and
Vagnoni,, 2015). Cost accounting system required for the further help of manager in their
decision making process. On the basis of cost analysis, manger build effective strategies which
help to increase their consultancy services among the clients.
Price optimisation system: It is the price analysis model which help the business to
identify the consumer's reaction on different price range of product & services. This system also
help the organisation to determine the price of their product & services that will meet with
company's objectives to increase profitability. Manager of Merlin Finance Consultancy adopt
this system to fix the rate of their services which is charged by them from their clients. Company
fix the rate of their services which can cover the overall cost or provide the decent profit margin
to the Merlin Finance Consultancy. Price optimisation system required to follow by the manager
to determine the reaction of client toward their price range. So it will help to build their strategies
according to it and take effective decision.
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P2 Different methods of management accounting reports
Management Accounting Reports: This report used by the various organisation to
determine their financial performance in respect of organisation as well as employees. These
reports help the manager to evaluate individual performance or it is used for the internal analysis.
These management accounting reports required for the users such as internal or external
stakeholders of the Merlin Finance Consultancy (Coad, Jack and Kholeif, 2015). There are
various management accounting report discussed below and it will used by the Merlin Finance
Consultancy to measure their employees or company's performance.
Budget Report: This report prepare by the manager to critically evaluate the
performance of employees as well as business (Management accounting reports, 2017). Budget
report used by every organisation such as large to small size business in their each department
for the effective work. Most of the organisation adopt this for the comparison of their budget
with the another one company. It will include the financial or statistical information which help
the manager to take important decision in an effectively way. Such as estimated value of
expenses, revenue or other optional strategies which increase the profit margin and it also
include the time duration to achieve their task. Merlin Finance Consultancy company's manger
use this budget report and build some standard for the further comparison. Manager compare the
actual performance with the standard one and then analyse it is beneficial or not of the company.
Performance Report: Performance report include the each employee performance in the
organisation which help the organisation to achieve their business objectives & goals. On the
basis of this report, management can take important decision such as incentive or any kind of
reward give to the employees due their excellence performance in the organisation. In Merlin
Finance Consultancy, manger use this report to measure individual performance and identify the
potential of each member. On the basis of this manager decide the promotion or demotion in the
business and if member required any kind of training then management provide them to enhance
their working skills (Cooper, Ezzamel and Qu, 2017). Manager can distribute work according to
the employees potential and this report help in decision making process which further helpful to
increase their productivity or profitability.
Account Receivable Aging Report: This report used by those organisation which done
their transactions in credit mode so they are vital to prepare it. It will help the manager to
identify the defaulters and take necessary action towards them. For this organisation required to
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maintain account receivable aging report and this report basically prepare by the medium to large
sector organisation. Because it is not easy to recall each defaulter without any records that why
manger prepare this report for the future help to recover their money. Manager of Merlin Finance
Consultancy use this report because they provide financial services to their clients and they have
to maintain records regarding their clients payment. With the help of this, manager can easily
identify the person who doing default and it will increase the efficiency of their work or increase
the profitability or reduce the number of non- payment clients.
Cost Managerial Accounting Report: This report include the all element which is
related to the cost of product & services. It provide the overall summery of these element such as
variable, fixed or overhead cost. It will help the manager of Merlin Finance Consultancy to
determine the cost of their services which help business to fix their consultancy charges and it
beneficial at the time of estimating profit margin (Hall, 2016). This report include the detailed
information regarding their expenses such as manpower cost, infrastructure, maintenance charges
and other expenses. This report help the Merlin Finance Consultancy company to manager their
cost in respect of increasing their profitability which lead to achieve their business goals &
objectives.
Difference between management & financial accounting:
Management Accounting Financial Accounting
 It required relevant information, so
manger can develop various policies
and strategies.
 Manager take important decision on the
basis of financial statements.
 This accounting only focuses on
preparing financial statement.
 It is compulsory to prepare and
required monetary information.
M1 Explain the benefits of management accounting system and it's applications in the
organisation
Management Accounting
System
Benefits
Price optimisation system  With the help of this system manager develop various
strategies to according to the demand of clients and they
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also compare their competitors price policy regarding
same services.
 It will help the manager to identify the consumers who
can pay for their services and also analyse the behaviour
of clients towards their price policy.
Cost accounting system  It is beneficial for the organisation to control their cost
for the period when company provide the financial
services to their clients.
 This system help to reduce the cost of their services
which further increase the profit margin as well as
efficiency of their employees.
Inventory management
system
 It provide updated information regarding their clients
which is helpful for the manager to build strategies
according to available data.
 Inventory management system save the time as well as
money of the Merlin Finance Consultancy company.
