Management Accounting Systems: Methods, Benefits, and Reporting

This report provides a comprehensive overview of management accounting, detailing its definition, purpose, and essential requirements within a business context. It explores various management accounting systems, including cost accounting, inventory management, and job costing, outlining their key functionalities and benefits. The report further delves into different management accounting reporting methods such as oral, written, and graphical presentations, evaluating their advantages and applications. It also examines the integration of these systems within an organization, emphasizing their role in enhancing efficiency, financial control, and profitability. Additionally, the report discusses the application of planning tools like budgetary control and how management accounting systems can address various financial challenges, ultimately aiming to assist managers in making informed decisions for sustained business success. The document includes detailed explanations of various costing techniques and their application in preparing financial reports. The content is based on the assignment brief provided. The report concludes with a discussion on the adoption of management accounting systems to respond to financial problems and provides a list of references.

Management

Table of Contents
INTRODUCTION...........................................................................................................................1
P 1 management accounting system and its essential requirements in business.........................1
P 2 Different methods of management accounting reporting.....................................................3
M1 Benefits of different management accounting systems and their applications in the
organisation.................................................................................................................................4
P3 Different types of costs and costing techniques and calculation of various costs to analyse
and interpret different costing techniques and preparing income statements.............................6
M2 Description of costing techniques and using these for preparation of financial reporting
documents.................................................................................................................................10
P4 advantages and disadvantages of different planning tools of budgetary control.................16
P5 Adoption of management accounting systems to respond various financial problems. .....18
CONCLUSION..............................................................................................................................19
REFERENCES..............................................................................................................................20

INTRODUCTION
Management accounting is the systematic presentation of financial activities in such a
manner that provides useful information to manager in taking rationale decisions. The purpose of
this accounting is to assist internal management in forming policies and strategies. The present
report will cover meaning, advantages and requirements of management accounting system. The
report will also shown the calculation of budgeted and actual costs by using different costing
techniques. Further, use of planning tools in management accounting for maintaining
profitability and sustainability of company will be discussed.
P 1 management accounting system and its essential requirements in business
Management accounting
Management accounting is a branch of accounting which helps the management in
taking managerial decision relating to the financial position of the company (Akhmetshin, E. M.
and Osadchy, E. A., 2015). It can be defined as applying the professional knowledge and skills in
preparation of the financial statements of the company so that they could provide relevant
information to the mangers in taking appropriate decisions and formulate the best policies for the
enhancement of business and increasing the financial position of the company.
Management accounting system
Management accounting system is a system of accounting which deals with the analysing
and controlling the internal system of the business including various resources of the business are
needed to operate the regular operations of the company. Management accounting system helps
the management in enhancing the overall capacity of the business in order to enhance its
efficiency and profitability.
Requirements of management accounting system
Management accounting system plays a vital role in the success of the company. Each
firm needs inclusion of a better management accounting system in order to enhance its financial
position over a time.
Types of management accounting system and their requirements
Cost accounting system, inventory accounting systems, job costing systems, price
optimization system, etc. are the various types of management accounting systems which could
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be adopted by the company in order to enhance its capacity and efficiency at various departments
of the business. Key requirements of these management accounting system are as under:
 cost accounting system
Cost accounting system deals with the analysing the cost efficiency of the business and
developing plans for the company in order to make it more cost efficien (Doluwarawaththa
Gamage, S. D. and Gooneratne, T., 2017)t. Management can identify cost incurred by the firm
on each product manufactured by the company. It helps in determining the selling price of the
product as well.
Requirements
 This system of management accounting is required by the company as it helps
them in having better control over the cost of the company.
 With the help of cost accounting system, business can determine cost incurred at
each level of production. It helps managers in identifying the wastage of cost at
each level and eliminate them.
 This system helps in determining the cost of each product incurred by the firm.
Managers can determine the selling price of each product after adding set profit to
be earned by the company.
 Inventory management system
It is the system which deals with the planning and controlling the inventory of the
company (Bedford, D. S., 2015). With the help of it, company can record the flow and
requirement of inventory in the firm. By maintaining the inventory accordingly company can
reduce the risk of insufficiency of the stock in the business.
Requirement
 It leads it proper maintenance of record of the inventory.
 This system is required by the manufacturing concerns, as with the help of it they can
identify the minimum requirement of the business to held the inventory for
eliminating the insufficiency or excess of the stock with the company.
 Through inventory management system, business can record each movement of
inventory, whether it is within the business of outside the business. It results in
enhancement of efficiency of the company in context with the inventory.
 Job costing system
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It is the system with the help of which company can determine cost incurred by the
company in performing each job or manufacturing a particular lot of the product or services.
Requirement
 Job costing system is required by those companies which are engaged with
manufacturing the product or services as per the requirement of its customers.
 Business concerns required this system of accounting if they want to determine the
cost of each type of product of services manufactured by them.
 With the help of this system they can also determine the selling price of the
customised product or services by additing the set profit of the company in order to
achieve the organisational objective of gaining profit from the products.
