Management Accounting: System, Techniques, and Budgetary Control

This report provides a comprehensive overview of management accounting, encompassing its core principles, systems, and reporting methodologies. The introduction establishes the significance of management accounting in business decision-making, highlighting its role in providing financial and statistical data to management. Task 1 delves into the management accounting system, differentiating it from financial accounting and outlining various system types, such as cost accounting, inventory management, and job costing. The benefits of each system are explored. Task 2 focuses on management accounting reporting methods, emphasizing the importance of accurate and reliable information. It also presents different methods, including cost reports, inventory reports, and job costing reports. Furthermore, the report illustrates the preparation of income statements using different techniques like absorption costing, variable costing, and cost-volume-profit analysis. It also covers planning tools of budgetary control, such as cash budgets, sales budgets, and activity-based budgeting, alongside their advantages and disadvantages. The report concludes with a discussion on how management accounting systems can be adopted to address financial problems.

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1 Management accounting system and its requirement in business.........................................1
P2 Methods of management accounting reporting......................................................................3
P2 Preparation of income statement using different techniques.................................................4
TASK 2............................................................................................................................................8
P4 Various planning tools of budgetary control and their advantages and disadvantages.........8
P5 Adoption of management accounting system as to responding to various financial
problems......................................................................................................................................9
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Management accounting is a branch of management which concerns with the preparation
of financial and statistical report of the business and making it available to management
whenever it is required. This report includes importance of management accounting in decision
making process, brief discussion about various management accounting system along with their
benefits. The study also shows preparation of income statement using different techniques of
management accounting. The report includes a brief comparison of different planning tools of
budgetary control and their importance in solving financial problem.
TASK 1
P1 Management accounting system and its requirement in business.
“Management accounting is a technique of management in which managers uses their
professional knowledge and skills for the preparation of data showing information relating to
accounts and statics of business for the purpose of using them in formulation of strategies and
plans for the business organization.”
It is an important part of decision making process as managers uses past informations for
taking better decisions for the business, and management accounting provides all major
information relating to cost, efficiency, financial data, financial performance, etc. to managers.
All these informations helps managers in taking the best decisions for the business and
developing the best strategies and plans for the business as per its past performance of business
in order to improve them and increasing overall performance and profitability of business
(Höglund, 2016).
There is major difference between management accounting and financial accounting like:
Basis Management accounting Financial accounting
Objectives Its main objective is to provide
relevant information to internal
members of business.
Its objective is to provide
information to the investors
and other outsiders of
business.
Mandatory Its preparation is optional for
any business
Business need to prepare
financial accounting reports
each year.
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Users Management and other internal
members of business.
It is useful fot outsiders of
business like investors,
creditors, competitors, etc.
Management accounting system
Management accounting system is an integral part of planning and controlling process
which helps the managers in managing financial position of business. It is a technique of
management that provides help in enhancing profitability and financial position of business by
increasing its efficiency in investment of cash, preparation of budgets, etc (Otley, 2016).
Types of management accounting system:
1. Cost accounting system: this system helps the management in managing cost efficiency
in the business. It provides methods of estimation of cost of various departments of
business. This technique is beneficial for manufacturing concerns.
Benefits:
 With the help of this technique, management can estimate cost of various
manufacturing processes.
 It enables management to make strategies to eliminate wastage of cost at each stage
of manufacturing process in order to develop the business as more cost efficient.
 It provides help in analyzing of cost control and efficiency, inventory management
and profitability of business.
2. Inventory management system: Inventory management refers to using different
techniques and methods for having an effective control in the business in order to avoid
shortage or excess of inventory in business. It is beneficial for every business whether it
is manufacturing concern, retail business, wholesale business or any other business.
Benefits:
 It helps management in tracking the data relating to receiving and outgoing of inventory.
With this information, business enables to maintain appropriate amount of inventory in
the business.
 With the use of this technique, management can minimize wastage of inventory.
 It helps in having effective control over maintaining appropriate amount of inventory in
organization.
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3. Job costing system: job accounting system includes gathering information about cost
incurred in manufacture of each product or services. This system is helpful for those
business concerns which provides product or services as per the requirement of customers
(Maas, Schaltegger and Crutzen, 2016). This system can be used by event management
organizations, hotels, etc.
