Management Accounting: Principles, Role, Techniques & Ovation System

This report provides a comprehensive analysis of management accounting, focusing on its principles, roles, and techniques, with a specific application to Ovation Systems. It begins by explaining the core principles of management accounting, including trust, up-to-date information, presentation, understandability, and timelines. The report then discusses the role of management accounting and its systems in costing, decision-making, planning, control, and performance evaluation. It further delves into the use of techniques such as absorption and marginal costing, presenting calculations for income statements under both methods to illustrate their impact on business growth. The integration of management accounting within an organization is evaluated through performance reports, operation budget reports, accounts receivables ageing reports, and job cost reports. The report also highlights the advantages of both absorption and marginal costing, including understandability and adherence to accounting standards. Finally, it briefly mentions planning tools and recommendations for Ovation Systems.

Management Accounting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
Part - 1..............................................................................................................................................3
An explanation of the principles of management accounting......................................................3
Role of management accounting and management accounting systems.....................................4
The use of techniques and methods used in management accounting by presenting calculations
for an income statement using variable costings to show how these financial reporting and
statements support business growth and success.........................................................................5
Evaluation of how management accounting is integrated within the organization.....................7
Benefits of the functions to the organization...............................................................................8
Critically reflecting the application of management accounting.................................................9
Part 2................................................................................................................................................9
Planning tools...............................................................................................................................9
Ways in which management accounting is applied, the effectiveness of Management
Accounting in dealing with financial problems and preventing financial problems in
organization................................................................................................................................12
Recommendation.......................................................................................................................13
CONCLUSION..............................................................................................................................14
REFERENCES................................................................................................................................1

INTRODUCTION
Management accounting can be defined as the financial data and advice given to an
organization in order to develop its business. The report consist of two parts: Part A will explain
the importance of principles of management accounting. Role of management accounting and
management accounting systems have also been discussed. The report will specify the use of
techniques and methods used in the management accounting by properly presenting the income
statement that are necessary for the growth of the business. Further the report will evaluate of
how management accounting is integrated within the organization of ovations system. Moreover,
critical evaluation of the application of management accounting will also be highlighted.
Part b will compare and contrast three planning tools that are used in the management
accounting and the examples to know the advantages and disadvantages. Further, with the help
of examples, the report will highlight and compare the ways in which management accounting is
applied and the effectiveness of management accounting in dealing with the financial problems.
Moreover, proper conclusions and recommendations for the organization of ovations system to
which methods have been applied to achieve sustainability have will also be highlighted. It is
important that the system of management accounting is properly studies and this will be further
discussed in the report.
Part - 1
An explanation of the principles of management accounting
Management accounting can be defined as the process that is required by the managers in
order to guide the managers about the correctness to take right decisions. Accounting helps the
users to understand the purpose of sharing. Under this, the management accounting is help
important for the managers as they can take important decisions regarding their organization
(Nawawi and et.al., 2020).
There is a small company names ovation systems in the united kingdoms that is engaged
in the business that serves the purpose of designing and manufacturing services related to video
surveillance used for commercial use particularly for the government and military forces. These
services consist of the video and audio records and video stabilization. The following discussion
will be on the management accounting of the Ovation systems.

