Management Accounting Systems and Techniques Analysis

This report provides a comprehensive overview of management accounting systems and techniques, focusing on their application within the context of ITW Construction Products. It begins with an introduction to management accounting, its role, origin, and principles, differentiating it from financial accounting. The report then delves into various management accounting systems, including job costing, price optimization, cost accounting, and inventory management. It discusses the significance of integrating these systems within a business organization. The report further explores management accounting reports, such as account receivable aging reports, performance reports, and job cost reports, highlighting their importance in decision-making. Additionally, it examines costing techniques used to prepare income statements, including cost-volume-profit analysis, flexible budgeting, and cost variances. The report also covers marginal costing, absorption costing, and cost allocation methods. Finally, the report touches on the advantages and disadvantages of planning tools used for budgetary control and compares how different business entities apply management accounting systems to address financial problems. The conclusion summarizes the key findings, emphasizing the role of management accounting in providing crucial information for managerial decision-making and achieving organizational goals.

Management
Accounting Systems
&
Techniques

Table of Contents
INTRODUCTION...........................................................................................................................4
TASK 1............................................................................................................................................4
Management Accounting and its systems:...................................................................................4
Management Accounting Reports:..............................................................................................7
TASK 2............................................................................................................................................8
Costing Techniques to prepare income statements:.....................................................................8
TASK 3..........................................................................................................................................16
Advantages and disadvantages of different types of planning tools used for budgetary control:
....................................................................................................................................................16
TASK 4..........................................................................................................................................19
Comparison of business entities applying management accounting systems for responding
different financial problems:.....................................................................................................19
CONCLUSION..............................................................................................................................20
REFERENCES..............................................................................................................................22

INTRODUCTION
In current business environment, every business entities want to establish a structure to
develop a source of information for managerial decision-making. Management accounting is
only a way that provides a systematic way to create structure within business entity, because it
contains functions and task directly related to providing information for taking vital decisions
(Bagautdinova, Kundakchyan and Malakhov, 2013). In this context a consultancy firm named
Alfa consultancy company. Report contains an exhaustive definition along with different aspects
like role, origin etc. of management accounting, clear distinction between financial accounting
and management accounting and, presentation of financial information under management
accounting reporting and systems in context of client company ITW Construction Products. It is
UK's manufacturing company engaged in manufacturing of fixing, fastening and drilling systems
for wood, steel and concrete applications. This report also includes pricing strategies, PEST
analysis, SWOT analysis and other different kind of reports of management accounting.
TASK 1
Management Accounting and its systems:
Management Accounting: Management accounting is the process in which the financial
information is utilised by the management in systematic manner in order to achieve financial as
well as operational goals (Collis and Hussey, 2017). Management Accounting comprises of all
technical aspects of financial accounting and cost accounting which assists management with
constructive data set which helps the ITW Construction Product's management in formulating
financial and operational policies which further provides the management with a strong set of
parameters to build robust decision-making systems. Under the aegis of management accounting,
accounting information is utilised judiciously by the management to improve the continuous
financial health of the organisation and devising further measures to minimise losses.
Management Accounting System: Management accounting systems refers to systematised use
of accounting information to achieve targeted goals in harmony with the organisational policies.
There are various management accounting systems which works in unison to integrate the
overall managerial processes which attributes to the substantial framework of policy making like
cost accounting, inventory management etc.
Significance of integration of systems within business organisation:

Efficiency and effectiveness in organisational functions is main aim of ITW Construction
Products, so managerial person always tries to integrate systems like inventory management, cost
accounting, price optimisation etc. with numerous activities of company. Such systems act as a
framework for business enterprise to run their business tasks smoothly (Demski, 2013). For
example company has integrated inventory management system with inventory process which
assist them in optimising expenses of inventory handling, warehouse expenses, storage expenses
etc.
Role, Origin and principle of management accounting:
There are no common view about management accounting's origin. The term
Management Accounting is initially used in approx 1959s. It is also considered as cost
accounting but afterwards management accounting becomes a filed of accounting (Management
Accounting. 2019). In business context it play role in safeguarding of financial resources of
business enterprise. It assist managers in quick and effective accomplishment of task of decision-
making. Following are some significant management accounting principles:
Influence:
Management accounting require to generate
informations that can persuasion potential
decisions.
Relevance:
Information must be consistent and applicable
or usable for different users.
Values:
Functions of management accounting
required to be combine an analysis which
exhibits effect on values determined by
business organisation (Thomas, 2016).
Trust:
Information generated from reporting of result
of management accounting system require to
be reliable and with a motive to develop trust
in individual.
Differences: Financial Accounting v/s Management Accounting:
Management Accounting Financial Accounting
Main objective of adopting of management
accounting is to circulate compatible
information for managerial and business
decisions.
Financial Accounting is adopted by entities to
communicate performance of company to
various interested parties and stakeholders.

