Management Accounting System for Cost Control: A Case Study of ABC Ltd

Desklib provides solved assignments and past papers to help students succeed.

IVAN- MANAGEMENT ACCOUNTING COPY 1
1

Executive summary
Management accounting system helps in understanding the need of controlling costs. The study
has helped in providing a detailed analysis of the managerial accounting processes, systems,
techniques and also its benefits. It has shed light on the elements of financial reporting and
determination of costs for ABC ltd. on the other hand, various kinds of managerial accounting
has also been examined. Furthermore, integration of both reporting as well as systems identified
under managerial accounting has also been evaluated. It has helped in understanding the level of
effectiveness that is derived from using managerial accounting.
2

Table of Contents
Introduction......................................................................................................................................4
Task 1: System of management accounting....................................................................................4
P1: Managerial accounting and different kinds of systems of managerial accounting................4
P2: Reporting of management accounting...................................................................................9
M1: Merits of managerial accounting........................................................................................11
D1: Evaluation of accounting reporting and system of managerial accounting......................13
LO2: Range of techniques under managerial accounting............................................................14
P3: Determination of marginal and absorption expenses.........................................................14
M2: Documents under financial reporting...............................................................................14
D2: Financial reports that help in interpreting business activities...........................................14
Conclusion.....................................................................................................................................14
Reference list.................................................................................................................................15
3

Introduction
Organisations often in order to compete effectively in a dynamic business environment have to
take the help of different techniques of managerial accounting. It has been seen that management
accounting system helps in understanding the need of controlling costs. In addition to this the
need to take preventive steps is also addressed, so that hindrances in operation as well as growth
can be eliminated. The study has helped in providing a detailed analysis of the managerial
accounting processes, systems, techniques and also its benefits. It has helped in understanding
the level of effectiveness that is derived from using managerial accounting. It has shed light on
the elements of financial reporting and determination of costs for ABC ltd. on the other hand,
various kinds of managerial accounting has also been examined. Furthermore, integration of both
reporting as well as systems identified under managerial accounting has also been evaluated. The
problem statement of the study is to provide an understanding of the way analysis of financial
data or information helps in making effective decisions.
Task 1: System of management accounting
P1: Managerial accounting and different kinds of systems of managerial accounting
Overview of managerial accounting:
Managerial accounting has been understood to be useful in the management of internal aspects of
an entity. It helps in the collection of financial as well as non financial information from various
departments operating in a company (Kieso, Weygandt & Warfield, 2016). The collected
information, is stored, analysed and evaluated by the top management of an organisation to make
effective decisions. Therefore it can be inferred that managerial accounting systems and
techniques facilitates decision making process of a company.
Different kinds of accounting system and the difference between managerial and financial
accounting:
Accounting has different branches such as financial, management, operational and others.
Financial accounting has been seen to help firms in assessing the performance of the companies,
and it deals with both external and internal factors that an organisation is exposed to (Nørreklit,
2017). In the opinion of management accounting has been found to be dealing with only internal
4

factors that includes costs, expenses, regular operations of the business and others. It has large
number of techniques that ultimately take the help of financial statements prepared as per
financial accounting (Malina, 2018). Therefore it can be said that both financial accounting and
managerial accounting are related to each other to some extent. However there are large numbers
of differences between the two types of accounting. These have been explained below;
Terms of differences Managerial accounting Financial accounting
Meaning The accounting system that
helps top management to
make decisions related to
expansion, control of costs
and others is known as
managerial accounting.
In the opinion of Otley
(2016), financial accounting
helps in the preparing
financial statements and thus
helps in analysing the
performance of the business.
Applies to It is applied in the internal
management that is in the
decision making process.
On the other hand, financial
accounting is applied in the
case of preparation of
financial statements and thus
helps in both external as well
as internal management of the
business (Malmi, 2016).
Scope It has a broader scope as it
also takes the help of
financial accounting to
prepare management reports
and based on these managers
take important decisions for
better functioning of
businesses.
Financial accounting also has
a wider scope however its
application is in limited
number of concerned areas.
Measures It measures both qualitative It measures only quantitative
5

