Exploring Management Accounting Systems: Inventory and Cost Control

Management accounting plays a pivotal role in assisting organizations to make informed business decisions. This essay explores the essential components of management accounting systems including Inventory Management Systems, which help track stock levels and reduce carrying costs; Cost Accounting Systems that focus on allocating overheads and direct costs for accurate financial reporting; Job Costing methods used in tracking expenses associated with specific jobs or projects; and Price Optimization strategies aimed at maximizing profitability. Each component is discussed concerning its contribution to strategic management and operational efficiency, underlining how they collectively enhance organizational performance. By leveraging these systems, businesses can improve decision-making processes, optimize resources, and achieve competitive advantage.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................2
TASK 1............................................................................................................................................2
P1. Management accounting systems and essential requirements of its different types .......2
P2 Explain various methods for management accounting reporting......................................4
TASK 2............................................................................................................................................7
P3 Determine income statement by using marginal and absorption costs............................7
TASK 3 ........................................................................................................................................10
P4 Merits and demerits of different kind of planning tools used for budgetary control......10
TASK 4..........................................................................................................................................12
P5 Compare how organisations are adopting management accounting systems.................12
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15

From- Management Accounting officer
To- General Manager
Subject- To prepare a report to GM including management accounting
and its systems along with various techniques of costing and
reporting to explain how organisation will use them
1

INTRODUCTION
Management accounting is an activity that includes identification and recording of
financial and non-financial information that are required to make appropriate decision making
regarding operations and investments. There are several problems that are faced by business
concerns due to alteration in policies of companies and dynamic external conditions. It
emphasises on reducing wasteful activities and enhancing profits of company. Another motive of
this process is to identify new markets for investing funds in order to generate revenues. In
today's complex corporate environment, adoption of management accounting is very important.
This assists in minimizing certain problems related with cash of enterprise and solving various
issues that are arising in different departments related with utilization of financial resources. This
report is about Taj Stores which is a grocery store in the UK. There are various administration
accounting systems and methods to use accounting reporting that will be covered in this
assignment. These techniques are applied on the process of management accounting. Apart from
this, there are various tools for planning. In this report, comparison between two organisations
will be done in order to use it in solving financial problems of the firm.
TASK 1
P1. Management accounting systems and essential requirements of its different types
Management accounting system is a process of collecting financial information related
with business operations including sales data, changes in stock and cost of raw materials in order
to use this analysis in report. It includes gathering operational information and several costs so
that budgeted expenses could be compared with actual ones. In case of Taj stores, main objective
of this system is to provide adequate information to managers in order to make sound decisions.
This helps in the administration in taking corrective steps regarding enhancement of
manufacturing time, cost cutting, increasing marketing budget and on hand stock. It is different
from financial accounting as this consists of internal systems to evaluate the processes of
management whereas other one deals with information of outside organisations. Several
management accounting systems are as follows:
Price optimization system- Pricing is the most important factor that affects demands of
a company. It is required to determine it in an effective manner so that more consumers can be
attracted to buy products and services of institution. Pricing optimization system helps in
2

identifying appropriate value for goods that are offered by this firm. High price of items creates a
negative impact on consumers and it affects their willingness to buy and it ultimately reduces the
profitability of company. Apart from this, if value will be very low then it might create losses for
this firm and it leads to make financial position of business weak. This is because; consumers
think that low priced commodities are not good in quality. Therefore, price optimization system
assists in maintaining a perfect balance between profit and value of products and services. It is
important to determine appropriate price for commodities so as to satisfy needs and wants of
buyers in an effective manner.
Inventory management system- This includes various plans and tactics for the purpose
of inventory control. It is a continuous process in Taj stores as it is engaged in selling of grocery
products. Over stock and under stock are common problems in retail business and it affects the
process of sale. If there will be less inventory as compared to demand then this firm might not be
able to fulfil the requirements of buyers on time. On contrary to this, in case of more stock,
carrying cost of company will increase as these goods are to be kept stored in warehouses. This
concept includes inventory management software that helps in tracking the level of orders, sales
and deliveries. Implementation of this technique could assist in avoiding problems of overstock
and outages. Another common method is bar code tracking which includes tracking goods that
have moved outside the warehouse. This helps in identifying the level of goods delivered. To
avoid wastage of stock, Economic order quantity (EOQ) could be used that assists in identifying
correct time for placing an order. This activity reduces wasteful activities and facilitates effective
functioning of the business. It is also required to find out the requirement of goods to be kept in
warehouses so that there will not be over stocking. Through this, firm can maintain proper
records of sales and it helps in enhancing the profits through effective system of delivery.
Job costing system- It is related with different jobs of this firm that are important in
generating profits. There are several works in organisation that contribute more to provide
benefits to company. This system helps in identifying such jobs so that profitability and
productivity of business could be improved. In case of Taj stores, supply and delivery of goods is
the most important job. So, it is required to make it more effective in order to fulfil specific
demands of consumers in an effective manner.
Cost accounting system- This is a framework that helps the enterprise in estimating
expenditure related with products in order to analyse profitability, value of inventory and control
3

