Management Accounting Systems and Techniques Report - Finance Module

This report delves into the core concepts of management accounting, exploring its role in financial decision-making and organizational goal achievement. It begins by defining management accounting and outlining the essential requirements of various systems, including cost accounting, inventory management, job costing, and price-optimizing systems. The report then examines different methods used for management accounting reporting, such as inventory reports, performance reports, accounts receivable reports, cost accounting reports, and cash flow reports. A significant portion of the report is dedicated to cost analysis, where it calculates costs using appropriate techniques to prepare income statements under both marginal and absorption costing methods. Furthermore, the report discusses the advantages and disadvantages of different types of planning tools used for budgetary control. Finally, it compares how organizations adapt management accounting systems to respond to financial problems, providing a comprehensive overview of the subject matter.

Management
Accounting Systems
&
Techniques

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
P1. Explain management accounting and essential requirements of various types of
management accounting systems................................................................................................3
P2. Explain different methods used for management accounting reporting...............................6
TASK 2............................................................................................................................................7
P3. Calculate costs using appropriate techniques of cost analysis to prepare and income
statement using marginal and absorption costs...........................................................................7
TASK 3..........................................................................................................................................11
P4 Advantages and disadvantages of different types of planning tools used for budgetary
control ......................................................................................................................................11
TASK 4..........................................................................................................................................14
P5. Compare how organisations are adapting management accounting systems to respond to
financial problems.....................................................................................................................14
CONCLUSION..............................................................................................................................16
REFERENCES..............................................................................................................................17
.......................................................................................................................................................17

INTRODUCTION
Management accounting is concerned with the process of assessing costs incurred in
business operations to prepare internal financial report, accounts and records for making
informed decision to accomplish organizational goals (DRURY, 2013). It is also known as
managerial or cost accounting. UK Financial Consultants Ltd. Has been chosen for this report.
Further, it covers meaning of management accounting along with its essential requirements and
different methods used for management accounting reporting. Furthermore, calculation of costs
through appropriate techniques of cost analysis and advantages and disadvantages of different
types of planing tools for budgetary control. Lastly, comparison of organizations opting
management accounting system to address financial problems.
TASK 1
P1. Explain management accounting and essential requirements of various types of management
accounting systems
The Institute of Cost and Management Accountants, London, has defined
Management Accounting as “The application of professional knowledge and skill in the
preparation of accounting information in such a way as to assist management in the formulation
of policies and in the planning and control of the operation of the undertakings.” In simple
words, it involves business activities of planning, organising, staffing, directing and controlling
the day-to-day activities for achieving goals and objectives of an entity. Policies are a major part
of this accounting by following which decisions are made (Hilton, and Platt, 2013).
Management Accounting System comprise of actions and framework which are applied
to each departments functioning in an organization. It forms a co-ordination between internal
parties. The scope of this system is vast as it takes into both financial as well as non-financial
data. Johnson and Kaplan defined that management accounting system should effective enough
to provide accurate, reliable and timely information so that costs can be controlled, measured in
order to improve productivity by implementing better production processes.
Managerial accounting can provide numerous benefits to an entity which can have
significant impact on its operations. Further, it is importance to make a part in as internal parties
use qualitative and quantitative information to make decisions. This encourages continuous

improvement, effective management of cost, management of quality etc. Further, it helps in
measuring costs in order to reduce unnecessary costs. It has four basic principles viz. Influence,
relevance, value and trust. Management Accounting undertakes number of tasks and activities
for managing business through strategic planning. It has its roots from stewardship role in
European merchant trading venture. It evolved during industrial revolution and emerged after
financial accounting.
Basis Management Accounting Financial Accounting
Meaning It provides qualitative and
quantitative information to managers
for making decisions, strategies,
plans and policies for smooth
functioning of business.
It refers to preparation of financial
statements on the basis of historical
and current financial information in
order to provide report to outside
parties whose decisions can be
influenced by such information.
Inherent It help in making fruitful decisions by
applying which organizational goals
can be achieved.
It classifies, analyses, records and
summarizes financial data into a
report form.
Application It improves the capabilities of
management to make strategies, plans
and policies to be applicable within
the organization (Hiebl, 2014).
The financial data is used to disclose
true picture of viability of financial
affairs.
Scope It has wider scope as it consists both
financial and non-financial
information.
It is not as wider as management
accounting.
Dependence It depends on financial accounting to
make right and accurate decisions.
It is independent of management
accounting.
Basis of
decision-
making
It takes into account past as well as
forecasted information to make
decisions.
Only previous financial data form the
basis for decisions that will be
implemented in future.
Statutory There is no legal requirements or It is legally compulsory for companies