and quantitative data. data and no inclusion of
qualitative information is
done.
Depends on It depends on the financial
statements and accounts
prepared
Financial accounting does not
depend on the data analysed
through managerial
accounting.
Decision making It facilitates decision making
process and its main aim is to
help managers understand the
need to make changes.
Moreover it uses forecasted
data as well as historical data
to make decisions.
On the contrary financial
accounting mainly takes into
account only historical type of
data.
Required as per statute Use of managerial accounting
is not made mandatory as per
statute (Van der Stede, 2016).
It used by businesses to make
the performance of the firm
effective.
In case of financial
accounting it has been seen
that it has been found to be
mandatory as per statute and
is also legally required.
Users of accounting Users of management
accounting are found to be
mostly belonging to an
internal organisation. For
example, employees,
managers and top
management of an
organisation.
Users in case of financial
accounting have been found
to be both external and
internal. For example
employees, customers,
managers, shareholders and
other stakeholders (Kamal,
2015).
Table 1: Difference between management and financial accounting
6

(Source: learner)
Requirements of different managerial accounting system:
The different kinds of managerial accounting system have been found out to be activity based
costing, marginal costing, budgeting and standard costing. All of this system of managerial
accounting has been found out to be essential for making the functions of an organisation
efficient. Requirements of all these have been discussed below;
Activity based costing
Activity based costing has been defined by Boučková (2015), as the system of allocating costs as
per costs drivers and allocation rates. It has been understood to be effective in identifying
different activities and the costs drivers as well as activity pools. According to the views of
Messner (2016), it has been understood to be useful since it helps in analysing the most
important activities. It also helps in recognising the most expensive activity undertaken by an
organisation. Therefore use of activity based costing leads to accurate determination of accounts.
Moreover it also helps in making decision related in the context of resource allocation. Therefore
it can be said that activity based costing system is essentially required in a manufacturing firm
like ABC ltd. however it has been found out that activity based costing is also prone to
limitations. This is due to the fact that it is of complex nature and is also time consuming.
Moreover it has been understood that lot of time consumption is found in the area of identifying
activity pools, costs drivers and determination of allocation rates. On the other hand it has been
found that employees with relevant knowledge in the field of activity based costing. In spite of
the differences it can be inferred that the use of activity based costing is found to be essential
because it enhances the effectiveness of processes.
Marginal costing
Marginal costing is evaluated to be useful in the context of ABC ltd, because, it helps in
identifying contribution made by the units or projects. As per the opinion of Hopper and Bui
(2016), marginal costing helps in determining the costs accurately as it does not allocate fixed
costs on the basis of units. Therefore it helps in allocating expenses based on its behaviours and
to the extent they should be allocated. It is essentially required in a manufacturing firm like that
of ABC ltd because it would help in determining the contribution made by each and every
project. It also helps in selecting the best alternative on the basis of the contribution they made.
Furthermore as per the opinion of Bromwich and Scapens (2016), it has been understood that by
7

