Management Accounting Systems and Applications Report - Finance

This report provides a detailed analysis of management accounting systems and their applications, focusing on KEF Ltd, a medium-sized manufacturing entity. It covers essential requirements of various management accounting systems, including cost accounting, price optimization, and inventory management. The report explores different managerial accounting reporting methods such as job cost reports, budget reports, inventory reports, performance evaluation reports, and receipts and payment reports. It further examines the utilization of absorption and marginal costing systems, comparing their advantages and disadvantages, and includes a practical example. Additionally, the report discusses planning tools used in budgetary control and how management accounting systems can be employed to resolve financial problems, offering comparative examples. The report concludes by emphasizing the importance of these systems for strategic planning, control, and overall financial performance.

MANAGEMENT ACCOUNTING
SYSTEMS AND ITS
APPLICATIONS

Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Management accounting and essential requirements of various type of MA systems...........1
Type of managerial accounting reporting methods................................................................3
TASK 2............................................................................................................................................5
Utilisation of absorption and marginal costing systems.........................................................5
TASK 3............................................................................................................................................8
Type of planning tools used in budgetary control..................................................................8
TASK 4............................................................................................................................................9
Using MA systems to resolve financial problems..................................................................9
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Management accounting techniques refers the concepts and methodologies to organise the
management requirements in operational and functional way. These techniques assist the
management and control to manage the flow of information in more strategic and proactive way
(Drury, 2012). the report expresses the clear understanding of management accounting and
crucial requirement of diverse management accounting systems for KEF Ltd that is a medium
size manufacturing entity. the methods of accounting reporting also defined in the report in order
to extract the information form management accounting systems for strategic planning and
control. Cost accounting techniques are used in order to calculate profitability by using two most
of the running methods as marginal and absorption costing methods. Application of planning
tools in budgetary control presented in organisational context. Contribution of management
accounting systems to resolve financial problems for entities and how organisations are adapting
these systems in operations also executed with comparative examples.
TASK 1
Management accounting and essential requirements of various type of MA systems
Meaning of management accounting system
Management accounting is recognised as an information communicating method to
management and accountants of an entity (Chiwamit, Modell and Yang, 2014). The accounting
information remains essential for accountants and managers subject to form a new business
strategy and take sustainable strategic decisions for future. As per IMA (Institute of Management
Accountants), management accounting is considered as a professional way to present and
connect the accounting information to users. This contains following exercises as the reporting of
financial outcomes and assisting management control, management decision making and
performance management systems.
Difference between financial accounting and management accounting
Management accounting Financial accounting
Aggregation It is a detailed formation of gathering
information from different
departments of an entity.
It is a summarised form of presenting
information of entire organisation at
the end of each financial year
Focus areas Management accounting mainly Profitability, capital adequacy and
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focus upon managerial activities and
business operations.
financial statements are the key focus
area of financial accounting.
Standards There are no particular standards
available for management
accounting. Organisations have their
own set of rules and compliance
structure which is considered as
management standards of an entity.
Financial accounting requires to
comply accounting standards,
financial rules and regulations which
are formed internationally and
domestically.
Management accounting systems
Cost accounting system: this accounting system work on overall cost of entity like cost of
production for manufacturing organisations, cost of services provided to customers and cost of
administrations. The key characteristic of this accounting system is to bifurcate the expenditure
by their nature as direct, indirect, fixed and variable (Watson, 2015). The use of cost accounting
system in KEF ltd may assist the managers to divide the producing and administrative cost
according to their cost nature.
Price optimisation system: this accounting system assist management to analyse the
variation in demand when prices of products and serviced are changed. The figures are aligned in
a single database and inventories levels are compared parallel to collected figures. Considering
the demand and trend of particular products and services updated prices are recommended to
management. This accounting system mainly works on mathematical concepts and principles.
The management of KEF Ltd can implement this price optimisation system to vary the prices of
products (Chiwamit, Modell and Yang, 2014).
Inventory management system: This managerial system is one of the running accounting
system used by entities to manage the level of inventories and keep coordination between the
supply and demand. There are three type of inventories available to organisation as raw material
stock, work in progress and stock of finished goods. There are three methods available for
managing the goods properly as FIFO that refers the goods manufactured first will be sold first,
LIFO that refers the goods manufactured last will be sold first and a weighted average method in
which aggregate quantity of goods are sold and retained by organisation for selling and
manufacturing. All these methods also used in setting up the cost of closing inventories at the
end of financial year (Watson, 2015).
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Job cost system: this accounting system mainly associated with gathering the data from a
particular job section and consolidating them as an overall cost (Collis and Hussey, 2017). This
accounting system mainly used by construction companies, organisation that deals in contractual
projects or seasonal jobs and large manufacturing units that deals in multiple customer units.
