Management Accounting

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 Table of Contents
Introduction ................................................................................................................................ 3

Task 1 ......................................................................................................................................... 4

Barefoot Books .......................................................................................................................... 4

P1: Explain management accounting and give the essential requirements of different types of
management accounting systems to the chosen scenario giving examples ............................... 4

P2: Different methods used for management accounting reporting that can also be used for
the chosen scenario .................................................................................................................... 7

Task 2 ......................................................................................................................................... 9

P3: Calculate costs using appropriate techniques of cost analysis to prepare an income
statement of marginal and absorption costing using the data provided below and explain the
differences between them. ......................................................................................................... 9

Task 3 ....................................................................................................................................... 12

P4: Explain the advantages and disadvantages of different types of planning tools that can be
used for budgetary control for the chosen scenario. ................................................................ 12

P5: Compare how organizations (Scenario chosen for the purpose) such as yours should adapt
management accounting systems to respond to financial problems. ....................................... 15

Conclusion ............................................................................................................................... 17

Reference list ........................................................................................................................... 18

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Introduction
Management accounting, in the present scenario, is one of the most essential requirements of
any firm to attain growth and sustainable success. This branch of accounting helps a firm in
the production of significant information that helps in the optimization of the effectiveness
and efficiency of the firm through efficient decision-making. Management accounting is
necessary to be implemented in any firm irrespective of its size. It is essential for small size
organizations to incorporate management accounting within the organizations in order to lead
these organizations towards growth and progress.

This report contains discussion about a small business named Barefoot Books in UK.
Barefoot Books is a British retailer that manufactures and sells books through its retail outlet
(Barefootbooks.com, 2017). The organization was formed during 1992, which presently
employs about 47 employees and has an annual turnover of about £445000
(Barefootbooks.com, 2017). The report demonstrates knowledge about management
accounting, its systems along with application of different techniques in management
accounting. It also discusses the different planning tools that can be used by Barefoot Books
and the systems that can be used by it in order to respond to financial issues.

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Task 1

Barefoot Books
To

The General Manager

Barefoot Books

From

Management Accounting Officer

Barefoot Books

RE: Reporting the role and functions of the department of management accounting in the
firm including the various management accounting systems employed within the firm along
with explanation of the different techniques used for preparation of the management
accounting reports in the firm. The report also contains the evaluation of the different cost
accounting techniques for enabling the organization to implement them.

P1: Explain management accounting and give the essential requirements of different
types of management accounting systems to the chosen scenario giving examples
Management accounting, often referred to as managerial accounting, refers to a branch of
accounting that involves sourcing, investigation, communication as well as decision-making
about relevant non-financial and financial information for preserving and developing the
value of an enterprise (Edwards, 2013). Management accounting comprises of techniques and
processes, which are focused to use the resources of an enterprise effectively in order to
support its managers for enhancing shareholder value as well as customer value (Edmonds et
al., 2016).

The benefits of adopting management accounting within an enterprise are huge (Tappura et
al., 2015). Adoption of management accounting in Barefoot Books will help an enterprise in
improvement of its effectiveness, productivity and in turn profitability. The advantages or
objectives of management accounting in a firm, for example Barefoot Books, is as follows –

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  Organizational planning – Managerial accounting helps a firm in planning, as it
helps it selecting the best from alternative options, which assists the firm in
accomplishment of its targets or goals.
 Organizational control and monitoring – Managerial accounting involves a process
with which a firm’s managers are able to seek and ensure that each plan devised by
them is being put in action.
 Measurement of performance – This is another objective of management accounting.
It helps a firm in assessing its actual performance in comparison to the planned
activities of the firm along with constantly gauging the firm’s likelihood of
accomplishment of its objectives.
 Decision-making – Decision-making is the major objective of management
accounting, as it provides information to enable the managers of a firm to enable its
management to make informed decisions that will be benefitting the firm.

