Management Accounting: Principles, Systems, and Applications

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MANAGEMENT ACCOUNTING
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Contents
INTRODUCTION............................................................................................................................. 3
LO1.................................................................................................................................................4
PRINCIPLES OF MANAGEMENT ACCOUNTING...........................................................................4
ELEMENTS OF MANAGEMENT ACCOUNTING SYSTEMS.............................................................5
METHODS FOR REPORTING....................................................................................................... 5
MANAGEMENT ACCOUNTING SYSTEMS....................................................................................6
BENEFITS OF MANAGEMENT ACCOUNTING..............................................................................7
LO2.................................................................................................................................................9
LO3............................................................................................................................................... 13
PLANNING TOOLS.................................................................................................................... 13
LO4............................................................................................................................................... 15
EVOLUTION OF MANAGEMENT ACCOUNTING........................................................................15
DETECTION OF FINANCIAL PROBLEMS.....................................................................................16
ADAPTING MANAGEMENT ACCOUNTING...............................................................................16
CONCLUSION............................................................................................................................... 18
REFERENCES.................................................................................................................................19
APPENDICES................................................................................................................................. 21
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INTRODUCTION
Management accounting is a tool used by organizations so that it can analyze and present
information through which the business decisions can be taken (Kaplan and Atkinson, 2015). In
this report, the necessity of management accounting has been described and its various
approaches have been examined. The report would also cover the cost analysis under
management accounting. Through this report, an overview of the different planning tools of
management accounting has also been given and usage of management accounting in the
success of an organization has also been determined.
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LO1
PRINCIPLES OF MANAGEMENT ACCOUNTING
Management accounting is a branch of accounting through which data is collected and analyzed
so that major business decisions can be taken in the organization (Malina, 2018). The process of
management accounting is based on certain principles, which are described in the following:
 Influence
Management accounting provides influential decisions based on which strategies can be
developed by the organization (Abednazari et al., 2018). Better decisions can be
influenced by the usage of management accounting as it provides informative data for
the implementation of a decision.
 Relevance
Before using informative data, management accounting ensures that it is relevant to the
decision which is being taken in the organization (Morden, 2016). It maintains a balance
between all time zones of information (present, past, and future), the background of the
information (internal and external) and data in information (financial or non- financial).
 Analyze
Through this principle of management accounting, a detailed understanding of the
business information is done so that it can generate significant value through the
analysis of the data. Varied data is analyzed to understand its impact on different areas
of business.
 Trust
This principle of management accounting ensures that the interest of business and all
the aspects related to it are secured and the results are accountable to the analysts
performing the analysis (Abednazari et al., 2018). It also ensures that business ethics
and integrity are maintained while gathering information and analysis.
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ELEMENTS OF MANAGEMENT ACCOUNTING SYSTEMS
For adopting different types of management accounting systems, there are various elements
that vary while their implementation, which are as follows:
 Information
The source from where the information is derived is one of the essential requirements
of the management accounting system as the treatment of the information is based
upon its source in different systems of management accounting (Adler, 2018).
 Management
Of the important requirements of management accounting systems, the style of
management adopted in the organization is also a crucial one as different styles of
management hold difference in the adoption of systems of management accounting
(Harris et al., 2019).
 Structure
The organizational structure followed within an organization is also a requirement of the
management accounting systems followed in the firm (Kaplan and Atkinson, 2015). By
understanding the structure followed by the organization, the results can be informed
to the required level of management in which it is relevant.
METHODS FOR REPORTING
Reporting refers to providing with results of the analysis which has been done through which
the decisions of the organization would be assisted (Berry et al., 2019). Reporting can be done
in various forms, some of which have been described in the following:
 Budget Reports
These reports stand of huge importance in management accounting as they represent
the budget which has to be followed while performing the tasks of management
accounting (Morden, 2016). The budget reports aids in representing the actual
performance in comparison to the budgeted performance of the organization.
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 Performance Reports
These reports represent the overall performance of the organization so that important
decisions can be taken based on the same (Shields, 2015). These reports allow
management accounting in getting an insight over the working of an organization.
 Inventory Reports
These reports assist the management accounting systems in overviewing the efficiency
of the manufacturing process followed by the organization (Collis and Hussey, 2017).
These reports represent the performance of inventory engaged in the manufacturing
process and the efficiency generated through it.
 Accounts Receivable Reports
These reports assist the management accounting systems in taking decisions regarding
the cash inflow and outflow of an organization (Berry et al., 2019). It determines how
the organization maintains cash flow in its functions and examines its efficiency in
meeting the short term obligations.
MANAGEMENT ACCOUNTING SYSTEMS
There are various types of management accounting systems that are adopted in an
organization, some of which are described in the following:
 Cost Accounting System
The system of cost accounting is used by the organization so that the estimation of cost
of production can be made for determining the possible level of profit which can be
gained by the organization (DRURY, 2013). The cost accounting system assists the
organizations to determine accurate costs allotted to different products manufactured
by the firm so that their costs can be control and profitability of the organization can be
estimated.