Critical evaluation of management accounting system and reporting
From the above analysis, it can be evaluated that involvement of management accounting
system can help the company in maintaining an effective control over all the financial transations
of the business. Although, for the purpose of adopting management accounting system, the
business needs to involve huge cost in the business.
Further, maintenance of management accounting reports could help the managers in
effectively analysing the actual position of the business and developing their strategies and plans
accordingly. On the other hand, for preparing the management accounting reports, company
needs to appoint professional accountants, that may increase the cost of company.
In this order, a company should adopt management accounting systems and maintain its
reports as well. As, although both involves a huge cost, but the company can recover the cost and
generate additional profits with effective management.
P 2 Different methods of management accounting reporting
Management reporting
Management reporting is a process of management in which deals with
documentation of all the relevant information to the managers including finacial reports and
reports of different accounting systems of the business (Collis, J. and Hussey, R., 2017).
Management reporting helps the management in financial control, project management,
presentation of business in business meetings, etc.
Methods of management reporting
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There are various ways to present the management reports like, written, oral, graphical,
group discussions, etc. managers can make their management report using any of these methods.
Oral reporting
It is the simplest method of transforming informations of business. In this method of
reporting, managers transfers all the informations in verbal form. Group discussions, meetings,
conversations are different ways to present the management reports in oral form. In addition, as
there is no proper record of these informations, theses are comparatively more flexible and easy
to change.
This method of reporting is the most cost efficient method among all the methods of
management accounting reporting. It also takes less time in conveying the information to the
audience. Further, managers can determine the response of the audience for they report through
their facial expressions.
Written reporting
It could be termed as the best method of reporting (Christopher, M., 2016). It is also most
common method of presenting the management reports. With the help of this method, company
can maintain all these reports for a period of long time. It also helps in maintain all the records
for the legal purpose as well.
Financial statements, income statements, balance sheets, cash flow statements, fund flow
statements etc. are various forms of maintaining the reports in written format. Written reports can
show the proper information about the business financial position, efficiency and all other
relevant informations which could help the managers in taking their managerial decisions.
There are various types of written reports like:
 Accounts receivable reports: In these reports, the informations relating to all the unpaid
customers of the company. For example, With the help of these reports, the managers
can analyse the amount of debts over the business. In this regard, they can maintain
sufficiency of fund in the firm.
 Budget reports: From these reports, managers can analyse the estimated operations of
the business. For example, It helps the managers in detecting various needs of the
business and maintaining the smooth running of all the operations as well.
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 Job cost reports: This reports are prepared by those businesses that provides customised
goods and services to the customers. It helps the managers in setting the appropriate price
of the products and generate profit as per the objectives of the company. Inventory management reports : Inventory reports helps the managers in tracking the
flow of inventory in the business. With the help of these reports, the managers can detect
the need of inventories for maintaining the sufficiency. Further, with the help of theses
reports, the company can also eliminate the inventory wastage in the business.
Graphical reporting
In this method of reporting, informations of the business are presented in the form of
charts, diagrams, pictures, etc. (Gooneratne, T.N. and Hoque, Z., 2016). it could be termed as the
most attractive way or presenting the management reports. Further, this method of reporting also
leads in better understanding a better transforming the informations to the users.
It is the method which is used by the professionals in order to show their reports and
transfer all the informations to the audience. It also eliminates the confusion about the
information that need to be provided through this method. Bar diagrams, Pie charts, Break even
charts, flow charts, etc. are the most common ways of graphical presentation.
M1 Benefits of different management accounting systems and their applications in the
organisation
Integration of management accounting system
Management accounting system is important to be included in the managerial system of
the company. Cost accounting system, job costing system, inventory management systems,etc.
are various types of management accounting system. This system of management helps the
managers in having better control over the various departments and enhance their efficiency of
performance. Managerial accounting system also helps in properly detecting the inefficiency of
the business and its each departments as well.
Integration of management accounting system is important as it results in elimination of
all the inefficiency of the business by detecting them and developing managerial strategies and
plans accordingly (Ansoff, H.I. and et.al., 2019). Hence, by integrating management accounting
system in the business, managers can enhance the efficiency of the business, make the financial
position better and increase the profit generation capacity of the business.
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Advantages of each management accounting systems
Cost accounting, inventory management, job costing, etc. are various types of
management accounting system. There advantages are:
cost accounting system
This system provides various tools to mangers through which managers can have better
control over the cost of business like marginal costing, budgetary control, standard costing, etc.
Advantages
 Majorly this method is helpful for the manufacturing concerns as through this system
they can evaluate cost incurred by each department at each level of production for the
purpose of detecting cost wastage.
 It also helps in determining the future cost of the business which may help managers in
maintaining sufficiency of cash in the company.
 This method helps in determining the price of each product as it could help in
determining each product's cost of the business.
Inventory management system
This system helps in effectively managing the stock in the company. In this system
managers can get the proper record of purchase, use and selling of inventory in the business
organisation.
Advantages
 With this method, company can determine the minimum stock requirement of the
business (Otley, D., 2015). Maintaining at least that level of stock can eliminate the
probability of insufficiency of the inventory in business.
 It enhances the efficiency of flow of inventory in the firm.