Management accounting systems refer to the systems of information, which produce the
detailed information needed by a firm’s managers for managing resources as well as creating
value (Weygandt et al., 2015). These systems give information on specific situations in a firm
for satisfaction of the needs of the firm for both long-term and short-term decision-making. A
management accounting system forms part of a firm’s wider management information
systems. The four different management accounting systems are – cost accounting system,
inventory management system, job-costing system, and price optimizing system (Ismail et
al., 2017).

There are various essential requirements of a firm for implementing or using these four
management accounting systems in the firm. For example, these systems help a firm in
bringing in accuracy in its stock level, helps in analysis and minimization of its costs and
assists in elimination of unprofitable jobs along with acting as an aid for making decisions
related to pricing. The other essential requirements of having these systems within a firm
such as Barefoot Books are as follows –

 Cost accounting system – The cost accounting system is a system, which estimates a
firm’s units such as departments along with its cost of products and services that it
produces (Horngren, 2014). The system provides in detail the cost data of a firm in
order to monitor its plans and current operations (Drury, 2013). The essential
requirements of this system is that it helps a firm in determining the firm’s product

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 costs as well as helping in its marketing decisions (Ibanichuka and James, 2014). For
example, Barefoot Books will be able to set its ideal selling price through this system
and measure its profitability along with meeting the competition in the market.
 Inventory management system – An inventory management system in a firm is a set
of policies of the firm that controls and supervises the level of stock in the firm
(Narsingh et al., 2016). The essential requirement of this system is that it helps a firm
in maintaining its stock levels, finding when the level should be replenished and the
quantity of stock that must be ordered (Higham and Visser, 2017).
It helps a firm by supporting its strategic plans and helping it to avail the benefits of
economies of scale through reduction of the total average cost of the unit purchased
by a firm related to set up costs, fixed ordering, transportation costs, etc. (Gluhovsky
et al., 2016). For example, Barefoot Books will be protected from uncertainties such
as short material shortage, work-in-process variations, changes in demand, etc. with
the use of an efficient inventory management system.
 Job costing system – Job costing system can be referred to a cost recording and
accumulation system in which there are identifiable activities (group tasks or jobs) for
which costs can be collected (Lanen, 2016). This system is most suitable for a firm
that undertakes jobs according to the special needs of a customer and all orders are of
comparatively short durations.
The essential requirement of this system is that it plays the role of an aid in planning,
minimization of costs and cost related decision-making. Barefoot Books will be able
to calculate the selling prices of its books and determine the profits or losses from
each job being performed in the firm.
 Price optimizing system – Pricing optimizing system can be referred to a kind of
strategy that allows firms in knowing how sensitive the firms’ existing customers are
to the alternations taking place in the prices of its product prices, which in turn
enables the firms in arriving at the firms’ defined profitability levels (Nagle et al.,
2016). This system can be utilized by firms to tailor their prices for various segments
of customers on the basis of their sensitivity and responses to the alternations taking
place in the prices of its product prices. This system is also an essential requirement of
a firm as optimal pricing helps it link the volume of the business with the profit of the
firm along with increasing profits even at the same level of retained customers (Nagle

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 et al., 2016). In addition to these benefits, Barefoot Books will be able to reach to its
desired profit level by analyzing the responsiveness of the firm’s clients.

P2: Different methods used for management accounting reporting that can also be used
for the chosen scenario
There are various types of management accounting reports within a firm (Maas et al., 2016).
These reports help a firm and its management in making significant decisions that are vital
for a firm’s operations. The reports are also helpful since they inform the department
managers of a firm with all the aspects of a firm. Management accounting reports collect
information from both non-financial and financial aspects of a firm and present in such a way
that it facilitates decision-making. The Barefoot Books can use the following management
accounting reports –

