Management Accounting Principles & Planning Tools for Accounts

This report provides a detailed analysis of management accounting principles with a focus on LovetheSales, an online fashion retailer. It explores different types of management accounting systems, including cost accounting and inventory management. The report discusses various methods for management accounting reporting, such as cost analysis and budgeting, highlighting their benefits for decision-making, planning, and controlling business operations. It includes a calculation of cost using marginal and absorption costing income statements. Furthermore, the report examines the advantages and disadvantages of budgetary control planning tools, emphasizing their role in maximizing profits and coordinating organizational activities. Finally, it briefly touches on how organizations adapt their managerial accounting systems in response to financial problems.

UNIT 5 – MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
Management accounting and different types of management accounting...................................1
Different methods used for management accounting reporting...................................................3
Calculation of cost.......................................................................................................................4
Advantages and disadvantages of different types of planning tools for budgetary control.........5
Comparison of organizations adapting to managerial accounting system with response to their
financial problems........................................................................................................................8
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Management accounting in an organization helps the managers of the company to make
decisions. It is the process of identification, analysation, interpretation and communication of
informations provided to the manager for achievement of business goals of the company. The
company chosen for this project is LovetheSales. It is an online fashion retailer which deals
provide multiple brands on its website. This project will explain the management accounting and
demonstrate the different types of management accounting system. In this project different
methods utilized for management accounting reporting will be explained. With the help of this
project the cost will be calculated with the help of techniques of cost analysis and also preparing
income statements. The advantages of the budgetary control will be stated in this project. The
disadvantages of the budgetary control will also be stated in this project. It will help in
comparison of the ways which organization uses management accounting to respond to financial
problems.
MAIN BODY
Management accounting and different types of management accounting
Management accounting is one the most useful tools of a manager which helps to make
the decisions of the company. This is the process of identification, analysation, interpretation and
communication of information which is provided to the manager for achieving the organizational
goals. The management accounting provides the manager with some crucial information of the
firm which helps in the decision-making of the manager. The company can use this system for
the calculations of costs and keeping an eye on the management process. It is important for every
company to incorporate the management accounting system in their organization, for it will be
helpful to the management teams to take necessary decisions for the company. Management
accounting helps in providing the statistical and the financial information to the company
leaders. Management accounting is done by the use of an accounting software. Management
accounting got its existence from the financial accounting, but they both vary from each other.
Many assumptions and changes were made as per the needs of management in this system of
accounting. The two major differences in management accounting and financial accounting are,
Financial accounting is the collection of accounting data and creation of financial statement for
the company of a given period. Whereas management accounting is used for keeping track of
business transactions with the help of an internal process. Financial accounting discloses the
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financial and accounts of the company (Al-Mawali and et.al., 2018). Meanwhile, management
accounting provide the information about the company which are related to its health and
management. It also provides suggestions and advices for the improvement of the company.
The different types of management accounting systems are as follows :-
Cost Accounting System :
This system of management accounting is used for keeping the information related to the
operations of manufacturing. Both direct and indirect costs of the company is considered in the
cost accounting system of the management accounting. Through the use of this system the
company can know the per unit cost of production of the products which helps in fixing the price
of the products of the company.
Inventory management system :
The system which uses the valuation of the raw material and the inventory of the
company is known as the inventory management system. Some procedures which are used in
this type of system are First In First Out (FIFO), Last In Last Out (LIFO) and Actual unit cost
method (AUCM). This system manages the transactions which affect the inventory of the
company. This benefits the company to figure out the selling price of the product and also the
production of the company. It helps in determining the losses on any product. By the
management of the inventory the company can know which product has to be produced the most
and vice — versa (Alaeddin and Thabet, 2018).
Job- costing system :
The system which generates the cost of production of the company is known as the Job-
costing system. This system helps the company to identify the cost of product. The data which is
generated by this system helps in determining the accurate estimation of the production cost of
the company. This system provides information of the cost which helps in setting the price of the
product. The system helps in the calculation of the reimbursement of any customers which
deserves the same.
Price optimization system :
The price optimization system determines the procedures of demands and needs of the
customers. This system provides the information which helps in setting the prices of the product
which will give them high profits and has the potential of high sales and high margins. Every
company should opt this system because it increases the margin of profit in the product.
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Different methods used for management accounting reporting
Management accounting reports concentrates on the data which is received through the
financial accounting. The main reason for the utilization of management accounting reports are
decision-making, planning and also controlling for the company. This type of accounting
contains earning statements, cash flow statements and balance sheet. There are different methods
of the use of the management accounting reporting are,
Cost :
In the management accounting the price determination is very important. This method
helps in the calculation of the products prices, labour cost, overhead cost and all the other cost
and prices which related to the operations of the company. The total cost of the company created
is then further divided into its number of expenditure. The main aim of the cost report is to help
its managers for the to understand the total cost of the good caparison to the sale price of the
goods. Cost for the LovetheSales company is the cost of fashion products it purchases from the
other brands. This method allows the company to forecast its profit with the analysation of the
total cost (Alsharari, 2019).
