Report on Management Accounting Systems, Techniques, and Application

This report provides a comprehensive overview of management accounting systems and techniques. It begins by defining management accounting and its principles, highlighting its roles in planning, costing, budgeting, decision-making, and performance measurement. The report distinguishes between management accounting and financial accounting, detailing various management accounting systems such as cost accounting, job costing, inventory management, and price optimization. It also explores different methods in management accounting reports, including ABC costing, batch costing, budget reports, and income reports. Furthermore, the report discusses the application of management accounting techniques to prepare income statements and analyzes the advantages and disadvantages of planning tools used in budgetary control. Finally, it compares two companies based on their use of management accounting systems, providing a thorough understanding of the subject matter.

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1. Management accounting systems..........................................................................................1
P2. Different methods in Management accounting reports.........................................................5
TASK 2............................................................................................................................................7
P3. Application of management accounting techniques to calculate or prepare income
statement......................................................................................................................................7
TASK 3..........................................................................................................................................10
P4. Advantages and disadvantages of distinct planning tools used in budgetary control.........10
TASK 4..........................................................................................................................................13
P5. Comparison among two companies in the way they uses management accounting system
...................................................................................................................................................13
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................16

INTRODUCTION
This assignment has been completed by three distinctive Parts where Part-1 consists of LO1
that has described importance of management accounting, roles of MA, principles of MA, FA
VS MA, different management accounting systems and different methods of management
accounting reporting systems. The Part-2 has described the process of calculating unit costs and
profits of Creams Ltd by the application of both absorption costing and marginal costing
methods. Part-3 has described different planning tools and their merits and demerits for the
company’s accounting functions. However, this part has also compared the financial and non-
financial performance between Creams and Crown Company to understand the financial
problems and solutions appropriately.
TASK 1
P1. Management accounting systems
Defining the Management Accounting:
The term management is defined as the methods of essential accounting process for
collecting, recording, interpreting and storing of financial and non-monetary accounting data to
facilitate different managerial decisions regarding costing, pricing and profitability of company
(Bedford and Speklé, 2018). It is used at Creams Ltd for the facilitating of appropriate costs
calculation that is prerequisite to determine accurate price level.
Defining the Management Accounting System:
The term management accounting system is defined as the process of preparing different
management systems through the collecting of budgeting and costing data. The accounting
system is integrated by costing systems, pricing system, job costing system and inventory system
for the appropriate management of all managerial decisions.
Principles of Management Accounting:
For ensuring effective utilization of all management accounting systems, there are
required to be guided by some accounting principles like the followings:
Influence Principle: The principle asserts the attributes of having materiality and influential
capacity to make alternative decisions regarding costing, pricing and budgeting for the taking of
best managerial decisions to facilitate the company goals largely (Berry, Broadbent and Otley,
2016).
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Relevance principle: The principle asserts the attributes of having appropriateness and
accuracy to the managerial decisions by providing needed costing data for costing decision,
needed profitability data for profit decision making effectively.
Analyze Principle: The principle asserts the attributes of having interpreting capacity of all
methods of accounting and data to critically analyse the cause and effects of each type of
accounting information to ensure best managerial data.
Trust Principle: The principle asserts the attributes of having trusted sources of data to
ensure high accountability and acceptability of data by decision makers of the company as the
decisions will be provided to be implemented by internal and external stakeholders.
Roles of Management Accounting:
In addition, according to above principles of this accounting, management of the
organizations can enjoy the benefits of this accounting system like the followings:
Planning: Planning means the attributes of explaining the future endeavours of pricing,
costing and financial performance of the company (Booth, 2018). Management accounting
creates plans of costs, price and other essential attributes through the application of different
planning tools like budgeting and pricing tools.
Costing: Costing means the attributes of expenditures those are incurred to meet certain
elements of the company daily and annually for the creation of resources. Management
accounting records appropriately those daily and annual expenditures of manufacturing,
marketing and supplying of goods and services by the application of marginal, ABC costing, Job
costing and absorption costing methods.
Budgeting: Budgeting is defined as the attribute to create the future assumption of
production needs, marketing needs, cash needs and other essential elements for the company.
Management accounting creates different budgeting like flexible and zero based for the
controlling of future uncertainties through the appropriate analysis of cause and effects.
Decision Making: Decision making is the attributes of taking pricing decision, costing
decision, production needs decisions and inventory decision. In this case, management
accounting creates different accounting systems such as job costing systems for costing decision
and price optimizing system for pricing decisions effectively for the company goals
achievement.
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Performance Measurement: Performance management is the attributes of measuring
company’s financial and non-monetary performance regarding profitability, cost control,
resource utilization and acquisition (Dekker, 2016). Management accounting applies different
standards and comparisons of measuring such performance for controlling the future
uncertainties and ensures high productivity effectively.
