Management Accounting System Evaluation in Pharmacy2U Company

This report provides a detailed analysis of management accounting (MA) practices at Pharmacy2U, an online pharmacy in the UK. It covers essential requirements of different management accounting systems such as cost accounting, inventory management, and price optimization, along with methods for management accounting reporting including budget reports, performance reports, and cost managerial accounting reports. The report also examines the principles of MA and its role in decision-making, including data provision, analysis, communication, and control facilitation. Furthermore, it discusses income statements under variable and absorption costing, the reasons for differences between them, and a critical evaluation of the MA system and reporting integration within Pharmacy2U, highlighting the benefits and potential drawbacks. The report also compares planning tools like cost accounting, marginal costing and cash flow analysis. The report concludes with recommendations for Pharmacy2U to enhance its financial decision-making through effective MA implementation.

Unit – 5 MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................3
PART A...........................................................................................................................................3
Management accounting and essential requirements of different types of management
accounting system........................................................................................................................3
Meaning of Management Accounting.........................................................................................3
Essential requirement of different types of management accounting system..............................3
Methods used for management accounting reporting..................................................................4
Principles of management accounting.........................................................................................4
Role of management accounting & MA systems........................................................................5
Income statement under variable and absorption costing............................................................6
Income statement under absorption costing.................................................................................7
Income statement under marginal costing..................................................................................8
Reason of difference between Marginal and Absorption costing................................................8
Critical evaluation of management accounting system and reporting integration within the
Pharmacy2U company.................................................................................................................8
Benefits of the function of management accounting to Pharmacy2U industry...........................9
Conclusion on application of management accounting...............................................................9
PART 2..........................................................................................................................................10
Comparison of three planning tools used in management accounting......................................10
.......................................................................................................................................................13
Comparison of ways in which management accounting is effective in dealing with financial
problems by preventing it..........................................................................................................13
CONCLUSION AND RECOMMENDATIONS:.........................................................................15
........................................................................................................................................................16
REFERENCES................................................................................................................................1

INTRODUCTION
Management accounting (MA) is also termed as managerial accounting is a process of
identify, estimate, analyse, interpret & communicate the financial information to managers of the
company for successfully achieving organizational goals (Ax and Greve, 2017). This report is
based on Pharmacy2U founded by pharmacist Daniel Lee in November 1999. It is an online
pharmacy located in UK. This report will study about principle of management accounting & the
role of MA. Moreover, it will study about income statement using absorption & marginal costing
method to present the co. financial statement & position. This report will also discuss the
function of MA & its advantages and disadvantages. Study will also further focus towards
planning tools of MA or case studies with example for compare the ways in which MA is
applied. Report will also give conclusions and recommendations to the company.
PART A
Management accounting and essential requirements of different types of management
accounting system
Meaning of Management Accounting
The institute of Cost and Management Accountants, MA is the preparation of financial
information by implementing of professional knowledge & skill. This information help in a way
to guide manager in the formulation of various policies and also help in planning and controlling
of the company's operation for achieving sustainable growth (Qian, Hörisch and Schaltegger,
2018).
Essential requirement of different types of management accounting system
The basic management accounting system which is required to be followed and apply by
Pharmacy2U are as follows:
 Cost Accounting
Cost accounting direct the manager to evaluate the company's total cost of production including
variable costs & fixed costs for production of per unit. For ex. Pharmacy2U co. use cost
accounting system to know the cost of each capsule which involve cost of drugs, any chemical
solution, or plastic body, packaging and so on. It assists the managers to take decision about the
price of per capsule.

 Inventory management system
This system is used for calculating the value of inventory by using various methods such as
LIFO, FIFO, AVCO. For ex. Pharmacy2U can use inventory system to evaluate the need of
quantity of products such as drugs, chemical solution, aluminium & plastic for packaging etc. so
that the overstock of material is ignored (Ngo, 2020).
 Price-optimization system
Price-optimization is used to calculate the price according to the changing market demand of the
product at different price levels. It helps companies to decide their price at that level they earn
maximum profit. For ex. Pharmacy2U use this system to calculate the price according to the
particular demand of the medicine.
Methods used for management accounting reporting
The different methods of MA that need to be used by Pharmacy2U finance and account manager
are as follows:
 Budget reports
Budget reports are very critical in evaluating company performance. An estimated budget is
made based on historical data & then according to that budget company's actual performance is
compared (Andriani and Suhartini, 2020). For ex. Pharmacy2U used cash budget to know the
cost of raw materials and on the basis of that plan their future prices to earn maximum profit.
 Performance reports
These reports are used to create the performance review of a company as a whole. Each
employee performance are analysed by this report which help company to know that which
employee underperform & need training.
 Cost managerial accounting reports
These reports help the company to analyse their cost of production including all direct and
indirect cost such as raw material cost, overhead, labour etc. For ex. These methods used by
Pharmacy2U to identify their cost including drugs, chemical solution, plastic & aluminium and
so on.
Principles of management accounting
The principles of MA that Pharmacy2U need to be followed are described below:

