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Table of Contents
Introduction:..........................................................................................................................................2
What is management accounting and what is management accounting system?................................2
Benefits of management accounting systems.......................................................................................3
How can integration of Management Accounting Reports help companies?........................................5
Planning tools used for Budgeting:........................................................................................................6
Advantages of Budgeting:..................................................................................................................7
Forecasting:...................................................................................................................................7
Price Setting:..................................................................................................................................8
Capital Needs:................................................................................................................................8
Flexibility:......................................................................................................................................8
How budgets and management accounting tool Solve Financial Problems:.........................................8
How can organizations avoid financial problems through management accounting?..........................9
Marginal and Absorption Costing:.......................................................................................................10
Marginal Costing:.............................................................................................................................10
Absorption Costing:.........................................................................................................................10
Difference in profit and inventory valuation:...................................................................................10
Conclusion...........................................................................................................................................11
References:..........................................................................................................................................12
Introduction:
This report will introduce and explain management accounting and the systems and tools used in
organizations.. The report will outline the benefits of management accounting system and why
companies should integrate such systems. We will also discuss one of the most used tool, budgeting
and explain the benefits of budgeting and how it can help companies forecast the future outlook,
compare and analyse variances and take corrective actions. The report will also look at ways
companies are adopting management accounting systems to steer through financial problems.
Towards the end, the report introduces two most used costing methods; absorption and marginal
costing, and explains the differences in net profit and inventory valuation caused by them both.

What is management accounting and what is management accounting

system?
Managerial accounting is the accounting process that helps managers with effective decision making
through the use of financial and non-financial information. Through management accounting, a
manager interprets, analyses, and presents financial information to evaluate, track and improves the
performance of the company. It is used for internal control and accounting purpose to prepare
budgets, break even charts, cost analysis, trend charts and other relevant reports to effectively run
the day to day operations of the company.

Management accounting uses financial information of the company such as invoices and financial
reports including income statement and balance sheet to interpret, analyze and evaluate the
financial position of the company. All the financial information required by the management of the
company to carry out these tasks is provided by the finance department whose objective is to
prepare and handle these financial statements. Using all this statistical data, management team is
able to make sound decisions based on their analysis to carry out the activities of the firm in a better
and controlled manner to ensure smooth development of the company. It can also be said that
management accounting makes into use the financial information of the firm to help the managers
in decision making. Managers apply professional skills to analyze financial information of the firm
provided to them to formulate the policies in order to execute the business effectively.

There are several departments which are essential to run a business. Some of them are finance,
human resource, marketing, sales and production. A successful management accounting system
takes into account all these departments to formulate policies and come up with a plan to run the
business. Management accounting uses all the information it can get from these departments in
order to come up with decisions. This information may not be in the official financial reports of the
firm but is still taken into account. This information includes number of calls made in a day, delays in
receiving orders, information regarding the delivery deadlines, status of payment from debtors and
to creditors, levels of all the inventory including raw materials, unfinished and finished products,
petty cash in hand, and sales reports. Although this information is non-financial in nature, it impacts
the decisions of the firms and the performance as well due to which it is taken into account during
the process of management accounting to come up with policies. This information is very useful and
indicates the performance of several areas in a business.

Management accountants focus on preparing some reports which would help them in decision
making. Some examples of the components of management accounting are; budget forecasting,
predicting revenues and expenses using financial reports, trends in sales and estimating returns on
investments. These are mostly done using historical data of financial statements and a trend analysis
is done to forecast these reports. Budgets are forecasted by estimating major future expenses such
as administrative and operating costs. Sales revenues are also estimated using trend analysis along
with some economic assumptions which would affect the sales of the form. These are the common
methodologies used in a management accounting system in order to carry out the functions of a
managerial accountant.

There are several other components of a management accounting system which are not so popular.
Some of these are; comparing cost of goods sold to other standard costs in operating a business and
analyses of the costs of a firm depending on the costs incurred during various activities such as
maintenance, production and data handling.

Benefits of management accounting systems

Management accounting systems are very beneficial to any firm and a firms’ performance might be
dependent on how efficient its management accounting system is. This is because the policies a firm
must devise for its development are dependent on its management accounting system. A firm’s
management team relies on the forecasted data such as expected expenses, sales revenues and
forecastied budget to devise the policies. Many of the administration policies are devised after
analysing financial reports and using management accounting system. As discussed earlier, an
effective management accounting system gathers information from all the departments of a firm to
identify the performance and then to come up with strategies in order to improve efficiency. So it
can be said that an effective management accounting system is necessary for a firm’s growth. The
benefits of a management accounting system include; using trend analysis to forecast future
expenses and sales revenue through which a budget can be forecasted, carrying out cost analysis to
make sure the firm is producing at a cost efficient level, carrying out constraint analyses to identify
sonstraints in growth and devising plans to remove them and lastly product costing which helps the
firm identify the price at which it must sell a product or service.

