Analysis of Management Accounting Systems, Budgeting, and Pricing

This comprehensive report delves into various aspects of management accounting, offering detailed insights into its principles, tools, and applications. It begins by defining management accounting and its objectives, contrasting it with financial accounting and emphasizing its role in aiding managerial decision-making. The report then explores key techniques such as financial planning, financial statement analysis, and control techniques including standard costing and budgetary control. It further examines cost accounting systems, including actual, normal, and standard costing, along with inventory management and job costing. Price optimization is also discussed. The report analyzes the benefits of management accounting systems for Imda Tech (UK) Limited, highlighting the integration of management and reporting systems. Task 2 delves into absorption and marginal costing, providing income statements and reconciliation, while Task 3 covers different types of budgets, the steps involved in budget preparation, and various pricing strategies. Finally, the report touches upon the Balance Scorecard Approach, providing a holistic overview of management accounting practices.

Task 1
a)
Part 1-
In every business enterprises, various transaction and events take place every day; sales
are affected, purchases are made, expenses are met or incurred, payment is received and
made, assets are sold and acquired. These events arising out of the decision and actions of
management exercise their effects and impact on the operational efficiency and position
of the enterprises. Most of these transactions and events have money values or can be
measured and expressed in money values. Since they affect the operation and position of
the enterprise, they need to be measured, recorded, analyzed and reported to the
management, so that the management can evaluate their effect upon the enterprise.
Management Accounting is defined as “The presentation of accounting information in
such a way so as to assist management in the creation of policy and in day to day
operation of an understanding”.
If the meaning of managing and accounting are understood, the definition of management
accounting becomes quite clear. The main objective of the management is to manage the
company following a managing pattern comprised of formulation of plan, allocation of
responsibilities for implementing the plan, organizing procedures to assist in the
execution of the plan, and control of the performance.
As compared with financial accounting management accounting is later development.
The periodicity in reporting financial accounts is much wider than in case of management
accounting data, which generally result, are reported on year to year basis. In
management accounting, weekly, fortnightly and even monthly reporting is used.

Financial Statements are required to be published and audited by statutory auditors.
Management accounting Statements are for the internal use and thus neither published
nor audited.
The fundamental objective of management accounting is to assist the management in
carrying out its duties efficiently so that it maximizes profit or minimize the losses. It
includes computation of plans and budgets covering all aspects of the business. Example:
production, selling, distribution, research, and finance. The management accounting
information is an important tool for department managers because it helps in formulation
of planning and policy, for interpretation of financial documents, to assist in decision
making process, to help in controlling, to provide reports, and to facilitate coordination of
operation. The management accounting process makes decision making process more
scientific with the help of various modern techniques. Information related to cost, price,
profit and saving for each of the available alternatives are collected and analyzed
accordingly which will provide a base for taking sound decisions.
Part 2-
A number of tools and techniques have been used under management accounting to help
the management in achieving the desired goals. For this the management accountant
normally uses the following tools and techniques:
a) Financial Planning: It is the process of deciding in advance about the financial
activities necessary for the organization to achieve the desired objectives. It
includes determining both long term and short term financial objectives,
formulating financial policies and developing the financial procedures etc.

b) Financial Statement Analysis: Financial statements are analyzed to make data
more meaningful. Comparative statement analysis, common size statement
analysis, trend analysis, ratio analysis, cash flow analysis etc. are the major
technique of financial statement analysis used in management accounting.
c) Decision Making: Management Accounting helps the management through the
technique of marginal costing, differential costing, capital budgeting, cash flow
analysis, etc.
d) Control Technique: Management should ensure that the plan formulated by it has
been transferred into action. Standard costing and budgetary control techniques
are useful for control techniques used by management.
e) Statistical and Graphical Technique: Management Accountant uses various
statistical and graphical techniques in order to make the information more
meaningful and presentation of the same in such a form so that it may help the
management in decision making.
f) Reporting: Management Accountant prepares the necessary reports for providing
information to different levels of the management by proper selection of data to
be presented, organization of data or selecting the appropriate method of
reporting.
B)
Part 1-
Management accounting system help in tracking the costs related to production of goods
and services. Cost accounting system is a type of accounting process which is used to
determine the cost of the product produced or service provided by the company. Each