Trust – It is the obligation of the managers to take corrective actions that is benefited for the
company. Trust is important part of any organization which makes the information needed in this
process to be accurate. A good management accounting practise can establish trust in the
organization.
Up-to date – It is important that the information used for management accounting is latest and
up to date. With the help of this the managers can know the present situation and not the
situation which has been outdated.
Presentation – It is one of the basic principles that includes the need for the managers to prepare
reports of sales and cost to achieve the organizational goals (Zadorozhnyy, 2022).
Understandable – It is the principle that used information which is clearly defined and easy to
understand for the managers. It helps the managers to perform the process easily and this will
lead to success of the organization.
Timelines – This principle of management accounting says that the data can be used for
continuous basis and for comparing with two or more items.
Role of management accounting and management accounting systems
There are many uses of accounts in any organization. It is in the interest of the accounting
information users to know about the actual outputs of the organization in a given time period.
This can be fulfilled with the help of accurate accounting information. Therefore, it can be said
that the main motive of accounting is to share information. This information is shared by
preparing the financial statements at the end of a financial year (MUHAMMAD and et.al., 2020).
This process can be derived from the internal and external users of the accounting. The managers
are considered the internal users of the information, and they are served with proper information.
Hence, there is no doubt in saying that management accounting plays a major part of accounting.
The system of management accounting is defined as the theoretical practices of procedures and
different rules in order to make report under the management accounting. It is essential for
ovation systems for understanding the need for management accounting and system of
management accounting.
Role of management accounting
Costing – Management accounting consist of all the techniques that are used to report the costs
and allocating them. Costing is one of the major part of accounting process as success of the
organization depends upon the costing of variety of products (Ruiz, and Collazzo, 2020).

Decision making – certain rules and regulation are made to form a organization. The top level
management hire managers and assign them with duties for operations of business according to
the principles made. Therefore, it is the duty of the managers to analyse the process and then take
decisions. Managers make use of the practise of management accounting as tool for performing
the duties in a way that is asked by the superiors.
Planning – Proper plans are made by the managers according to the ideas and principles to
achieve the goals. Planning is the imprint key because it allows the organization to know for
what they are working and the need to achieve the objectives of the organization.
Control – Management accounting plays a major role in controlling the activities of the
organization. It is important for the business to be controlled from various barriers that come in
the way of success of the organization and which hinders the performance of the firm.
Performance evaluation – The managers need to evaluate the performance of different
department in the organization and reward them for their successful completion of work. The
employees will get an idea about the work they need to be perform in order to become efficient
and this will encourage them for giving their best in roder to achiev the rewards and become
successful
The use of techniques and methods used in management accounting by presenting calculations
for an income statement using variable costings to show how these financial reporting and
statements support business growth and success.
Absorption costing – absorption costing is the costing approach which includes the direct cost,
fixed cost and the indirect cost. It is also known as absorption costing. Under this no cost is
written off.
Preparation of income statement – under absorption costing, income statement includes the
combination of all revenues and expenses for calculating the net profit and net loss for the
respective year. The initial step of this method is the noting of sales and then the income
statement is prepared. Then it is proceeded by the cost of goods sold. Further, subtraction of cost
of goods sold from sales produced gross margin. Moreover, the next stage is the treatment of
selling and administrative expenses. Lastly, organizations will be able to find the net profit or net
loss.
Marginal costing – marginal costing is the approach of costing which includes the process of
writing off the fixed cost and including the direct and overhead costs of different units.

Preparation of income statement – Income statement in the marginal costing method begins with
the sales and but can not be considered similar to absorption method of costing. Under this, cost
of goods sold, variable costs, and variable selling expenses are subtracted to get the contribution.
The next step is to treat the selling expenses and the fixed administrative expenses to further find
the net profit or net loss.
Company produced the 200,000 units in first year and in second year 250,000. The variable
overhead cost is £7, direct labour cost is £8 and the direct material cost is £10. In both the years
there is no opening and the closing inventory. The administrative expenses were 150000 and the
fixed production overhead is 130000. £50 is the selling price of the company.
Marginal costing
Income Statement of Ovation System
(Under Marginal Costing)
Particular 2022 2021
Sales
Cost of Production
Direct labour
Direct material
Variable overhead
Less: Cost of Production
Contribution
Less: Administrative expenses
Production Overhead
Net Profit
10,000,000
1,600,000
2,000,000
1,400,000
5,000,000
5,000,000
150,000
130,000
4,720,000
12,500,000
2,000,000
2,500,000
1,750,000
6,250,000
6,250,000
150,000
130,000
5,970,000
Absorption costing
Income Statement of Ovation System
(Under Absorption Costing)