Management accounting deals with benefitting company in the future hence it focusses on making
decisions that will benefit the firm in the future. Using the past financial reports like balance sheet
and income statement, management accountants figure out the trends and forecast future inflows
of the company through sales. Assumptions about economic factors, for example inflation rate, are
used to forecast a reliable data. They also predict major expenses such as administrative and general
expenses, operating expenses, capital expenditures and the research and development cost to
formulate a budget for the firm to cover these expenses. Budget forecasting helps the firm
determine the amount they need to carry out their operations in future which is quite helpful as it
gives a target to the firm about their financial requirements. Forecasting helps the firm to gather
useful information regarding the future cash flows and the expected return on capital expenditures.
This data is quite useful to the firm because having an idea about firms’ future conditions is helpful
for the management team while they are devising policies. These forecasted values are kept in mind
when management of a firm comes up with new policies and changes anything.

Production is one of the major components of any firm. It is essential to know the costs of the
product it is producing as many important factors are dependent on it. A firm must know the
production cost in order to come up with a price and amount of sales that would break even.
Product pricing is one of the most vital benefits of management accounting. Management
accountants analyze input costs such as the cost of raw materials, cost of labor and capital required
to produce and the administrative and other operating costs, to come up with the total cost of a
product or service. Management accountants also consider other factors such as consumer behavior
about the product and geographical factors to come up to a price in which they must sell the
product or service to break even. The process of product pricing is very beneficial to a firm because it
determines the price at which the firm must sell the product or a service.

Cost analysis is also carried out using performance reports and the projected costs. These two are
compared to identify the problem areas in which the firm is having trouble in performing. It is very
important to identify the areas in which the firm is facing a high cost and these areas are identified
using cost analysis method which makes use of management accounting by comparing the projected
costs and the performance reports, once the underperforming areas are identified, executives come
up with policies in a timely manner to address these problems. Hence management accounting is
helpful in the process of figuring out the problems and then solving them in order to remove any
constraints that firm might be facing in achieving a stable growth.

Two of the major areas in which a firm must perform is production and sales. However, when a firm
faces any constraints in these two departments, then there is a hinderance to the growth of the firm.
Management accounting comes into use here as well as it analyzes the constraints to the production
process and activities on the sales to determine any obstacles. These obstacles might cause the firms
growth to slow down. Using management accounting systems, a firms’ management team identifies
any constraints to growth and devises policies to overcome them. Data is provided by the
managerial accountants after carrying out constraint analyses. This data is then used to come up
with policies in order for the firms to meet its desired goals.

How can integration of Management Accounting Reports help

companies?
Management accounting provides companies with a lot of quantitative and qualitative data
that can be used to analyze the financial and operational performance. To collect such data,
a company needs to install some processes and place measures/KPIs to assess, analyze,
plan and improve operations and make decisions. Companies should adopt and integrate
various different management accounting tools and reports to help them make informed
decisions. Some of the ways these tools and reports can be integrated in the following way:

1. Budgeting:
The reports produced by budgeting can be used to organize and plan for the
targeted values represented by these reports. The reports act as a path for a
company and by analyzing them, it can plan better and achieve the results.
The reports can also act as benchmarks, hence when a variance is detected,
timely corrective action can be taken to remain on the path of achieving the
goals set out for the year.
2. Performance Reports:

These reports will help the companies assign the best available resources to
the respective tasks. They will also provide the managers with information
that can help them plan for production activities whilst maintaining the desired
level of costs.

3. Business Situation Reports:

 The future is uncertain, but all managers should plan in advance for all the
possible outcomes. These reports give the managers an outlook of the
company and its performance given different scenarios. By integrating them
into the business processes, a company and its managers can have valuable
information which will allow them to make timely decisions for the company.

4. Account Receivables ageing Report:

This type of a report is very important for companies as it informs them of the
payment behvaiour of their receivables. When integrated with the processes,
these reports can help a company with collection schedules,
pricing/discounting decisions and also help it with the prediction of bad debts.

5. Inventory Management Reports:

These should always be integrated with the systems and business
processes as they update a company about different inventory levels
and can help the company with inventory management whilst ensuring
minimum storage costs.

Hence, all business should integrate management accounting reports and systems with their
business processes to smoothly run their operations and to make well informed decisions.
These reports provide the companies with data that can be analyzed and can help them with
operational efficiencies.

