Financial Problem Solving using Management Accounting

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MANAGEMENT ACCOUNTING

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INTRODUCTION
Management accounting enables the organization to present the financial information to its
intended user. This assignment is being prepared with the objective of analyzing the principles
of management accounting in a business environment where the business organizations
function. The assignment would be aimed at determining the methods in which the financial
data is being used in the decision making process and also for undertaking the monitoring and
financing of the organizations. The planning tools which are being used will also be analyzed.
Also, the various methods with which the organizations can make use of for responding to the
existing financial problems can be determined.

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LO1: MANAGEMENT ACCOUNTING SYSTEMS
MANAGEMENT ACCOUNTING
Management accounting can be well-defined as the use of professional skills and knowledge for
preparing the accounting information in a presentable manner. This information should also be
capable of assisting the management in formulating strategies and policies and also helps in
controlling and planning of operations (Kaplan and Atkinson, 2015).
MANAGEMENT ACCOUNTING SYSTEM
The management accounting systems are focused on developing reports which can be used by
the management of the company for taking decisions pertaining to business activities. The
system produces reports which can fulfil the requirements of the organization and include
trend charts, breakeven charts, budgeting, breakeven charts and others (Otley, 2016).
ORIGIN OF MAS
Managerial accounting is in practice since the industrial revolution. At this time, the firms were
controlled by a few owners who made borrowings from their personal sources. As the company
had nearly no shareholders, the need for generating management reports was not felt.
Conversely, the management accounting helped in providing essential information for
managing the large scale production services (Jermias et al., 2018). However, over decades, it
was found that the companies faced pressures from the capital markets, regulatory bodies and
tax authorities among others. With this, there was an immense increase in the need of raising
funds through outside suppliers of capital, who relied on the audited financial statements for
taking their decision of investing in the organization (Kaplan and Atkinson, 2015). All this has
resulted in an increased focus of management accountants in providing the necessary financial
information.

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PRINCIPLES OF MAS
The principles of the management accounting system are:
 The accounting information should be designed and compiled for deriving solutions for
business problems. The information can also be modified as per the requirements of the
situation.
 The MAS should adopt the standard costing system and budgetary control system for
managing the accounting systems. This is helpful in analyzing the deviations within the
results (Kaplan and Atkinson, 2015).
 This helps in ensuring that the costs are being controlled at the source. The qualitative
and quantitative information is being gathered with reference to the performance of
workers, materials and services (Jermias et al., 2018).
 The success of the business activities should be determined by taking into account the
impact of inflation on the profits of the organization.
MANAGEMENT VS FINANCIAL ACCOUNTING
Management accounting Financial accounting
Deployed for internal purposes It is reviewed by the management but is
basically drafted for the use of external
reporting
No rules and regulations are applicable
(Bennett and James, 2017)
It needs to be prepared in accordance with
the principles of standards
The management uses the information
depicted in management accounts
All the stakeholders make use of the financial
accounting systems
It is not mandatory to prepare the
management accounts and also their audit is
not essential
Presenting financial accounts is mandatory
and it must be audited by the auditors
(Bennett and James, 2017)
It can include both financial and non-financial
information
It should necessarily contain financial
information

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TYPES OF MANAGEMENT ACCOUNTING SYSTEM
The types are:
Figure 1 management accounting systems
(Source: Jermias et al., 2018)
COST-ACCOUNTING SYSTEMS
This is being used by the manufacturers for recording the actual production by making use of a
perpetual inventory system. This accounting system helps in tracking the flow of inventory at all
the stages of production (Jermias et al., 2018).
INVENTORY MANAGEMENT SYSTEMS
This system is highly helpful in defining the placement and the shape of the stocked goods. It
helps in ensuring that the production activities and the stock of materials are being planned
regularly (Otley, 2016). This should be deployed at several locations within the production
facility.
JOB-COSTING SYSTEMS
This is a method of allocating the costs to the specific jobs undertaken by the business. This is
highly beneficial when the firm has undertaken numerous projects simultaneously (Jermias et
al., 2018).

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PRICE-OPTIMISING SYSTEMS
It is a process of finding the best price for the product or service offered, at which the company
would be in a position of ensuring that the products are being sold at the right price while
maintaining a decent profit (Otley, 2016).
PRESENTING FINANCIAL INFORMATION
INFORMATION
Information can be defined as a set of data which is accurate, precise and can be used within a
given context for increasing the clarity about a particular topic. It has a significant effect on the
decision-making process and the outcomes of activities undertaken (Kuhnen and Miu, 2017).
 RELEVANCE
The data collected should be relevant to the objective of collecting the data. The organization
should focus on conducting a periodic review for determining the changing needs (Kurlat and
Veldkamp, 2015).
 RELIABLE
The data should be capable of reflecting the consistency in the data collection processes across
all the points of data collection. The real changes in the process should be reflected during the
process of determining the performance targets (Kuhnen and Miu, 2017).
 ACCURACY
The collected data should be accurate and should fulfil the purpose of data collection. With the
objective of maintaining accuracy, the data should be collected at the point of activity (Kurlat
and Veldkamp, 2015).

