Management Accounting: LO1. Demonstrate An Understanding of Management Accounting Systems

Management Accounting
LO1. Demonstrate an understanding of management accounting

systems.
RAHMEE 1
P1. Explain management accounting and give the essential requirement of

different types of management accounting systems.
Management accounting, also called managerial accounting or cost accounting, is the process
of analyzing business costs and operations to prepare internal financial report, records, and
account to aid managers’ decision-making process in achieving business goals. In other words,
it is the act of making sense of financial and costing data and translating that data into useful
information for management and officers within an organization.
Origin
Managerial accounting has its roots in the industrial revolution of the 19th century. During this
early period, most firms were tightly controlled by a few owner-managers who borrowed based
on personal relationships and their personal assets.
Since there were no external shareholders and little unsecured debt, there was little need for
elaborate financial reports. In contrast, managerial accounting was relatively sophisticated and
provided the essential information needed to manage the early large-scale production of textile,
steel, and other products. After the turn of the century, financial accounting requirements
burgeoned because of new pressures placed on companies by capital markets, creditors,
regulatory bodies, and federal taxation of income. Johnson and Kaplan state that “many firms
needed to raise funds from increasingly widespread and detached suppliers of capital. To tap
these vast reservoirs of outside capital, firms’ managers had to supply audited financial reports.
And because outside suppliers of capital relied on audited financial statements, independent
accountants had a keen interest in establishing well defined procedures for corporate financial
reporting. The inventory costing procedure adopted by public accountants after the turn of the
century had a profound effect on management accounting. As a consequence, for many
decades, management accountants increasingly focused their efforts on ensuring that financial
accounting requirements were met and financial reports were released on time.
Roles
Formulate Financial Strategies
Management accountants can formulate financial strategies using sales forecasts, budgets and
job-costing techniques, among other managerial accounting tools. They also can incorporate
data from a company’s financial statements to develop strategies that enhance gross income,
net profit and earnings per share. Whether it’s formulating a plan to purchase capital equipment
or reduce operating costs to ensure the continued viability of a business, management
accountants serve a vital role in formulating effective financial strategies.
Explain Financial Consequences of Decisions
If senior leaders adjust their company’s capital structure, management accountants can explain
the ramifications of adding additional debt or equity financing. This is true of other decisions,
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such as merging with other companies, opening new operating facilities or laying off large
numbers of employees. They can explain how decisions impact budgets and financial
statements, illustrating how decisions change a company’s profit or loss for a given period of
time. While some business decisions may sound good, it's only when digging into the numbers
that a company finds whether they truly add up or not.
Monitor Expenses
Management accountants can create static, flexible or rolling budgets, along with other types of
reports that allow senior leaders and department heads to monitor expenses. This is important,
because operating expenses have a direct impact on bottom-line profit. Management
accountants can select the optimal budgeting technique, given the specific needs of their
stakeholders, and help their company run as cost-effectively as possible. They also can create
ad-hoc reports that make it easier for their stakeholders to understand the nature of the
expenses their department or organization incur.
Maintain Profitability
There are many tools management accountants can use to keep their businesses profitable,
including performing a break-even analysis. With this type of analysis, the accountants weigh
sales against variable and fixed costs to determine the point at which a company breaks even.
Knowing this point will help management determine production levels, sales objectives and
overhead costs, among other points impacting profitability. Also, management accountants can
examine direct and indirect manufacturing costs, helping to optimize a company’s cost structure.
Principles
Designing and Compiling
Accounting information, records, reports, statements and other evidence of past, present or
future results should be designed and compiled to meet the needs of the particular business
and/or specific problem.
It means that management accounting system is designed in such a way presenting the
relevant data. If so, a particular problem is to be solved. Moreover, accounting information can
be modified and adopted to meet the requirements of management.
Management by Exception
The principle of management by exception is followed when presenting information to

management. It means that budgetary control system and standard costing techniques are
followed in the management accounting system.
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In this way, the actual performance is compared with pre-determined one for finding the
deviations. The unfavorable deviations alone are informed precisely to management as what is
going wrong. If so, the management has spent less time to read and study the information and
more time to take action.
Absorption of Overhead Costs
Overhead costs are absorbed on anyone of the predetermined basis. The overhead costs are
the combination of indirect materials, indirect labour and indirect expenses. Hence, the selected
method or methods for the absorption of overheads should bring about the desired results in the
most equitable manner.
Control at Source Accounting
Costs are best controlled at the points at which they are incurred – control at source accounting.
The performance of individual workers, details of materials issues and utilization and usage of
services such as machine, power, repairs and maintenance, vehicles etc. are prepared in the
form of quantitative and qualitative information. In this way, control can be exercised over
employees, materials and service providing devices.
Accounting for Inflation
A profit cannot be said to be earned unless capital is maintained intact in real terms. It means
that money value is not stable. Hence, it is necessary to assess the value of capital contributed
by the owners of the business concern in terms of real value of money through revaluation
accounting. In this way, rate of inflation is taken into account to judge the real success of the
business concern.
Management Accounting System