Planning tools used for Budgeting:

Budget planning tools are used in business to forecast, plan and manage the operations and
to estimate the financial needs of the business in the near future. They are prepared to
assess the performance,financial, operational requirements of the business and to track
various matrics, analyze variances and take corrective measures, this is also called
budgetary control. There are various types of budgets, as explained below:
1. Capital Budgeting: Used to evaluate major business projects and its feasibility 
2. Operational Budgeting: This maps the expenditure and revenue of the business
operations
3. Master Budgeting: This is an amalgamation of all departmental budgets
4. Cash Flow Budgeting: This is an estimate of all cash receipts and expenditures that
occur in an expected period.
 5. Financial Budgeting: This budget is used to predict all the future incomes and
expenses of a business

Budget planning tools are used to plan and forecast a company’s budget such that the short terms as
well as long term goals of the company are achieved. In the current environment, companies are
shifting their focus on cloud based budgetary softwares and tools. The types of planning tools
involved in the budget making process are:

1. SCORO:
This tool manages all the budgets of the company in one system, and integrates the
information flow. The tool provides various options such as a feature to manage all expenses
and resources, evaluation of actual and targeted levels, it helps the business to automate
invoicing and streamlines revenue information for better forecasting and planning.
2. Prophix:

Many small management tools are integrated together to manage the resources
from various departments and prepare budget accordingly. The tool assists in decision
making by providing scenario analysis for different scenarios. It also aids in forecasting
cashflows which then help the company make decisions for working capital and to maintain
the liquidity of the company at acceptable levels. It also helps in human resource
management, hence personal KPIs can be tracked and the performance of individuals
appraised in a transparent manner. Hence, Prophix can be used to manage corporate
performance of companies.

There are other various tools and techniques that can be used in the budgeting process. These
include different costing, forecasting, inventory valuation techniques. The appropriate techniques
used with the relevant type of budget can give a company an accurate budget which can help it to
plan the operations and set benchmarks and KPIs accordingly.

Advantages of Budgeting:
As discussed previously, budgets are prepared to forecast the future outlook and help in planning
the operational activities. The advantages of preparing budgets are discussed below:

Forecasting:
Through budgeting, companies can forecast sales and costs for a specific time period. By forecasting
such information, a company can track costs and sales as they occur. This can help the company to
manage its cash flow in a much better way as it would know how much and when a specific cost will
be incurred, hence through forecasting a company can manage its costs, cash flows and utilize its
resources to maximize the return. Forecasting also helps a company in preparing for different
scenarios and be ready in case the macro/micro economic factors change. For example, forecasting
interest expense using various scenarios can help the company manage any changes in the interest
rate well ahead of time.

Price Setting:
By preparing a budget, a company can project its manufacturing and other costs such as rent, wages,
marketing, administration costs, to know the actual cost per unit of the products being
manufactured. This can help the company in setting a price according to the desired profit levels.
This gives the company leverage as it has a better understanding of its total costs and the product.
The budgeted costs and prices can be used to analyze the operations and give the managers insights
to reduce them to gain competitiveness in the industry.

Capital Needs:
Many financial institutions only give out credit limits or loans when they have complete financial
knowledge of the company and can establish that the company is a going concern. Budgeting can
help a company present its potential to interested investors and banks to avail financing. Budgeting
will also indicate the company of any financing needs in advance, and hence allow it source funds
well ahead of time.

Flexibility:
A budget provides a range of information and helps a company track its performance and compare it
to the benchmarks set through budgeting. It can help the company make changes in allocation of
funds/costs to the departments in need. For example, if the marketing efforts are showing results in
terms of increased sales, budgets can be used to allocate more funds for such advertising activities,
and cut costs from less important areas.

Hence, a budget is a financial plan to outline and achieve financial and operational objectives. It is
used as a tool to compare the performance, track variances and put in corrective measures to
achieve long term targets of the business. The budget also provides the business with a benchmark
and helps bring harmonization between various departments.

How budgets and management accounting tool Solve Financial

Problems:
The competitive business environment in recent years have forced companies to adopt flexible
management accounting tools to respond to changes and stay ahead in the industry. Budgets and
the tools used to them are a way through which companies can predict, and plan for any future
changes and financial problems. Budgets can be used as a benchmarking tool to gauge financial and
operational performance and identify key areas and focus on specific areas where intervention and
changes are necessary.

Balance scorecard is another management accounting tool that can help companies evaluate
performance, and improve it in the future. Balance scorecard is strategic performance tracking tool
used to measure performance with respect to various key performance indicators (KPIs).

