Management Accounting Report: Systems, Benefits, and Applications

This report on management accounting provides a comprehensive overview of the subject, focusing on the application of professional skills in preparing financial information for managerial decision-making. It examines management accounting systems, including inventory management, cost accounting, and price optimization, detailing their benefits and applications within a manufacturing concern, GSQ Limited. The report also covers management accounting reporting, such as inventory management reports, budgeting reports, performance reports, and cost reports, highlighting their role in effective business operations. Furthermore, it explores costing techniques like marginal costing and absorption costing, comparing their advantages and disadvantages. The report also delves into the integration of management accounting systems with reporting systems and how management accounting aids in resolving financial issues, offering insights into planning tools and their impact on organizational performance. The report concludes with detailed financial statements using both marginal and absorption costing methods.

MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
TABLE OF CONTENTS................................................................................................................2
INTRODUTION..............................................................................................................................1
REPORT..........................................................................................................................................1
Management accounting systems with its benefits and applications...........................................1
Benefits and application of management accounting systems....................................................3
Management Accounting reporting.............................................................................................4
Integration of management accounting systems with the reporting systems of management
accounting....................................................................................................................................5
Management accounting costing techniques...............................................................................5
Different types of planning tools used by organisation with their advantages and
disadvantages...............................................................................................................................6
Management accounting adapted by companies in resolving financial issues............................8
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUTION
Management accounting can be defined as the method of gathering, analysing, interpreting
and preparation of financial reports used by the management in decision making. This is the
process involving use of financial information and the resources in decision making by th
managers. Management provides information and prepares report that is essential for the internal
users of the management. Present report is based on GSQ limited a manufacturing concern.
Report will cover management accounting systems, reports used in management accounting and
costing techniques used in management accounting. It will also cover the management
accounting costing techniques used for recording closing stock. It will also provide about the
planning tools used by MA and how MA systems help in solving the financial issues of an entity.
REPORT
Management accounting systems with its benefits and applications.
Management Accounting
Management accounting refers to the application of professional language & skills in
preparation of the accounting information in manner for assisting the management in formulation
of the policies as well as in planning and controlling the operation of undertaking. MA provides
information for the internal management of the company unlike the financial accounting that is
useful for external users of the company.
Management accounting systems
Management accounting systems are used by enterprise for effective management of the
operation of the organisations.
Inventory management system
Inventory management system refers to the system used by management for recording all
the transactions related to the inventory. Entity have different inventory such as capital assets,
raw materials, work in progress and the finished goods. Inventory system with the collaboration
of advance software has become very useful for the management in having proper record and
information of all the inventory of the enterprise (Turner and et.al., 2017). It keeps information
of all the inventory movements from raw material to finished goods.
Just-in-time – This is the inventory systems used by enterprise for having inventory on the spot
as and when required. This prevents company to overstock and save its storage costs,
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Material requisition planning – In this method of inventory management company used to
analyse the requirements of inventory based in its previous trends and stores inventory
accordingly.
Cost accounting
Cost accounting is one of the most important management accounting systems used by
the enterprise for recording all the information related to the cost of products and services. Cost
accounting is used by the entity for calculating the cost of products or services. This is essential
for the business to assess the costing of every product for deciding its prices and the profit
margins. Cost accounting also involves comparison of the budgeted and actual figures to identify
the variances in the process. This helps company to take measures and steps for reducing the
variances and improving the performance of company. Cost accounting systems are very
essential for the business enterprise to control its costs.
Direct Costing
This is the method in which organisations only considers variable costs associated with
the products. This includes direct costs such as materials, labour and overheads. Fixed costs are
not considered in this costing method.
Standard costing
It refers costing in which standards are decided for every cost and process before the start
of production process. At the end of production process actual costs are compared with the
standard for identifying the variances.
Price Optimisation
Price Optimisation refers to the systems in which organisation decided the prices of their
product and services. It is a process which involves mathematical analysis and calculation. It
helps the organisation in identifying the demand of its product at different level of prices. There
is a direct impact of the prices on the demand of product (Bui and De Villiers, 2017).
