Management Accounting Techniques and Financial Problems Report

This report provides a detailed overview of management accounting, encompassing its definition, various types, and the benefits of different systems like inventory, price optimization, and cost accounting. It delves into management accounting reporting methods, including budgets, variance analysis, and cost schedules, along with their integration with organizational processes. The report analyzes the application of management accounting techniques such as marginal and absorption costing, providing practical examples and calculations. Furthermore, it explores the use of planning tools in forecasting budgets and addressing financial problems, evaluating how these tools contribute to sustainable success within an organization. The report uses ABC Ltd., a medium-sized manufacturing company, as a case study to illustrate these concepts.

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Management accounting and its types....................................................................................1
Different method of management accounting reporting........................................................2
Benefits of different management accounting systems..........................................................3
Management accounting system and reporting is integrated with organisational processes. 3
TASK 2............................................................................................................................................3
Applying a range of management accounting techniques:.....................................................3
TASK 3............................................................................................................................................6
Planning tools used in management accounting:....................................................................6
Uses of different planing tools in forecasting budget.............................................................8
TASK 4............................................................................................................................................8
Comparison of how organisations are adapting management accounting systems to respond to
financial problems:.................................................................................................................8
Analysis about how responding to financial problems, management accounting lead
organisation to sustainable success:.....................................................................................10
Evaluation of how planning tools for accounting respond appropriately for solving financial
problems to lead organisations to sustainable success:........................................................11
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Management accounting is a kind of accounting system which is related to internal
management of companies(Ward, 2012). It consists a wide range of reports, tools and techniques
which are required for overcoming the various financial issues. This process provide raw data to
managerial personnels for decision making activities. It provide a systematic framework for
business organisation for achievement of organisation goals and objectives. The project report
contains detailed explanation about the management accounting and its types as well as benefits,
various aspects of management accounting reporting, advantage and disadvantage of various
planning tools along with their application to respond financial problems of ABC Ltd, an a
medium sized manufacturing company. This report also exhibits integration of management
accounting system and reporting within organisational processes, practical application of
management accounting techniques and an explanation about how responding to financial
problem leads organisation to sustainable success.
TASK 1
Management accounting and its types.
Management accounting may be defined as an accounting system which plays a crucial
role for internal management as well as for controlling the financial performance of companies.
This accounting system contains all kind of information including financial and non financial
information which becomes basis for the managers to take important decisions. This accounting
system is used by the ABC limited company for enhancing the management of their
manufacturing system. Herein, some types of management accounting system are mentioned
below:
 Inventory management system- Inventory management system is a kind of system that
is related to management of raw material as well as of finished products. It is required for
track the quantity of available stock the warehouses and with the help of this companies
make decisions for the production. The ABC limited company use this system to analyse
about the quantity of raw material and prepared products.
 Price optimisation system- Price optimisation system provides a framework for
determining the price of products and services. Apart from this, it is required in analyse
the reaction of customers on different pricing levels(DRURY, 2013). Due to this
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companies can assign an accurate price of their products which is affordable for both to
the customers and company. The ABC limited company sets the price of their products
with the help of this system which satisfy their customers as well as they can earn profit
too.
 Cost accounting system- Cost accounting system is a kind of system which is related to
the estimation of cost of products and services. Due to this companies can analyse their
profitability by the selling of product and services. The main requirement of this
accounting system is to control the cost which occurs during the production. The above
company ABC limited implements this system for right estimation of cost of products.
Different method of management accounting reporting.
Management accounting reports are those reports which consists all kind of information
that is necessary for internal management of the companies. Due to these reports organisations
can evaluate their financial and non financial performance(Wickramasinghe and Alawattage,
2012). The ABC limited prepares different kind of management accounting reports on the basis
of various methods which are as follows:
Budgets- Budgets are the estimation of income and expenses for a particular time period.
Eventually, these are helpful in making comparison of actual performance with the budgeted
targets. It is an important method of the preparing management accounting reports. The ABC
limited company prepares the budgetary reports with the help of different types of budgets
because these consists all needed financial informations.