Cost accounting system provides the company different methods of tracking the cost
record of the company. The cost accounting system helps to ascertain various types of
variable costs such as material and labor and fixed costs such as overheads and
depreciation on equipment.
In actual costing all the production cost related to actual cost of material, actual cost of
labor, actual cost of overheads incurred. Thus the costing system includes only actual
cost incurred and experience based allocation of cost. Normal costing is used to derive
the cost of production based on actual cost of material, actual cost of labor and a standard
overhead rate applied on product actual usage. If there is a difference between standard
overhead cost and actual overheads cost then the difference is applied to cost of goods
sold or to the costing profit and loss account. Standard costing is the substituting the
expected cost for the actual cost in the accounting record and then periodically record the
variance that is the difference between expected and actual costs. The reason of using
standard costing there are in certain cases it is time consuming to determine actual cost,
so standard cost are used as a close approximation of actual cost.
Part 2-
Inventory management is a management tool to effectively manage the inventory i.e.
incoming and outgoing of inventory from the company. Traditionally it was done
manually but in the present scenario it is managed using the information technology
software which saves lots of time of personnel of company.
Part 3-

Job costing system is used when the work is undertaken as per the customer’s special
requirement. According to this method costs are collected and accumulated according to
jobs, contracts, products or work orders. Job costing is carried out for the purpose of
ascertainment cost of each job and takes into account the cost of materials, labor and
overheads etc.
Part 4-
Price optimization system is a mathematical tool which is used by the company’s
management to determine the customer responses to different price level of its product
and services through different channels. It enables the company to ascertain the price
level where the objective of maximized profit can be achieved.
Merits & Distinctions – Task 1
Benefits and Application of Management Accounting Systems of Imda Tech (UK)
Limited-
Once implemented the management accounting system would provide to the management
of Imda Tech with the following information viz. (1) data designed to assist in the
formulation of the plan covering all business functions, (2) transform the project in
quantitative terms with sources available to finance the project costs, (3) devise workable
standards of performance matching to the responsibilities and measure the performance
and assist in the revision of the plan.

Integrating Management Accounting Systems and reporting systems within
organizations:
Financial Statements prepared under financial accounting consist of monetary
information only. Management accounting statements in addition to monetary
information also consist of non-monetary information i.e. quantities of material
consumed, number of workers, quantities produced and sold so on.
Any information required for decision making is the concern of management accounting.
Financial Accounting is majorly focused on the financial statement which are provided to
the stakeholders of the company such as investors, lenders, creditors, government and
owners of the company whereas Management Accounting has its focus on providing an
information within the company so that managerial decision can be taken efficiently. This
provides the necessary rapidly to management accounting information.
Task 2
Part 1-
Income Statement Using Absorption
Costing
Particulars Amount
Sales ( 2000x 35) €
70,000.00
Less: cost of goods sold (Refer Working
Note)
€
(33,750.00)

Less: Selling, Distribution and Admin
Expense
a) Fixed €
(10,000.00)
b) Variable €
(10,500.00)
Net Profit/(Loss) €
15,750.00
Part 2-
Income Statement Using Marginal
Costing
Particulars Amount
Sales ( 2000x 35) €
70,000.00
Less: cost of goods sold (Refer Working
Note)
€
(22,500.00)
Less: Selling, Distribution and Admin
Expense
€
(10,500.00)
Contribution €
37,000.00
Less : Fixed Costs
a) Production Cost €