Distinctions between Management Accounting and Financial Accounting:
Financial accounting: FA means the financial accounting that is somewhat difference
from management accounting where two branches are practiced in same organization. In Creams
Ltd, Financial accounting is used to deal with standard data to calculate company’s performance
for providing to external parties. Financial accounting’s goal is to convince the investors to
execute investment in the organizations. The reports of financial accounting are needed to be
audited by registered auditors for the purpose of government acceptance. Only financial
information of the company functions are treated by financial accounting (Dewi and et. al.,
2018).
Management accounting: Management accounting deals with actual data to calculate
company’s performance for providing to internal parties. Management accounting’s goal is to
convince higher management by the measurement of internal functions’ performance. The
reports of management accounting are not required to be audited by such auditors by verified by
intern CEO of the company. Both financial and non-financial information are treated by
management accounting effectively.
Different types of management accounting systems and their essential requirements:
Management accounting also deals with application of many types of accounting systems
those are needed to determine least price, cost control and inventory management accurately.
The management accounting systems are discussed below with their essential requirements:
a) Cost Accounting System: There are many types of functional costs and expenditures such
as production, marketing and distribution where there are variable costs and fixed costs of
in those functional areas of the company (Eckardt, Selen and Wynder, 2015).
Management accounting suggests applying this accounting system to calculate and
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measure such expenses effectively by arranging the following requirements
appropriately:
 Variable expenditures.
 Fixed expenditures.
 Semi variable expenditures.
 Standard costing.
 Appropriate software to store data.
The essential requirement of cost accounting system at Creams Ltd is to establish accurate
cost for its all units that are manufactured by the company. Along with this, the system is also
used for estimating cost all the commodities for the purpose of profitability analysis, controlling
of cost as well as valuation of its inventory.
b) Job Costing System: There are many jobs in the production like raw materials collection,
direct labour, indirect labours, factory overheads and administrative costs those are
needed to be calculated effectively. In that case, Management accounting suggests
applying this accounting system to calculate and measure such job costs effectively to
assign appropriately to each job by arranging the following requirements appropriately:
 Direct labour cost.
 Direct factory costs.
 Indirect costs.
 Overhead costs.
 Appropriate software to store data.
In context to job costing system, its essential requirement in Creams Ltd is to keep record of
all the expenses that are related to a specific commodity by arrange and preparing separate
record of job associated with all the product line. Addition to it, another essential requirement of
this system in the company is to accumulate information about direct labor, direct material and
overhead related with the job (Hiebl, 2014).
c) Inventory Management System: There are some types of inventories such as work in
process inventory, finished goods inventory and raw materials inventory those are needed
to be arranged and maintained all costs regarding those stock levels. Management
accounting suggests applying this accounting system to calculate and measure such
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expenses effectively to manage good stock levels by arranging the following
requirements appropriately:
 Production data.
 Stock data.
 Application of inventory tools such LIFO, FIFO, Average and JIT system.
 Appropriate software to calculate stock levels.
Essential requirement of inventory management system at Creams Ltd is to track goods and
materials across the supply chain and warehouse of the entity. It also helps in checking flow of
stock as well as ensuring that materials are supplied to the demanded place of the company in
accurate time and at minimum possible rates (Hoque, 2018). The firm also requires the system
for keeping accurate record of the entire inventory which enters or leaves the premise or its
warehouse.
d) Price Optimization System: There is needed to determine appropriate and least price tags
for the produced goods of the company by the calculation of all relevant costs and apply
the profit margin. Management accounting suggests applying this accounting system to
calculate and measure best prices effectively by arranging the following requirements
appropriately:
 Accurate costing information.
 Accurate pricing strategies.
 Accurate profit margin.
 Appropriate software to store data.
In Creams Ltd, essential requirement of price optimisation system is to calculate the ways
in which demand of the offerings varies at distinct level of prices. The system is also required at
the company for setting suitable prices of the commodities that it is planning or is offering in the
market. Furthermore, the system also assists in knowing exact price of commodities and services
after researching about rival products or market needs (Kaplan and Atkinson, 2015).
P2. Different methods in Management accounting reports
Methods of Management Accounting Reports:
The tools that are used to understand numbers behind the things or workings going in the
organisation are termed as management accounting reports. In Creams Ltd, Management
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accounting requires preparing reports to present the financial performance and information to
internal management by the application of following reporting processes effectively:
a) ABC Costing Report: In the production levels, there are many types of activities and jobs
those are needed to provide costs to each activity. This report is prepared to assign
overhead costs and calculate each activity costs to measure the financial control over all
activity basis costs and expenses of the company. The managers of Creams Ltd prepares
ABC Costing report for the purpose of allocating costs to all identified activities as well
as assigning the same to organisational products or services. Moreover, the reporting
method also helps in eradicating any issues in implementing systems appropriately.
b) Batch Costing Report: In the production units, there are many batches of products those
are difference in volume and nature of behaviours. This report is prepared to present the
costs of each batch separately so that costs can be assigned according to each batch that
helps to determine actual costs of the products. In Creams Ltd, administrators prepares
batch costing report for the purpose of analysing costs involved in manufacturing
products in different batches. When the company receives orders from distinct customers,
they have various common products in the orders. The managers issues the production
orders for batches and uses the reporting mechanisms to calculate costs involved with
each batch (Kieso, Weygandt and Warfield, 2019).