Organisations using the price optimisation analyses the demand of its products and services and
decide the prices that are most optimum for product. They are decided after keeping in view the
objective of organisation.
Job Costing System
This is the process of management accounting that calculates the cost of each job
separately. In job costing system management identify the costs of producing every job related
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with the product. This system is not concerned with the process but with each job. It considers
information related to raw materials, labour and other overheads. This is used by enterprises
having different process to manufacture a product.
Benefits and application of management accounting systems
MA System Benefits Application
Inventory Management
System
 It is used by management for
recording all the inventory
movements.
 This helps in identifying the
frequency of inventory movements.
 Timely purchase orders can be made
by the inventory management
system.
Inventory management
helps GSQ in making
purchase orders before the
entity goes out of stock.
Also for identifying the
trends of consumption.
Cost accounting System  Cost accounting helps the business
in recording costs information.
 It helps the business in keeping its
costs and expenditures under control
by application of effective
strategies.
 Provides cost information for
deciding the profit margins of the
product.
This is used by GSQ in
calculating the cost of
product manufactured by
it and for reducing the
variances.
Price Optimisation System  It helps in deciding optimum prices
of product.
 It helps in analysing the market
demand at various prices levels.
 It provides important information
for management decision making
(Collis and Hussey, 2017).
This is applied in the
management process for
making decision related to
prices and profit margins
of product.
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Job Costing System  It helps business to identify cost of
each job.
 It provides detailed cost information
for deciding the profit margins.
This is applied by GSQ in
specific orders related to
the product for giving
costing information to the
consumers.
Management Accounting reporting.
Reporting is an important part for effective management of the business operations.
There are various management reports that helps the business to make decisions.
Inventory management reports
This report is prepared by the management for having the information related to the
inventory. It consists of information related to inventory purchased, consumed and output
produced. This provides the company information to make decisions related to the purchases as
well as to take promotions for the product. It contains trends of inventory movements of raw
materials and finished goods for placing the purchase orders after analysing the movements. The
report is based on information provided by the inventory management system. It enables the
company in preventing its storage cost by making orders on the basis of requirement.
Budgeting Report
Budgeting report is prepared by the organisation for planning the business operations.
Budget could be defined as the report that is prepared on the forecasts made over the incomes
and expenditures of company. Budgets are prepared over by the business based on it previous
budgets. Managers make adjustment related to the inflations, market condition, consumer
behaviour etc for preparing budgets for current year. Budget report helps the business enterprise
in keeping its expenditures. This provides the departments with specified resources on the
budgets prepared. They help the business in making effective allocation of the resources among
the various department and keeping the expenses under control.
Performance report
Performance report contains the information related to the performance of organisation
during the specific period. It gives the company essential information related to the performance
of various department, products and services. This helps the company in identifying the
productive operations of enterprise. Performance report helps the business enterprise in
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identifying the ability of company in achieving its targeted objectives. Management based on the
performance report makes effective improvement strategies for increasing the productivity and
efficiency of the process. It is also essential for rewarding and providing incentives to the
employees who are performing well in enterprise.
Cost Reports
Cost report contains all the information related to the cost associated with the product in
detailed manner. It provides information related to the variable costs and fixed costs in producing
a product. Cost report are important for managers in decisions making related to the cost of
product, and deciding the prices after appropriate profit margins (Chiwamit, Modell and
Scapens, 2017). Cost reports also provide the management in carrying out the cost analysis and
setting standard for each new period. After the end of period standard cost are compared within
the actual costs. Variances are identified by the management and on the basis of this corrective
measures are taken. This helps the business in reducing the cost by implementing cost efficient
strategies in the business.
Integration of management accounting systems with the reporting systems of management
accounting.
Management accounting is a broad concept consisting of various tools and techniques for
effective management of the enterprise. MA accounting systems are the system with the use of
which managers keep proper record of all the transaction and events related to the different
activities and operation. On the other MA accounting reports are prepared by the organisation for
having complete information related to the outcomes of the management systems. Management
accounting systems and reporting together helps the management to maintain effective control
over its operations. For example the cost accounting systems provide the information related to
the actual costs incurred in the production process and cost report provide information related to
the variances incurred between actual and standards cost. This enables the company to identify
areas of improvements and to take corrective steps for increasing productivity.