cost. To enhance the revenues from operations, it is very important to determine accurate cost of
goods. This system assists in identifying such expenses in an effective manner which is crucial
for reducing the wastages. Cost of labour and material can go down by using this technique. This
ultimately facilitates profitability of this firm.
P2 Explain various methods for management accounting reporting
Management accounting reporting is very important for small business enterprises like
Taj Stores. This helps in monitoring and controlling performance of company. It is required
prepare proper accounting periods as needed for this firm (Jiang, Petroni, and Wang, 2010). This
assists the managers and owners in determining adequate time to complete any task. Different
types of reports are as follows-
Inventory control reporting- This report is prepared to evaluate the level of stock
management. It is required to analyse whether inventory in managed in proper way or not. This
helps in identifying the sections in which improvement is required. Along with that, this report
determines problems related with under stocking and over stocking. Current position of company
related with management of inventory could be analysed through this study. It helps in analysing
4
Management
Accounting
systemSyste
m
Inventory
Management System
Cost
Accounting System
Job Costing
Price
Optimisation

whether sales activities are taking place on appropriate time or not. Problems related with
delivery of goods can be eradicated by using this tool.
Application- Taj Store can apply this method by preparing its report by analysing all the
activities of sales. This will help in determining accurate need for stock that is required to be kept
in stores in order to fulfil demands of consumers in effective manner. Along with that, this will
also reduce carrying and ordering costs which might facilitate profitability. Since, it is an grocery
store so there are several variety of goods available in stores. Therefore, it becomes easy for this
firm to identify appropriate quantity of goods to be supplied in future. Past mistakes and
problems can be evicted by preparing inventory control report.
Account receivable reporting- This report an critical tool to manage cash flow of
company. It determines the amount and parties from whom money is to be received. In this
report complete information related with debtors is included so as to identify the time when they
have taken credits. There are separate columns for different time periods (Tessier and Otley,
2012). Through this reporting owner can identify the problems that are taking place in the
collection process of company. It assists in dWey, W.M., 2015. Smart growth and transit-
oriented development planning in site selection for a new metro transit station in Taipei, Taiwan.
Habitat International, 47, pp.158-168.etermining buyers who failed to make their payments.
This study helps the collection department in analysing past debts of firm.
Application- In Taj Stores, this report will provide huge assistance in preparing credit
data on appropriate time basis that is weekly, monthly or quarterly. Through this method, they
can decrease the value of bad debts. Along with that, it will also assist in formulating tough and
adequate policies related with debtors who are delaying in making payments.
Account payable reporting- In this report, information related with amount of cash
that company has to pay to suppliers are included. To ensure delivery of goods on time, it is
required to maintain healthy relations with suppliers and other creditors. This reporting method
helps in preparing proper records of amount that it is to be payable along with the time in which
payment is to be made (Bebbington, Unerman and O'Dwyer, 2014). Through this creditors and
suppliers get their amount in desired period which creates positive image in their minds about the
creditworthiness of firm.
Application- Taj Stores can prepare this report by recording all the transactions related
with credit taken by their firm from suppliers or other parties. Through this, payments can be
5