D1 Critically evaluate the link between management accounting system or management account
report with the organisational process
Every business required management accounting system or reports to complete their
organisational process. Because this process include the various activities which can be done
through different strategies and it also involve the decision which taken by the manger for the
benefit of business. For this, Merlin Finance Consultancy have to follow accounting systems or
reports because they provide the budget or performance repost which required at the time of
decision. Cost accounting system or inventory management system help the manager to build
effective strategies in respect of reducing cost or increase the profitability. Integration of systems
or report in the organisational process help to achieve business goals & objectives (Maas,
Schaltegger and Crutzen, 2016).
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P3 Calculate cost by using marginal or absorption costing methods
Absorption Costing: - This costing method help the organisation to calculate total cost of
production which help the manager to identify the cost of each unite. It is also called full costing
method.
Marginal costing: - It is the change of per unit at the time of producing each single unit over the
period of production. Purpose of this costing is to achieve economics of sale.
Income statement by Absorption Costing:
Particular Amount
Sale(10000*25) 250000
Less: - Cost of goods sold
Material Cost 50000
Labour Cost 30000
Variable Cost 20000
Fixed manufacturing overheads 40000
110000
Less: - Selling & Administration Expenses 60000
Income 50000
*Working Notes: -
Selling & Administration Expenses = ( Fixed + Variable)
= (30000 + 30000)
Income statement by marginal Costing:
Particular Amount
Sale 250000
Less: - Marginal cost 130000
Contribution 120000
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Less: - Fixed Cost 70000
Income 50000
*Working Notes
Marginal cost = Direct material+ Direct labour+ Variable manufacturing overhead+ Variable
Selling and Administrative Expenses
= 50000+30000+20000+30000
= 130000
Fixed Cost = 40000+30000
= 70000
Interpretation: - According to above calculation, it has been concluded that net income
of the company is 50000 through absorption costing method and same as from marginal costing
method. Cost of goods sole is 140000 on the basis of absorption costing and fixed manufacturing
expenses of the product is 60000. Similarly in the marginal costing method, marginal cost is
130000 and fixed cost is 70000. Net income is same on both cases by using different methods of
costing.
Income statement by absorption costing method( 5000 units):
*Working Note
Sales (5000*25) = 125000
Cost of goods sold = 50000+30000+20000+40000 = 140000
Selling and Administrative Expenses = 30000+30000 = 60000
(Variable selling and administrative expenses+ Fixed selling and administrative expenses)
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Income statement by marginal costing method(5000 units sold):
*Working Notes
Sales(5000*25)= 125000
Marginal cost of sales: (50000+30000+20000+30000) = 130000
Calculation of fixed cost: (40000+30000)= 70000
Interpretation: - On the basis of above calculation it has been concluded that after
considering 5000 units of radiators sold company bear the loss of (145000) in the absorption
costing and (75000) loss through marginal costing methods.
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M2 Explain the range of Management accounting techniques and develop financial reporting
document
From previous discussion accounting technique like as absorption costing and marginal
costing helps to get the financial situation of company and financial documents give financial
data of enterprise. It also helps to calculate accurate forecasting budget for an organisation.
Merlin use following technique to get appropriate results such as:
Historical cost accounting: It states any enterprise and industry can take better decision
and comparative decision by evaluating past information. It involves previous year information
that helps to measure the value of the accounts which is prepared by the Merlin's manager. It also
help to give ideas about which planning are required to minimize the cost and maximize the
profits of an organisation.
Financial planning: As finance is the first need of any business same as planning is the
first function of management that helps to know what to do, when to do, and how to do to fill the
need of funds. Such as manager of Merlin makes financial planning to utilize the available funds
in order to make profitable organisation (Nitzl, 2016).
D2 Develop financial report which interpret business activities
It has been recommended that by applying management accounting technique such as
marginal and absorption costing technique a organisation can get success to calculate accurate
cost and expenses and helps to make sustainable business activities. It also helps to produce
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financial reporting documents that gives proper records of financial transaction and incurred cost
in an enterprise. Manager of Merlin prepares financial reports every year that is useful to
understand the data and take effective business decisions.
P4 Advantages and disadvantages of planning tools
Budgetary control is the procedure of managing and controlling the budget of any
organisation that helps to manage the budget and profits of any enterprises. It includes division
of company on functional basis in to various section is called budget centre. Each firm should be
prepare budget reports every financial year that helps to show the financial position of the
company and also show what plans should be taken in future. For example, Merlin finance
consultant is providing financial services and advices to its customer about investment and make
profitable company (Otley, 2016). Manager of Merlin set financial performance objectives with
estimated budget and compare with actual results. To set the budget each company used different
planning tools which is discussed as below:
Zero base budget: It is an essential planning tool that does not include previous budgets
and also not compare with past results. It involves budget should be started with zero and its goal
is to minimize the spending and expenses by observing at where cost may be cut to improve the
business activity. Such as Merlin finance consultant is a UK based company that focuses on
reducing the company's expenses and increase the productivity by providing finance services. It
use zero base budget to control the budgets and give suggestion what should be done without
comparing previous data.