Budget :
Budget is a method of management accounting reporting which is based on the prediction
of the future cost and expenses. One of the major principle of the management accounting is to
plan the total spending of the company. This procedure is calculated with the help of analysation
of the previous year's performance. The previous year explains the future projection of total cost
the company will have to incur. This allows the manager to plan a budget for the total upcoming
expenditure of the company. Budget therefore becomes an objective for the company which
allows it to successfully achieve its objectives. The managers in this method are seen to analyse
the reports for finding ways for diminishing of cost. In LovetheSales company this method is
used for the calculation of the future cost which is going to happen in the upcoming years related
to its website.
Execution Reports :
Manager uses this report to plan spending the contrast genuine and total of the sum of the
income. After the determination of the new budgets with the help of intension and analysation of
all the data of the amounts which are listed on the performance and their reports. With the
calculation of performance of the organization in months or quarterly according to the reports.
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This method is based on the results of the company from the previous years. In this method the
organizations try to understand and calculate the performance which is the profit or the revenue
of the company with the help of the analysation of the profit which the company was able to
achieve in the previous years. These reports contain total cost, sales and expenditure in the
previous year and thus the total profit which was generated. Manager try to understand by
making which changes in the factors like cost, sales, operation etc. the total profit of the
company could have increased in the previous year. Thus, the calculated process is thus applied
on the current years by the management (Amir, Rehman and Khan, 2020).
Some benefits of the management accounting system for a company like LovetheSales
are,
Decision-making :
The management accounting system in a company helps it in the prediction for the cost
and revenue. This helps the managers to make decision regarding the company's performance
and the changes which might be required.
Planning :
Management accounting system helps the companies to plan its strategy for the business
related to its operations. With the help of planning the company is able to fix its goals and aims
which will help the business operations of the company.
Controlling Business operations :
Business operations of the company can be controlled by the management accounting
system. The business operations are run by a certain budget which calculated by management
accounting system (Din and Habibullah, 2017).
Understanding financial data :
Management accounting system contains different types of report which allows the
company to understand its financial performance with the help of data present in it.
Understanding the financial data is very important for the company as it is important for
planning, controlling and decision-making of the company.
Calculation of cost
The calculation of cost for Lovethesales company can be made with the help of,
Income Statement with the marginal costing
Marginal Costing Income Statement
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Sales Revenue 500000
Marginal cost of sales:
Opening inventory (valued @ marginal cost) 100000
Add :- Cost of production (valued @ marginal cost) 55000
Less :- Closing inventory (valued @ marginal cost) 70000 (115000)
Gross profit 385000
Less :- Variable distribution and administration costs (45000)
Contribution 345000
Less :- Fixed costs (Production, distribution, administration) (150000)
Profit for the year 195000
In the marginal cost income statement, the fixed and variable costs are treated separately and it
also shows the contribution (Gnawali, 2017).
Absorption Costing Income Statement
Sales revenue 500000
Cost of sales
Opening inventory (valued @ Absorption rate*) 100000
Add :- Production cost (valued @ absorption rate) 50000
Less :- Closing inventory (valued @ absorption rate) 70000 (80000)
Gross Profit at normal 420000
Under absorption 30000
Gross Profit at actual 450000
Less :- Distribution and administration costs (fixed+ variable) (45000)
Net profit 405000
Absorption rate per unit
= Variable production overheads per unit + Fixed production overheads per unit
In this method of preparing the income statement there is no difference between the fixed and the
variable cost. Absorption Costing states that the fixed cost is mixed with the products and so as
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the remaining costs of production, hence all the cost should be the part of the product cost
(Hlaciuc and et.al., 2017).
Advantages and disadvantages of different types of planning tools for budgetary control
The advantages of planning tools of budgetary control are,
Maximization of Profits :
The main aim of budgetary control is the maximization of the profit of the organization.
For achieving the aim of and planning and coordination of different functions are needed to be
undertaken. This is how the company inserts proper control over the different types of capital of
and the expenditure made for the revenue (Hamidah, 2020).
Coordination :
There are different work of different departments and sectors of which needs to be
properly coordinated in LovetheSales. Budgetary control helps in planning of the different
departments which helps in bearing one another. This is how the organization is helped with the
coordination of different executives and subordinates which helps in achievement of the budget
(Laela and et.al., 2018).
Specific Aims :
Top management is responsible for decisioning the plans, policies and goals. That is how
all organization put in efforts for putting together the common goals in the organization. With the
help of budgetary control every department is give a target for achievement. These efforts are
further directed towards the achievement of specific aims. Aim is necessary for the business as
with specific aim the efforts of the management get wasted.
Tool for measuring performance :
Providing the different department with aims and targets budgetary control becomes a
tool for the measurement of the performance. In this process the budgeted targets are compared
to the results which they present by determination. The performance of the departments are then
given to the top management which help it to enable the introduction of management by
exception.