 Performance reports – A performance report enables a firm’s management to have an

access to the performance of each good, services, department or market segment in
which the firm functions (Van de Walle and Cornelissen, 2016). The report helps a
firm to analyze its profits from segments, departments, product lines, etc. and enables
it to take necessary measures to supervise and control the costs of the firm. Barefoot
Books can use a performance report for bringing in effectiveness in the firm’s
operations along with improving its overall performance.
 Job cost reports – A job cost report consists of information related to the costs spent
by a business for execution of a specific project (Sanders et al., 2016). These reports
are usually harmonized through estimating revenues of a firm so that it is able to
estimate the profit it earns from its jobs. Barefoot Books will be able to identify the
high earning jobs and focus on them instead of spending money for non-profitable
jobs in the firm.
 Operating budget report – This report provides information about the performance of
the various departments of a firm and the firm as a whole (May, 2017). This report is
helpful for a firm to supervise and control the operational costs of the firm. The
operating budget report can be used in Barefoot Books for analysis of the firm’s
performing along with providing incentives to its staff so that the efficiency and
productivity of the firm can be enhanced.
 Accounts receivable report – An accounts receivable aging report is a type of
management accounting report that enables a firm for management of its cash flows

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 through the evaluation of the credit given by the firm to its clients (May, 2017). The
report presents and lists the continuous late payers of a firm in different columns
according to the period that they have been late to pay off their dues. Barefoot Books
can use this report to find out the issues arising in the firm due to lack of a good
strategy to collect debts along with improving the credit policies of the firm in case of
issues.
 Inventory management report – An inventory management report presents
information about the physical inventories present in a firm (Wild, 2017). It helps a
firm in managing and controlling the level of stock held by the firm. Barefoot Books
can use an inventory management report in order to monitor the stock levels of the
firm and take measures to replenish its stock level and derive the ideal stock quantity
that should be ordered.

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Task 2

P3: Calculate costs using appropriate techniques of cost analysis to prepare an income
statement of marginal and absorption costing using the data provided below and
explain the differences between them.
Sale price of each unit = £ 35

Volume of goods sold = 500 units

Therefore, total revenue earned by Barefoot Books = £ 35 * 500 units

= £ 17500

Total variable cost required to produce each unit = £ (5 + 6 + 1+ 2)

= £ 14

Thus, total cost of Barefoot Books’ sales = £ 14 * 500 units

= £ 7000

Volume of goods remaining in stock = 600 – 500

= 100 units

Therefore, worth of Barefoot Books’ closing stock = £ 14 * 100 units

= £ 1400

Income Statement of Barefoot Books with application of absorption costing technique

Particulars Amount (in £) Amount (in £)

Revenue from sales (500 * £ 35) 17,500
Less: Cost of sales (500 * £ 14) 7,000
Add: Closing stock (100 * £ 14) 1,400
Margin of gross profit 11,900

Less: Administrative costs 800

Less: Production overheads 1,800
Less: Selling costs 400 (3,000)

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Margin of net profit 8,900

Income Statement of Barefoot Books with application of marginal costing technique

Particulars Amount (in £) Amount (in £)

Revenue from sales (500 * £ 35) 17,500
Less: Marginal or variable costs of sales
Direct labour (£ 5 * 500) 2,500
Direct materials (£ 6 * 500) 3,000
Variable sales overhead (£ 1 * 500) 500
Variable production overheads (£ 2 * 500) 1,000 (7,000)
Contribution 10,500
Less: selling cost (fixed) 400
Less: Administration cost (fixed) 800 (1,200)
Margin of net profit 9,300

The preparation of the income statements of Barefoot Books shows that the net profit amount
of the organization is different in case of the two methods of preparation of income
statements. From the above analysis, it can be seen that the profit of Barefoot Books amounts
to 8900 in absorption costing and 9300 in marginal costing. This difference in the net profit
of Barefoot Books under the two methods arises due to the manner in which the fixed costs
are treated. The fixed costs, in case of absorption costing, get absorbed as they are included
as product costs. However, in marginal costing, fixed costs are treated as period costs, which
results into the variance between profits derived under the two methods.

The variance obtained in the profit amounts of Barefoot Books indicates that there are several
differences between the two costing techniques. The following table shows the basic
differences between the two methods of costing –

Absorption costing Marginal costing

 The absorption costuming technique  The marginal costing refers to a costing
refers to a costing method in which the technique that is used for decision-
total costs spent or needed for production making by ascertaining the total costs
are apportioned to the centre of costs for spent or required for production in a firm.

