Exploring Management Accounting Techniques and Applications

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Management Accounting
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Table of Contents
Introduction.................................................................................................................................................3
Activity 1......................................................................................................................................................4
Part A.......................................................................................................................................................4
Part B.......................................................................................................................................................6
Conclusion...................................................................................................................................................9
References.................................................................................................................................................10
Annex........................................................................................................................................................11
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Introduction
Management Accounting is the accounting tool that is used by the organization. Every individual
organization wants to manage its books of accounts and financial statements. For doing
management, financial statements are required and also the all information related to the
management is required. It also helps an individual to manage themselves in the organization and
also to increase their efficiency so that the organization can able to achieve their goals.
Management accounting can help the organization to expand the business. There are many
benefits of management accounting but have some limitations such as it is very expensive to do
management accounting so small business operates can’t able to adopt such practices. It charges
huge costs in gathering the information and also for the arrangement of the given information.
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Activity 1
Part A
Accounting is the tool for recording financial transactions to analyze the business. Accounting is
also the process of summarizing, analyzing and reporting all financial transactions. Management
accounting is also a tool of accounting in the financial statement. The need for accounting in
every management is required to follow their goals and dreams. Usually, accounting helps to
prepare the annual report of the organization. Management accounting is very beneficial to the
organization in the development and also in growing in the business market (Aleem, Khan and
Hamad 2016)
Types of Management Accounting
 Cost-accounting Systems: - It is the accounting system that is used to identify the cost of
the product in the organization. It also helps in analyzing the profit margin and also helps
in the control of the price of the product. The cost of the product mainly depends on their
raw material, manufacturing overhead, labor overhead. Cost accounting depends on the
change in the price of their raw material. It also helps the firm to analyze that which
product provides more profit and which will not and also which product requires more
raw material. It also helps in analyzing the cost of closing stock of raw material,
inventory, and also of stock of finished goods (Andrianesis, Caramanis, Masiello, Tabors
and Bahramirad 2019).
 Inventory Management System: -It is the system of accounting in which the valuation
of inventory is done. Under this inventory method, the organization has various methods
for valuation of inventory such as LIFO (Last-in-First Out), FIFO (First-in-First Out) and
average inventory. Every valuation has its benefits and limitations. If a business is done
on goods that are perishable and have expiry period then under that the organization will
follow FIFO so that the 1st product produce will sale 1st. It will help in the clear of old
inventory and also helps in reducing the risk of perishable goods.
 Job-costing System: - It is the costing method usually used to measure the number of the
completed job. It is used to check the cost of production exceeds the overhead and also
the price of raw material. It is also used when only a single product is produced or the
goods are produced but all have their separate production process (Chenhall and Moers
2015).
 Price-optimizing System: - it is the process of finding the final price of the product so
that the customer can will to buy. It is a very simple process which identifies the sale as if
the price of the product is low then it is sure that the demand will get increased and if the
price increases it implies the decrease in the demand as the customer will unable to buy
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it. It also provides the best combination of the price and profit so that the customer can
able to buy and the organization can able to earn a profit.
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Types of Management Accounting Reports
1. Job Costing Report: - It is the costing method which is used by the industries. In the
construction industry, it is very much used by the manager to identify the cost of a
particular job so that it can estimate the future cost and also helps in analyzing the
percentage of work done. It helps in tracking the cost of the on-going production of a
particular product. It is used mostly in a week once so that the cost can be identified and
reports can be prepared (Andrianesis, Caramanis, Masiello, Tabors and Bahramirad
2019).
2. Inventory Report: - It is the report which is used by the inventory manager to find out
the inventory stock and cost of the inventory. Most of the use of this report to find out the
information related to the closing stock of finished goods. It also shows the summary of
all items belonging to the business orb organization (Aleem, Khan and Hamad 2016).
3. Budget Report: - It helps in measuring the performance of Aerospace organization and
helps in preparing the report for small business and also department wise. Every
Aerospace organization prepares the overall business budget to analyze their
performance. Usually, budgets are based on the previous estimates and experience and
also contain classified information. Every Aerospace organization wants to achieve its
goal and mission by staying on the budget and following the budget (Chenhall and Moers
2015).