 Designing and compiling
MA system is designed accounting information in such a way that helps managers to solve
various problems. Accounting information is easily altered according to the requirement of
managers.
 Accounting for inflation
To know the value of capital given by the owner of the company in term of real value of money
it is necessary to evaluate through revaluation accounting. In this inflation rate is considered to
know the real success of the business.
 Forward looking approach
Management accounting helps the company to analyse the future problems with the help of
standard costing techniques. Future problems may be avoided to arise (Burger and Middelberg,
2018).
Role of management accounting & MA systems
The role of MA of the Pharmacy2U in decision-making process of organization are as follows:
 Provides data
For every co. data is important for analyse the company performance. MA provides data to the
organization about the past achievements of the co. that help them to forecasts for the future
plans. Without the reference of data no MA planning is successfully done.
 Analysis and interpretation of data
The financial data is not easily understandable for any manager of the co. MA helps in
rearranged data with proper analysis in that way the data is meaningful interpreted. Data is
arranged with the help of ratio analysis, P&L account, balance sheet and so on (Gonçalves and
Gaio, 2021).
 Communication
Management accounting play the role of communicator of data. Each and every member of the
company needs data MA provide information as per the need of various level of management
such as top, middle, and lower levels. For ex. The top-level manager needs critical information
for long term planning.
 Facilitate control

MA helps companies in facilitate control of the activities through preparing of budgets and
standard costing. According to that estimated budget and standard costing actual performance of
the company is compared and any deviation is arisen then take corrective measures to control the
activity.
Income statement under variable and absorption costing
Income statement under absorption costing

Income statement under marginal costing
Reason of difference between Marginal and Absorption costing

The main reason of difference between marginal & absorption costing is treatment of
fixed cost of production. In absorption costing both fixed and variable cost are considered in cost
of goods sold (COGS) whereas in the marginal costing method only variable costs are included
in COGS (Childers and Maggard-Gibbons, 2018).
Critical evaluation of management accounting system and reporting integration within the
Pharmacy2U company
Management accounting system assists the Pharmacy2U industry managers to make
decisions concerning future plans. It also helps managers in formulation of policies for planning
& controlling the operations of the firm. MA requires high professional knowledge & skills for
formulation of financial and accounting information in that way through which management
takes necessary decisions. Understand this with various types of MA such as inventory valuation
help the manager to know the actual cost of production and it also identifies its economic order
quantity so the Pharmacy2U give their products to the customer at its best price. Cash flow
analysis assist the company about the working capital which used to run business operations and
complete transactions (Yousefizadeh and Molanazari, 2018).
But it is always advisable to the company before take any decision as per the basis of MA
system business need to understand their objectives. Because MA need to hire professional
person who has an knowledge about that and it is costly for small & medium-sized companies.
MA system are based on past records and estimation that not proven always right & if company
fails to achieve their goals according to their budgeted plan then they might suffer huge financial
losses.
Benefits of the function of management accounting to Pharmacy2U industry
In case, if Pharmacy2U company adopt management accounting tools and techniques along with
system within the organization, then they will enjoy the following benefits:
 MA helps the company in determined their break-even point through the margin analysis
technique. Break-even point is the point that show company's equity point where co.
cover its total cost of production. It helps in determine optimal sales mix of the products
& manage its profitability.
 Variance analysis show the manager of the company about the difference between
estimated budgets and actual performance of the co. Budgets are formulated on an