Three major cost are recognised in the cost accounting system as direct material, direct labour
and overhead cost. KEF limited can utilise job cost system to focus on customer requirements
and operational changes incurred at particular product or services.
Type of managerial accounting reporting methods
Management reports
Managerial reporting is considered as a professional way of communicating the information
to management of organisation. The reports are critically examined subject to take crucial
decisions, strategic planning, forming regulation and taking decisions on performance measures
for sustainable business structure (Collis and Hussey, 2017). key reporting methods are
communicated below that are being used in running organisations and assist management for
better planning;
Job cost reports: A cost report is prepared by the cost accountants that includes the cost
applied to a particular job section. In small and medium size entities cost of fragmented jobs is
reported by this reporting method. Mostly, this report presents the summarised overall cost plan
to managers in order to measure the total cost for the particular job centre. This helps in
assessing the profitability of separated job sections (Elmassri, Harris and Carter, 2016). KEF Ltd
would be benefited by implanting this reporting method in order to identifying the cost centres at
different production sections and allocating the resources as per the requirements of different
cost centres.
Budget reports: Accounts and financial experts uses this reporting methods in order to form
a consolidated report of anticipated financial forecast for successful operations of business
operations. this reporting method helps managers to analyse the financial requirement for
subsequent events and activities of entities (Elmassri, Harris and Carter, 2016). Main purpose of
constructing budget reports in to evaluate the difference between the actual cost of incurred in
last year and estimation of budget of current year. this reporting methods would help the
accountants of KEF Ltd to assess the differences between actual and estimated cost and manage
their financial resources accordingly.
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Inventory reports: This reporting method is consistently used by both of small and large
enterprises subject to track every day fluctuation of inventories in an organisational context. At
current business environment type of software has been innovated and widely used by
organisations. Inventory reports plays a vital role in a manufacturing industry because without
having an accurate forecast for upcoming requirement of inventories could create complications
subject to meet the production and suppliers demand (Tucker and Schaltegger, 2016). The
inventory reports present a clear information regarding usage of raw material to a particular
production centre, scrap amount and a defected finished goods for a particular span of time. with
proactive evaluation of inventory reports management separates the production line form high
efficient to low efficient manner and create reorder plan considering the departmental strength.
So, it is considered that inventory reports are essential for KEF Ltd in order to manage the order
of inventories and flow of raw material stock in production process.
Performance evaluating reports: these reports are presents a significant aspect subject to
performance of organisation during the year. In performance reports the graph of current year’s
operations are analysed with the past year’s performances (Tucker and Schaltegger, 2016). If the
results remain higher than the key performance indicators are highlighted in the reports and if the
results remain unfamiliar than the reasons of having low performances are highlighted with
suggestion to attain the required efficiency for succeeding year. the favourable performance
report not only used for future planning and control but it also assists the managers to motivate
their team members by celebrating the success of business. The report can present positive
outcomes in respect of KEF limited if management starts analysing and report the performance
on periodic basis. This will improve both the potential and capacity to bear future risk and lead
organisation towards sustainable success.
Receipts and payment reports: Management of revenues and payments is also a prime
requirement of businesses. A consistent management and appropriation of financial resources of
organisation helps in conducting the best possible aspects for entity to gain desired advantages
and results (Strauss, Kristandl and Quinn, 2015). This reporting methods help accountants to
collect the information of receivables and payables during the year. the irrecoverable amounts,
outstanding payments and prepaid expenses are noted separately to assess the further financial
requirement. it also helps in deciding the lag in period of collection payment form customers and
making discounting policies for those customers who clear their debts on or before payment
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dates. This report can be beneficial for KEF limited in order to fragment the collection
information in accurate and accessible manner.
TASK 2
Utilisation of absorption and marginal costing systems
Cost: It refers the expenses and overheads incurred in production process in order to
determine the overall cost of organisation.
Direct cost vs indirect cost: The main difference around direct costs and indirect costs is
that fixed cost items can only be attributed to additional costs. A price item, like a product,
product, client, project, or activity, is really for which a cost is collected. Typically, these
expenses are categorized as directly or indirectly costs only if they relate to manufacturing
activities, not organizational practices.
Variable cost: The cost which vary with the variation of production units. Direct
material, direct labour and direct expenses are recognised as variable cost. It is also recognised as
prime cost.
Fixed cost: the cost which is not affected by variation among production units. Even if
organisation having null production the fixed cost has to pay by entity. Factory rent, interest on
borrowing and depreciation are the type of costs considered in fixed cost.
Marginal costing: this is the costing system consolidate the cost of production in
propionate to each produced unit.
Advantages: This costing technique helps in long term running process and one of the
cost effective technique.
Disadvantages: the value of closing stock remain uncertain by using this costing
technique.
Absorption costing: this is the cost techniques that consider overall cost of production in
order to calculate profit/loss for an accounting period.
