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Management Accounting
Management Accounting
Management Accounting
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Contents
Introduction......................................................................................................................................1
LO1..................................................................................................................................................2
P1. Explanation of management accounting and the essential requirements of different types
of management accounting systems............................................................................................2
LO2................................................................................................................................................10
P3. Calculations of costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costs.........................................................................10
LO3................................................................................................................................................15
P4. Explanation Regarding the advantages and disadvantages of different types of planning
tools used for budgetary control................................................................................................15
LO4................................................................................................................................................19
Conclusion:....................................................................................................................................25
References......................................................................................................................................26
Introduction
Management accounting is mainly associated with the management of the whole business
organisation (Atkinson, Kaplan and Matsumura, 2015). Management accounting is very much
important for a business organisation as it assists the organisation in a number of ways such as
reducing the cost of its business operations, pinpointing the areas requiring proper attention,
improving the efficiency of its production systems, etc. Again an organisation can solve various
problems with proper application and implementation of management accounting systems
(Scheffé, 2016). In this assignment we are using a hypothetical business organisation named
ABC Ltd. which is medium-sized enterprise in the manufacturing sector. We will try to show the
importance of management accounting, the tools and techniques used in management
accounting, different kinds of management accounting reporting systems and how it helps to
solve the financial problems in context of the organisation.
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LO1
Management Accounting
Another widely accepted definition has been provided by the Chartered Institute of Management
Accountants (CIMA). It says,
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Management accounting plays a very important role in a business organisation. The main
contribution of management accounting is that it provides information of great importance to the
managers as well as the shareholders of the business organisation in a timely manner (Drury,
2015). It assists in making various short-term or day-to-day managerial decisions. The most
common uses of management accounting are the monthly even weekly preparation of various
reports regarding the availability of cash and inventories, amounts of orders yet to be fulfilled,
accounts receivable and payable situation, amount of sales, variance analysis, etc.
Again there are some differences between financial accounting and management accounting.
Some of the notable differences between financial accounting and management accounting are as
follows:
Managerial No scope for applying managerial There is scope for applying managerial
Jurisdiction jurisdiction. jurisdiction.
Use of Data Deals with actual data. Deals with both actual and estimated data.
Reporting Provides reports regarding the Provides reports suggesting the ways to
profitability of the organisation. increase profitability for the organisation.
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A brief discussion about various kinds of management accounting systems and their
essential requirements are as follows:
Management accounting systems can be of various kinds while each system varies from one
another regarding their use (Atkinson, Kaplan and Matsumura, 2015). Each of these systems is
crafted especially to provide the management of the organisation with essential information that
will enable the management to take potential decisions. The most common types of management
accounting systems are-
1. Cost Accounting System: Cost accounting sometimes also referred as product costing system
is one type of product costing model in which a business firm determines the cost of its products
in order to determine the value of the inventories, evaluation of the profitability of its operations
and controlling the costs (Sims and Smith, 2014).
Business organisations divide the cost accounting system into two categories. They are-
a) Job Order Costing: Job order costing is one type of cost accounting system is which costs
regarding the production of any product are assigned to that individual product only. The job
order costing system is suitable for those business organizations dealing with the production of
low volume but very many expensive products or services (Drury, 2015). Job order costing
systems are mainly customer-oriented that means the organisation needs to craft its goods or
services as per the customers' specifications. Example: construction of bridges or buildings.
b) Process Costing: Process costing is one type of costing system in which the costs regarding
the production of goods and services are assigned to each process through which the products
and services pass (Funnell and Williams, 2013). Process costing is most appropriate for those
business firm’s which manufactures large volume of similar type products where there is no
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scope for customer specification. Example: production of nails, electric wires, hardware tools,
etc.
3. Job Costing System: A job costing system is the systematic process that involves aggregation
of necessary information regarding the costs of producing a certain product or service. This
information is very much important in preparing a cost report which is to be submitted to the
customers in order to get the costs repaid. This costing system is very much useful in assigning
the costs of inventories to the finished products.
The job costing system needs to accumulate 3 types of information mentioned below:
a) Direct materials: Job costing systems must need to trace the costs regarding the materials
used in the production process. It can draw this cost information by manual tracking from the
cost sheets or from the production or warehouse area (Bragg, 2013).
b) Direct labour: Again this system is required to trace the costs of direct labours used in the
jobs. In case, if the jobs are related to giving services then the direct labour cost covers almost
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the whole costs of the jobs. These costs information can be drawn from time cards or sheets of
the employees.
c) Overhead: The job costing system generally assigns the overhead costs among a range of cost
pools. Again the accumulated overhead costs of each cost pool are assigned to various jobs on
the basis of consistent allocation strategy which differs from organisations to organisations
(Drury, 2015).