estimated basis that directs the future actions of the company. Analysis of variances helps
the company to make informed decision (Iravani, Akbari and Zohoori, 2017).
 It assists the manager of Pharmacy2U co. about the hurdles and bottlenecks with the help
of constraint analysis technique. It analyses the impact of this in revenue-generating
capacity & profit of the company.
 Rate of return technique of MA helps the manager in determining the most profitable
project or proposal. The project that give higher profit is selected.
 Manager makes a decision regarding future capital investments of the company such as
fixed assets & equipment. These decisions are made with the help of capital budgeting
analysis that shows the capital availability of the company.
Conclusion on application of management accounting
The report has concluded that if Pharmacy2U company want to take various decision for
growth & success of the organization. With the earning of maximum profit then company need
to follow various MA system & methods. The report has examined in detail about the principles
of MA which directs the co. to follow right procedure. It has also studied about the role of MA &
its system. The report has also concluded about the various MA tools and functions with its
implementation in the Pharmacy2U industry. It has also researched about the benefits of
financial reporting & statements and critically evaluate the MA system & reporting.
PART 2
Comparison of three planning tools used in management accounting
Particulars Cost Accounting Marginal Costing Cash Flow Analysis
Meaning Cost accounting (CA)
is the process of
identifying the total
cost of production
including fixed cost or
variable cost. It helps
the managers in cost
Marginal costing is the
technique in which
only variable cost is
considered as the cost
of production. While
fixed cost is fully
written off against the
Cash flow analysis is a
technique that used to
know the cash inflows
and outflows of the co.
It is used by investors
and managers to
analyse the actual

controlling & making
various future decision
with the help of
comparing standard
cost with actual cost. It
deals with the cost of
production, selling &
distribution.
contribution. It
describes the
additional cost include
in producing a one
more extra unit.
Marginal costing is
also termed as
incremental cost
(NGUYEN and LE,
2020).
liquidity position of
the co. it mainly
includes three different
activities such as
operating activities,
financing activities
and investing
activities.
Advantages  It helps the
manager in
identify future
prices of the
product.
 Through CA
manager control
the excess stock
of materials. It
reduces wastage
(Devi and
Izzaty, 2021).
 It directs the
manager to
analyse the
reasons of
losses and take
corrective
action to
improve them.
 Marginal
costing helps to
evaluate and
control cost of
production. It
gives
opportunity to
co. to earn
more profits.
 It helps in
formulating
short-term
profit planning
and various
decision-
making.
 With marginal
costing
technique the
alternative
production
 It eases
calculation of
the company
capability to
meet its daily
expenses.
 It helps
management in
formulating of
financial
policies &
budgets for
future
investments.
 It helps the
management to
show the
performance of
the co. on cash
basis. With
compare the

policies or
sales profits are
properly
evaluated. This
assures that
decision taken
will give
maximum
return to the
co.
actual cash
flow with the
estimated cash
flow statements
(Petera,
Wagner and
Šoljaková,
2020).
Disadvantages  The main
limitation of
CA is it based
on past
performances
that managers
apply for taking
future
decisions. It not
gives the
correct results.
 CA ignore
financial
expenses at the
time of cost
calculation.
 It is a costly
system because
it requires high
professional
knowledge &
 It not always
give accurate
results because
it segregates all
costs into fixed
and variable
cost. All costs
become
variable in long
run.
 Marginal
costing is
generally
beneficial for
short term
decisions.
 It does not
show true and
fair view of
financial
affairs.
 The main
drawback of
this statement
is it does not
show the net
profit of the co.
it happens due
to the
ignorance of
non-cash items.
 It completely
ignores the
accrual concept
that is one of
the basic
accounting
concepts.
 This statement
is based on
historical data
that not give

skill. Because it
excludes fixed
cost from
valuation of
stock that also
impact the
profit of the
company.
accurate
results.
For example Pharmacy2U co. can
use CA tool to identify
their cost of production
that helps manager to
make future plans. It
also helps manager in
controlling of material
& supply through
which co. earn
maximum profit. But it
also considered the
drawback of CA is that
it is not beneficial for
SME co. because it is a
costly method. It also
based on past data that
not always give
accurate results.
Marginal costing is
used by Pharmacy2U
co. to calculate the
cost of extra producing
unit. After reaches at
optimum production
level. It helps co. to
formulate their short-
term plans because it
is not beneficial for
long term planning. It
ignores the fixed cost
of production that
impact the future
profits of the co.
This statement is used
by Pharmacy2U co. to
know their working
capital of the
company. Working
capital is that capital
which remain after the
pay-off all liabilities. It
shows the liquidity
position & profitability
of the co. On the other
hand manager need to
be cautious about the
non-cash items that
also impact the co.
profitability.