Companies can also use management accounting software to make informed financial decisions such
as how much profit to reinvest, and a better understanding of the financial position of the company.
This will enable the companies to view the profitability position and the financial position at any
given time and take corrective action, to improve the performance and achieve targets and long
term goals of the company. An example is that a company can make efforts to get discounts from
suppliers, extend credit limits, approach financial institutions for any financial help if the company
foresees any trouble in the future. Hence, management accounting tools such as budgeting, can help
companies track their performance and out in timely measures to improve it and achieve long term
goals.

How can organizations avoid financial problems through management

accounting?
As discussed previously, management accounting provides companies with a range of financial and
non-financial data, and provides an opportunity to analyze that data and understand the operations
of the company better, and improve decision making and planning of the operations. Now we will
discuss ways in which certain organizations adapt to management accounting to improve the
performance.

Management accounting helps managers classify the costs and ascertain the importance relative to
the business operations. For example, a company analyses its costs and finds that it is incurring high
transportation/travel costs and can better utilize resources spent on these costs. The company can
therefore look for cheaper alternatives such as switching to online meetings to avoid unnecessary
travel costs and time, and allocating that cost to the department in financial trouble, or to use
resources saved to help the company recover financially. Hence, by using management accounting, a
company can adapt to changing scenarios and make quick, well informed decisions. It can help a
company to quickly cut down costs in case of cash flow and profitability problems as it provides a
better understanding of them.
Companies can also use managerial accounting to prioritize customers by analyzing them and
forecasting the potential and treat them differently according to their potential. A company, by
analyzing past data can know the traits of the customers, their most favored products, payment
behavior, and order behavior. This can help the company to target each customer/segment
differently by using different marketing techniques, price levels, and product traits. This technique
can help the company improve sales and profitability and can improve its position in the market
when faced with declining sales and profit levels.

Companies like Dell have incorporated management accounting systems to improve its financial
position. At Dell, benchmarking is used to identify key financial areas that need attention and to
improve them. Dell uses budgets and balance scorecards to forecast and evaluate the performance
and take corrective measures and will enable it to make decisions which can help it to overcome
short term financial troubles such as working capital issues faced by the company. Management
accounting will help the company predict its cash conversion cycle and identify areas where
operational streamlining is required.

Hence, it can be seen that companies can adopt management accounting to identify trouble areas
and take actions to respond to financial problems timely.

Marginal and Absorption Costing:

Marginal Costing:
It is a costing system that treats the variable manufacturing costs as product costs and fixed
costs are treated as period costs and are written off against the contribution. Contribution is the
difference between the sales and total variable manufacturing costs, and helps the company in
knowing whether the manufacturing overheads are covered by the sales or not. The opening and
closing inventory are valued at the variable cost. Marginal costing is the technique used for decision
making in companies as it is simple and provides insights into the cost directly related to production.

Absorption Costing:
This costing method treats variable and fixed manufacturing costs as product costs, as it is argued
that production cannot take place without the fixed manufacturing overheads and thus these costs
should be included in the product costs. The method avoids any fluctuation in profit which is noticed
in profits reported under marginal costing.

Difference in profit and inventory valuation:

Under absorption costing, inventory is valued at full production cost per unit. As mentioned above,
this is due to the fact that it is thought that product costs should include all manufacturing costs and
overheads and fixed costs should be absorbed. This will also result in a higher value of closing stock,
as factory overheads are included in the product costs. Whereas, under marginal costing, the
inventory is valued at the total variable production cost per unit. The fixed manufacturing overheads
are treated as period costs, and are thought to be incurred regardless of production. The value of
closing inventory is less than that under absorption costing as only variable costs are included in the
product costs.

There is a difference in profits under both methods because of the difference in inventory valuation.
The difference can be reconciled. However, both methods provide unique analysis of costs of the
company and can be used to control the costs. Marginal costing is thought to be more useful and
can provide insights into the variable costs that can be controlled with the sales volume.

Conclusion
Management accounting is a process through which organizations can make well informed decisions
and can achieve the long term goals of the company by providing a better understanding. There are
various tools in management accounting that can be used by the organizations to understand their
processes and analyze the data. These tools such as budgeting, balance scorecards can provide the
companies with valuable range of information that can help them track the performance evaluate it
and take in place corrective measures if necessary. Budgeting will help the organizations forecast
future costs and sales and can help them plan the operations accordingly. Moreover, a company can
use various types of budgets as it deems fit for their company and can use many different tools to
prepare them. There are many benefits of managerial accounting and as discussed in the report, a
company can use it to overcome financial problems and streamline its processes.
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