Variance analysis- Variance analysis is a kind of method which compares the actual
performance with the standard goals. If any difference occurs then it take appropriate actions to
resolve the difference. With the help of this method companies prepares the management
accounting reports because it provides a basis for that. Herein, the above company ABC limited
apply this method of preparation of the various kind of reports.
Cost schedules- Cost schedules are the estimation of cost in any kind of budgets. While
preparing the management accounting reports, these cost schedules help a lot. This is why
because if actual cost is below the cost schedule then it will be a positive mark in the reports.
Same as if occurred cost is more then the estimated cost, it will be negative aspect for the
performance reports. The ABC limited company use this method for making accounting reports.
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Benefits of different management accounting systems.
Different types of management accounting systems are very crucial in the context of
organisations. Benefits of these accounting systems are as follows:
 Benefits of inventory management system- The inventory management system is
important because it helps in the tracking of raw material and prepared products in the
warehouses. Herein, the ABC limited company it is important for evaluate the quantity of
available material for the production. This helps them in tracking the movement of goods
in entire supply chain system.
 Benefits of price optimisation system- This system helps to the ABC limited company
in assigning the accurate price of their manufactured products. Additionally, it provides
them a framework to analyse the customer's reaction at different price levels.
 Benefits of cost accounting system- Cost accounting system is beneficial for the above
mentioned company in making prediction about the cost. Further, it becomes a basis for
evaluation of profitability.
Management accounting system and reporting is integrated with organisational processes.
Management accounting system and reporting both have a link with organisational
process. Basically, this is possible because different kind of accounting systems become basis for
the preparation of the accounting reports (Otley and Emmanuel, 2013). Due to this integration,
various functions of companies can implement smoothly. Herein, the ABC limited company they
use different kind of accounting systems like price optimisation system, inventory management
systems which plays an important role for the effective use of different available sources. Same
as different methods of management accounting reporting like variance analysis, budgets etc. are
linked with the organisational process as well as with the success.
TASK 2
Applying a range of management accounting techniques:
A business organisation while operating its day to day activities incur various costs which
are necessary to operate. Cost simply refers to monetary amount which organisation is ready to
pay for performing any activity or to acquire some thing. Proper management of cost is essential
for proper utilisation of organisation's resources (Jakobsen, 2012). Following are some major
management accounting techniques that assist in calculation of cost effectively, as follows:
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Marginal costing : It is technique under which variable costs concerned with
manufacturing and production of product, is charged to cost of units, whereas fixed costs are
considered as period cost so completely written off against net contribution. Marginal cost refers
to additional cost incurred by manufacturer in producing an traditional or extra unit. Under this
technique costs are classified as fixed and variable on the basis of variability. Here price are
calculated as per marginal contribution and marginal cost. While computing the the amount of
finished goods and closing stock, only variable costs are considered. Although variable
distribution and selling overheads are not added in valuation of stock.
Marginal cost = Direct labour + Direct Material + direct expense + other variable
overheads
Absorption costing : It is techniques in which all manufacturing costs whether fixed or
variable are assigned to cost of units manufactured. Absorption cost includes direct labour, direct
material, fixed and variable manufacturing overheads (Gibassier, 2017). This technique is
required for external financial reporting. It provide more accurate calculation of profit as
compare to variable costing. It do not classify costs into variable and fixed costs which is not
possible practically. It presents efficient and inefficient utilisation of various production
resources by indicating over or under absorption of factory overheads. It provide calculation of
net profit and gross profit separately under income statement.
