Analysis of Management Accounting Systems and Their Applications

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Management accounting
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Table of Contents
Introduction......................................................................................................................................3
LO1:.................................................................................................................................................4
P1: Explanation for the management accounting system................................................................4
P2: Explanation for the various methods used in the management accounting reporting:..............6
M1: Evaluation of benefits of the management accounting system:...............................................6
D1: Critical evaluation of how management accounting system is evaluated in the organizational
process:............................................................................................................................................7
LO2:.................................................................................................................................................8
P3: Preparation of the income statement using the absorption and the marginal accounting
system..............................................................................................................................................8
D2: Interpret the range of financial reports of the business activities...........................................11
M2: Range of management accounting techniques.......................................................................11
LO3:...............................................................................................................................................12
P4: Explain the advantages and disadvantages of various planning tools:....................................12
LO4 comparing the ways organizations can utilize management accounting to deal with financial
problems........................................................................................................................................13
M3 Explanation of the advantages and limitations of planning tools used in budgetary control..13
P5 Comparison of adopting management accounting systems by organizations..........................15
M4: Role of management accounting and planning tools in responding to financial problems to
lead the organization towards sustainable success........................................................................16
D3: Evaluation of how various planning tools help in solving the financial problems of the
company:........................................................................................................................................16
Conclusion:....................................................................................................................................18
References......................................................................................................................................19

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Introduction:
The system of the managerial accounting can simply be termed as the method and the process for
the preparation of the management reports of the company. System of managerial accounting in
the companies help in the timely preparation of the statistical and the financial information of the
company. It also helps the management of the company to take the short term decisions in
organizations on the day to day basis. Managerial accounting is entirely different from that of the
financial reporting system which helps the management to prepare the reports of the company for
the external stakeholders of the company. The present report is also making the analysis over the
system of managerial accounting and the various planning adopted in the companies for the
creation of the projected budget reports of the company. The report is also making the discussion
over the various costing methods adopted in the organizations for preparation of the income
statement of their organizations. The disadvantages and the advantages of the different planning
tools that are adopted in the company also analyzed in the report. In whole the report is making
the discussion for the importance of the management accounting system and the management
accounting reporting in the sustainable growth of the company
LO1:
P1: Explanation for the system of managerial accounting
System of Management accounting is having another name called as the managerial accounting
or the cost accounting. It is the type of the managerial system which is used in the companies for
analyzing the business cost also known as the business operating cost and is helpful in the
preparation of the internal financial report of the company (Belfo and Trigo, 2013). The

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managerial accounting system of the company does not deal with the external e performance of
the company, this system basically reports for the internal performance of the company, whereas
the Financial reporting basically deals with the external performances of the company. Financial
accounting reports are prepared after the fixed period of intervals whereas the management
accounting reports do not have any fixed interval for preparation. With the adoption of the
management accounting system in the companies, management of the company is able to make
the proper distinguishing between the indirect cost and the direct cost of the company. This
differentiation helps the company to allocate reasonable prices to the products of the company.
Origin of the management accounting system:
The system of the management accounting firstly emerged in the early industrial revolutionary
period in the big industries. The system of management accounting came after the system of
financial accounting (Braun, 2013). Two of the main industries in the revolution period has
played a vital role in the history of management accounting were the railroads and the textile
industry.
Need for the various type of managerial accounting system
Management accounting is the type of the system which helps the management to derive the
internal information of the company from the different resources and thereby helps the
management in taking the various decisions for the companies. Internal information about the
operational activities of the company helps the top management to take the decision regarding
the strategies, planning, pricing and the cost reduction decisions in the company (DRURY,
2013).

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Here are the essential requirements for the 4 types of management accounting system:
Cost accounting system: The system of the cost accounting adopted in the company should be
as per the size and the nature of the business and as per the information required in the
organization. The cost system should be adopted in the company which is economical to the
organization and maximum benefits must be derived from the system.
Job costing system: Effective job costing system should be adopted in the company which is
able to track the various types of cost adopted in the course adopted in the company (Parker,
2012). This type of information is useful in the companies for the determination of pricing of the
products of the company.
Inventory management system: This system of the company helps in avoiding the collection of
excess inventory in the company and thereby helps in the proper tracking of every movement of
inventory in the production process of the company.
Price optimization system: Price optimization strategy is useful in the company for determining
the prices of the products of the company to develop the proper competition in the market (Feng
& Figliozzi, 2013)).
P2: Various methods used in the system of managerial accounting:
Budgetary report: This is the type of report which is used by the companies for the preparation
of the projected income and expense sheet of the company. Historical financial records are used
by the company for the development of the forecasted budget report of the organization for
determining the future performance of the company.