 Further, this system also makes the company more cost effective.
Job costing system
This technique is mostly used by those business concerns which are engaged in
manufacturing the products or services as per the requirement of customers of which produces
the customised products.
Advantages
 It helps in calculating the cost incurred for each type of product manufactured.
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 With the helps of it management can also determine the efficiency of budgetary control
system of the company.
 Company can also determine different prices of different products as per their
manufacturing process and pricing strategy of the whole organisation.
Price optimising system
This system of management accounting helps in determining the best price of any
product after analysing and comparing the pricing strategy of the organisation and the customers'
attitude for towards the product.
Advantages
 It helps in setting up the best price of product which customer will pay happily and
through which organisation will achieve its objectives effectively as well.
 This system also provides various alternatives to determine the bets price of the product
or services.
P3 Different types of costs and costing techniques and calculation of various costs to analyse and
interpret different costing techniques and preparing income statements
Cost
In terms of business, cost is the amount incurred by the business to manufacture any
product or getting any product or service for the purpose of further sales or to procure any
product for using it in the normal course of business (Mohamed, I.A., Kerosi, E. and Tirimba,
O.I., 2016). For example, material, labour, overheads, etc. Are the main costs of each company.
Role of costing
costing plays an important role in any business organisation like:
 The main role of costing in the business is to determine the actual cost incurred by the
business during a period in order to calculate the actual profit of the company.
 Costing also helps the managers in determining the optimistic price of the product so that
customers could be satisfied with it and company could achieve its profit earning goals as
well.
 Further, it also helps managers in maintaining cost efficiency of the business concern.
 It helps in determining the actual financial position of the firm to take appropriate
decisions for it.
Different types of costs
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Mainly cost are of 3 types namely fixed costs, variable costs and semi variable costs.
Fixed costs
Those costs which do not vary with the variation of production of number of goods or
services. Company incurs these periodically (Kwarteng, A., 2018). They do not depend upon the
volume of production of the business. Rent, office salaries, etc. are the fixed cost of any business
concern.
Variable cost
These costs are also termed as per unit cost of the company, as they incurred by the firm
on per unit basis (Alami, S. and Boussetta, M., 2018). The total amount of variable costs varies
with the variation in the volume of production or services by the business. Direct material,
labour, packing costs, etc. are the various variable cost of a company.
Semi variable cost
These costs are the combination of both fixed and variable costs. Part of these costs
remains same periodically and other part keeps changing as per the change in the volume of the
production of company.
Product cost
Those costs which could be directly associated with the production of the company can
be termed as product cost (Walker, R.L. and et.al., 2016). It includes those costs which are
incurred directly to the product in the manufacturing process. For example, direct material, direct
labour, etc.
Period cost
Period costs are those which do not incur directly for the business. Rather, these costs are
associated with the period. Therefore, these are charged against the expenses of the company.
Selling expenses, advertisement expenses, etc. are the examples of period cost.
Marginal cost
Marginal cost can be defined as cost that would need to be incurred by the for
manufacturing one extra unit of the output.
Contribution
Contribution can be termed as the amount earned by the business by selling its product or
services after deducting all the direct costs incurred by it.
Absorption cost
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It is the total amount incurred by the business in the production process including all the
indirect and direct expenses of the company for turning the raw materials into finished products.
Under absorption of overhead
Under absorption is a situation where overhead actually incurred by the company are
more than the amount of overheads predicted by the managers (Christian, D., 2018). This
situation indicated the inefficiency of the organisation.
Over absorption of overhead
This situation occurs when the actual overheads are incurred less than the amount
predicted by the managers. It shows the enhancement of efficiency of the business.
Difference between absorption costing and marginal costing approach to income
statements
Basis Absorption costing Marginal costing
Calculation of profit Provides lower amount of
profit as fixed costs are also
charged upon the product cost.
Provides higher amount of
profit as fixed cost is not
considered as a product cost.
Classification of costs Production cost, selling and
distribution costs, etc.
Fixed cost and variable cost.
Actual production cost of the company
July August September
Unit sold 500 400 500
Unit produced 600 400 350
Actual fixed
manufacturing
overheads
1000 1000 1000
Actual variable cost 8000 5000 4250
Actual production cost
(15 per unit)
9000 6000 5250
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Budget for 500 units
Particular Amount (€)
Direct material 2000
Direct labour 1500
Variable overheads 1000
Fixed manufacturing overheads 1500
Total manufacturing cost 6000
Cost per unit(6000/500) 12
Budgeted profit 1000
Estimated sales 7000
Manufacturing overhead absorption rate = estimated fixed manufacturing overhead/
estimated material cost*100
Absorption rate = 5000/2000*100 = 250%
Amount of fixed manufacturing overhead absorbed = overhead absorption rate*actual
material cost
Amount of overhead (600 actual material cost) = 250%*600= €1500
calculated of under or over absorbed overheads (500 unit)
Particular Amount (€)
Estimated fixed manufacturing overheads 1500
Actual fixed manufacturing overheads 1000
Over absorbed overheads (estimated cost-
actual cost)
500
Calculation of cost per unit under marginal costing and absorption costing
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