Management accounting costing techniques
Marginal Costing
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Marginal costing refers to the costing technique in which only variable cost are
considered for calculating the cost of product. This is also known as the direct costing method.
Marginal costing considers the fixed as period costs and are not considered in the costing of the
product. In marginal costing variable cost is charged to the cost units. Fixed costs is charged
directly against the contribution.
Advantages
 Marginal costing allows the management to make comparisons between two products.
 This do not have calculation for under/over absorption of overheads.
 Only variable cost are considered in costing.
Disadvantages
 It is not accepted by the accounting standards.
 All the costs are not considered for costing product.
Income statement under Marginal Costing
Profit or loss statements using Marginal costing
(50000
units) June
Sales Revenue (50000*30) 1500000
Marginal cost of
sales
Direct materials (50000*8) 285000
Direct Labour (16667*9) 150000
Variable
production
overhead (50000*2) 100000 535000
Contribution 965000
Fixed production
overhead 160000
Fixed admin &
distribution cost 60000
Variable selling
expenses (50000*4) 200000 420000
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Net Income 545000
Absorption Costing
This is costing techniques that consider all the cost incurred for manufacturing the
product. This involves both variable as well as fixed costs associated with the product. In this
method overheads are considered absorbed by the cost units of the product (Abernethy and
Campbell, 2018). Absorption costing unlike marginal costing do not considers the fixed cost as
period cost.
Advantages
 It considers both variable and fixed costs.
 It is recognised by the accounting board.
 Overheads are absorbed by the cost units.
Disadvantages
 Complex calculation of under or over absorption.
 This technique do not allow comparison of two products.
Income statement under Absorption Costing
Profit or loss statements using Absorption costing
(50000
units) June
Sales Revenue (50000*30) 1500000
Marginal cost of
sales
Direct materials (50000*8) 285000
Direct Labour (16667*9) 150000
Variable
production
overhead (50000*2) 100000
Fixed production
overhead 160000 695000
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Gross Profit 805000
Fixed admin &
distribution cost 60000
Vaiable selling
expenses (50000*4) 200000 260000
Net Income 545000
Working Notes :
Calculation of labour cost
1 unit = 20 minutes
50000 units =
1000000
minutes
Total hours (1000000/60)
16666.66667
Units per hour 50000 / 16667
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Labour Cost 16667 * 9
150000
Different types of planning tools used by organisation with their advantages and disadvantages.
Budgeting refers to the process in which estimation regarding the revenues and
expenditures of the organisation are made by the management. It is prepared for giving the
organisation a planned structure to follow. There are various planning tools used in budgeting
such as;
Zero Based Budgeting
This refers to the budgeting process in which all the expenses and incomes that are not
present in the previous budgets are required to be justified by the management. Zero based
budgets are prepared by the enterprise from zero base. This makes analysis of all the needs and
requirement of the enterprise (Zero Based Budgeting, 2019). This do not consider the previous
budgets for preparing current budget.
Advantages
 ZBB provides more accurate information a compare with other budgets.
 This efficient allocation of resources in different departments.
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 Justification of every line item causes company to consider the inflation and other market
conditions.
Disadvantages.
 It is a time consuming process as everything is taken from the fresh.
 Explanation of every cost and expenditure is difficult process.
 This is costly process as large number of information is searched to prepared ZBB.
Activity based Budgeting
The budget is prepared using the information of activity based costing. This do not
consider the budget of previous years like zero based budget. Budget is prepare after properly
analysing the expenses associated with each activity. This is prepared by the management in
business having number of activities to prepare the product (Rikhardsson, 2017). It is not
prepared based on the operation but over different activities carried out in the process.
Advantages
 This helps in effectively evaluating the cost drivers in different activities.
 This helps in eliminating the unproductive costs and expenses from the budgets.
 ABC budget help the business organisation in increasing its productivity and efficiency.
Disadvantages
 This requires professional knowledge to understand the functional areas of business.
 It is time consuming and expensive process to implement thios budgeting.