In the job costing system, as long as the job is in processing the accumulated cost is recorded by
the management as an inventory asset. When the costs are submitted to the customers that mean
they are being billed then the management can shift the costs to COGS (cost of goods sold)
account. This system allows the revenues to match with the incurred expenses for a specific
period.
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P2. Explanation of Different Methods Used for Management Accounting
Reporting
Management accounting reports are generally required by the managers for a range of purposes
such as planning of the business operations, evaluating the performance of the employees,
controlling and monitoring the management’s activities, etc.
1. Budget Reports: The budget report is one kind of an internal report of an organisation which
is mainly used by the managers for the purpose of comparing the actual performance with the
budgeted one for a specific period (Bragg, 2013). Again it can be stated that budgeted reports are
prepared in order to compare/evaluate the actual performance. The nature of budget reports
depends on the size of the organisation. If the organisation is smaller in size then the organisation
can prepare the whole budget report of the organisation which is not feasible in case of bigger
organisation (Donovan, 2016). In bigger organisations budget reports are generally prepared
departmental wise. A budget report is prepared to don the basis of the organisation’s previous
performances, trends or by analysing the market in which the organisation operates. A budget
report works as a road map for business organisations. Budget reports provide managers a wide
range of insights which suggests managers pursue various potential management actions such as
cost reduction, employee motivation, better negotiation with suppliers, etc. So we can conclude
that budget reports are of significant importance for any organisation.
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organisation whether it should tighten its credit policies if the writing off bad debt is crossing the
limit (Drury, 2015). So, it can be stated that account receivable aging reports provide the
managers a close insight into the receivables position of the firm.
3. Performance Reports: Performance reports of any business organisation are mainly produced
for the purpose of evaluating the overall performance of the whole organisation along with the
performances of the employees of the organisation. Moreover, in case of big organisations,
performance reports are produced departmental wise. Performance reports enable the managers
to implement necessary corrective actions for better future performance (Funnell and Williams,
2013). In order to achieve the missions and visions of any business organisation, the performance
of the overall organisation needs to be monitored and analyses timely which can be done through
the performance report. So, performance report plays a significant role in achieving the goals and
objectives of an organisation (Thomas, Tietz and Harrison, 2016).
4. Cost Managerial Accounting Reports: Managerial accounting determines the costs of the
goods being manufactured by taking into consideration the costs of the raw materials, labour
wages, and overhead (Drury, 2015). This report assists in setting the optimal price for the firm’s
product by comparing the cost of manufacturing those products. Managers can determine the
per-unit cost of the products by summing up all the relevant costs incurred while manufacturing
the products then dividing that by the numbers of products being manufactured. Cost report is
very crucial as it provides the managers with insights into the product selling price and its profit
margin (Donovan, 2016). Moreover this report also suggests the optimisation of resources used
in various departments of the organisation.
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1. Costs reduction: Management accounting assists a business organisation in minimising the
costs regarding its operations. It also suggests the optimal uses of the organisational resources
which help to reduce the costs of the whole organisation at a great amount (Bragg, 2013).
2. Effective Planning and decision making: Proper planning and making the right decisions is
the key to organisational success (Fleisher and Bensoussan, 2015). Management accounting
provides the managers of the organisation essential information regarding its business process,
promotional and marketing related activities, best available production technology, etc. which
helps the managers to plan their actions properly and make most suitable decisions (Thomas,
Tietz and Harrison, 2016).
3. Performance appraisal: Every business organisation should evaluate the performances of its
employees as well as the organisation itself. Management accounting has provided a range of
ways by which an organisation can evaluate its performance (Drury, 2015). In the case of
appraisal of organisational performance, an organisation can use benchmarking, variance
analysis, etc.
So, proper implementation of management accounting system ABC Ltd. can enjoy the
following benefits-
ABC Ltd. will be able to minimise the costs of its business operation.
It can obtain the latest product information for manufacturing its products.
Proper application of management accounting will help ABC ltd. to improve its cash
flows.
ABC Ltd. can easily and accurately evaluate the performance of its operations.
The organisation can gain a competitive advantage by updating its business operation
with the best available practice by using benchmarking approach.