Advantages: it delivers more accurate data comparative to other costing techniques. It
contains both the fixed and variable cost.
Disadvantages: It derive the profitability downwards due to considering the fixed
expenses and is not beneficial for comparison of product lines.
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Activity based costing: this cost accounting technique also referred as an aggregate
production costing because it segregates the overall cost of production among each production
units.
Advantages: it presents realistic results in terms of manufacturing of specific products
and helps to target towards improvements.
Disadvantages: there is huge time required to gather overall production cost data which
delay the associated processes of analysis. GAAP do not advise this reporting technique.
When production is 19000 units
Marginal costing method
Particulars
No. of
units £/unit (£) (£)
Sales revenue 18000 70 1260000
Less: Prime cost
Opening inventory 0 50 0
add: producing 19000 50 950000
950000
Less : Closing inventory 1000 50 -50000 -900000
Contribution 360000
Fixed production overhead -130000
Profit 230000
Absorption method
Particulars No. of units £/unit (£) (£)
Sales 18000 70 1260000
Cost of
opening inventory 0 56.5 0
add: production 19000 56.5
107350
0
107350
0
Less : Closing inventory 1000 56.5 -56500 -
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1017000
Contribution 243000
Under: absorption -13000
Reconciled profit with the marginal costing 230000
The above calculation states the profit of £230000 with both marginal costing and
absorption costing.
When the production is 22000 units and closing inventory is 2000
Marginal costing
Particulars
No. of
units £/unit (£) (£)
Sales revenue 20000 70 1400000
Less: Prime cost
Opening inventory 0 50 0
add: producing 22000 50 1100000
1100000
Less : Closing inventory 2000 50 -100000
-
1000000
Contribution 400000
Fixed production overhead -130000
Profit 270000
Absorption costing
Particulars No. of units £/unit (£) (£)
Sales 20000 70 1400000
Cost of
opening inventory 0 56.5 0
add: production 22000 56.5
124300
0
124300
0
Less : Closing inventory 2000 56.5 -113000 -
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1130000
Contribution 270000
Form the above calculations it is clearly considered that the organisation will earn
£270,000 with marginal costing. There is no significant change is recognized form both of the
level of production. Form the above calculations it is clearly considered that the organisation will
have to bear a profit of £270000 at actual production of 22000 units with closing stock of 2000
units.
v) Recommended costing technique
The above evaluation presents the dynamics of marginal and absorption costing
technique. it critically is reviewed that marginal costing presents more favorable results
compared to absorption costing technique because the concepts related to marginal costing
bifurcate the criteria and management approach in more strategic and synchronized form.
TASK 3
Type of planning tools used in budgetary control
Budgetary control
Basically budgetary control is considered as a terminology of considering the anticipated
income and expenditures in an organised form (Strauss, Kristandl and Quinn, 2015). In this
process the forecasted revenue and expenditures are analysed on frequently basis and projected
outcomes are encountered to attain organisational objectives. In different contextual way the use
of budgetary control process is applied to specific projects or contracts.
Rolling budget
This is a form of budget that will be carried out following the end of the accounting
period of previous years (Arunruangsirilert and Chonglerttham, 2017). This plan is used by the
KEF limited liability entity as after the conclusion of the reporting cycle.
Advantage: The budget can be changed during the year which is a key characteristic of
rolling budget. This is useful towards being reactive to clients to quickly handle unpredictable
adjustments. KEF ltd can get benefit of logical decision by using this budget with in operation.
Disadvantage: Such plan is not appropriate for all those businesses who change their
operations year by year.
Production budget
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This is a plan that involves the calculation of the operations relating to the materials and
the resources required for development (Budding, Grossi and Tagesson, 2014). The KEF Ltd is
planning this plan for its terminology of production.
Pros - This is useful for making the development price-effective for businesses.
Utilisation of plants and machinery be easily to attain maximum level of adequacy with in
operations.
Cons - False estimate of the necessary quantities of product or finance can lead to
massive economic loss in certain situations. Formation of budget in volatile business situation
become more complex for managers and accountants.
Cash budget
It is a form of business plan that provides data about in-or of out of-cash operations. This
budget is drawn up in all those entities whereby cash is made on a continuous basis for
operations (Jack, 2015). Their executives use important data from this expenditure to the above-
mentioned firm to organise the prerequisite for operating capital. It has certain benefits and
drawbacks such as:
Benefits - This plan assists businesses define goals for deficits. This budget may assist the
users to track all the cash relevant activities at a single point of view.
Disadvantage - Because of this allocation, administrators are unable to use the budget as a
company requirement agreement. it tends to adhere the operation of the money expenditures.
TASK 4
Using MA systems to resolve financial problems
Financial challenges are parts of business operations in todays’ changing business
requirements. Scope and reach of organisational activities has been vast at both at large level.