 It focuses over the short term goals of the business enterprise.
Operating budget
Operating budget refers to the budget which is prepare by the business enterprise for
planning it daily expenses. They are prepared by the organisation based on previous budgets.
Adjustments related to the requirements of current year are made in this budgeting. It involves
forecasting about the revenues and expense essential to carry out the operations of business.
Advantages
 This helps business in managing it current expenses.
 This helps the organisation to prepare budget analysing the previous trends.
 It is easy to prepare and simple to understand and interpret.
Disadvantages
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 It is based on previous budgets therefore the errors or mistakes could be carried forward.
 This don not provide accurate information of costs.
 Budget is prepared for short term business goals and objectives.
Management accounting adapted by companies in resolving financial issues.
An organisation for carrying out business has to face number of challenges. It is required to
overcome these challenges for the growth and success of the organisation. An organisation
problems related to the scarcity of resources and such other issues.
Management accounting systems.
GSQ faces the problem of increased storage cost of inventory. Inventory management
systems of MA helped the business to reduce its storage by adopting to just- in-time method.
Order is placed on demand and urgent delivery is made eliminating storage cost.
ABC faced the problems of high expenses. It adopted cost accounting systems to control
its expenditures. With use of standard costing specific resources were allocated to each
department for carrying out operation. This helped in identifying the department consuming
highest cost and was reduced by cost effective strategies.
Management accounting tools
Benchmarking helped the GSK in setting objectives for various tasks to be performed by
the organisation. This helped the management in identifying the performance of the departments.
They set realistic and achievable target for boosting motivation.
Key performance indicator is tool used in MA to measure the performance by
identifying the level of success achieved in accomplishing the set objectives (Dearman, Lechner
and Shanklin, 2018). Reasons are identified and corrective measures are taken.
MA planning tools
Zero based budget prepares budgets after analysing all the information related to incomes
and expenses that provides accurate information this reduces the variations in the actual and
budgeted figures.
Activity based budget has helped the business to resolves its issues of increasing costs. It
made budget based on activities involved in the process. Using this company identified the
consumption of resources by each activity and corrective steps to control the cost were taken.
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CONCLUSION
The above report about management accounting has provided important information of all
the concepts used by organisation. Management accounting systems such as inventory
management systems, cost accounting systems, job costing systems and price optimisation helps
the business in effective management of business operations. They help the business in keeping
proper record of all the transactions of business. The management accounting reports helps in
taking strategic and operational decisions as it involves detailed information about the costs and
performance of business. This is essential for business decision making as it provides the
business to make strategic steps regarding the strategies for improving the efficiency and
productivity of business. Cost accounting techniques helps business in analysing the profits of
company. This also planning tools involving forecasts about the future income and expenditures
that are helpful in controlling the cost of operation.
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REFERENCES
Books and Journals
Turner, M.J. and et.al., 2017. Hotel property performance: The role of strategic management
accounting. International Journal of Hospitality Management. 63.pp.33-43.
Bui, B. and De Villiers, C., 2017. Business strategies and management accounting in response to
climate change risk exposure and regulatory uncertainty. The British Accounting
Review.49(1).pp.4-24.
Collis, J. and Hussey, R., 2017. Cost and management accounting. Macmillan International
Higher Education.
Chiwamit, P., Modell, S. and Scapens, R.W., 2017. Regulation and adaptation of management
accounting innovations: The case of economic value added in Thai state-owned
enterprises. Management Accounting Research.37.pp.30-48.
Abernethy, M.A. and Campbell, D., 2018. Virtual Issue on Empirical Management Accounting
Research. Journal of Accounting Research, August.
Rikhardsson, P.M., 2017. Information systems for corporate environmental management
accounting and performance measurement. In Sustainable Measures (pp. 132-150).
Routledge.
Dearman, D., Lechner, T.A. and Shanklin, S.B., 2018. Demand for management accounting
information in small businesses: Judgment performance in business
planning. International Journal of the Academic Business World. 12(1).pp.93-102.
Online
Zero Based Budgeting. 2019. [Online]. Available through :
<https://efinancemanagement.com/budgeting/zero-based>.
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