No legal or statutory requirement for adoption. In almost all countries financial accounting is
statutory requirement.
Qualitative and Numerical facts and elements
are considered in management accounting.
It emphasises on numerical figures and fact
only.
Type of management accounting systems:
Job costing system
The job costing system is the method of accumulating cost information associated with specific
service or production job. Job costing helps in determining manufacturing costs in a systematic
manner by dividing them under direct material, direct labour and overhead costs by individually
estimating them at their actual costs (Kanellou and Spathis, 2013). Manufacturing firms such as
ITW Construction Products use job costing method to regulate the use of raw materials, labour
hours and equipments by allocation of cost to every customer order separately. Job costing
method is useful for the firms who manufacture goods and services based on customer
specifications or in distinguished batches.
Price optimising system
Price optimisation system is a quantitative tool used by businesses in determining prices for
various products at a given period of time. It helps the management in ascertaining as to how the
demand will fluctuate at various levels and how demand function will behave at various
channels. It is a system of behavioural modelling of potential customers through using specific
data sets , these data sets results into a set of big data for the firms to manipulate the information
for devising price optimisation models for various price levels i.e. initial pricing, promotional
pricing & concessional pricing in ITW Construction Products.
Cost accounting system
A cost accounting system comprises of cost accounting models which are used by businesses to
ascertain the actual cost of their products which aids the organisation in profitability analysis,
stock valuation and cost control. Estimation of correct costs of each and every product is of great
importance to an organisation in order to determine which products are profit making and which
one's are loss making. It is a process of examining the forward flow of goods through each stage
of production namely from raw material stage to passing through production line in batches to

finally converting into finished goods. Under the system when raw materials are put to process
the system credits the raw materials account and debits the goods in process account in ITW
Construction Products.
Inventory management system
Inventory management system combines technology with processes and procedures to ensure the
availability of inventory which consists of raw materials, goods in process and finished goods to
further ensure their availability at all times with the right quality (Bloomfield, 2015). It is often
used at manufacturing firms such as ITW Construction Products, and other concerns by using
asset tags to control the inflow of raw materials and outflow of finished goods as well as
maintaining requisite amount of goods at all times to ensure timely delivery to the clients.
Furthermore, it helps in determining future order requirements in advance which helps in smooth
flow of work processes.
Presentation of financial information:
While applying management accounting systems, main focus of business organisation is
on generation of informations that are reliable, complete, having relevance of various users and
must be accurate. As such kind of information is essential for managers to gain understanding of
facts and data which help in taking strategic decisions. Such information provides a complete
framework for developing action plan and strategies and implement them effectively. A simple,
complete and understandable information is needed in management accounting as managers are
not usual with some technical and financial terms.
Management Accounting Reports:
Account Receivable Aging Report
Account receivable report is vital to the organisation as it provides the information about the
debtors that owe the organisation. These reports are helpful to those organisations which work
heavily on credit basis. In ITW Construction Products, it helps the organisation in tracking
company's collection process simultaneously helping with finding substantial loopholes in
smooth credit flow process. This report provides managers with the inputs to develop robust
credit policy and weed out the probability of generation of bad debts.
Performance Reports
These reports provide information about the asymmetry between the actual execution and the
budgeted execution standards. In this regard, execution or performance can be comprehended as

the effectual and efficiently achievement of business entity’s targets. The difference between the
actual vs budgeted parameters provides critical information about the gap in the execution
standards and the possible key factors which are leading to such differences (McLaren,
Appleyard and Mitchell, 2016). In ITW Construction Products, performance reports are prepared
using key performance indicators (KPI) as tools to assign weights to each function of the
performance evaluation. These reports are instrumental in taking strategic decisions about the
future endeavours.
Job Cost Report
This report is evidential in ascertaining cost, expenses and profit making capacity of each task. It
helps in evaluating the potential earning capacity of each project so that company can increase
more efforts on the potential projects and reduce targeted focus from the loss making projects. In
ITW Construction Products, this report is prepared on the basis of cost estimates, further
arrangement of job cost estimates into the same category of costs that further will be utilised to
generate the in real job cost information. It helps in difference evaluation between actual job cost
to estimated costs.
TASK 2
Costing Techniques to prepare income statements:
Cost: Costs are simply implies to expenses incurred by business enterprises for organisational
purpose. These are necessary for effective accomplishment of operations of business entity.
Costs can also be defined as consideration paid by organisations to acquire something or against
any expense. As ITW Construction Products is a manufacturing company so there are wide range
of expenses are incurred by them. In company costs are classified as variable, semi variable and
fixed. Cost analysis is done by company to increase their manufacturing efficiency. In cost
analysis interconnection of numerous costs and volume of production is evaluated critically.
ITW is using cost analysis to minimise the per unit cost.
Cost-Volume Profit: CVP analysis is used by ITW Construction Products to determine the way
in which volume of production and costs affects organisation's net profit and operational income.
It provide help in optimising price of products to achieve competitive targets.
Flexible budgeting: It is budgeting techniques in which a budget is prepared by accountants and
managers that is flexible and adjustable with changes in level of production and activities. It is