Benefits:
 Through this technique, business can identify cost incurred on production of particular
product or services.
 Business can use this technique when they provide customized goods or services to its
customers.
 Through this management accounting system, management can easily track the accuracy
of budgetary control system of the business concern.
P2 Methods of management accounting reporting
Management accounting reporting can be defined as a system of management of
providing relevant report to the management including financial, statistical and cost related datas
in order to help them in developing better strategies and plans for the business and taking the
best decisions for the business as well through which profitability and efficiency of the business
can be enhanced over the year. Although, informations provided by the management need to be
relevant accurate, as wrong information may result in taking wrong decisions and development
of ineffective strategies by the management, which would directly affect the efficiency of the
business in negative way.
Through management accounting reporting, managers provides information related to the
financial position of the business, through which management enables to take appropriate actions
to develop and enhance the financial position of the business in competitive market. In case,
management accountant provides any wrong or non reliable information to the internal manager,
it would result in suffering loss by the whole organisation due to wrong decisions and strategies
of the business. Therefore, informations provided by the management need to be reliable and
accurate (Kwarteng, 2018).
All the reports made by the management accountant must be realiable in easily
understandable by the internal management of the business as in case management could
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understand the report, and wrongly interpret any information, it would result in taking wrong
decisions by them which would lead in enhancement of inefficiency in the business and suffering
loss by the company.
Methods of management accounting reporting:
there are numerous methods available for the management accountant to prepare
management accounting reporting like:
 Cost reports: this report includes information and data related to total cost incurred in
manufacture of any product or services including cost of direct material, labour,
electricity, and other overheads, etc. all these cost information helps management ion
having cost control by eliminating wastage and determining appropriate sales price of the
product or services as well.
 Inventory report: it includes all the information relating to purchase and sale of
inventory along with the quantity and rate of inventory purchased or sold by the business.
With the help of these informations, management can have effective control over
management by eliminating excess or shortage of inventory in the business. This report
may provide wrong information to the management in case of any wrong entry made by
the accountant.
 Job costing report: it includes the cost incurred in manufacture of each product or
services as per the demand of customer. It helps management in determining the selling
price of different jobs as per the cost incurred by the business in manufacturing the
customized product or services and amount of profit to be gained by the business from a
particular job. Although this report is of no use for those organizations which
manufactures same products and services for all customers and earns same profit from
them as well.
P2 Preparation of income statement using different techniques
Microeconomics techniques
Cost: it means amount paid by the business to produce any product or render any service to th
customer. It is a sum total of amount paid by the business for running its normal course of
actions.
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Absorption costing: it is a technique of costing which concerns with calculation of cost of
production including all direct and indirect expenses like direct material, labour, overheads, etc
(Techniques of Controlling, 2018.).
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Variable costing: it is a method of costing which assumes that variable cost incurred on product
are product cost whereas as all fixed costs incurred on the product are period cost for the product.
Interpretation:
From the above calculations it can be seen that from both techniques, i.e. absorption and
marginal costing (variable costing) techniques, net profit of the company can be determined.
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Absorption costing provides lower profit than marginal costing technique as it also includes
under or over absorption of cost by the mangers.
Cost volume profit:
This technique shows variation of cost at various levels of production. It is used to
determine break even point to evaluate selling price of product for gaining specific profit.
Flexible budgeting:
It shows the need of cost at different level of production level. It helps mangers in
determining the optimistic level of production at which it will need to incur minimum cost for
maximum output (Cool, Stouthuysen and Van den Abbeele, 2017).
Cost variance:
It shows the difference between budgeted cost and cost incurred by business. It majorly
helps management in determining cost efficiency of business, through which managers can take
appropriate action as to enhance the efficiency and having better control over business.
Product costing:
Cost allocation:
It includes bifurcation of various costs incurred in business operations at different level of
business. This process is used by management while preparing financial reports of company. It
helps in determining cost efficiency of all levels of business.
Standard costing:
This technique of costing helps in identifying efficiency of business' overall performance.
It includes various formulas which helps in comparing budgeted costs of business with actual
cost incurred during business operations.
Role of costing setting price:
Costing provides some methods and techniques which helps management in determining
actual cost of production through which they can determine selling price of product as to gain
reasonable profit from it:
 It helps in determining actual cost incurred bu the business for production of particular
product through which company can determine selling price by adding set profit of
management (THE ROLE OF COSTS IN PRICING, 2019).