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 deriving the entire costs involved in the
process of production.
 Under this costing method, both fixed  Under this method, only the variable
costs as well as variable costs are costs involved in production are assigned
assigned or allocated to the goods to the goods manufactured in a firm and
manufactured in a firm. the fixed costs are treated or apportioned
as periodic costs.
 As per this method, stock is valued at the  As per this method, stock is measured as
total costs involved in production. the total amount of variable costs in
production.
 The absorption costing method assists to  The marginal costing method assists to
find out the net profit from each unit of find out the contribution from each unit
good. of good.
 This method is acceptable as per the IAS  However, marginal costing is not
2. acceptable in IAS 2.
Table 1: Table illustrating the differences among absorption costing and marginal costing

(Source: Varian, 2014)

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Task 3

P4: Explain the advantages and disadvantages of different types of planning tools that
can be used for budgetary control for the chosen scenario.
Planning can be referred to as the process that is undertaken by a firm’s management in order
to define the firm’s goals for determination of the firm’s future direction along with deciding
and allocating the resources required by the firm for achieving its targets (Kerzner and
Kerzner, 2017). In order to reach the targets of a firm, the managers of the firm undertake
planning for devising the firm’s business plans, marketing plans, etc. In addition to planning,
a firm also requires to adopt budgetary control.

Budgetary control refers to a control system devised by the management of a firm for
comparison of the planned and actual income and expenditure of the firm, which assists in
monitoring whether the plans prepared by the firm are being followed properly or not
(Balogun et al., 2015). The budgetary control is also helpful for measuring whether the plans
of a firm are required to be changed or not.

The planning tools chosen by a firm helps the firm in bringing the effectiveness of budgetary
control in the firm, which in turn help in improvement of the performance and effectiveness
of the firm itself. Adoption of suitable planning tools will be useful for Barefoot Books to
enhance the firm’s effectiveness and reduce the variances in the firm’s income and
expenditure. Barefoot Books can use the planning tools mentioned below in order to devise
budgetary control in the firm –

 Cash budget – This is a type of budget plan, which comprises information about the
estimated or except disbursements and receipts of cash within a firm during a
particular accounting year or period (Cull, 2017). The cash budget estimates a firm’s
inflows and outflows of cash from operating activities, financing activities and
investing activities. In other words, cash budget is a plan that projects a firm’s
approximate cash position.
There are different advantages of using cash budgets (Pinheiro, 2014). The benefits of
Barefoot Books of using a cash budget are as follows –
 Helpful for coordinating operations of various divisions and departments in a
firm
 Helpful for minimizing costs and maximizing profits of a firm

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  Useful for a firm to improve its communication, harmonization and
cooperation among its employees
 Helps in the identification of the liquid cash amount required in a firm in order
to accomplish the firm’s short-term financial requirements without any trade
credit or bank overdraft

However, in addition to advantages, there are disadvantages of cash budgets as

well (Pinheiro, 2014). The demerits or limitations of using cash budgets in
Barefoot Books are –

 The cash budget is devoid of flexibility

 This budget does not include any non-financial aspects of a firm
 The success of this budget totally depends on the cooperation among a
firm’s staff
 It is also quite costly to operate any cash budget
 Cost plus pricing – The cost-plus pricing is also one of the most effective planning
tools for a firm (Nagle et al., 2016). This is cost-based method of planning that helps
a firm to plan and set the selling prices of the goods and services sold to consumers.
In this planning tool, a firm derives all the costs required for producing the goods
manufactured by it, followed up summation of the total costs with a certain
percentage of mark-up.
The adoption of this planning will be helpful for Barefoot Books in various ways
through attainment of a huge customer base (Holzhacker et al., 2015). The other
advantages of Barefoot Books for using the cost plus pricing technique are as follows
–
 It is one of the most simple planning tools, which is helpful deriving the
selling prices of the goods and services manufactured by a firm and sold to its
consumers
 This method is useful for the firm to set product prices even when the firm
will be unable to forecast the demand of the firm’s goods in the marketplace
 It is also useful in case if the firm is unable to derive information about the
changes taking place or the factors prevailing in the market
 This tool is also useful in case if the nature or extent of the competition
prevailing in the market cannot be predicted