Calculation Of Costs:
A. Marginal Costing
Statement Of Profit Or Loss For
January2019
Per
Unit Budgeted Actual
Sales Revenue 50 800000 800000
Cost Of Sales
Cost Of Production: Variables
Direct Material 10 180000 190000
Direct Labour 20 360000 380000
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Variable Overhead Expenses 5 90000 95000
Standard Production 35 630000 665000
Opening Inventory 0 0
Less : Closing Inventory 35 -70000 -105000
Standard Cost Of Sales Variables 15 -560000 -560000
Contribution 240000 240000
Fixed Overheads -100000 -100000
Profit 140000 140000
B. Absorption Costing
Statement Of Profit Or Loss For
January2019
Per
Unit Budgeted Actual
Sales Revenue 50 800000 800000
Cost Of Sales
Cost Of Production:
Direct Material 10 180000 190000
Direct Labour 20 360000 380000
Variable Overhead Expenses 5 90000 95000
Fixed Production Overheads 5 90000 95000
Standard Production 35 720000 760000
Opening Inventory 0 0
Less : Closing Inventory 40 -80000 -105000
Standard Cost Of Sales Variables 10 -120000 -125000
Contribution 640000 240000
Standard Profit 160000 165000
Adjustment Of Under Absorption -10000 -10000
Profit 150000 155000
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Absorption Costing: Reconciliation Of Budgeted Profit
And Actual Profit
Budget Actual
Number Of Units Sold 16000 Units 16000 Units
Standard Profit/Unit 10 10
Standard Profit 160000 160000
Fixed Overheads Charged In Cost Of Production 90000 95000
Add: Fixed Overhead In Under Absorption 10000 5000
Total Fixed Overheads Charged 100000 100000
Fixed Overheads Transfer For Next Month Feb. 2019 10000 15000
Net Fixed Overhead Charged- Absorption Costing 90000 85000
Fixed Overheads Charged – Variable Costing 100000 100000
Reduction In Variable Costing Profit 10000 15000
TASK 3
Planning tools used in management accounting:
In management accounting various planning tools are used by managerial personnels
which assist them in achievement of organisational objectives and goals. These tools are used by
managers and accountants in budgetary control within business organisation. Budgetary control
implies to how effectively managerial personnels apply various budgets to track, monitor and
control various costs and functions for a particular period of time (Schaltegger and Zvezdov,
2015). It simply refers to a systematic process used by managers to determine performance
objectives and financial goals with help of budgets, make comparison of actual results and re-
evaluate performance, as per requirement. Budget includes estimation and forecast of costs and
revenues over a projected period of time. It is generally re-evaluated and prepared for a particular
period like monthly, quarterly, annually etc. In ABC, budget is applied by managerial personnel
as an internal tool and not required for reporting by outsiders or external parties. In company it
act as blue print for future performance and actions. In company, various type of budgets like
sakes budget, purchase budget, cash budget etc. are prepare by managers or department heads.
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Then these budgets are used by company's top management in order to take strategic decisions.
Budgets are prepared by companies for internal analysis, normally there is no statutory
requirement for preparation. It help to identify any irregularities or problem that may arise in
near future.
Cash Budget
Cash budget is a significant budget which is prepared by companies to forecast or
estimate the cash in flow and out flow during a specific period of time. This budget assist
managerial personnel to track the actual movement of cash within business organisation. This
budget is also used by business enterprises to ensure the availability of cash to operate. This
budget is normally prepare by mangers after purchase, sale and capital expense budget. In ABC
Ltd, cash budget is prepare by management to manage the movement of cash of company. It
also used to assess the actual liquidity position of company (Amoako, 2013). Management with
help of cash budget also assess the requirement of cash within company. A detailed and
systematic cash budget assist in tracking any loss or theft of cash in company.
Advantages: It is advantageous for ABC, as it assist in determining whether remaining
cash balance is sufficient or adequate to pay their daily working expenses and whether minimum
threshold limit of cash requirement lay down by banks or internal policies are keep up,
Disadvantages: Cash budgets may lead to distortions or misinterpretations, because cash
inflow always do not relate or equate to gain or profits. Cash inflows arise due to capital receipts
like sale of any fixed asset, fines or penalties, deposits etc. are non-sustainable activities, these
are not considered as ongoing and reliable sources of revenue to assess actual profitability.