Economy :
The plans of the expenditure is very systematic and economic in the spending due to the
budgetary control. This allows the finances of the company to be put into its optimum utilization.
This is how the budgetary control benefits the national economy. Use of budgetary control
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influences the economical use of the resources and the wastage of resources is limited benefiting
the economy.
Determining Weaknesses :
With the help of budgetary planning the organization is successful in understanding its
actual performance which enables it to find out the weaknesses of the company. This allows the
company to then focus on those weak area were improvement in necessary.
The disadvantages of planning tools of budgetary control are,
Uncertainty in Future :
All the budgets are the preparation for the upcoming future. Even though the predictions
made for the future are as good as it can get predictions do not always come true. The
uncertainty is always there in the future and thus the presumption of any kind has chances of
failure. In case of change in the future conditions which was not predicted it upsets the budget
which was made on the assumption of the future. This is how the uncertain future of budgetary
control system reduces its utility.
Budgetary revision :
The preparation of the budgets are on the basis of assumptions and that is how certain
conditions fail the budgets. The uncertainties in the future affects prevail necessities of the
budgetary targets. This is how the frequent revision of targets reduces the value of the budget
and revision is being made fails as involvement of huge expenditures (Makarenko, 2018).
Discourage Efficient Persons :
Under budgetary control different individuals are given different targets in this
organization. It is the tenancy of those individuals to try their best for achievement of the targets.
The efficiency of those persons some time may affect the targets. In the uncertainties of the
events of the future some times those individual fail due to an external factor this then
discourages them.
Coordination problem :
The success to budgetary control is totally depended upon the coordination in the various
departments. In case one department gets affected by another department the results of these
other departments is affected. This is for overcoming the problems coordinating budgetary
officer of the company may be required. However, in every problem in coordination appointing a
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budgetary office is not affordable. Lack of coordination is the result of poor performance in the
business (Chen, C.X., 2017).
Conflicts :
Conflicts among the functional departments of the company may be caused due to
budgetary control. For every departmental head the main worry is to reach the goals of the
department. This is why every department want maximum allocation of funds which helps it to
improve its performance thus conflicts arise between the departments.
Depends on Top management support :
This system of budgetary control system is totally depended upon the top management.
This is why the management needs to be enthusiastic for the success in the system by providing
total support. Lack of support leads to collapse of the system.
Comparison of organizations adapting to managerial accounting system with response to their
financial problems
LovetheSales is a company which is all small retailer which uses the help of its own build
website for selling online clothes of different brands on its website. Therefore, there are many
other competitors for the business of this company. The main idea of success for this company
has been to provide its customers with all the product in one place so that customers can buy
them after making comparison in quality and prices. One of the competition of this company is
amazon which is a world renowned online retailer which deals in many products including
fashion clothes. Thus, for the comparison of managerial accounting system competitive
environment and management accounting techniques can be used by these companies for
responding to their financial problems. Management accounting is a tool for setting the bench
market which can be used for pointing out the key financial area in which the company can
improve its operational practices with the help of financial managers. In LovetheSales the
management accounting system is the source for streaming internal benchmarking. Financial
performance measurement is very difficult for companies like Amazon which operate
multinationally. Whereas, in LovetheSales these procedures is fairly easy due to its size. This is
why in LovetheSales the management accounting is more effective. Amazon has to do
improvisation in its management accounting techniques for finding a sound monitoring facility
of their financial performance. Management accounting techniques are enduring in financial
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governance through computer software in both the companies (Banani, Riyasari and Widiastuti,
2019).
Another techniques which can be used for LovetheSales is Balance scorecard. In this
method the financial performance evaluation play a very important role in the overall
sustainability and performance of the company. The accounting software used by this company
may provide it better scope for the improvement and making financial decisions. With the help
of this software the managers and the accountants of the company can easily view the position of
the company and the total generation of profit. The key factors for the business which affects its
financial performance are, profit percentage, market share, economic value added, EBIT,
depreciation, ROC, ROE etc. The endorsement of any management accounting technique for
overcoming the financial issues faced by the company in a short term period the above
mentioned factors are needed. This helps the company to eventually generate sustainability of
their financial information in comparison to its competitors.
CONCLUSION
With the help of this project it can be concluded that the management accounting system
of LovetheSales help it to improve its overall effectiveness by using computer technology in the
key operations. The involvement of budgetary control in the management accounting of the
company helps it in the budgetary process for asserting control. This project also concludes that
different types of management system which are, job-costing system, inventory management
system, price optimization system and also cost accounting system have their own benefits and
are utilized for different procedures of in this organization. Conclusion of the used planning
tools, budgeting and cost calculation is made for planning the appropriate strategies and
activities. With the comparison of adapting management and accounting system of the company
response to its financial problems is made in this project. The advantages and disadvantages of
different types of planning are explained in this project for showing the usage of budgetary
control over the organization. Calculation of cost is done in this project with the usage of
appropriate techniques, cost analysation and marginal and observation costs. Utilization of
different methods of management accounting and reports in the context of the organization are
made in this project.
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