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However, this planning tool has several disadvantages (Holzhacker et al., 2015).
The following are the disadvantages of using cost plus pricing in Barefoot Books
–

 This costing method is entirely cost based in nature ad ignores the factor of
demand of the good present in the market
 The tool is often not useful in nature, as it is often quite impossible to
ascertain a firm’s total costs for manufacturing a product in a precise
manner.
 Another major issue in the use of cost plus pricing is that the costs of
producing a product is seldom static in nature
 This planning tool is totally a firm’s internal process of pricing products
and services, which does not involve the consideration of the competition
prevailing in the marketplace

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P5: Compare how organizations (Scenario chosen for the purpose) such as yours should
adapt management accounting systems to respond to financial problems.
In a business organization, different kinds of issues can arise. For example, the business can
be unable to achieve the success, which can be considered as the financial problem of the
company. In addition to this, the company can face problem to reach to performance targets
as targeted by the management.

In order to solve the above mentioned issues, the management of the company adopts
different types of management accounting system. For example, the management of the
company can make use of financial governance to respond to the financial issues such as
lower level of profit. On the other hand, the company can use the key performance indicator
measure its performance, which will help in mitigating the issues of the financial crisis.

In order to respond to the financial crisis, the company can make use of management
accounting system. Some of the accounting information system that can be used by Barefoot
Books are as follows:

Key performance indicators: Key performance indicator or KPI can be described as the
measurable value, which helps in demonstrating the effectiveness of the business that are
related to achieve the key objectives of the company. In additional to this, there can be two
types of the KPI such as financial and non-financial. For example, in order to measure the
profit level of the company, the Barefoot Books can fix certain value, which would determine
profit of the company (Parmenter, 2015). In some of situation, if the company is not able to
achieve the profit, then they can make use of the effective measures to improve and recover
the level of profit.

Benchmarking:

Benchmarking can be described as the process of comparing the performance matrix to the
best performance and practice of the industry. This can be the other management accounting
system that can be used by Barefoot Books to respond to the financial crisis. For example, if
the product quality of the Barefoot Books is compared with the best quality that is available
in the industry, then the management will be able to identify the reason for the lack of the
better quality (Kärnä and Junnonen, 2016). In addition to this, if the company compares the
liquidity level with the other big companies of the same industry then the company will be
identify the financial issues that has arised due to poor liquidity.

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Financial governance: Financial governance is considered as one of the most important tools
that can help the organization in responding the financial crisis. In addition to this, financial
governance is set of policies, guidelines and rules adopted by the management to administer
and govern the financial issues prevailing in the company.

With the help of the financial governance, the company will be able to administer each
financial process, which can help in mitigating the issues of the financial issues. With the
help of the financial governance, the management will be able to solve the issues such as
growth levels, output of employee or department and others. It is important for the company
to formulate effective guidelines and rules for progress of the financial performance.

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Conclusion
Thus, the discussions made in the report regarding management accounting help in realizing
the four different systems of management accounting – cost accounting system, inventory
management system, job costing system, and price optimizing system and the fundamental
requirement of a firm such as Barefoot Books to implement these systems within the firm. It
helps in understanding how different management accounting reports such as job cost reports,
accounts receivable aging report, performance report, etc. help a firm in enhancing its
operational effectiveness.

The preparation of Barefoot Books’ income statement as per absorption and marginal costing
shows how the profitability of a business can be measure through application of costing. The
report also shows how planning tools such as cost-plus pricing and cash budget helps a firm
in budgetary control. Lastly, this report helps in understanding how organizations are
adopting management accounting tools such as KPIs, financial governance and
benchmarking in order to achieve sustainable success through response to financial issues.
Therefore, the report helps in acquiring sound knowledge and understanding the significance
of management accounting in all organizations.

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