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So, we can state that the management accounting and reporting system can contribute
significantly to the business operations of ABC Ltd.
LO2
Marginal Costing
Month January (£)
Per Unit Cost Total Production Cost
Direct Materials 10 180,000
Direct Labour 20 360,000
Variable Production Overhead 5 90,000
Fixed Manufacturing Overhead - -
Total 35 630,000
Absorption Costing
Month January (£)
Per Unit Cost Total Production Cost
Direct Materials 10 180,000
Direct Labour 20 360,000
Variable Production Overhead 5 90,000
Fixed Manufacturing Overhead 5.56 100,000
Total 40.56 730,000
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2. Preparation of income statements using budgeted data:
ABC Ltd.
Budgeted Income Statement (Under Marginal Costing)
For The Month Ended on 31st January
Particulars January (£)
Sales 800,000
(-) All Variable Cost:-
Variable Cost of Goods Sold (560,000)
Contribution Margin (CM) 240,000
ABC Ltd.
Budgeted Income Statement (Under Absorption Costing)
For The Month Ended on 31st January
Particulars January (£)
Sales 800,000
(-) Cost of Goods Sold:-
Beginning Inventory nil
(+) Cost of Goods Manufactured 730,000
(-)Ending Inventory (120,780)
(+/-)Under/over Production 11,120
Adjustment
Total COGS (620,340)
Net Operating Profit 179,660
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3. Unit Product Cost (Actual):
Marginal Costing
Month January (£)
Per Unit Cost Total Production Cost
Direct Materials 10 190,000
Direct Labour 20 380,000
Variable Production Overhead 5 95,000
Fixed Manufacturing Overhead - -
Total 35 665,000
Absorption Costing
Month January (£)
Per Unit Cost Total Production Cost
Direct Materials 10 190,000
Direct Labour 20 380,000
Variable Production Overhead 5 95,000
Fixed Manufacturing Overhead 5.26 99,940
Total 35 674,940
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Preparation of income statements using actual data:
ABC Ltd.
Income Statement (Under Marginal Costing)
For The Month Ended on 31st January
Particulars January (£)
Sales 800,000
(-) All Variable Cost:-
Variable Cost of Goods Sold (560,000)
Contribution Margin (CM) 240,000
ABC Ltd.
Income Statement (Under Absorption Costing)
For The Month Ended on 31st January
Particulars January (£)
Sales 800,000
(-) Cost of Goods Sold:-
Beginning Inventory nil
(+) Cost of Goods Manufactured 764,940
(-)Ending Inventory (120,780)
(+/-)Under/over Production 5260
Adjustment
Total COGS (649,420)
Net Operating Profit 150,580
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Interpretation:
In the income statement using marginal costing income only the variable costs are recognised as
product cost and the fixed costs are ignored in determining the product cost. As both in the
budgeted and actual format there is no change of unit sold and fixed production overhead cost,
that’s why we have got the same net operating profit by using the marginal costing for both
budgeted and actual data.
But in the case of absorption costing method, the net operating incomes are different. The reason
behind this is while computing per unit cost of product in absorption costing, the cost of fixed
overhead production needed to be considered. Again for budgeted income statement the per-unit
production overhead cost was = (£100,000 ÷18000) = £5.56 per unit while for actual income
statement it was = (£100,000 ÷19000) = £5.26 per unit. Again in absorption costing the over or
under level of production is also needed to be taken into account. In this case study the
mentioned standard production level was 20,000 units while in budgeted and actual data the
production level was 18,000 and 19,000 units respectively. So there was an adjustment regarding
these under productions. Again the ending inventory was 2,000 for budgeted data while it was
3,000 for actual data which is also a reason for the difference in net income.
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LO3
A brief discussion of some widely used budgetary control planning tools along with their
advantages and disadvantages is as follows:
1. Standard Budget:
Standard budgets of an organisation are generally prepared for the estimated information
regarding the business organisation’s fixed revenue and expense (Warren, Reeve and Fess,
2014). The standard budget is highly preferable to firms having a simple business model which
means the firms faced very small variance in their budgeted and actual performance and they can
estimate the cost with great certainty.
This model is very much suitable for a centralised and controlled environment,
It improves cost controlling.
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2. Behavioural Implications of Budgeting:
i) Dysfunctional Behaviour:
The budget will be proven much effective if there is a high degree of a positive correlation
between the organisation’s and the individual employee’s goals and objectives. This harmony of
goals and objectives between the employees and the organisation as a whole is termed as the goal
congruence (Shim, 2012).