Operating Budget
It is planning tool which is used by business enterprises to maintain operating and
functioning. For instance, a normal operational budget includes labour and material costs that are
required to operate activities related to manufacturing of product or to provide services. This
budget exhibits company's estimated or forecasted income and expenses during near future
period (Brewer, Sorensen and Stout. 2018). In ABC, this budget is part of income statements
which is prepare by company to assess the operating profit or loss company during the whole
year. It includes a summary schedule which included all items related operating income and
expense. This budget is prepared while considering all variable and revenue expenses but not
includes capital expenditure due to their long term nature.
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Advantages: This budget is prepare by ABC Ltd, to manage their day to day operations
and activities in order to achieve predetermined profitability level. It assist in enhancing the
accountability within a business organisation. It assist in monitoring and tracing the daily
operations of business organisation to minimise additional day to day expenses.
Disadvantages: Operating budgets is kind of short term budgets and prepared by
companies on daily basis which is a time consuming task and also enhance the complexity. In
business organisation that have seasonal business, operating budget does not show true results.
Master Budget
In business organisations, various functional division prepare their own budgets. A
master budget is tool which presents aggregate amount an value of all such divisional budgets. It
assist managerial personnel in decision making and financial planning. It combines all functional
or divisional budgets to provide an overall assessment of company's performance during a
particular period. It determine goals or target for business enterprise to achieve a level within a
specific period (JOSHI and et. al., 2011). In ABC, for preparation of this budget managerial
personnel gather the information of budgets prepared by different functional or divisional
managers, than such information is consolidated to prepare a master budget while considering
organisation's overall objectives and goals. various budgets are prepared by different project
managers and at last a master budget is prepared by mangers to develop a complete picture of
company's performance.
Advantages: It assist business organisation to analyse the complete and detailed
performance and growth during a particular period of time. It provide a framework for master
planning and for identification of any potential problem or issue.
Disadvantages: Through master budget is hard to identify and analyse value of any
specific business item. For intense, it one would not be able to determine or analyse how much
administration department is incurring expense during a particular period.
Uses of different planing tools in forecasting budget
Planning tools are a systematic set of tools that are applied by managerial personnels to
efficiently manage and plan different business activities. Planning tool play a vital role in
preparation and forecasting various budgets. Different – different planning tool assist in
preparation of effective budgets with more accurate and reliable figures (Klemstine and Maher,
2014). Managers in ABC, can apply these tools to identify and assess various problems which
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may occur in near future. Company by using these tools, can increase their efficiency and
effectiveness in forecasting and projecting the amounts and values of items of budgets. Overall
objective of these planning tool is to provide assistance to manager and accountants in
preparation of most reliable and accurate budget. These different tool help in enhancing the
accountability in budgets. Planning tools provide a data or information which point out towards
the a particular trend and scenario in values or amount of various financial items, which assist in
find out most accurate figure for preparation of budgets.
TASK 4
Comparison of how organisations are adapting management accounting systems to respond to
financial problems:
In current business environment, various financial and other problem arise before
business organisation. Sometime, these problems may put question mark on survival of business
enterprises. So early identification and solution of these problem is crucial for business
organisation to sustain success in market. Financial problems refers to circumstances where
lack of money or monetary resources can affect the organisation's operations and functions.
Financial problems develops adverse situation for a business organisation which directly or
indirectly leads to decrease in overall performance, growth and probability of business
organisation (Lim, 2011). Management and owners always wants to avoid or resolve the
financial problem. Following are some major financial problem, in the context of ABC Ltd, as
follows:
Increasing Debts: This is one of the major financial problem for company which affects
overall efficiency of company to generate profit or gains. Increase in shore term and long term
debt indicates that company is not able to generate adequate income to pay its debts. It directly
affects the working capital requirement of company, which is a sign of liquidation. Continuous
increase in debt affects the whole capital structure of company.