 In case of production of customized product or services, through costing technique,
managers can determine cost incurred on each product which helps the company in
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estimating selling price of product after adding profit as to be gained by business to fulfill
organization goals.
TASK 2
P4 Various planning tools of budgetary control and their advantages and disadvantages
Budgetary control
It is a technique of costing though which management predicts costs which would be
incurred by organisation in its normal course of action. Reports of budgetary control helps
management in having better control over efficiency of business .
Planning tools of budgetary control
Planning tools helps management in taking various decisions for business with the help
of various budgets like operating budget, financial budgets, etc. some planning tool are:
 Cash budget: cash budget predicts receipts and payments of business in particular time
period. It helps in managing source of finance in advance which provides smoothness in
financial activities of business.
Pros Cons
It enables management to identify source of
finance in advance
Prediction of cost is uncertain, therefore, it
may provide wrong result
It helps in smooth running of normal course of
business.
It can be prepared for short period only.
 Sale budget: it shows the expected sales to be made by business in order to gain
organizational goals. It makes management to fully utilize the resources for achieving
selling objectives (Budgetary Controlling Techniques, 2018).
Pros Cons
It shows management how the resources need
to be utilize to achieve predetermined sales.
It requires lots of informations to prepare sales
budget.
It helps in forecasting profit for the year. In case of wrong sales budget, whole
production and profit of business may suffer.
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 Activity based budget: it includes identifying, recording and analyzing of various
activities related to cost. It helps Nero ltd. In analyzing relation between various activities
of business.
Pros Cons
It enables management to analyse the actual
performance of business
Company needs numerous sources to prepare
activity based budget.
It helps managers in having effective
management of planning, controlling and
decision making process
It is a costly tool of budgeting, therefore every
company can not use it.
Evaluation of using different planning tools of budget for solving various financial
problems:
Above mentioned planning tools helps management in solving various financial problems
of business. Being a manufacturing concern, Nero ltd. Uses activity based planning tool for
solving its financial problems. With the help of it, company effectively predicts its cost to be
incurred in various activities through which it enables to identify sources of fund and being able
to eliminate financial problems in business.
Use of budget
Pricing: Through determining exact cost, organisation enables to set appropriate price of product
by adding reasonable profit in it.
Common costing system: it helps business in becoming more cost effective through comparing
budgeted cost with actual cost incurred.
Strategic planning: through budget, company enables to analyse various financial factors of
business with the help of PESTLE and SWOT analysis, company can effectively manage all the
factors influencing business of company.
P5 Adoption of management accounting system as to responding to various financial problems
Management accounting systems are to be used by managers in order to solving various
financial problems in effective way. Companies can use management accounting to solve
financial problems and grab success as under:
key performance indicator:
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This system of accounting analyses overall performance of business. Company's
management can identify performance of each department of the organisaion and effectively
monitor them in order to enhance efficiency in their performance (Parmenter, 2015)).
` through monitoring performance of all departments, management of company enables to
estimate its future problems and can find their solution in advance, and also by effective control
over each department, company grows rapidly.
Bench marking:
While using this system, company selects few major factors which influences overall
performance of business. Management analyses those factors only for analysing overall business
performance.
It enables management in developing efficiency in key operations of business which
reduces the work of management through which their efficiency of management can be
improved. Which directly helps the company in having sustainable growth by its effective plans
and strategies (Lubis, Torong and Muda, 2016).
Balance score card:
Balance scorecard technique enables the mangers to link and interrelate all the factors of
business to develop a strong control over all business operations like, consumers, sales, purchase,
profit, etc. this management helps the company in determining the actual problem in a particular
activity, through which company can manage all the operations of business in effective way.
When business have control over all business operations, it automatically helps the company in
having sustainable growth in the market.
Financial governance:
It means collecting various informations to monitor financial activities of business as to
having an effective control over them. Through effective monitor over all financial activities,
company also enables to detect all the possible problems that can be arisen in the future. It helps
management in identifying their solutions in advance and help company in having smooth
growth in the future.
Identification of problems and effectively solving them
All management accounting techniques help management in detecting financial problems
in advance and determining their solutions as to have sustainable growth. Nero ltd. Adopts
balance score card technique, through which its managers develops a strong perspective over all
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