4. Performance Report: - It is the report which shows the performance level of the
organization and also of the individual at every period. Every organization prepares every
department with a separate performance report so that it can analyze. It also helps in
finding the ability of an individual. It also measures the capacity of an individual as per
the work. It plays a very important role in every organization to maintain accurate
measures and also their goal.
5. Cost Management Accounting Report: - It is the report shows the cost analyzes on a
different product. It is the report which also helps in finding the cost per unit. It also helps
in analyzing the cost price with the selling price so that the profit margin can be able to
identify.
Benefits:
• Planning: different spending plans are readied and bookkeeping exchanges are recorded
according to the item, division, and so on which aides in powerful tasks of issues of the business.
• Organizing: these frameworks helps in legitimate sorting out the exercises in an association.
Under these frameworks chain of command of obligation and specialists are characterized well.
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• Communicating: dissemination of work is simple through these frameworks. Bookkeeping data
and execution reports are sent to administrators for the procedure of basic leadership.
• Profit expansion: real execution is estimated against the fixed principles. On the off chance that
deviations are discovered sensible, remedial advances must be taken. Henceforth benefit can be
boosted.
Integration
• Performance reports: the incorporation between reports of Belfour Beatty and these framework
reports will help in the arranging of better future expenses and production.by contrasting the
planned targets and real results, standard exhibitions are examined and data at last displayed in
the presentation reports.
• Budgeting reports: based on these reports future spending plans are determined. While making
the assessment of the exhibition of organization and controlling costs, these reports give an
arrangement to break down the presentation. Joining between procedures of a Belfour Beatty
makes a route for the association to concentrate on focused targets and results.
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Part B
Marginal Costing is based on variable cost. Under this variable cost is charged to cost per unit
whereas fixed cost is based on a particular period. It involves an additional cost for producing an
extra unit of product.
Marginal Cost = Direct Material + Direct labor + Direct Expenses + Variable Overheads.
The marginal costing helps in determining the price of the product, helps in the valuation of
stock, also helps in profitability. It also helps in classifying the cost such as fixed and variable.
Characteristics of marginal costing
1. Determine the selling price: - marginal cost helps in determining the price of the product
as it is based on the variable cost. It also sometimes includes semi-variable costs.
2. Value of stock: - marginal costing helps in the valuation of the stock. At the time of the
valuation of finished goods the variable cost is taken into account (Chenhall and Moers
2015).
3. Increase profitability: - marginal costing helps in increasing the profit as the variable cost
determines the cost per unit and fixed cost remains fixed for the entire production.
4. Classify the fixed cost and variable cost: - marginal cost helps in determining the and
abler to differentiate into fixed cost and variable cost (Andrianesis, Caramanis, Masiello,
Tabors and Bahramirad 2019).
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Advantages of Marginal Costing
1. Cost Control: - it is one of the most important merits of marginal costing. It also helps in
avoiding the fixed cost so that management can able to achieve and maintain the consistent
marginal costing (Chenhall and Moers 2015).
2. Simplicity: - it a very simple method to understand and can easily able to operate. It can also
easily able to combine with other costs.
3. Able to find out the cost per unit: - as fixed cost is not charged to the production in the
marginal costing so the units have a standard cost.
4. Short term profit: - Marginal costing helps in planning and also profit graphs. Profitability
helps the management in decision making.
5. Maximize return to the business: - as in marginal costing the effect of sales or production
policies which ensures that the decision helps in the growth of the business (Schaltegger and
Burritt 2017).
Disadvantages of Marginal Costing
1. Classifying Cost: - under marginal costing, it is very difficult to differentiate the variable and
fixed cost. Under the business, all costs are variable in the long run. Thus it leads to negative
results. Under the organization which is dealing with a different type of product marginal cost
proves less useful (Aleem, Khan and Hamad 2016).
2. Semi-variable Cost: - sometimes under marginal cost, it is difficult to estimate whether the
cost should be included or excluded.