requirements obligation to prepare report under this
branch of accounting.
to prepare financial statements and
accounts at the end of each financial
year in order to present to
shareholders.
Used for Internal management Primarily for existing and prospective
stakeholders.
Rules It does not have any specific rule for
preparation of reports.
The financial statements should be
prepared per the GAAP or IFRS.
Different types of management accounting systems and their essential requirements
 Cost accounting system: This system is used to ascertain per unit cost of products in
order to have better control on profits, inventory and cost. It is used by manufacturers to
track cost that is being incurred at every stage of production of an item. Calculation of
raw materials, work in progress, and finished goods are done. Further, cost utilised in
input is compared with actual output for measuring financial performance. The essential
requirements are data to be used should be accurate, cost of installation and operating of
system should be included etc.
 Inventory management system: This system is useful managing supply chain or
delivery of goods by tracking dispatch of products (Christ and Burritt, 2013). It involves
technology, processes and procedures for the whole process which begins with suppliers
and ends with delivery of final product to final consumer. The essential requirements are
forecasting of inventory, purchasing, shipping, order management, inventory control etc.
 Job costing system: The process of gathering information regarding costs attributed with
a particular production or job is considered under this system. The information so
extracted is used to provide detail about cost to a customer for the purpose of
reimbursement. It included three types of information viz. Direct material, labour and
overhead. These cost can not be avoided in job costing system and forms basis for
calculation.
 Price-optimising system: Under this system, an organization predict or assess the
responses of customers to different prices for all the products it selling. Further, the best

price is chosen which fits all the criteria such as objectives of the entity. Such information
can be obtained by conducting survey data, operating costs, inventories etc. The essential
requirements for this system are adopting a suitable optimization model, collection of
past data, monitoring results etc.
P2. Explain different methods used for management accounting reporting
Management accounting report is made in a comprehensive way which include all
information are included so that right decisions are taken. There are many types of reports
available that are prepared in management accounting which are as follows:
 Inventory report: These are the reports prepared to track movement of inventory in
different locations such as manufacturing plant, warehouse etc. It is prepared in a
summary form comprising comprehensive accounts of stock and its supply. Further, it be
categorised into different parts for recording amount of various items.
 Performance report: This report is prepared to assess the work performed by each
individual. There are specified standard which are used as a basis to compare the actual
results obtained by each employee to find out variance. Furthermore, a company dispatch
this report to each personnel explaining their achievements along with differences that
have occurred (Schaltegger and Burritt, 2017).
 Accounts receivable report: This report comprise information about invoices of unpaid
customers and unused credit bills within date so prescribed. In other words, it
differentiate account receivable on the basis time of an invoice has been outstanding. A
inventors is always interested in knowing the time that is being taken by company to
collect its receivables. This helps in determining financial soundness of an entity. Further,
major decisions can be taken on the basis of such reports about lowering credit risk in
sales. Further, a total of receivables of a company is shown at the bottom according to
time given for such credit.
 Cost accounting report: A company selling products has to incurred costs for raw
material and each such process through which it passes in order to become a final goods.
The report contain information about expenses and revenues that have been credited to or
debited from cost centres, attribution of total cost to each element of product, transactions
of cost accounting and a summary detail financial and cost accounting. Hence, it is
prepared on the costs that have been spent in making a finished product.

 Cash flow report: It is an important part of financial statement which is prepared to
show inflow and outflow of cash in business operations. It presents an overview of
financial activity in the company for a specified time period. These may be prepared on a
quarterly basis to have better control on management of costs. Further, it may include
balance sheets, income statement, statement of changes in equity, prime transactions of
company which may have significant impact etc.
TASK 2
P3. Calculate costs using appropriate techniques of cost analysis to prepare and income statement
using marginal and absorption costs
Cost is an amount refers to an amount expressed in monetary value that is spent by
company in order to manufacture a product. This is spent for creation of a goods or service.
Moreover, profits are not included while calculating costs.
Absorption costing: It is associated with involving the cost attributed to production of a
particular product. These include direct costs such as wages, raw material etc. which form the
basis for whole calculation. It is also called full costing whereby fixed overhead charges are
included as product cost (Anandarajan , Anandarajan and Srinivasan,Eds., 2012).
Marginal costing: Under this costing system, only variable costs are considered and
fixed costs are not at all taken into account for the calculation. Further, it involves additional
costs incurred for producing an extra unit of output which can be computed by total variable cost
assigned to one unit.
Income statement using Absorption costing
Particular Amount Amount
£ £
Sales (25*100000) 250000
Less: Variable cost:
Direct material 50000
Direct labour 30000
Variable o/h 20000