Particular 2022 2021
Sales
Cost of Production
Direct labour
Direct material
Production Overhead
Variable overhead
Cost of Production
Add: Administrative expenses
Less: Total cost
Net Profit
10,000,000
1,600,000
2,000,000
130000
1,400,000
5,130,000
150,000
5280000
4,720,000
12,500,000
2,000,000
2,500,000
130000
1,750,000
6,380,000
150,000
6,530,000
5,970,000
Evaluation of how management accounting is integrated within the organization
Management accounting can be termed as the guide line to the managers of the organization. It
not only shares the information but also allow making reports for the internal financial
information. These reports fulfil the main purpose of the management accounting. Following is
the analysis of the reports:
Performance reports – Performance report is one of the reports which are integrated through
the organization is integrated. It contains each report that lists all the departments in the
organization and the individuals as parts of the performance appraisal. Any deviations or the
success and the errors are found from these reports.
Operation budget report – There is no organization that needs to go in losses. The operation
budget report is the one which includes estimation of expenses and revenues to get an idea of the
different plans in an organization. It can be a reason for the successful functioning of the
organization.
Accounts receivables ageing report – All the operations of the business are done in cash but on
accrual basis which can result in the increased accounting receivables. As the accounts
receivables increase there is increment in the liquidity of the organization. In order to know
accord with this compliance, every organization require wants to know the actual numbers of
accounting receivables for making the decision making process smooth and effective. This the
reason for management accounting for getting integrated.

Job cost report – Job cost report is one of the most important report that is prepared under the
management accounting. This report shows that how much cost has incurred in manufacturing
one unit of a product.
With the help of preparation of above reports management accounting is integrated within the
organization.
Benefits of the functions to the organization
Advantages of absorption costing
There are many benefits of the function of absorption costing which the organizations use.
Following are the benefits :
Understandable – this function of absorption costing is very simple and not complex (Lebedev,
P., 2018). It is very easy to understand and clearly defined. It is not termed as a sophisticated
method in terms of the ability to understand. This makes the decision making process easy with
the help of this technique.
Following standards – Absorption costing method is related to generally accepted accounting
principles which is universal and realistic in nature. It is real to produce the report of the
financial statements and it becomes easy for the users to analyse the statements.
Commendable for all business – Any kind of business can make use of this type of costing
method. Businesses use the absorption costing method for the validation and simplification of the
accounts.
Advantages of marginal costing
Marginal costing comes with many advantages that are helpful for the organizations. Following
are the benefits:
Variance – It is the method of costing that can be sued for all the variable costs. Therefore, it is
easy to know the changes and the possible changes in all the variable costs.
Allocation of costs – It is important for the organization to know allocate the cost properly in
order to take correct decisions regarding the business. It can be achieved with the help of
marginal costing.
Preparation of cost reports – Marginal costing methods allows the business to make convenient
costs reports.
Therefore, it can be said that both the absorption costing and marginal costing methods have
several benefits regardless to the type of organization (Lebedev, 2018).

Critically reflecting the application of management accounting
Management accounting is an important tool in any organization for fulfilling the goals. The
application can be considered important for all the organizations. Correct decisions are taken in
context with the organization by management accounting.
Cost accounting – The organization of ovation systems uses costing approach for doing all its
hardware activities for the products and services. Therefore, efficient allocation is important
regardless of the costs incurred that is properly termed by the cost accounting.
Inventory management system – This system is used at the end of the process and end of the
production in an organization. Therefore, it can not be doubted in the manager of the
organization of ovations system to take the correct estimations.
Inventory cost – It is the cost which is calculated as management tool of accounting which is
helpful in order to procure the effective control over the stock or the inventory.
Job costing – Job cost can be defined as the cost which is based on the different cost of different
units. In the organization of Ovations Systems it is sued for attaining efficiency and it is termed
as an effective approach.
Price optimization system – The system of management accounting opens a huge area for
keeping a watch over the reactions of its customers. It is sued in order to set a price for different
products of the organization (Kamarzaman, I.H., Yahaya, R. and Yusof, R., 2022).
Part 2
Planning tools
Assumptions are made on the basis of various facts that helps in getting an estimate of the
results. Such assumptions that are based on some sense is essential for the business to get a
strategical direction in which the business functions are aligned. It helps the management in
recognition of the levels to which the profits are to be aimed. These assumptions are somehow
related to the vision and mission of a business that is incorporated as central goal. A
supplementary record in enacted in the form assumption which helps in recognizing the expected
journey of the business for a specific time period. Planning tools are there to support the
assumptions made by the management of ovation system. These tools are termed as budgetary
tools which helps the management to accumulate the assumptions of the monetary transactions