made in given time period. This plays an vital role in creating good relations with suppliers.
These parties will provide stock on time and company can fulfil demands of buyers in accurate
time period as there will not be any problem of shortage of inventory. Along with that, firm can
avail additional benefits such as discounts and rebates. It also determines value of cash to be kept
aside for making payments of creditors.
Performance reporting- This report is concerned with performance of several divisions
of an company. It includes information and data related with working outcomes of employees so
as to identify whether they are performing in effective manner or not. This is required to find out
the deficiencies in their working and take corrective actions to improve it in timely manner
(Libby and Lindsay, 2010).
Application- In scenario of Taj Stores, there are not so many departments but still it is
required to prepare this report in order to evaluate level of performance delivered by its
members. This consists mistakes conducted by employees that assist in identifying the gap
between standards and actual performance. Manager can identify the areas to improve their
working and it also facilitates in determining which employee is entitled to receive incentives
and rewards.
Budget reporting- It is very important for small business organisations to budget
reports. This assists the managers in analysing actual performance of overall firm. Budget is
prepared to estimate the amount of expenses that will take place in prior year from operational
activities of business. This report assists in identifying whether cost incurred is as per the
estimated budget or not. Through this managers can evaluate the areas where more cost has
incurred and reason for the same.
Application- Taj Stores can prepare this report as it will assist in providing adequate
information to workers about available cash in firm for particular activities. This removes
several confusions and doubts from their minds and they can perform better to attain desired
goals and objectives of this company (Baird, Jia Hu and Reeve, 2011). This leads to proper
utilisation of resources of enterprise as employees are aware about availability resources for
them.
6

TASK 2
P3 Determine income statement by using marginal and absorption costs
Income statement refers to the financial document of company that consists financial
performance of firm in specified accounting year. It is an summary of all the revenues and
expenses that incurred in the course of business from operating and non-operating activities. This
helps in calculating net profit or loss of that particular year.
Methods to prepare this statement are as follows-
Marginal costing- This method includes those costs of company that are incurred due
additional production due to which fixed cost gets affected (Lee and et.al., 2011). Such extra
production results in variable cost that is to be considered in income statement. This cost
includes expenses related with labour and material used to produce additional portion.
Absorption costing- This method is related with selling and administration expenses
that are required to be considered in income statement (Kaplan, 2011). It includes cost of
finished stock that consists direct material and labour, variable and fixed overhead etc. This
method of costing is very significant for mangers in taking adequate decisions and allocate all
the resources in effective manner. This technique is mostly used in traditional method of
accounting. It assists in reducing wasteful activities that results in additional cost.
Difference between marginal and absorption costing-
Basis Marginal costing Absorption costing
Meaning It is technique used to
determine total cost of
production for the purpose of
decision making.
This is method to allocate total cost
for the purpose of determining cost
incurred in production unit .
Cost
acknowledgement
For product variable cost is to
be considered and fixed cost is
advised as period costs.
Product cost includes both fixed
and variable cost.
Overheads It includes fixed and variable
overheads.
This consists administration,
production, selling and distribution
overheads.
7

Profitability Profitability is determined on
the basis of profit volume ratio.
Profits gets affected due to fixed
costs.
Highlights It highlights contribution per
unit of company.
This determines net profit per unit.
Cost per unit Cost does not gets affected due
to variances in opening and
closing inventory.
Expense per unit is influenced by
opening and closing stock of firm.
Calculation according to absorption costing -
Working notes:
Absorption costing
Working 1: Calculate full production cost
Direct material £6
Direct labour £5
Variable cost £2
Fixed cost £3
Total £16
Working 2: calculate value of inventory and production
Opening inventory Production Closing inventory
0 700*19 = £13300 100*16 = £1600
Working 3: under/ over absorbed fixed production overhead
Actual fixed production: £2100
Fixed overhead: £2000
Total £100(over absorbed)
Administration Cost: In this budgeted cost is £800 and Actual cost is £700
Selling cost: In this budgeted cost is £400 and Actual cost is £600
Net profit using absorption costing £ £
8

Sales
(-) Cost of Sales:
Opening stock
Manufacturing
Closing stock
(Under)/ Over absorbed fixed prod.
O/h
Gross Profit
Less Expenses
Variable sales expenditure
Fixed administration expenses
Fixed selling expenditure
Over absorption
Net Profit
0
11200
(1600)
600
700
600
(100)
21000
(9600)
11400
(1800)
9600
Working 1: Calculate variable production cost £
Direct material 6
Direct labour 5
Variable production O/h 3
Variable production cost 14
Working 2: Calculate value of inventory and production
Opening inventory Production Closing inventory
0 700*14 = 9800 100*14 = 1400
Net profit using marginal costing £ £
Sales value
Less: Variable costs
21000
9