In order to keep consistency with the employees’ objectives, the firm may make poor
decisions.
The objectives of the employees may not in favour of the firm.
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It allows the participation of managers irrespective of their levels in the firm.
It helps to motivate the lower-level managers by allowing them to take part in decision
making.
Budgetary slack sometimes also referred to as padding the budget is the manager’s deliberate
underestimation of firm’s revenue or overestimation of its expenses and seeking more resources
that the required level (Sims and Smith, 2014). Budgetary slack does produce any kind benefit
for the firm.
The revenue centre of a business firm is responsible for producing the firm’s sales revenue. The
managers of the revenue centre can monitor the marketing expenses of the firm’s products
though they generally do not have control over costs (Warren, Reeve and Fess, 2014). A
common example of a revenue centre is a sales representative.
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Measuring and evaluating the performance generally consumes a huge amount of time.
This report is not effective in the situation of improper estimation of budgeted revenues.
4. Variance Analysis:
Variance analysis is one of the most important budgetary controlling tools. It deals with
measuring the actual performance deviations from the budgeted/estimated performance (Scheffé,
2016). Variance analysis assists the managers in finding out the areas with these deviations.
Zero-based budgeting is a budgeting framework that requires the justification and approval of all
the expenditures for each operating period. In this budgeting method, the starting amount is
generally zero. This model analyses the demands and costs of all the operations and distributes
the resources accordingly (Sims and Smith, 2014).
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Disadvantages of zero-based budgeting:
From the above discussion, we can easily understand the various features of different types of
budgetary reports as well as their merits and demerits used in management accounting. This will
help a medium business enterprise like ABC Ltd. to prepare those reports which are suitable for
its business operations. Again it can easily evaluate its performances with the help of these
reports (Warren, Reeve and Fess, 2014).
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LO4
Nowadays the business environment is very much dynamic than ever before. Every individual is
very much concerned regarding his goals and objectives. Everyone is trying hard and soul to
carry out his missions (Shim, 2012). So, in this increasingly competitive world a medium-sized
organisation like ABC (mentioned in the brief) may expose to a wide range of financial problems
such as-
Proper application of management accounting can enable the small-sized organisation like ABC
ltd. to respond to the financial problems that they are facing. Many management accounting and
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planning tools are available for business organisations. If the business organisations can
successfully implement these tools then they can solve the financial problems at ease and achieve
sustainable success for the business organisation (Scheffé, 2016).
Some of the widely used management accounting planning tools for solving an organisation’s
financial problems are discussed below:
Key Performance Indicator also termed as KPI is a calculated value that explains how effectively
and efficiently an organisation is carrying out its goals and objectives (Sims and Smith, 2014).
KPI assists in evaluating the organisational success in attaining its overall mission and visions as
well as particular initiatives are taken by the business firm such as investing in various projects,
introduction of new products, etc. (Smith, 2013). Business organisations use a range of KPIs to
assess their overall strategic position. Some of the widely used KPIs are such as Quantitative
indicators, financial indicators, input-output indicators, process indicators, etc. Moreover
managers use KPIs for the purpose of setting the organisational goals and preparation of budget.
Again KPIs provide necessary information to the management which in turn assists in initiating
the appropriate managerial decisions.
Activity-based Costing often referred as ABC is one type of accounting model that identifies and
allocates the total overhead cost of the business organisation in various cost pools and then shift
these cost to individual departments on the basis of their uses and some criteria (Glad and
Becker, 2014). Activity-based Costing is most appropriate for those business organisations
manufacturing a range of products through various levels of operating complexity. ABC system
assists in flourishing a firm’s costing process through the various ways mentioned below-
Activity-based Costing helps to increase the number of suitable cost pools for the firm
with a view to allocating the overhead costs.
The allocation of overhead costs is done by level of activities rather than size.
It allocates the costs to several cost pools instead of accumulating in just one cost pool.
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It introduces new bases (often called cost drivers) for allocating these overhead costs.
3. Benchmarking:
i. Business processes
ii. Customers
iii. Finance and
iv. Learning and growth.
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These four legs cover the total business organisation including its missions, visions and business
strategies. These four areas require consistent management focus for collecting and analysing
important data.
1. ABC. Ltd should implement activity-based costing in its production system which will help it
to eradicate the problems of excessive use of its resources.
2. ABC ltd. should assess its KPIs in a timely manner to find out the areas requiring
management’s attention which will ultimately result in sustainable organisational success.