(Hamamura, 2019). This planning tool Is very helpful in the management accounting. Some
budgetary tools are mentioned below:
Basis Incremental budget Zero based budget Functional budget
Definition  This tool helps the
management in
adjustment of the
increment in the
budget that is noticed
frequently due to
various changes in
different factors. It
provides a room of
change to the
management and
enhances the process
of management
accounting.
 Meaning of
this tool is
depicted in
i9ts name itself
which states
that this tool
includes new
values for each
session and
starts from
zero. Cost
based on the
new budget is
included by
this tool in the
management
accounting
process
(Hutahayan,
2020).
 There are
different
functional
areas in the
business whose
operations
result in
continuous
cash flow. So,
it is necessary
for the
management to
consider every
aspect6 of the
business in
accounting
process which
is supported by
this planning
tool.
Advantages  This planning tool is
very simple and easy
to apply.
 Departmental
functions can be easily
adjusted here.
 Cost in the
initial budget
session is
ignored by this
method.
 Every cost is
 Assumptions
for every
business
function is
viable through
this planning

included
properly
tool.
 Formulation
for master
budgets easier
as it provides
the information
regarding
every aspect of
the business.
 Comparing the
performance of
difference
business
functions gets
easier.
Disadvantages  More focus on the
internal functions
 High cost has to be
incurred while using
this planning tool.
 It may face the
issue of lack of
expertise.
 Highly time-
consuming to
the
management.
 Higher
engagement of
the labour.
 The inclusion
of every aspect
of the business
makes this
process more
costly for the
management.
 It may lack in
coordination.
Similarities in zero based budget, incremental budget and functional budget
The objective of these three tools that is to assume the final results of the organization in
the monetary term depicts their similarity. Direction is provided by these tools to management in
selecting the best project which is most beneficial for the organization (Chut, 2020). The process
of comparing the outputs is another similarity depicted by these three tools.

Dissimilarities in zero based budget, incremental budget and functional budget
Technique for appraisal is the factor that differentiated these three tools from each other.
Functional areas of the planning tools also differs that depicts their own individuality. Purpose
for which these tools are availed may differ as well.
Ways in which management accounting is applied, the effectiveness of Management Accounting
in dealing with financial problems and preventing financial problems in organization.
There are various factors that creates the issue in the organization and acts as a barrier to
its smooth functioning. These issues can have a vital impact on the profitability of the firm so it
is necessary to evaluate the intensity of its impact and formulate the plan according to minimize
it. Some factors may not be evaluated in the monetary terms but the effects of others can be
measured. Moreover, there are various measures by which the management of ovation can
determine the gaps and the rationale for it can be analysed. Various ways for measuring the
performance is mentioned below:
Key performance indicators: these are the criteria which are formed to acknowledge the
performance of the strategies. These are the standards which can help in measuring the business
performance. In case the requirements are not met then the organization can monitor the reason
behind it to eliminate them.
Standard costing variance: gap between the standard costing and the actual cost incurred can
be determined with the help of this technique. The measurement of the gap can aware the
managers about the faults in the business functions.
Financial ratios: this is the method of determination of the abilities and disabilities of the
organization from various aspects. It is basically a tool to analyse the financial statements of the
organization in terms of the ratios (Casas-Arce and et.al., 2022). The managers can compare
these ratios with the previous to know whether the business has experienced growth or not.
Rationale behind it can be recognized by the management.
Benchmarking: This tools focus on monitoring the organizational performance with comparing
it to the benchmarks. Management can knowledge the areas of business which lagged behind and
it can be enhanced thoroughly.