Comparison of ways in which management accounting is effective in dealing with financial
problems by preventing it
Budgetary Control Ratio Analysis Investment Appraisal
Techniques
Budgetary control is the
procedure of formulating
estimated budgets for future
decision-making. Compare this
estimated budget with the
actual performance for finding
deviations between them. If
any deviation is arisen then
take corrective measures. It is
an important tool for managers
to make important decisions
and planning for organization
success & growth. It is a
continuous process that helps
in evaluating the performance
of the company. Its main aim
is to maximize the profitability
of the company (Cuzdriorean,
2017).
Ratio analysis is a tool
through that company
compares its data of financial
statements such as income
statement, balance sheet and
profit & loss account. It is a
quantitative method that
evaluate the company's
revenues, operational
efficiency, profitability &
liquidity. It shows the
broader picture of the
performance & financial
health of a company. It helps
in comparing of company
performance with the same
industry or another. It gives
an accurate result to the
managers .
Investment appraisal techniques
is used to choosing from
available alternative options to
decide whether investing in a
particular project or machine is
worth or not. Various techniques
are available such as payback
period, net present value (NPV),
accounting rate of return (ARR)
and so on. This technique is
mainly used to evaluate the
achievement of a new project
based on alignment with
strategy, prioritization of
options, acceptable returns Vs
unacceptable risk. Each different
technique analyse the project
from a different angle.
Performance analysis Profitability measurement Unprofitable investment
In Pharmacy2U co., budgetary
control tools helps the
company managers to evaluate
the performances of its
employees . For every co.
In Eagle Eye Networks,
company calculate its profit
by profitability ratio. It used
to analyse the company's
capacity to recover its cost
In Monzo Bank, management
accountant evaluate the worth &
profitability of the available new
projects. It help the manager in
eliminating those projects that

employee performance is the
first priority to monitor
because they contribute in
overall profitability and
performance of the company.
Budgets are based on past
performances of the co.
through that actual
performance of employees is
determined. If any deviation is
arise between budgeted &
actual performance then
corrective measures such as
training & development
programs are arranged for
eliminate such deviations.
and other expenses through
its generated income during a
particular period. Profitability
ratio is calculated by
company net income divided
by average total assets. High
profitability ratio shows the
better performance of the
company as compared to its
other competitors. This ratios
are mainly useful for
companies when it compared
to its other company with
similar line of business.
are unprofitable. This evaluation
is done by one of the available
various investment appraisal
techniques. For ex. Manager
used accounting rate of return
that show the percentage rate of
expected return on investment.
The ARR is calculated by
average annual profit divided by
initial investment. The higher
the ARR the better is the project
(Cooper, Ezzamel and Qu,
2017).
CONCLUSION AND RECOMMENDATIONS:
From the above report it has been concluded that Pharmacy2U company can use different
planning tools that used in management accounting such as cost accounting, marginal costing
and cash flow analysis with advantages & disadvantages. Also demonstrate the examples
according to the various business needs to analyse the overall profitability & performance of the
company. The report also has concluded about how to overcome the financial problem of n
organization by considered various management accounting problem solving tools. There are
many recommendations that can be offered to the financial management team of Pharmacy2U
company, so that they achieve business stability & sustainable growth. Some of this are as
follows:
 For identify its cost on any investment for earning maximum profit with cost
minimization Pharmacy2U co. use the cost accounting method. Company estimate its

cost with the use of past records or current market cost & then compare it with actual
cost.
 Pharmacy2U co. use marginal analysis tool to know the additional cost with profit of
producing extra one more unit of production. Every co. manager wants to know
incremental change in production volume.
 For analysing the liquidity position of the business, Pharmacy2U co. can prepare the cash
flow statements that show the co. inflows and outflows of cash. This also helps in
identifying co. liquidity needs that may arise in the future .
 Budget helps the managers to evaluate the variances between budgeted & actual
performance of the company. If manager of Pharmacy2U co. want to achieve sustainable
growth & earn maximum profit for this manager can prepare budgets.
 Pharmacy co. manager can use the ratio analysis technique to know their operational
efficiency as compare to competitive industry. Ratio give more accurate results as
compare to other techniques of MA. Various types of ratios gives different information
such as liquidity ratio describe the co. liquidity position, profitability ratio shows co.
profit capacity, efficiency ratio and so on (Khan, 2018).
 Pharmacy2U co. can use various investment appraisal techniques for selecting the best
option from available investment opportunities. Co. manager choose the option that prove
appropriate and most profitable for their organization .

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