assessing the contribution level projects are ranked and it becomes easy for organisations to
make decisions regarding make or buy. However it also has limitations that have been found to
be mainly use of historical expenses and data. It does not take into account time value of money
and uncertainties. In spite of the disadvantages that exist marginal costing has still been found to
be of high importance and it has been beneficial for use by ABC ltd.
Figure 1: Managerial accounting system
(Source: learner)
Budgeting
Budgeting as a management accounting system plays a significant role in controlling expenses.
This is because, budgeting has been understood to reflect the costs related to each and every
activities and it also helps in preparing budgets accordingly. Preparation of budgets helps in
forecasting expenses related to next quarter or next financial period. Moreover it has been seen
that organisation also become able to take preventive steps and this reduces the chances of
determining high costs of production. As per the suggestion given by Brewer, Garrison and
Noreen (2015), budgeting also helps in assessing the costs associated with different activities as
well as the assessment of funds that an organisation has to meet the budgeted expenses. It has
been identified to be of essential requirement because with the help of it economies of scale can
be achieved. Since it helps in finding the most cost consuming activities hence managers are able
to reduce expenses related to them or eliminate the activity altogether. Therefore it can be said
that budgeting enhances the productiveness of an organization's. Moreover ABC ltd would be
able to interpret the expenses and other costs by preparing budgetary reports on a quarterly basis.
On the other hand, it has been observed that, the organizations can use different types of budgets
such as flexible budgeting system, cash budget, zero based budgeting system and others.
8
ActivitybasedcostingMarginalcostingBudgetingStandardcosting

However like other system of managerial accounting, budgeting too has large number of
disadvantages. These have been mainly seen to be associated with high time consumptions and
high complexity. Furthermore in case of flexible budgeting it has been understood that a lot of
confusion is created. Still, budgeting helps in reducing costs by taking a proactive approach and
helps in addressing any forecasted negative outcomes.
Standard costing
Standard costing helps in setting standards in terms of expenses and revenues. It helps in
comparing between budgeted or standard costs and actual expenses. Variances if any are found
in the context of a particular quarter or year then it is used to improve that particular activity or
area for which variances have arisen (Nasseri, Yazdifar and Askarany, 2016). On the other hand,
standard costing also has large number of use in the area of manufacturing. This is due to the fact
that costs related to direct material, labour costs and variable overhead standards rates are set
with the help of this. Moreover it also helps in preparation of reports that in turn helps in
assessing variances. However it also has certain demerits that make it of limited use in an
organisation (Kaplan and Atkinson, 2015). For example it has been seen to be of expensive
nature and it also consumes a lot of time.
P2: Reporting of management accounting
The different methods that are used for reporting under management accounting have been found
to be performance reports, cost management reports, standards costing reports and budgetary
reports. The use of these reporting methods has been discussed below;
Performance reports
Performance reports helps in assessing the outcomes of different activity and thus helps in
comparing the performances based on previous achieved outcomes or on the basis of internal
departments’ performance. Moreover it also helps in assessing the impact of different changes
incorporated within organizational processes (Sokolov and Elsukova, 2016). With the help of
performance reports managers are able to compare between budgeted expenses or results and the
actual outcome. Moreover variances are also analysed with the use of performance reports.
Managers usually look for unfavourable or adverse variances in a performance reports. This is
because removal of such assessed adverse variances would improve the functions. For example
in case of ABC ltd, performance reports are prepared to analyse the variances in material, labour
9

and others. This is prepared on a quarterly basis. In case of the organisations, performance
reports help in assessing the performance of the employees as well and their capabilities to retain
loyal customers as well as attract new customers.
Cost management reports
Cost management reports is used by manufacturing companies like ABC ltd, to help the
managers to understand different types of costs that a firm incurs. The extents to which the
identified costs are incurred are also referred through such reports (Wang and Wang, 2017).
Moreover it has been understood that costs management reports helps in identifying those
activities for which large number of funds are being used. Moreover it also helps in
understanding the effectiveness with costs are allocated for each and every activity. With the
help of this managers are able to make judgement that if any activity cost have been
misappropriated or not. In case of ABC ltd, it has been found to be of use as large number of
expenses has to be shown in such reports. Moreover cost management reports are prepared by
the firm on a half yearly basis.
Figure 2: Financial reporting
(Source: learner)
Standard costing reports
Standard costing reports is another essential type of financial reports that are prepared under
management accounting. This has been due to the reason that standard costing reports undertake
the incorporation of various standards rates which a firm has expected to achieve in a particular
financial year. It helps in finding out the favourable and adverse variances. The managers are
benefited by the use of such reports as it helps in comparing actual with expected or standard
rates of expenses. On the other hand, standard costing reports help in finding out the activities
that needs more attention.
10
PerformancereportsCostmanagementreportsStandardcostingreportsBudgetaryreports