3. Recovery of Overheads: - under marginal costing, it is a serious problem of under and over-
recovery of overhead. As variable cost is apportioned based on estimates, not on actual value.
4. External Reporting: - marginal costing cannot be used for external reporting. As it must have
complete information related to both direct and indirect expenses.
5. Increasing Cost: -since the cost report depends on the historical cost, which leads to
increasing the cost as information has to arrange before the preparation of the report.
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Absorption costing is the costing which identifies that all the cost related to manufacturing is
assigned to the entire production. In this method of costing, the cost of finished goods includes
direct material, direct labor, manufacturing overhead and fixed overhead. It is used for
preparation of financial report and income tax report. It includes all the things which direct cost
in the production of goods. The main advantage of absorption costing is it does not include all
fixed costs (Chenhall and Moers 2015).
Advantages of Absorption Costing
1. GAAP compliant: - it is one of the most important benefits of absorption costing. Under this,
it is required to report to the internal revenue services.
2. Accounts of all production cost: - under the absorption costing all cost related to production
are taken into the account. It includes direct cost as well as a variable cost. It also includes a
fixed cost such as salary, rent, and any utility bill. Under this cost, it is easy to identify the cost
line and also the cost per unit.
3. Track Profit: - it also helps in tracking the profit if all the products are solved during the
accounting periods. It helps in the Aerospace organization to increase the sale.
Limitations of Absorption Costing
1. Affect profit and loss: - Absorption costing leads to causer in the profit level of the
Aerospace. It implies that all fixed cost is not deducted from revenue until all manufactured
produced are sold.
2. Effect the operational efficiency: - it is unable to provide better efficiency as compared to
the variable costing. If fixed cost is very essential to the total production cost then it is very
difficult to determine the cost of variation at a different level of production (Schaltegger and
Burritt 2017).
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Conclusion
Management Accounting is the accounting tool that is used by the organization to manage the
financial information of the organization. Due to the change in time, every organization wants to
adopt management accounting to manage their available resources and also to achieve their goal.
Every organization plan its resources and allocate them to separate departments so that the
particular department can able to complete the given task and helps the organization to grow and
create the image in the market.
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References
 Aleem, M., Khan, A.H., and Hamad, W., 2016. A comparative study of the different
costing techniques and their application in pharmaceutical companies. The Audit
Financiar journal, 12(143), pp.1253-1253.
 Andrianesis, P., Caramanis, M., Masiello, R., Tabors, R. and Bahramirad, S., 2019. The
locational marginal value of distributed energy resources as non-wires alternatives. IEEE
Transactions on Smart Grid.
 Chenhall, R.H., and Moers, F., 2015. The role of innovation in the evolution of
management accounting and its integration into management control. Accounting,
Organizations and Society, 47, pp.1-13.
 Christ, K.L. and Burritt, R.L., 2015. Material flow cost accounting: a review and agenda
for future research. Journal of Cleaner Production, 108, pp.1378-1389.
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accounting a panacea? Market stress, incentive distortions, and gains trading. The Journal
of Finance, 70(6), pp.2489-2538.
 Maas, K., Schaltegger, S. and Crutzen, N., 2016. Integrating corporate sustainability
assessment, management accounting, control, and reporting. Journal of Cleaner
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 Merchant, K.A. and White, L.F., 2017. Linking the Ethics and Management Control
Literatures☆', Advances in Management Accounting (Advances in Management
Accounting, Volume 28).
 Otley, D., 2016. The contingency theory of management accounting and control: 1980–
2014. Management accounting research, 31, pp.45-62.
 Quattrone, P., 2016. Management accounting goes digital: Will the move makes it
wiser?. Management Accounting Research, 31, pp.118-122.
 Renz, D.O., and Herman, R.D. eds., 2016. The Jossey-Bass handbook of nonprofit
leadership and management. John Wiley & Sons.
 Schaltegger, S. and Burritt, R., 2017. Contemporary environmental accounting: issues,
concepts, and practice. Routledge.
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