Analysis of Management Accounting Systems and Techniques in ABC Ltd

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REPORT ON MANAGEMENT ACCOUNTING
STUDENT NAME:
STUDENT ID:
ASSIGNMENT CODE:

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Introduction
Management accounting is one of the essential needs of the organizations as it provides the
necessary support systems to the managers in taking decision with respect to the routine matters
of the organization. In the current report, the ABC Ltd has been selected for developing an
understanding with respect to the system of management accounting. The report conducts an in
depth discussion regarding the implementation of the management accounting system in ABC
ltd. The report also explores that how the different costing techniques like marginal and
absorption costing helps the ABC ltd in taking appropriate cost related decisions. Further, the
different planning tools of management accounting assist in addressing the financial problems of
the company for attaining the long term success will also be discussed. Lastly, the report will
involve exploration regarding how different techniques of management accounting like
benchmarking, financial governance, activity based costing, key performance indicators and the
balance score card assists in overcoming the financial issues for long term success of the
company.

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LO1: Understanding the management accounting systems
P1: Explanation of management accounting and essential requirements of different types of
management accounting systems
The management accounting can be termed as the process of preparing the report for the
management and accounts which has accurate statistical and financial information to manager to
help them in making both short-term as well as long-term decision. The management accounting
helps the management in forecasting the future trend of the business by making the use of
different tools. It facilitates decision making both at strategic level as well as operational level by
providing information in the forms of the reports. The management accounting uses analytical
technique which helps management in understanding the performance variance (Banerjee, 2012).
The information extracted from the management information report can also be used to forecast
the business situation.
The management accounting is different from financial accounting as it reports what is causing
problem whereas the financial accounting reports over the profitability of the business. The
management accounting deals with the estimates rather than the verified fact on the other side on
the other side financial accounting requires that the financial statements are correct. The financial
accounting requires complying with the accounting standards whereas no such requirement is
there for the management accounting.
Essential requirement of management accounting system
The management accounting has few set of system which is useful for the business.
Cost accounting system–The cost accounting system will assist the ABC limited in
measurement and improvement of efficiency of the company. The system can be used by the
management to segregate profitable and unprofitable activity and provides guidance for reducing
and fixation of price. It will also assist in gathering information for proper planning and building
control over the material.
Inventory managementsystem –The inventory management system at ABC limited will reduce
the risk of production shortage. It also facilitates reducing the order cost and minimizing the

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blockage of the financial resources. The system will help in avoiding lost sales and achieving
efficient production schedule.
Price optimization system– The price helps the management in focusing over the key area of
the business and facilitate better and quick decision making. It helps the management to identify
the customer response towards the change in the product policy.
Job costing system–The system helps in determining the cost before producing the product and
facilitates comparison of actual and estimate cost.
P2: Methods used for management accounting reporting
Budget reports – The budget helps the management of ABC limited in forecasting the future
condition based in the past and present data thus facilitating informed decision making for the
business (Kaplan and Atkinson, 2015). The budget facilitates the management in appropriate
allocation of resources so that there is no underutilization or over utilization of the resources.
Job cost report – The report match the expenses of the particular project with the revenue in
order to evaluate the profitability of the job. This provides information to the management of
ABC limited about the higher earning area of the business so the management can focus over the
area rather than wasting the efforts over the other area. It also helps in tracking the project which
is in progress so the wastage can be controlled before the cost spiral out of the control.
Inventory and manufacturing – The management accounting report can be used to make the
process of manufacturing more efficient. It provides information about the waste of the
inventory, per unit overhead cost or hourly labor rate.
Account receivable aging – The report helps in managing cash flow if the goods are provided
on credit to the customer. The report break down the customer on the basis of duration of their
owing thus helps in finding problem with the collection process of the company (Banerjee,
2012). The reports prevent the business from the situation of overlooking of the older debts.

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M1: Benefits of management accounting systems and their application within the
organization
The management accounting provides the management of the ABC limited with the current
capacity of the company in the form which can be used for planning future business action
(Bebbington and Thomson, 2013). The management can use budget, charts, forecast in order to
obtain the insight of the business for decision making. The system also facilitates early detection
of the problem and creating future strategy for the business.
D1: Critically evaluation showing integration of management accounting reporting and
management accounting systems
Management accounting system
Cost accounting system - The cost accounting system provides information to the management
of ABC limited about the expansion in the production and identifies reason for losses detected.
The system checks accuracy of the financial accounts and also assists in taking decision.
Price optimization system – It can be used in the selling process in order to facilitate accurate
pricing and production decision.
Job costing system – Through the system the cost of each specific job of the company can be
ascertained.
Inventory management system – Can be used by the storage process in order to check the
proper flow of goods.
Management accounting report
Budget report– Can be used by the management to forecast future business condition.
Job costing report – It facilitate in identifying the most profitable process if integrated with the
organization process.

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Cost report–Will helps in ascertaining the cost of different product manufactured by the
company.
Inventory and manufacture report - Can be used with the production process.