 Job Costing System
Through the system of job costing, costs are allocated based on the individual jobs that
are performed in the firm and is suitable for an organization that owns manufacturing of
more than one product (Weygandt et al., 2018). Through the system of job costing,
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organizations are able to determine the return generated from specific jobs which
increases the efficiency of the cost control adopted by the organization.
 Inventory Management System
System for managing the inventory assists the organization by monitoring the
manufacturing process of the organization (Swafford and Lembke, 2018). The inventory
management system ensures that the resources that are implied in the production
process are used at their maximum efficiency so that the manufacturing costs of
products can be reduced and their profitability can be increased.
 Process Costing System
This system is used as a part of management accounting when the produced units are
identical in nature (Fisher and Krumwiede, 2015). The process costing system allows the
organization in accumulating the costs incurred while the production of a large number
of units and later charges it over the individual units so that costs of all the processes
undertaken for manufacturing of a product can be charged over the same.
BENEFITS OF MANAGEMENT ACCOUNTING
TPG Processing can gain various benefits through adopting the management accounting
systems, some of which are as the following:
 Efficient Planning
Management accounting systems examine different types of information based on
which the plan is being (Ward, 2012). This would result in a lower probability of
variation in the planning process and would increase the efficiency of TPG Processing.
 Increase Profitability
The systems of management accounting make use of various forms of budgets through
which the costs of the processes are monitored and control (DRURY, 2013). Through
adopting these systems, TPG Processing would be able to increase its profitability.
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 Simplify Decision Making
Through producing various kinds of reports after a thorough analysis of data, TPG
Processing would be assisted with simplifying the decision-making process as they
would be able to review the past performances and take decisions accordingly (Shields,
2015).
 Manage Uncertainty
Management accounting would also allow TPG Processing in managing uncertainties by
identifying symptoms of problems at an early stage through constant review and
examination of reports produced in management accounting (Berry et al., 2019).
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LO2
Marginal Costing
Income Statement from Marginal Costing for Year 1
Particulars Amount Amount
Sales Revenue (36000*70) 25,20,000
Less: Marginal Costs (Sales)
Opening Inventory Nil
Add: Cost of Production (40000*48) 19,20,000
Less: Closing Inventory (4000*48) 1,92,000 17,28,000
Less: Variable Costs
Selling and Distribution Expenses 10000
Administration Expenses 15000 25000
Contribution
Less: Fixed Costs 64000
Profit 7,03,000
Income Statement from Marginal Costing for Year 2
Particulars Amount Amount
Sales Revenue (40000*70) 28,00,000
Less: Marginal Costs (Sales)
Opening Inventory (4000*48) 1,92,000
Add: Cost of Production (48000*48) 23,04,000
Less: Closing Inventory (8000*48) 3,84,000 21,12,000
Less: Variable Costs
Selling and Distribution Expenses 10500
Administration Expenses 15000 25,500
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Contribution
Less: Fixed Costs 64,000
Profit 598500
Income Statement from Marginal Costing for Year 3
Particulars Amount Amount
Sales Revenue (60000*70) 42,00,000
Less: Marginal Costs (Sales)
Opening Inventory (8000*48) 3,84,000
Add: Cost of Production (51000*48) 24,48,000
Less: Closing Inventory (3000*48) 1,44,000 26,88,000
Less: Variable Costs
Selling and Distribution Expenses 11000
Administration Expenses 15000 26,000
Contribution 14,86,000
Less: Fixed Costs 64,000
Profit 14,22,000
Absorption Costing
Income Statement from Absorption Costing for Year 1
Particulars Amount Amount
Sales Revenue (36000*70) 25,20,000
Less: Marginal Costs (Sales)
Opening Inventory Nil
Add: Cost of Production (40000*49.6) 19,84,000
Less: Closing Inventory (4000*49.6) 1,98,400 17,85,600
Less: Variable Costs
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Selling and Distribution Expenses 10,000
Administration Expenses 15,000 25,000
Contribution 17,60,600
Less: Fixed Costs 64,000
Interest Expenses 1,000 65,000
Profit 16,95,600
Income Statement from Absorption Costing for Year 2
Particulars Amount Amount
Sales Revenue (40000*70) 28,00,000
Less: Marginal Costs (Sales)
Opening Inventory (4000*49.6) 1,98,400
Add: Cost of Production (48000*49.3) 23,66,400
Less: Closing Inventory (8000*49.3) 3,94,400 21,70,400
Less: Variable Costs
Selling and Distribution Expenses 10,500
Administration Expenses 15,000 25,500
Contribution 6,04,100
Less: Fixed Costs 64,000
Interest Expenses 1,250 62,750
Profit 5,41,350
Income Statement from Absorption Costing for Year 3
Particulars Amount Amount
Sales Revenue (60000*70) 42,00,000
Less: Marginal Costs (Sales)
Opening Inventory (8000*49.3) 3,94,400
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Add: Cost of Production (51000*49.2) 25,09,200
Less: Closing Inventory (3000*49.2) 1,47,600 27,56,000
Less: Variable Costs
Selling and Distribution Expenses 11000
Administration Expenses 15000 26000
Contribution 14,18,000
Less: Fixed Costs 64000
Interest Expenses 1500 65500
Profit 13,52,500
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