(15,000.00)
b) Selling, Distribution and Administration €
(10,000.00)
Net Profit/(Loss) €
12,000.00
Working Note (Part 1 & 2) – Task 2:
Calculation of cost of goods sold
Particulars Absorption costing Variable costing
Direct Material (2000X5) €
10,000.00
€
10,000.00
Direct Labor (2000X8) €
16,000.00
€
16,000.00
variable Production cost (2000X2) €
4,000.00
€
4,000.00
Fixed Production cost ( 2000x7.5) €
15,000.00
€
-
Total €
45,000.00
€
30,000.00
Add : Opening Stock €
-
€
-
Less : Closing Stock (2000-1500) €
(11,250.00)
€
(7,500.00)

Cost of Goods Sold €
33,750.00
€
22,500.00
Merits & Distinctions – Task 2
Reconciliation between absorption costing and variable
costing
Particulars Amount
Net Profit/(loss) as per Absorption
Costing
€
15,750.00
Less: closing stock as per Absorption
costing
€
(11,250.00)
Add: Closing stock as per Marginal
Costing
€
7,500.00
Net Profit/(loss) as per Marginal
Costing
€
12,000.00
Task 3

Part a)
There are different types of budget which are prepared by the management which are as
follows:
a) Physical Budgets: Those budgets which contain information in term of physical
units about sales, production etc. for example, quantity of sales, quantities of
production, inventories, and manpower budgets are physical budgets.
b) Cost Budgets: Budgets which provide cost information in respect of
manufacturing selling, administration etc. for example, manufacturing costs,
selling costs, administration costs, and research and development cost budgets are
cost budgets.
c) Profit Budgets: It is a budget which enables in the ascertainment of profit, for
example, sales budget, profit and loss budget, etc.
d) Financial Budgets: A budget that is concerned with various factors that
determine financial position of a company is financial budget. It may include
budgets like Cash flow budget, capital expenditure budgets, etc.
e) Functional Budget: Budgets which relate to the individual function in an
organization are known as functional budgets. For example, purchase budget;
sales budget; production budget; plant utilization budget and cash budget.
f) Master Budgets: It is a consolidated summary of the various functional budgets.
It serves as the basis upon which budgeted profit and loss account and forecasted
balance sheet are building up.
There are certain advantages of preparing all of the above types of budget.

1) Valuable means for controlling income and expenditure
2) Helps in directing capital and other resources.
3) Enable management to decentralize activities etc.
There are certain disadvantages of preparing all of the above types of budget.
1) Planning, budgeting or forecasting is not an exact science.
2) A budgeting is only a tool not a replacement of management.
3) The establishment of budgeting process is time consuming etc.
Part b)
An organization uses various level comparisons in process of preparation of budget. The
comparison can be horizontal or can be vertical. In horizontal comparison the Financial
Statement of different entity in the same industry is to be done whereas in case of
vertical, comparison is to be done with the financial statement of previous year and then
the forecasting is to be done for preparation of budget. The basic steps of preparation of
budget include the following:
1) Update budget assumptions
2) Review bottlenecks
3) Determine available funding.
4) Step costing points
5) Create budget package
6) Issue budget package
7) Obtain revenue forecast
8) Obtain department budgets

9) Obtain capital budget requests
10) Update the budget model
11) Review the budget
12) Process budget iterations.
13) Issue the budget.
14) Load the budget.
Part c)
An organization uses various pricing strategies for its product and services. The
management is responsible for setting the price at a level so that the objective of
maximizing the profit is achieved and maximum customer is too targeted so that market
shares can also be uplifted. So basically pricing strategy is the policy followed by
company to determine the price of its products. There are various strategies like Cost plus
strategy, competitor pricing policy etc.
Task 4
a)
Part 1-
Balance Scorecard Approach is the management system and strategic planning which is
used to align business activities to the vision and mission of the organization and
monitoring the performance against strategic goals. This approach was first published in
1992 by Kaplan and Norton.
Part 2-