Advantages
 It helps to create first budget: This is helpful in a start-up of business where
company does not have previous budget to look, so here is need to start from
scratch. This budget help Merlin to prepare budget through scratch that gives a
idea how much should be invest.
 Save money: This tool helps to save money and focuses on improvement in
profits of the organisation. Manager of Merlin save time and money by preparing
zero based budget that helps to give information about business expenses and try
to minimize the wasting cost.
Disadvantages
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 Manipulation: It has drawback also such as manager of the company can be manipulated
the business activity in context to get more resources which is not required.
 Intensive resources: Merlin's manager take a lot time and efforts to make and closely
check each budget element instead of changing existing budget.
Master budget: This includes collection of all lower level budgets which is prepared by
the company in different functional areas (Pavlatos and Kostakis, 2015). It also involves
estimated financial statements, financial plan and a cash forecasting.
Advantages
 It involves all expenses: Master budget help to involve operating and financial
budget that keeps records of inflow and outflow. Like as Manager of Merlin
prepare master budget that help to show operating and financial budget. Operating
budget contains income generating activities of Merlin and financial budget states
inflow and outflow of cash.
 Effective decision: Every enterprise can make effective decision by preparing
master budget that helps to get data about future spending and revenues.
Disadvantages
 Time consuming: Manager who prepare master budget takes too much time because it
requires lots of financial account such as income statement, balance sheet, inflow and
outflow statement. Cash budget: This is the estimated budget of inflow and outflow of a business for a
certain period of time that help to show the adequate fund to operate the business.
Manager of Merlin used this budget to know the actual fund require to run the
business(Renz, 2016)
Advantages
 Better communication: It helps to coordinate in better way by understanding and
harmonious interrelation with employees. Manager of Merlin can get fund
information by preparing cash budget.
 Minimizing cost: This tools helps to minimize the cost of organisation and
focuses on increase in profit margins.
Disadvantages
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 Depend on cooperation: This budget is based on the coordination and
cooperation of employees.
 Subjective estimate: This tool has drawback also that it build on subjective
estimation and assumption. Manager of Merlin prepare budget which based on
assumption and may take more time to achieve objects.
Cost system differs from the job costing, process costing, batch and process costing.
Cost system Job costing Process costing Batch costing Contract costing
This system is the
framework which
is used by the
organisation to
estimate their
product cost for
the analysis of
profitability,
valuation and
control the cost
over the
production
period.
It is a method
where manager
track the cost and
revenue which
occur by
following this
costing methods.
it calculate each
unit of cost on the
basis of each job
assigned in the
manufacturing
process.
This costing
system calculate
direct cost
through
accounting
methodology and
various standard.
It occurs at
different process
of production.
Basically large
operations will
use this and it
include entire
monthly
production.
It is a specific
costing where
each batch
identify with
different number
and it is similar to
job costing. This
costing system
help the manager
to calculating
each unit cost on
the basis of
different batch.
It is a variant of
job costing
system and based
on same costing
principle. Large
order consider as
contract and
smaller one is
called job.
Contract costing
close after
completing their
contract.
Balance scorecard- It is strategic framework which measure the performance and it's
main objective is to convert company's vision or mission into actual plane. So it is manager's
responsibility to evaluate the performance of employees as well as organisation. This tool help
the Merlin company to use this strategies to determine the financial performance of the business.
It will help the manager to determine their actual performance with the standard which they
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decision before doing task. Difference in the performance will analysis by the management and
take necessary decision according to it. In addition, it impacts fir the better improvement of
financial performance in the organisation.
M3 Evaluation of planning tools and its applications
It has been recommended that planning tools are helpful to prepare a budget and
forecasting because it gives ideas that whether a organisation is earning a profit or not. It also
give suggestion which planning tool should be used to make profitable organisation. These tools
are valuable in forecasting budget that states what action should be taken in case of loss
situation. For example, if Merlin company use cash budget that it will provide inflow and
outflow of business and its operations. To know the all low and medium size of expenses Merlin
should follow master budget that helps to show the all spendings and revenues. Zero base budget
are mostly helpful in new start up business where an enterprise does not have previous
information (Schaltegger and Burritt, 2017).
P5 Management of accounting system to solve the financial problems
Management accounting systems are techniques to solve the financial problems by
making effective decision, planning and performance evaluation. In additional, it helps to
provide expertise, reporting financial issues and controlling the management in the formulation.