Budgetary reports
Budgetary reports have been recognised to be the most effective type of financial reports under
managerial accounting. This is because it helps in analysing the amount of expenses and revenue
that are expected to be achieved by an organisation for a particular quarter or financial period. It
also helps in analysing the costs level for each unit of production as well as budgeted profits. As
per the view of Mouritsen and Kreiner (2016), it has been observed that the budgetary reports
assist top management to make decisions for expansion. It also helps in making decisions related
to type of control that they are required to exercise on the costs and activities. In case of ABC
ltd, it has been found out that budgetary reports are prepared with the help of flexible costing
techniques and it prepares flexible budget on a quarterly as well as yearly basis.
M1: Merits of managerial accounting
Merits of managerial accounting have been outlined below;
● Helps in decision making process
Decisions making process is facilitated with the use of managerial accounting techniques like
marginal costing, transfer pricing and others. According to the opinion of Nilsson and
Stockenstrand (2015), it has been understood that in an organisation different techniques of
managerial accounting are used so that various results can be analyzed properly. In turn this
analysis of results helps in outlining various aspects, elements associated with a business that
helps top management to judge its functions as effective or ineffective. Thus if a firm is willing
to make decisions regarding expansion, constipation or increasing its level of production , then
this managerial accounting technique would be observed to be useful. For example ABC ltd
would make decisions related to number of units that they should produce.
● Assists in controlling costs
Managerial accounting offers various techniques such as budgetary control, standard costing and
variance analysis that helps in controlling costs. It has been understood that, the organisation is
able to control expense and achieve economies of scale by the continuous use of this. With the
help of budgets, it has been seen that organisations have been able to allocate costs and assess
whether number of activities would be prone to high costs (Amara and Benelifa, 2017). In
relation to standard costing standard rate is allocated to different elements of production. Thus
11

with the help of the two variance analysis is done. ABC ltd has been benefited by it as it helps in
variable costs.
● Helps in analysing the level of contribution
Contribution is determined in case of manufacturing firms mostly. It has been stated to be so
because, manufacturing firms have to make decisions regarding accepting orders, or either make
machines or buy from external market (Guffey and Harp, 2016). On the other hand contribution
also helps in differentiating between different similar kinds of projects. This is done by ranking
different projects on the basis of high level of contribution. It has also been seen that
organisations have to use marginal costs analysis in order to determine contribution. ABC ltd has
been able to analyse the contribution level with the help of marginal costing.
Offers different parameters to assess the performance of organisation
Different parameters to assess the performance of the organisations under management
accounting have been found out to be both financial and non financial. For example,
organisations have to use number of customers retained and attracted by the organisation in a
specific time period, is seen to be a financial parameters (Nielsen, Mitchell and Nørreklit, 2015).
On the contrary, non financial parameters include amount of satisfaction that customers get and
the feedback that is received from them. All these aspects help in the determination of the level
of performances. Therefore it can be stated that management accounting helps in assessing
performance effectively and thus helps in improving the costs associated with it. ABC ltd is seen
to be using mainly financial parameters to assess performances.
● Analyses variances
Variance analysis is done with the help of comparison between budgeted or standards costs and
the actual costs that have been determined. Variance analysis outlines favourable and
unfavourable costs (McLaren, Appleyard and Mitchell, 2016). The extents to which expenses are
found to be exceeding expected expenses and if it is adverse then the reason behind it are also
found out. Variance analysis has been done with the help of budgeted result in ABC ltd.
Thus it can be said that ABC ltd would be highly benefited by the use of managerial accounting.
D1: Evaluation of accounting reporting and system of managerial accounting
Managerial accounting systems and reporting have been observed to be integrated effectively in
the organisation of ABC ltd. For example it uses marginal costing methods to produce income
12