used by ITW Construction Products to evaluate performance of company at different production
level in all aspect.
Cost Variances: It is simple costing term cost variance implies to gap between actual incurred
expenses or cost and expected costs. In ITW Construction Products, cost variances are analysed
by company to allocate any areas of manufacturing that require improvement.
Marginal Costing: In this method of costing cost are classified and presented as fixed
and variable to calculate cost. In ITW Construction these method is used to prepare cost sheet.
Here all fixed costs are classified as time or period cost regardless their nature.
Absorption Costing: It is most widely used method of costing in which all production
expense irrespective of their nature (Fixed or variable), is considered as cost of production in
order to calculate net income (Mitchell, and et.al., 2015).
Cost Allocation: Cost allocation implies to process of classification, collecting and
assigning expenses to per unit. Through allocation of costs to each unit, ITW Construction
determine their pricing policies. Following is a brief discussion on types of cost incurred by
company, as follows:
Variable Expenses: These are kind of expenses that increases and decreases as per
change in production level. In Company major variable expenses are material and labour costs.
Fixed Expenses: These are expenses which are considered as period cost. Main feature
of these expense is that such expenses do not change with varies in production, such fixed selling
and distribution expenses.
Semi-variable Expenses: These kind of expenses are classified as both fixed and
variable. Some part of these expenses are fixed and other one is variable.
Normal Costing: It is most common and usual method of costing. Under this method
simply expenses are allocated to cost per unit. In ITW Construction, these method is used to
calculate net income and asses the cost per unit.
Standard Costing: It is an extension of normal costing. Applying this method ITW
Construction compare their actual performance with standard performance. It provides a
systematic and comparative data to evaluate organisation's efficiency.

Activity-Based Costing: In this method organisation like ITW Construction make a
detailed classification of different costs and allocate them to particular activities and functions. It
help to increase efficiency of different activities in order to attain predetermined goals.
Inventory Costs: Inventory costs are expenses incurred by business entity to store,
manage and procure different kind of inventory. ITW Construction being a manufacturing
company incurs inventory costs such as Cost of storage, handling costs, logistic cost, loading and
unloading expenses etc.
Advantages of minimising inventory costs to an organisation: inventory cost is a vital
factors that assist in calculating gross and net profit. In manufacturing and construction
companies. In ITW Construction, inventory costs are controlled by production managers to
increase overall profitability. Reduction in inventory costs help company to reduce price of
products and increase per unit profit percentage.
Inventory Valuation Methods: There are different approaches are used by managers to
value inventories. But most acceptable and commonly applied methods are LIFO, FIFO and
Average cost. Following are explanation of these methods, as follows:
LIFO Method of inventory: This method is emphasises on presumption for valuation of stock
that last purchased inventory is sold at first place.
FIFO Method of inventory: This method emphasises upon assumption for valuation of stock that
first purchased stock is sold at first place (Bromiley and et.al, 2015).
Average Cost Method: Under this method average cost of inventories is calculated and applied to
value inventories.
Overheads Costs: These are expenses incurred by business enterprise excluding
production and manufacturing costs or cost which are incurred directly for the purpose of
production of products. In ITW Construction overhead expenses are selling expenses, salaries
expenses, administration expenses etc.
Marginal costing:

Absorption costing:

TASK 3
Advantages and disadvantages of different types of planning tools used for budgetary control:
Preparing a Budget: Budget is an estimate about the future income and expenses which will
arise as an outcome of business transactions for a given period of time. It is a financial plan for
future endeavours. A business like ITW Construction is required to create budgets to synchronise
estimated outcomes with tasks.
Capital Budget: It is an unique sort of financial plan which assist organisation in making
strategy for increasing long term funds, to take decision regarding purchase of capital asset and
other long term decisions. It is prepared for taking long run decisions and for long period
(Malinić and Todorović, 2012). In ITW Construction, this budget prepared to determine viability
of any major capital asset and, to take buy or sell decisions and when to sell decisions. In this
context following are the advantages and disadvantages of capital budget, as follows:
Advantages:
 It is advantageous for company to understand risks and effects of risks and to take
decisions to grab investment opportunities.
 It help in recognising risks involved in new capital projects and determine effects.
Disadvantages:
 These budgets are most often based on projections, estimates and hypotheses as which
sometimes put question mark of its relevance in decision-making.
 Most of the techniques used in capital budget are based on assumptions so it doesn't
guarantee about accurate results.
Operating budget: It is prepared by ITW Construction for short period to manage and estimate
daily operating costs and expenses. It helps in analysing operating cost to optimise overall cost of
goods sold. Following are the key advantages and disadvantage of this budgets, as described
below:
Advantages:
 It generates reliable and accurate information which is used by managers in preparation
of financial budget.
 It assists managers in handling small operative and routine functions of organisation to
increase accountability.

Disadvantages:
 It can be easily used by managers to hide inefficiencies involved in routine work.
 Due to difference in assumptions and techniques used by different managers it creates
conflicts.
Alternative method of budgeting:
Cash Budget: It simply prepared by ITW Construction to analyse the actual flow of cash in or
out side the company. Main motive of preparation of this budget is to determine the actual
liquidity position of company. It also help to estimate figures of cash sales, cash purchases,
expenses etc. It includes all cash receipts and cash expenses whether they are operational or non-
operational in nature.
Behavioural implications of budgets:
The need to plan for a budget is very crucial in every aspect for every concern. Budget
provides an insight about the key areas on which the organisation has to spend maximum and the
areas from which it has to cut budget allocation (Takeda and Boyns, 2014). It provides the
management with the clear vision to pay attention on the focus areas alone. Certain benefits of
planning for a budget are as :
 It helps in clearly visioning the long term goals and provides a platform to achieve them
in gradual manner.
 It enables the habit of thrift in the attitudes of planners .
 It provides a balance to the ratio between income and expenditure.
Pricing Strategies: It refers to plans developed by business entities such as ITW Construction
to set price of its different products while considering objectives and goals of company. In long
run an effective pricing strategy provide competitive advantages. Following are key pricing
strategies:
Penetration: This strategy focus towards minimisation of prices in order to increase
company's turnover and expand market share.
Premium: It is used by company with high competitive advantages. Under this strategies
main motive of company is to increase product prices to increase profitability.
Strategy of competitors to determine prices: As ITW is medium sized company so it is
important to analyse competitor's strategies. Key competitors of company hold good position in
market so they are applying competitive pricing strategy to fix their products' prices.

Supply and demand considerations: These are factors or constrains that have direct impact on
demand and supply and its related functions. For manufacturing organisation such as ITW
Construction these factors are economic policies, government's foreign exchange policies
suppliers bargaining etc.
PEST analysis: Following is PEST analysis of ITW Construction Materials, as follows:
Political
law, regulations, policies, taxes and other
political factors directly affects company's
revenue and operational tasks.
Economical
Inflation, foreign rates, population factors, sex
ratio, bargaining power of customers etc. are
factors that affect organisation's strategies and
product demand.
Social
Social trends, living of standards, different
culture, religions etc. are factors that can affect
demand and supply of company in long run
(Abdelmoneim Mohamed and Jones, 2014).
Technological
New technological change, expensive
necessary technological change etc. are
technological factors that impacts
organisation's efficiency and survival.
SOWT Analysis:
Strengths
ITW Construction Materials has loyal
customer base due to its quality products.
Weaknesses
Weak funding sources are weakness of
company.
Opportunities
New favourable government policies in
relation to construction business can boost
company's sales.
Threats
Large competitors with wide resources give
tuff competition to company.
TASK 4
Comparison of business entities applying management accounting systems for responding
different financial problems:
Financial problems are threat for small and medium sized company like ITW
Construction Material that can affect organisation's performance. Financial problems create