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TYPES OF REPORTS
Figure 2 Managerial Accounting Reports
(Source: Weygandt et al., 2018)
BUDGET REPORT
This aims at estimating the expenses and profits for the present year based on the figures of the
past years. This is helpful in determining the efficiency of the process of the company and also
providing incentives to the employees (Appelbaum et al., 2017).
ACCOUNTS RECEIVABLE AGING REPORT
This is a very important tool for those companies who provide credit to their customers. The
report aims at breaking down the customers on the basis of duration for which they owe to the
customers. This is very helpful in determining the problems existing in the collection process
(Weygandt et al., 2018). This also helps the collection department to overlook the bad debts.
JOB COSTS REPORT

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These reports depict the expenses of the company. The profitability of the organization can be
determined by comparing the costs with the revenues. This also helps in the identification of
areas where the organization can focus to earn higher profits. This report is also highly useful in
analyzing the expenses when the project is in operations (Appelbaum et al., 2017).
INVENTORY AND MANUFACTURING
The companies possessing physical inventory should use reports for ensuring the efficiency of
the manufacturing process. The reports comprise up of per unit overhead costs, inventory
wastage and hourly labour costs (Weygandt et al., 2018).

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LO2: MANAGEMENT ACCOUNTING TECHNIQUES
MICROECONOMIC TECHNIQUES
COST
The cost can be defined as the monetary value which is being spent by an organization for
producing a complete product. It depicts the overall sum of money spent by the organization
for producing a product or providing a service (Shepherd, 2015).
TYPES OF COSTS
 Fixed Cost – the cost which is not impacted by the changes in the level of output is
known as the fixed cost. Ex: rent, interest, insurance
 Variable Cost – These costs fluctuate with changes in the level of production. Ex: wages,
bonus (Wilkinson and Klaes, 2017)
 Direct Cost – the cost which can be directly attributed to the production of specific
goods. Ex: direct labour, direct material
 Indirect Cost- the cost which cannot be attributed directly to the cost object. Ex: indirect
labour, indirect material
 Material Cost – the cost incurred on the direct material which can be attributed to per
unit of production (Shepherd, 2015).
 Labor Cost – the benefits which are being provided to the employees for engaging in
production activities. Ex: wages along with insurance, pension contribution and other
employee benefits.
 Inventory Cost – this includes the cost of ordering and holding the inventory (Wilkinson
and Klaes, 2017).

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COST-VOLUME-PROFIT
Cost volume profit is a method of cost accounting. This method is being used with the major
objective of determining the impacts of changes in volume and cost of production on the
income of organization (Bergo et al., 2016).
COST VARIANCES
The cost variance can be defined as the difference which exists in the actual cost and the
budgeted cost. These are an important part of many management accounting systems. The cost
variance is said to be favourable when the actual costs are fewer than the budgeted costs. In
reverse situations, the cost variance is regarded unfavourable (Wilkinson and Klaes, 2017).
COSTING SYSTEM
The costing system is framework which is being used by the organizations for determining the
costs of the products. This is helpful in analyzing the profits of the company, controlling the
costs and undertaking inventory valuation.
 Absorption costing
As per the principles of this costing, all the costs are allocated to the cost of production of a
particular unit. Under this method, the fixed overheads incurred in the manufacturing process
are being allocated to products manufactured and also are being comprised in the valuation of
the stock (Garvey et al., 2016).
 Marginal costing
The costs are being divided into fixed costs and the variable costs. The fixed cost incurred for a
fixed period of time is being written off against the contribution for that period while the
variable costs are being charged to the variable costs (Bergo et al., 2016).

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PRODUCT COSTING
COST ALLOCATION
Cost allocation is being defined as the assigning of cost components to the departments or
products. This is necessary as all the costs cannot be directly traced to a specific object.
NORMAL AND STANDARD COSTING
The normal costing evaluates the cost of materials on the actual cost of materials,
manufacturing overheads and also the direct labour costs. These costs are being referred to as
the product costs. In contrast to this, the standard costs are the costs which have been
evaluated by using pre-determined product costs (Farkas et al., 2016). The difference between
the actual cost and the pre-determined costs is known as a variance.
ACTIVITY-BASED COSTING
Activity-based costing is a method of accounting, which is being used by the organizations for
tracing the overhead costs and also for assigning these costs to the specific objects. Thus, it can
be said that it is allocation of overhead and indirect costs to the departments of the
organization who are generating the cost during the process of manufacturing (Hofmann and
Bosshard, 2017).
ROLE OF COSTING IN SETTING PRICE
The price of the product should never be determined by its cost. Rather other factors should be
taken into consideration while setting prices such as the decisions of the company about the
quantity being manufactured, the marketing strategy and the cost of production among others.
The pricing decision for the products is majorly dependent on the four major costs which are
the total cost of the product, the proportion of fixed and variable cost in the overall production
(Farkas et al., 2016). After determining all the costs, the firms look after the expected profit
margin. When the costs are being added with the profit margin it results in the pricing.