Manager of Merlin company use management accounting system that to report the financial
problem and make effective decision by using accounting system. By solving financial issue an
organisation can be sustain at market place and generate profits. Merlin is facing different types
of financial problems which affect company's budget like as-
Spending less money on necessary: This means an organisation can face finance
problems because of lack of customer. This is why because a company pay less money on needs
and wants of customer. Merlin company is also facing financial issue because it need to hire
professional advise who can make understand to customer for taking financial services. For
solving this issues company need to spend more money that will help to increase in customer as
well as profit margins.
Tax services: In present, tax is also a big reason of facing the financial problems because
government is continuously increasing tax rate and other taxes that reduces company's profits. As
Merlin is a financial consultant who provides financial services to its customer and pay more tax
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that reduces its profits (Shields, 2015). In this situation manager need to make solid plan and
management system that will help to reduces the tax and unwanted costs.
Management accounting approach: It helps to keep accounting records and making affective
decision in an organisation by using proper management and accounting rules. Merlin follows
different types of management accounting system such as-
Benchmarking: It lies best method of comparing process and performance with another
corporation's performance. Manager of Merlin used this system and measure the performance
that helps to show what and where improvements are need to make profitable organisation.
Key performance indicator: KPI is the tool that help to evaluate the performance of
enterprise as well as employees who are working in a company. Managers of Merlin company
measure and evaluate the performance of accountant that they providing clean and clear
information or not and where money investment is more needed to get best returns etc. These
data and information helps to take better and effective decision in making budget. KPI include
the financial or non financial indicators which help the business to measure the element which
affect the organisation. Financial indicators are income statements, balance sheet and other sales
& expenses report. Non financial KPI's include the measurement of customer, employee relation,
operations, quality of product etc.
Financial governance – Financial governance is a kind of rules where management of
the company have to collect, manage and control all financial informations related to the
organisation. It provide transparency in the financial transaction to stop the frauds, errors,
mistake and poor decision-making. Along with this, these features it determine the different
financial resources into activities sufficiently.
Comparison between Merlin and Bright Star financial limited:
Basis Merlin financial consultants Bright star financial limited
Problem Merlin financial consultants is
suffered with the issue of
identifying the activities which are
profitable, due to this their
financial resources are not
allocating into right activities.
This overall effecting their
The selected company is facing the
issues of bad measurement
framework, ineffective production
process and policies and due to this
their financial growth is getting lower
continuously. In addition, their
competitive strategies are very weak
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financial performance and
becoming a financial problem.
and because of this they their
competitors are far away from them.
Approach Herein, on the basis of above
financial issue company is
required to apply KPI( Key
performance indicator). This is a
kind of approach that identifies the
high performing activities.
Company can achieve the
financial success by focusing on
the beneficial activities. If they
implement this approach correctly
then they will be able to solve
their financial issues.
On the basis of this situation company
is needed to apply an appropriate
approach that is Benchmarking. This
is a framework which compares the
competitive strategies and policies to
improve the efficiency. The selected
company can solve their financial
issues with the use of this because
they can adopt better strategies in
compare to other. This will help them
higher profitability.
M4 Evaluation of management accounting system that help to sustainable success
It has been evaluated that management accounting system helps to solve the financial
problems which is arising during business (Strauss, Kristandl and Quinn, 2015). Accounting
system gives opinion which managerial accounting system should be use to solve different types
of financial issues. It helps to record and managing the problems and find the solution of
difficulties. Recorded transactions are helpful to compare the previous and actual performance of
Merlin and also helps to take effective decisions. Any organisation can lead sustainable business
by applying and managing accounts because decent management of accounts gives true and fair
results. Above mentioned managing system help Merlin to get statistical and financial
information which is beneficial for sustainable success and short term or long term decision.
D3 Planning tools are helpful to solve financial problems
It is concluded that above mentioned planning tools are very essential to solve the
financial issues that helps to maintain sustainable success business by managing accounting
system. To respond properly a company should make effectual planning and strategy that helps
to solve financial problems and run effectively business. Manager of Merlin company should
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adopt cash budget planning tool that will help to know the inflow and outflow and also will
suggest what action should be taken to make profitable organisation (Van der Stede, 2015). On
other side, management accounting system will show a path which system should be followed to
over come the problems.
CONCLUSION
From the above discussion it has been concluded that management accounting systems
are very important for each organisation that helps to set the budgets and provide guidance
through recording, analysing and classification of financial data. This report covered various
topics such as inventory management system, job costing, absorption and marginal costing. More
over this report contained planning tools that helps to set budget and accounting system which
helps to solve financial problems of any enterprises.
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