Opening stock
Manufacturing
Closing stock
Contribution
Less Fixed costs
Variable Production expenses
Administration cost expenditure
Selling cost
Net Profit
0
9100
(1300)
2000
1300
600
(7800)
13200
3900
9300
As per above statement it could be determined that, absorption costing is an appropriate
method that Taj Stores can use for preparing their income statement. It could be seen that, net
profit of this company is £9600 from this method but by applying marginal costing method it is
£9300. There is clear difference of £300 that is because of considering fixed cost. In marginal
costing method, profit is determined after reducing fixed cost from this. This is related with
expenses incurred on sold commodities in an particular year. This shows that fixed cost is
different in both the methods. Apart from this, in marginal costing, expenses incurred on closing
inventory are considered in next year. It is not important whether the commodities are sold out or
not but cost occurred is to be included in current year.
Therefore, because of these factors that are resulting in variation in profit marginal
costing method is not appropriate for this firm (Chenhall and Smith, 2011). It is required to adopt
marginal costing technique to maintain if this enterprise wants to earn more profit. This is most
effective technique according to International accounting standards. It is simpler and easily
accessible process to prepare income statement.
TASK 3
P4 Merits and demerits of different kind of planning tools used for budgetary control
Budgetary control is a procedure for checking whether the plans are followed and
determining difference between budgeted and actual earning and expenditure. Planning tools are
10

used for various work like forecasting and making provisions. If they are utilised in in correct
way then they can different deviation can be minimised (Renz, 2016). Managers are held
accountable under budgetary control for missing any goals and they have authority to make
needed alternations in original plans. Some planning tools along with their advantages and
disadvantages are as follows:
Zero based budgeting method – This budget is formed without considering old data. Not
a single item comes automatically in this budget and manager have to justify that why are they
expending money only particular function. When zero is taken as a base for forming new budget
then various importance of historical information go down because if manager will fail to tell
valid reason by conducting an expenditure then they would not get fund of that work.
Advantages – Efficiency in the performance of complete organisation will enhance if
ZBB is used by an enterprise. When managers have responsibility to use funds in best way then
they will try to locate various functions which are not important for company and have high
contribution in increase cost of business. It makes a positive impact on operational efficiency of
organisation. Taj stores can earn various benefit through ZBB, they can reduce spending
financial resources on insignificant tasks and increase efficiency of their employees.
Disadvantages – This is a costlier method and at the same time it is very complicated.
Making fast decision by using this tool is not possible. If manager of Taj stores fail to understand
this approach then they can use it in right way and it will negative affect their whole operations.
Activity based budgeting method – This approach focuses on different activities which
play crucial role in attaining organisation objectives. Activities which are company will do are
first determined and their cost driver is analysed.
Advantages – This planning tool provide realistic budget and managers get better control
on different activities by using this method. This approach explained significant cause behind
any kind of deviation, if there is any. ABB motivate company enhancing their efficient by
reducing the number of activities which is not in their hand and which they cannot control. Taj
stores can adopt this method if they want to stop spending money on insignificant activities
(Qian, Burritt and Monroe, 2011).
Disadvantages – Need of various resources and money is high in this approach. Their are
many assumption in this method and they may create problem in getting accurate data. Problems
of misinterpretation of data is also their and if managers fail to understand crucial plans than they
11