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Cost report: It is the report used by the companies for determining the per unit cost of
production in the companies (Hilton & Platt, 2013). By making the use of this report in the
company, management can calculate the total cost of production in the company which helps the
management in taking the cost reduction decision for the avoidable cost of the company.
Variance analysis report: It is the report which is prepared in the companies for calculating the
variation between the projected and the actual income statement of the company. This system
will make the analysis for the variation between both the costs of the company and then helps in
the correction of the same.
M1: Evaluation of benefits of the system of management accounting system:
Management accounting is the type of the system which measures the internal performances of
the company and helps in the decision-making process of the organization. Here are some of the
benefits of the management accounting system in organizations:
 It helps in the management of the company to make a comparison between the actual and the
budgeted performances of the companies (Fisher & Krumwiede, 2012).
 It further helps the management in such a way that it helps the company to maximize the profits
and the return on the capital employed of the company.
 With the help of the management accounting system, the business activities of the companies are
managed in a better way and help in the effective planning and budgeting in the companies.

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D1: Critical evaluation of how management accounting system is evaluated in the
organizational process:
Basically, the main objective of the management accounting system and the accounting reporting
in the organization is for the maximization of the profits of the company. The system for the
management accounting system in the company basically helps in the developing the competitive
strategies in the company and thereby helps in taking the decision in the related manner (Hilton
& Platt, 2013). The reporting system of the management accounting helps the company to
measures the profitability of the company from the various activities conducted in the
organization. The reporting system of the management accounting also helps in the analysis of
the weak and strong sectors of the business organization and thereby helps in taking the futuristic
decisions for the company. Thereby understanding the benefits of both the management
accounting and reporting systems it can be concluded that the integration of both the system in
the management system of the company will really prove beneficial for the company (Simpson,
et. al., 2013).
LO2:
P3: Preparation of the income statement using the absorption and the marginal accounting
system:
Variable costing: It is the method of costing which basically takes the variable cost of the
company for the determination of the total cost of the company. The fixed cost of the company
for a specific period is deducted against the contribution earned by the company (Hurlimann and
March, 2012). Marginal cost can be termed as the cost which generally increases with the
increase in the production of the additional units in the company.

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Here is the income statement of the company prepared on the basis of the marginal costing
approach:
Marginal costing:
Particulars Amount (£)
sales unit 40,000 units
sales price per unit 15
Cost of sales
Material cost per unit 4
labor cost 4
variable cost per unit 2
the total cost of sales 10
Contribution per unit 5
Contribution in value 200,000

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Less: Fixed production
o/h
50,000
less: Other fixed o/h 100,000
profits 50,000
Absorption costing: This is the type of the costing method which indicates the total
manufacturing cost of the company. This method is also popularly called as the full costing
method. This type of costing method is used by the companies for the preparation of the external
financial reports of the company for the income tax purpose (Kerzner and Kerzner, 2017).
Here is the preparation of the income statement of the company using the absorption costing
approach:
Absorption costing
Particulars Amount (£)
sales unit 40000 units
sales price per unit 15

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cost of sales
material cost per unit 4
labor cost 4
variable cost 2
fixed production o/h 1.25
the total cost of sales
per unit
11.25
Contribution 3.75
contribution in value 150000
less other fixed o/h 100000
profits 50000

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D2: Interpret the range of financial reports of the business activities:
In the given case the profits by both the approaches are the same as the companies do not have
the opening inventory in their stock, so profit determined by both the approaches are the same.
M2: Range of management accounting techniques:
Budgetary control: This tool is used by the management accountants for controlling and
planning the several activities of the various business operations (Laudon and Laudon, 2016). It
is the technique which is used by the companies to achieve the desired results of the company.
Fund flow statement: This technique is used by the companies for analyzing the changes in the
fund flow of the company and in the financial position of the company.
LO3:
P4: Disadvantage and advantages of different planning tool:
Advantages:
 Standard costing process in the company helps in setting the reliable base for the calculation of
the total cost of production in the company and thereby helps in the calculation of the selling
price of per product in the organization.
 Variance analysis act as the performance measurement tool between the actual and the budgeted
performance of the company. This tool also helps in setting responsibility for the individual
employees for the individual task (Lavia López and Hiebl, 2014).