Variable S & A 30000
Total variable cost -130000
Less: fixed cost
Manufacturing overhead 40000
S & A exp. 30000 -70000
Total cost -200000
Profit 50000
Calculation of per unit cost under Absorption costing
Particular Amount
£
Total variable cost 130000
Fixed Selling & Admin Exp. 30000
Fixed manufacturing o/h 40000
Total cost 200000
Absorption cost per unit:
Total cost/Unit produced:
£200,000/10,000 = £20
Income statement using Marginal costing
Particular Amount Amount
£ £
Sales (25*100000) 250000
Less: Variable cost:
Direct material 50000
Direct labour 30000
Variable o/h 20000
Variable S & A 30000

Total variable cost -130000
Contribution 120000
Less: Fixed cost:
Manuf. O/h 40000
S & Admin Exp. 30000 -70000
Profit 50000
Interpretation: The calculations done above shows that there is no change in income i.e.
£50,000. Hence, it can be said that, both viz. Absorption and marginal methods can be used for
costing as both yield same income.
Income statement using Absorption costing (when 5000 units sold)
Particular Amount Amount
£ £
Sales (25*5000) 125000
Less: Variable cost:
Direct material 50000
Direct labour 30000
Variable o/h 20000
Variable S & A 30000
Total variable cost -130000
Fixed cost:
Fixed manufacturing exp. 40000
Fixed S & A exp. 30000 -70000
Total cost -200000
Less: Closing stock (5000*20) 100000 100000
Profit/(Loss) 25000
Working note
Cost per unit using Absorption costing

Variable cost = £13
Income statement using Marginal costing (when 5000 units sold)
Particular Amount Amount
£ £
Sales (25*5000) 125000
Less: Variable cost:
Direct material (50000)
Direct labour (30000)
Variable o/h (20000)
Variable S & A (30000)
Total variable cost 130000
Less: Closing stock valuation:
5000*13= 65000
Cost of good sold -65000
Contribution 60000
Fixed cost -70000
Profit/(Loss) -10000
Working note. Calculation of per unit cost as per Marginal costing
Particulars Cost
£
Price per unit 25
Direct material (50000/10000) 5
Direct labour (30000/10000) 3
Variable Manufacturing o/h (20000/10000) 2
Variable S & Admin exp. (30000/10000) 3
Total Variable Cost 13
Contribution per unit 12

Interpretation: These two methods give different net amount when used for calculating
cost when 5000 units are sold. The absorption costing give a profit of £25000, whereas under
marginal costing a loss of £10,000 has been incurred. Hence, the company should use former
method to get profits.
Flexible budget means a budget that can be modified with changes in volume or
situations. It is useful is static budget. There is a variable rate that is applied as and when budget
is adjusted and there is no involvement of one fixed total amount.
£ £
5000 units 10000 units
Sales 125000 250000
Cost of sales 50000 100000
Production contribution margin 75000 150000
Variable selling/admin costs 15000 30000
Net contribution margin 60000 120000
Less: Total fixed costs
Fixed manufacturing OH 40000 40000
Fixed selling & admin 30000 30000
Net profit -10000 50000
Cost variance: This method is used to calculate gap or difference between cost actually
incurred and budgeted amount of cost. These are used to track the costs fr expense line items.
The difference should be noted and made a part of reporting so that such deviation can be
reduced in future. This helps in minimising wastage and utilise the costs in more important jobs
or tasks.
For fans:
Labour price variances
(Budgeted price – Actual price) x Actual hours

(5 – 5.20) x 3400
= -680 Unfavourable
Labour usage variance
(Budgeted Hours – Actual Hours) x Budgeted Price
(3000-3400) x 5
= -2000 Unfavourable
For packaging boxes:
Material Price Variances
(Budgeted price – Actual price) x Actual usage
(10 – 9.5) x 2200
= 1100 Favourable
Material usage variance
(Budgeted Use – Actual Use) x Budgeted Price
(2000 – 2200) x 10
= -2000 Unfavourable
Actual costing system: It is a process of recording product cost which is based on
various factors such as actual cost of materials, actual cost of labour, and actual overhead costs.
Along with this, the main concept of actual costing system is they used only actual cost and
allocate base experienced.
Normal costing system: In this system includes all those cost which helps in making a
product such as material cost, actual direct cost and manufacturing overhead. The key point of
normal costing system is to find the overall cost of particular product which use in making up the
product.
Standard costing system: It is a tool which use in preparing budget, managing and
controlling cost, and also to evaluate it for measuring performance. Along with this, standard
costing system main motive is to evaluate the different cost such as standard and actual for
maintaining the productivity of their organisation.
Job costing: This costing helps in determining the manufacturing costs by categorised it
in three parts such as overhead, direct material and direct labor cost for estimating its actual
value. Also it is a process of keeping an account in the form of direct cost and indirect cost.