Changing organisational operations and needs enhanced the requirement of various type of
financial resources (Murthy and Rooney, 2018). Working capital requirement is one of the
common financial challenges faced by entities in order to carry out day to day business activities.
Financial governance: Proper management and control subject to relevant financial
problem is recognised as financial governance. The concept of financial governance is very
ancient in business operational studies. Financial governance is a set of internal financial
management rules and monetary policies of organisation. Whenever a business faces financial
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challenges and find any financial issues the governance structure is reconstructed after certain
amendments. Kind of financial problem identifier tools are used by entities to overcome the
financial challenges which are defined as follows;
Benchmarking: This is one of the common tool that is used by entities to identify the
financial issue by comparing the past outcomes to current year’s outcomes (Vann, 2016). It is
one of the proactive approach that not only identify the financial issues but also suggest the
possible actions to resolve these financial challenges itself.
KPI (Key performance indicator): This is a form of methodology that businesses use to
concentrate on such elements that generate highest capabilities to overcome financial challenges
(Klemstine and Maher, 2014). By using this technique to obtain information, managers can
readily analyse the source of the financial problem in businesses. This approach is used by many
business entities not only to figure out the specific financial problem, but also to control their
actual performance properly.
Comparison of ways to adapt management accounting systems
TPG Airdrie
Financial problem The organization is faced with
the financial problem of
increased investment in its
services or events. In other
terms, the overall spending is
much more in line with
expectations. Due to which
entity have to pay excess
money to meet their
production requirements.
The company’s reorder level
of inventories is not beong
managed by the store keepers
due to which the lag in period
of manufacturing goods
increased. Company is failing
to meet the required level of
demand and supply parameter
to buyers and suppliers. This
lead organisation to huge
financial loss for the current
year.
Financial Governance Organisation used financial
KPI’s to identify the gap
among operation.
Benchmarking tool is applied
to recognised the past
favourable records of
maintaining reorder level of
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inventories.
Applied management
accounting system
Cost accounting system is the
suitable accounting system
applied by managers in order
to consolidate the cost of
different sections and allocate
the financial resources
appropriately.
Inventory management system
is being used by managers of
entities in order to manage the
flow of raw material stock in
production process. By
applying LIFO method in
production process, the entity
be able to attain the required
re order level of inventories in
business.
CONCLUSION
The above report states the key characteristic of management accounting systems. It
clearly states that how management accounting systems assist the organisational structurer to
meet the objective of business in aligned manner. It clearly explicit the concept of cost
techniques that helps in determining the profitability of business in further. It is quite cleared that
effective use of planning tools leads budgetary control in right direction assist managers to attain
strategic objective of business. The essentialness of Managerial accounting systems in
organisational context to overcome financial challenges clearly concluded with comparison
among two different organisations.
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REFERENCES
Books and Journals:
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accounting innovations: economic value added and institutional work in the fields of
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pp.144-180.
Watson, L., 2015. Corporate social responsibility research in accounting. Journal of Accounting
Literature. 34. pp.1-16.
Collis, J. and Hussey, R., 2017. Cost and management accounting. Macmillan International
Higher Education.
Elmassri, M. M., Harris, E. P. and Carter, D. B., 2016. Accounting for strategic investment
decision-making under extreme uncertainty. The British Accounting Review. 48(2).
pp.151-168.
Tucker, B.P. and Schaltegger, S., 2016. Comparing the research-practice gap in management
accounting: A view from professional accounting bodies in Australia and
Germany. Accounting, Auditing & Accountability Journal. 29(3). pp.362-400.
Strauss, E., Kristandl, G. and Quinn, M., 2015. The effects of cloud technology on management
accounting and decision-making. Management and Financial Accounting Report. 10(6).
Budding, T., Grossi, G. and Tagesson, T. eds., 2014. Public sector accounting. Routledge.
Jack, L., 2015. Future making in farm management accounting: The Australian “Blue
Book”. Accounting History. 20(2). pp.158-182.
Drury, C. 2012. Management accounting for business decisions: textbook / trans. from engl.
M.: UNITY- DANA. 655 p
Murthy, V. and Rooney, J., 2018. The Role of management accounting in Ancient India:
evidence from the Arthasastra. Journal of Business Ethics. 152(2).
Klemstine, C. F. and Maher, M.W., 2014. Management Accounting Research (RLE Accounting):
A Review and Annotated Bibliography. Routledge.
Vann, C. E., 2016. Strategic benefits of integrating the managerial accounting function with
supply chain management. Journal of Corporate Accounting & Finance. 27(3). pp.21-
30.
Arunruangsirilert, T. and Chonglerttham, S., 2017. Effect of corporate governance characteristics
on strategic management accounting in Thailand. Asian Review of Accounting. 25(1).
pp.85-105.
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