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LO2: Applying range of management accounting techniques
P3: Calculation of costs using absorption and marginal costing techniques
Marginal and absorption costing techniques
Both absorption and marginal costing focus over the key issue that how the overall cost of input
resources a business organization are organized in order to determine the overall profit attained
from particular product or service.
The choice behind selection of the costing system might be influenced by the method of Costing.
For instance in case of Costing of specific order organization will implant the absorption costing
method. The reason behind the application of this method is that the pricing of each order will
invariably make an overall reference to total incurred cost. On the other hand where there is
continuous operations, marginal costing method is implanted as to utilize opportunities of cost
volume profit analysis.
Marginal costing
The technique of marginal costing is a tool of recording the cost where in all variable cost of
manufacturing are incorporated as inventoriable costs. In this particular system all the fixed
manufacturing cost are not included as part of cost sheet. They are recorded as the cost of the
particular period in which it is actually incurred (DRURY, 2013).
Variable costing system represent the production cost that changes with the level of output. The
overall cost of manufacturing in the particular system are been charged to the product. In this
variable cost of the goods are been charged to cost units & on the other aspect the fixed cost of
the particular period is been written off as against the total contribution of the company. This
concept of marginal costing is also referred to the principal costing which is been utilized in the
decision making. The technique of marginal costing consists of two main features including –
 Segregating the elements of the cost into the fixed and variable cost figures.
 In order to calculate the unit cost the fixed cost is required to be eliminated.

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Marginal costing statement for the current organization ABC Ltd.
Absorption costing
The term absorption costing makes sense that the overall cost of manufacturing goods are been
absorbed by the units produced in total. In other sense, the cost of units of finished goods that
exists in the final inventory incorporate the cost of
 Direct materials
 Manufacturing overhead (fixed and variable)
 Direct Labour
This is the prime reason that the particular approach of costing is also referred as full costing
methodology. Further under this particular technique the cost is segmented as per their
functionalities. The evaluation of gross profit is made after reducing the cost of production from
the revenue amount to derive gross profit. Other costs of the business is then deducted from the
above gross profit to determine the amount of net profit. In general consideration the absorption

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costing render better data to the users for the purpose of pricing of products and service as it
includes both variable & fixed cost of production(DRURY, 2013).
Absorption costing statement for the current organization ABC Ltd.
Absorption Costing and Marginal Costing
The relevant difference among the approach of Absorption Costing and Marginal Costing
Under the technique of Absorption Costing all variable & fixed cost are recovered been from the
production on the other hand in Marginal Costing only the variable costs is been recovered from
the production.
Under the technique of the Absorption Costing inventory valuation related to the finished goods
and work in progress is worked outat total costs basis of both variable and fixed cost. On the
other hand the inventory valuation related to the finished goods and work in progress is worked
out at total variable cost only.

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Long-term decision making is long term focus of the Absorption Costing approach on the other
handshort-term decision making is main focus of Marginal Costing.
Absorption Costing lays emphasis on production, operation or process while Marginal Costing
focuses on selling and pricing aspect (Dewa, et. al., 2016).
D2: Interpretation of data for producing financial reports for a range of business activities
Reconciliation of profit as calculated under marginal and absorption costing
Allocation rate = Total fixed manufacturing expense / Total number of units produced
= 320000 / 80000
= $ 4 per unit
Allocation of fixed manufacturing overhead = 75000 units * $ 4 per unit
= $ 300000
Under allocation = $320000 - $ 300000
=$ 20000
Reconciliation is as follows:
Marginal costing profit + (closing stock * allocation rate) = Absorption costing profit
=$ 130000 + (5000 * 4)
= $ 150000

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LO3: Use of planning tools in management accounting
P4: Merits and demerits of various types of planning tools used in budgetary control
Benefits
Provide direction to organization action: The organizations like ABC ltd are able to
channelize their efforts, actions and activities with the help of planning tools as these tools help
in clearly defining the core objectives and goals of the company along with the strategic planning
(Alviniussen and Jankensgard, 2015).
Better coordination: The planning tools assist in fixing the organizational targets for each
specific department that helps in achieving effective coordination among the employees of
different departments along with each of the department.
Elimination of unnecessary expenses: The accurate future plans can be prepared on the basis of
the planning tools. Thus, the different budgets with the help of planning tools enables the
organizations like ABC ltd to subsequently reduce their cost and thus avoid the wasteful
expenditure that results in raising the cost of the company’s products.
Limitations:
Unable to control inflation: There are certain planning tools like fixed budgets that cannot be
changed with the change in future conditions and circumstances. Thus, the planning tools under
this situation fail to control the rising price of products and services leading to inflationary
conditions.
High focus over the financial aspect: Most of the planning tools like budgets focus over the
numerical figure and ignores the qualitative factors like customer satisfaction and product quality
that are equally important for gaining long term success within the business (Klychova, et. al.,
2014).