3. The organisation can assess its business strategies and practices through benchmarking. It will
help the organisation to attain efficient use of its resources again reduce the cost of production
which will help the organisation to reduce the product’s price and capture a large portion of the
market (Smith, 2013).
4. ABC ltd. can use the balanced scorecard to analyse the performance of its business process as
well as gather essential information regarding its financing and customers.
Checkout.com
Checkout.com is one of the leading international online payment solutions providers which was
launched in 2012. During the last year, the company’s UK employee base grew by 90%.
Moreover the company’s revenues and profit are continuously growing at a higher margin.
(Source: www.checkout.com).
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Checkout.com has implemented a range of management accounting tools and concepts to solve
its financial problems. Some of the potential management techniques implemented by
checkout.com are as follows:
Checkout.com uses 100% proprietary technology to handle every part of the payment
process for customers (Source: www.checkout.com). This strategy enables the
organisation to effectively handle its operations which assists in reducing the costs and
building a strong financial position for the overall company.
The organisation provides flexibility and control to its merchants and consumers which
helps them to capture the market attention. For this purpose checkout.com uses flexible
accounting method.
The management of the organisation keeps updating its business operations with the best
available practice such as fraud filters, providing direct access Visa, Mastercard, etc. That
means it is using the benchmarking tool of management accounting. It is helping the
company to get a competitive advantage over its rivals (Scheffé, 2016).
Giacom
Giacom is a UK based medium-sized multinational IT service provider that works with top
merchants all over the world for providing best cloud solutions. During the last few years
Giacom has gained profitable growth. It is now providing more than double the services to
double the customers than it did just two years ago (Source: www.realbusiness.com).
Giacom uses a flexible management accounting model for producing and rendering its
services. It managed to double its clients by dint of its flexible management accounting
system which ultimately enables Giacom to attain organisation success.
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Giacom assesses the quality of its services on a regular basis (Nick Marshall, Founder of
Giacom. It helps the organisation to remain competitive in the market as the IT market is
very much sensitive to latest information and technology. So, by using the benchmarking
system Giacom is able to ensure the quality of its services which contributes to raising
the profitability for the organisation.
The organisation frequently analyze its market position by financial market analysis. So,
Giacom is using its KPIs to evaluate its overall financial position in the market which
suggests it take potential decisions that will help to increase its market share.
So, from the above discussion, we can conclude that proper application of appropriate
management account tools and techniques can solve financial problems and bring sustainable
success to an organisation (Atkinson, Kaplan and Matsumura, 2015).
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Conclusion:
Management accounting generally deals with the overall management of an organisation.
Management accounting is very much important for a business organisation as it assists
the organisation in a number of ways such as reducing the cost of its business operations,
pinpointing the areas requiring proper attention, improving the efficiency of its
production systems, etc. (Atkinson, Kaplan and Matsumura, 2015). Again with proper
implementation of management accounting an organisation will be able to respond to the
financial problems that it faces. Again proper use and application of management
accounting can bring a business organisation sustainable success (Drury, 2015).
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References
Atkinson, A., Kaplan, R. and Matsumura, E. (2015). Management Accounting. Pearson
Education UK.
Bragg, S. (2013). Cost accounting. New York: John Wiley.
Donovan, S. (2016). Budgeting. Minneapolis: Lerner Publications Co.
Drury, C. (2015). Management and cost accounting.
Fleisher, C. and Bensoussan, B. (2015). Business and competitive analysis methods.
Indianapolis: Financial Times Press.
Funnell, W. and Williams, R. (2013). Process costing. Sydney: Butterworths.
Glad, E. and Becker, H. (2014). Activity-based costing and management. Chichester: Wiley.
Heitger, L. and Matulich, S. (2012). Job order costing practice set. New York: McGraw-Hill.
Scheffé, H. (2016). The analysis of variance. New York: Wiley-Interscience Publication.
Shim, J. (2012). Sales management. Cranbrook: Global Professional Publishing.
Sims, A. and Smith, R. (2014). Management accounting. Oxford: CIMA Pub.
Smith, M. (2013). New tools for management accounting. London: Pitman.
Thomas, C., Tietz, W. and Harrison, W. (2016). Financial accounting.
Vinten, G. (2016). Achieving managerial control. [Bradford, England]: Emerald Group Pub.
Warren, C., Reeve, J. and Fess, P. (2014). Financial & managerial accounting. Mason, Ohio:
Thomson/South-Western.
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