may make incorrect decisions. If Taj stores will use this approach then it will increase financial
burden on them.
Incremental cost approach – This old method of making budget runs on the concept of
modifying old budget. Rate of inflation is the used for finding amount which is needed to be
added in next budget.
Advantages – Taj stores are operating at low level so this simple method would be most
suitable and more than sufficient for them. Gradual changes in budget assist in running business
sin a smooth way and it provide stability to the organisation (Parker, 2012).
Disadvantages – This budget would work in this fast changing world because it do not
concentrate on various issues and idea which are new and latest. An organisation who believe in
innovation should use this approach because employees will not get any incentive for finding
way of reducing cost.
TASK 4
P5 Compare how organisations are adopting management accounting systems
Business environment is very dynamic in nature due to this it changes rapidly. Because
of these issues small enterprises are facing several problems related with financial and non
financial activities (Scapens and Bromwich, 2010). This is affecting their profitability and
productivity. Management accounting system has been introduced as an effective way to
overcome such problems and providing best solutions to resolve these issues. Taj Stores has
adopted this concept in their operations but there are certain firms that works on the basis of old
techniques and Vectair holding is one of them. This company is still using traditional approaches
in accounting.
Comparison between both the enterprises-
Taj stores Vectair holding
It is an small grocery store in UK. They are
using modern techniques such as lean
accounting. This method focusses on reducing
unnecessary activities in order to minimize
They are relying on traditional methods that
does not emphasises too much on reducing
wastage. These techniques are simpler as
compare to modern ones but it will not assist in
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wastage of useful resources. attaining competitive advantages.
Such techniques are complicated as it requires
more time to analyse data and information that
results in accurate results.
These methods are easier but there is no such
focus on analysing data deeply so results are
not appropriate.
Such approaches helps this company in taking
quick and effective decisions for benefit of
firm.
This type of accounting system does not
provides benefits of effective decision making.
Data and informations are recorded through
software which helps in more reliable and
appropriate accounting.
Such methods are dependent on manual work
due to which there are more chances of frauds
ans errors.
Therefore, it can be analyse that, modern techniques of accounting are providing several
benefits to Taj Stores that are assisting this firm in effectively dealing with problems related with
financial issues (Renz, 2016). Some of the common issues faced by this enterprise are as
follows-
Profitability- This is most important motive of every business concern as profit is the
base for survival and growth in long run. More cost of operations of this company can affect its
profits and it might create problems in achieving desired goals (Otley and Emmanuel, 2013).
Therefore, it is required to maintain the inventory in proper manner. Inventory control system
will assist in managing balance between demand and stock that will evict problems like under
stocking and overstocking.
Price- Another problem faced by this company is related with determining the value for
products. It is required to set pricing in such a manner that it will ensure profitability of company
and satisfaction of buyers. Price optimization could be best tool to overcome such issues as it
helps in determining that value for commodities which will be in favour of firm and consumers
both.
Performance appraisal- For achieving best possible outcomes from workers, it is
required to monitor and control their performance in timely manner (Ward, 2012). Performance
reporting is an essential method for determining whether they are performing in effective manner
13

or not. Through this, their working could be monitored and steps can be taken to reduce the
deficiencies.
Apart from this, there are several other tools that could be used by this firm in
order to deal with financial problems. These are as follows-
Key performance indicators- It is an value that determines ways through which this
firm can attain its key business goals in effective manner. This method is used at various levels
in order to evaluate the success of business in attaining desired targets. There are two type of
levels in this method. High level KPIs is focussed towards performance of overall enterprise
whereas low level KPI emphasises on activities of particular sections such as sales, marketing
etc. Using this tool Taj Stores can achieve their set targets in appropriate time period.
Benchmarking- It is related with setting standards for various operational activities.
These standards are set in order to achieve best possible outcomes from business. This scenario
help in reducing several activities that are not in favour of business. Taj Stores can overcome
various financial problems by setting standards for accounting activities.
Financial governance- It is related with conducting internal audit in firm that includes
checking and verifying necessary financial documents. In this process, auditor deeply verifies
financial statements in order to give true and fair opinion (Macintosh and Quattrone, 2010). This
assists in identifying errors in recording of transactions and determining frauds and misconducts
that are resulting financial problems. Therefore, manager can take corrective actions against
these identified issues.
CONCLUSION
From the above mentioned report it can be concluded that, management accounting
system is very important concept for developing profitability of business. This assignment was
based on Taj stores which had adopted this tool in order to deal with issues it is facing in its
financial and non-financial activities. Such problems creates hurdles in way to attain success and
accomplish goals and objectives in effective manner. There are two methods to prepare income
statement. These are marginal and absorption costing and both these tools have their own
benefits. But, as per this report absorption costing method is best suitable for profitability of this
firm.
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