c) Budget Report: There are many functions and requirements of production and other
relevant areas of the companies. This report is prepared to measure the internal
performance of each function through the appropriate budgeting techniques such as
flexible, zero based, production and costs budgets etc. Budget report is used in creams
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Ltd for recording different types of budgets that are depended on organisation financial
needs along with available data. Moreover, it is prepared as per the requirement of
business and recording expenses or income that are forecasted for upcoming period.
d) Income Report: In the functions of the companies, there are both types of sources of
generating revenues and incurring costs by the effective completion of the works. This
report is prepared to present the net income or net loss by differentiating between total
revenues and total expenses of a definite time. In Creams Ltd, managers prepare income
report for the objective of recording the incomes received from different sources and with
different products. It is prepared in different forms that are operating income report, net
income report and many more. It helps in differentiating among total revenues earned and
capital invested in manufacturing different products.
e) Balance Sheet Report: There are some resources and assets against retained earnings and
liabilities of the companies (Maskell, Baggaley and Grasso, 2017). This report is
prepared to present a good balance between such assets and liabilities of day of
accounting year to measure accurate financial performance of the companies effectively.
Balance sheet report is prepared by finance department of Creams Ltd for the purpose of
analysing where the company stand in the market. The report gives snapshot of the
financial position of the company on given day and it prepared at the end of each quarter
or annual year.
f) Cash Flow Report: There are needs of sourcing cash to meet the obligation of cash
expenses of the companies. This report is prepared to present the cash balance of a
definite time through the assumption of cash sources and cash needs appropriately for the
company cash obligations. In Creams Ltd, cash flow report is prepared for making up
financial statements as well as annual reports. The main concern to prepare cash flow
report is to present overview of financial transactions occurred in business over
designated duration.
TASK 2
P3. Application of management accounting techniques to calculate or prepare income statement
What is Marginal Costing?
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In the functions of the companies, there are both types of expenditures such as variable
expenditures and fixed expenditures. These are calculated to determine actual costs of
production. But according to rule of marginal costing tool, management accountants only
evaluates and calculate unit costs by variable costs consideration (Raffoni and et. al., 2018).
What is Absorption Costing?
In the functions of the companies, there are both types of expenditures such as variable
expenditures and fixed expenditures. These are calculated to determine actual costs of
production. According to rule of absorption costing tool, management accountants evaluates
and calculate unit costs by both fixed and variable costs consideration.
Creams Ltd
Calculation of Costs
Marginal Costing System Absorption Costing System
Direct materials………………£5
Direct labour…………………..3
Variable production overhead…2
Unit product Cost…………£10
Direct materials……………………£5
Direct labour……………… ……….3
Variable production overhead………2
Total Variable production costs........10
Fixed Production Overhead ………..4
Unit Product Cost………………..£14
Creams Ltd
Income Statement using Marginal Costing
Particulars January (£) February (£)
Sales
Less: Variable Costs:
250000 125000
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Variable cost of goods sold
Variable selling expense
Contribution Margin
Less: Fixed Costs:
Fixed production costs
Fixed selling and administrative costs
Net Operating Income / Loss
(100000)
(30000)
(50000)
(30000)
120000
(40000)
(30000)
45000
(40000)
(30000)
50000 (25000)
Workings
1. Sales Revenue
January = 10000*£25 = £250000
February = 5000*£25 = £125000
2. Variable COGS
January = 10000*£10 = £100000
February = 5000*£10 = £50000
Creams Ltd
Income Statement using Absorption Costing
Particulars January (£) February (£)
Sales
Cost of goods sold
Contribution Margin
Variable selling costs
Fixed selling and administrative costs
Net Operating Income / Loss
250000
(140000)
125000
(70000)
110000
(30000)
(30000)
55000
(30000)
(30000)
50000 (5000)
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Workings
1. Sales Revenue
January = 10000*£25 = £250000
February = 5000*£25 = £125000
2. COGS
January = 10000*£14 = £140000
February = 5000*£14 = £70000
Reconciliation Statement
Absorption and Marginal
January and February
Particulars Amount in
(£) January
Particulars Amount in
(£)
February
Marginal Income
Add: Difference in
Stock*OAR
Absorption Costing Income
(50000)
0
Marginal Income
Add: Difference in
Stock*OAR
(25000)
20000
£50000 Absorption Costing Income £(5000)
TASK 3
P4. Advantages and disadvantages of distinct planning tools used in budgetary control
Application of Planning Tools:
Budgeting means the attributes of creating the future assumptions of production needs,
marketing needs, cash needs and other essential elements of the companies (Renz, 2016).
Management accounting creates different budgeting like flexible and zero based for the
controlling of future uncertainties through the appropriate analysis of cause and effects. The
following planning tools are applied by Creams Ltd effectively:
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