adverse situation for company which impacts company's growth. Early detection of numerous
kind of financial problems is essential to enhance company's performance. Financial problems in
case of a new business venture can create question on basic survival needs. Management while
formulating a strategy, required to consider financial problems and their solutions. Following are
major financial problems:
Late identification of contingent obligations:
A sudden or contingent liability on company like ITW Construction Material can stop
manufacturing process and can create adverse liquidity condition. Early detection of contingent
expenses and creation of reserve for such expense is required to avoid such burden
Excessive cash outflow:
ITW Construction Material also facing problem of negative cash flow and excessive cash
flow. Identification of core cause of excessive cash outflow from business organisation is necessary
to maintain level of cash in and out flow in enterprise.
Benchmarking: Benchmarking is the process of evaluating performance of an organisation
comparing it with the industry's best practices prevalent. It is the method of finding the best
business practices which are popular in the business fraternity and implementing them in one's
business processes. Benchmarking is done internally as well where the departments carrying out
similar processes are evaluated based on relevant parameters (Maher, Stickney and Weil, 2012).
Key Performance Indicators: Key performance indicators are the key critical factors which are
instrumental in reaching towards intended results. These are key quantifiable indicators which
helps the management to evaluate the performance. KPI are metrics which are utilised to
determine the company's performance towards achieving the strategic goals which the
organisation has encapsulated in its vision.
Financial Governance: Financial governance refers to the manner in which the organisation
collects, accumulates, monitors and utilise the financial information. It includes how the
organisation controls the data, financial transactions, manage performance, operations, financial
information and compliances. The concept came into recent purview because of the poor
financial management by the organisations which led to the dooming financial performance.
Comparison between ITW Construction Material and Galway Plc:
ITW Construction Material Galway Plc
Company has major financial problem of Galway Plc has problem of mishandling of

increasing outflow of cash that leads to
negative Woking capital and lack of liquid
funds.
inventories that leading to increase in cost of
inventories.
Cost accounting system is effective to solve
this problem as it assist in minimising or
optimising capital expenses and control the
flow of cash within entity.
Inventory management system is effective in
responding to such financial problems. As it
assist in managing inventories and optimising
cost of inventories.
Cash budget can be applied by company to
manage the movement of cash and its usages.
Company can apply operating budget to control
and trace the reason of increasing inventory
costs.
Characteristics of an effective management accountant:
Dynamic personality: Management accountant must be a person with dynamic
personality which assist him in maintaining effective co-operation with employees.
Conveyancing Power: He should be a person with great conveyancing power which help
in proving motivation to employees for accomplishment of difficult tasks.
Management accountant with these qualities can face all adverse situations and financial
problems.
CONCLUSION
From above report it has been articulated that management accounting systems give
assistance in developing a framework which provide a basic data for formation of different
policies and procedures. Main motive of management is to achieve targets and objectives to
enhance performance of enterprise. Planning tool is important for companies to analyse each and
every aspect of organisation as per predetermined standards.

REFERENCES
Books and Journals:
Books and Journals:
Bagautdinova, N., Kundakchyan, R. and Malakhov, V., 2013. Development of management
system of manufacturing companies on the basis of management accounting elements.
Collis, J. and Hussey, R., 2017. Cost and management accounting. Macmillan International
Higher Education.
Demski, J., 2013. Managerial uses of accounting information. Springer Science & Business
Media.
Thomas, T. F., 2016. Motivating revisions of management accounting systems: An examination
of organizational goals and accounting feedback. Accounting, Organizations and
Society. 53. pp.1-16.Grabner, I. and Moers, F., 2013. Management control as a system
or a package? Conceptual and empirical issues. Accounting, Organizations and Society.
38(6-7). pp.407-419.
Kanellou, A. and Spathis, C., 2013. Accounting benefits and satisfaction in an ERP
environment. International Journal of Accounting Information Systems. 14(3). pp.209-
Bloomfield, R. J., 2015. Rethinking managerial reporting. Journal of Management Accounting
Research. 27(1). pp.139-150.
Abdelmoneim Mohamed, A. and Jones, T., 2014. Relationship between strategic management
accounting techniques and profitability–a proposed model. Measuring Business
Excellence. 18(3). pp.1-22.
Maher, M. W., Stickney, C. P. and Weil, R. L., 2012. Managerial accounting: An introduction to
concepts, methods and uses. Cengage Learning.
McLaren, J., Appleyard, T. and Mitchell, F., 2016. The rise and fall of management accounting
systems: A case study investigation of EVA™. The British Accounting Review. 48(3).
pp.341-358.
Mitchell, R. K., and et.al., 2015. Stakeholder inclusion and accounting for stakeholders. Journal
of Management Studies. 52(7). pp.851-877.
Bromiley, P. and et.al, 2015. Enterprise risk management: Review, critique, and research
directions. Long range planning. 48(4). pp.265-276.
Malinić, S. and Todorović, M., 2012. How does management accounting change under the
influence of ERP?. Economic research-Ekonomska istraživanja. 25(3). pp.722-751.
Takeda, H. and Boyns, T., 2014. Management, accounting and philosophy: The development of
management accounting at Kyocera, 1959-2013. Accounting, Auditing & Accountability
Journal. 27(2). pp.317-356.
Online
Management Accounting. 2019. [Online] Available Through:
<https://wiki.mises.org/wiki/Management_Accounting>.