Increase in costs: A continuous increase in costs and expenses within a business
organisation is a financial problem which leads to decrease in overall profitability. Increase in
cost indicates various issues like mismanagement of inventories or other material item, decrease
in efficiency of worker, decline in product demand, ineffective management etc (Boyns and
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Edwards, 2013). it is essential for company to identify the main reason of increasing cost on
early basis.
To avoid or resolve these financial problems, management accounting system is
necessary. Management accounting system propose some methods and techniques to solve or
handle financial problems. Following are some significant methods and techniques which assist
in handling financial problem in ABC Ltd, as follows:
Key financial indicators: KPI or key financial indicators refers to collection of various
quantifiable measures which business enterprise can use to measure its performance over a
particular period. KPI indicates towards any issue that may rise in near future and assist in
resolving these issues. In ABC Ltd, KPI's like net profit, gross profit, account receivable or
payable turnover etc. are applied by managers to analyse the main reason of increasing debts and
area of excessive costs or expenses.
Benchmarking: It includes a set of activities that assist in making comparison of
company's performance against a certain level of performance which may be based on industry
average. Under benchmarking process management first determine the benchmark level, after
that they critically analyse the variance if any to identify cause of financial problem (Tessier and
Otley, 2012). In ABC Ltd, management by applying this method identifies and analyse the main
reason of increase in cost or expenses during a particular problem.
Comparison:
Basis ABC Ltd BCM construction
Financial issue Company is facing financial
problem of increasing debts and
excessive costs which leads to
decrease in profitability (Van der
Stede, 2015).
For BCM construction major financial
problem is high cost of its projects
which forces clients to shift towards
competitors.
Decision making Company is applying management
accounting system to take business
and strategic decisions. Most of the
decisions of company emphasises
on resolving financial problems.
BCM is medium size company and
engaged in construction of buildings,
rail projects and commercial
properties, company's focus towards
taking decisions regarding expansion
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of their business to increase market
share.
Cost tracking In ABC Ltd, company using cost
accounting system to track the
costs to solve their financial
problem of increase in costs.
In BCM, company has variety of
projects which are unrelated so
company in order to track cost,
applying job costing method.
Analysis about how responding to financial problems, management accounting lead organisation
to sustainable success:
In present business scenario every organisation wants to retain their success and put their
efforts to sustainable success, but it is difficult to achieve sustainable success in dynamic
business environment without adopting management accounting system. Responding to various
financial problem on early basis by adopting management accounting is one way which lead
organisation to sustainable success (Zoni, Dossi and Morelli, 2012). Achieving sustainability in
success means maintain growth, profitability and existing performance. Business organisation by
adopting various management accounting systems and techniques ensure their success. Various
financial problems are barrier for companies to maintain sustainability in success. In ABC Ltd,
management is aware about such fact so company through different management systems,
respond to financial problems that help company to sustain success in long term. Responding to
various financial problem assist in overall performance growth and increase in profitability.
Evaluation of how planning tools for accounting respond appropriately for solving financial
problems to lead organisations to sustainable success:
In business organisation Planning tools play a significant role to achieve sustainable
success. Managers in business organisation by applying various planning tools, not only respond
to various problems but provide solution of different financial problem. Different – different
planning tools are used by managers to solve specific financial problem as per requirement
(Lavia López and Hiebl, 2014). In ABC Ltd, managerial personnels applying planning tools like
cash budget, operating budgets and master budget to solve financial problem. In company with
help of cash and operating budget, managers are engaged in responding to problem of increase in
cost. To respond to financial problem of increasing debt company is using master budget.
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Company also apply planning tool to identify financial problems at initial stage to operate
effectively.
CONCLUSION
From above project report it has been concluded that management accounting is key of
internal management of the companies. Eventually, it is a wide term which consists different
kind of accounting systems like price optimisation, inventory management etc. All these have
own importance in the context of companies. Additionally, various kind of accounting reports
methods are important for the preparation of reports. Apart from it, management accounting
systems and reporting are integrated with the organisational process which is important for
organisational success. Various planning tools ensures sustainable success of business
organisation by responding to financial problems effectively.
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