Financial accounting focuses on preparing information for external parties, such as
stockholders, public regulators and lenders, in accordance with generally accepted accounting
principles. Managerial accounting, on the other hand, takes a company's financial information
and develops reports for internal and confidential use by managers for decision-making and
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identifying ways to run the company more efficiently. These reports are based on
management's informational needs and include budgeting, breakeven charts, product cost
analysis, trend charts and forecasting.
Inventory management System
Inventory management is a discipline primarily about specifying the shape and
placement of stocked goods. It is required at different locations within a facility or within
many locations of a supply network to precede the regular and planned course of
production and stock of materials.
Cost Accounting System
A cost accounting system is used by manufacturers to record production activities using
a perpetual inventory system. In other words, it’s an accounting system designed for
manufacturers that tracks the flow of inventory continually through the various stages of
production.
Job Costing System
Job cost accounting is the process of assigning the costs you incur to a specific job you
or your business is involved with. This term is widely used in the construction industry
and it refers to allocating costs to individual construction projects at a company.
Price optimization System
Price optimization is the process of finding that pricing sweet spot, or maximizing price
against the customers willingness to pay. Companies up and down the supply chain,
both in B2B and B2C settings, rightly dedicate a massive amount of time towards price
optimization to ensure that their products will sell quickly at the right price while still
making a decent profit.
The different between Financial Accounting and Management Accounting
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BASIS FOR COMPARISON FINANCIAL ACCOUNTING MANAGEMENT

ACCOUNTING
Meaning Financial Accounting is an The accounting system

accounting system that which provides relevant
focuses on the preparation information to the managers
of financial statement of an to make policies, plans and
organization to provide the strategies for running the
financial information to the business effectively is
interested parties. known as Management
Accounting.
Is compulsory? Yes No
Information Monetary information only Monetary and non-

monetary information
Objective To provide financial To assist the management

information to outsiders. in planning and decision-
making process by
providing detailed
information on various
matters.
Format Specified Not Specified
Time Frame Financial Statements are The reports are prepared as

prepared at the end of the per the need and
accounting period which is requirements of the
usually one year. organization.
User. User Internal and external Only internal management.

parties.
Reports Summarized Reports about Complete and Detailed

the financial position of the reports regarding various
organization. information.
Publishing and auditing Required to be published Neither published nor

and audited by statutory audited by statutory
auditors. auditors.
P2. Explain different Methods used for management accounting reporting
RAHMEE 6
Why information should be relevant to the user, reliable, up to date

and accurate.
What is Information?
Data that is accurate and timely, specific and organized for a purpose, presented within a
context that gives it meaning and relevance, and can lead to an increase in understanding and
decrease in uncertainty. Information is valuable because it can affect behavior, a decision, or an
outcome.
Relevance
Data captured should be relevant to the purposes for which it is to be used. This will require
a periodic review of requirements to reflect changing needs.
We have a duty to collect and report performance information against a wide range
of statutory indicators. These are set out in the context of the Government’s White
Paper – Strong and Prosperous Communities. Where appropriate each service will
identify reliable local performance indicators to manage performance and drive
improvement. These are reviewed on an annual basis to ensure relevance.
Reliable
Data should reflect stable and consistent data collection processes across collection points
and over time. Progress toward performance targets should reflect real changes rather than
variations in data collection approaches or methods.
Source data is clearly identified and readily available from manual, automated or other
systems and records. Protocols exist where data is provided from a third party, such as
Hertfordshire Constabulary and Hertfordshire County Council.
Accuracy
Data should be sufficiently accurate for the intended use and should be captured only once,
although it may have multiple uses. Data should be captured at the point of activity.
Data is always captured at the point of activity. Performance data is directly input into
Performance Plus by the service manager or nominated data entry staff.
Access to P+ for the purpose of data entry is restricted through secure password
controls and limited access to appropriate data entry pages. Individual passwords can
be changed by the user and which under no circumstances should be used by anyone
other than that user.
Where appropriate, base data, i.e. denominators and numerators, will be input into the
system which will then calculate the result. These have been determined in accordance
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with published guidance or agreed locally. This will eliminate calculation errors at this
stage of the process, as well as provide contextual information for the reader.
Timeliness
Data should be captured as quickly as possible after the event or activity and must be
available for the intended use within a reasonable time period. Data must be available
quickly and frequently enough to support information needs and to influence service or
management decisions.
Performance data is requested to be available within one calendar month from the end
of the previous quarter and is subsequently reported to the respective Policy and
Scrutiny Panel on a quarterly basis. As a part of the ongoing development of
Performance Plus it is intended that performance information will be exported through
custom reporting and made available via the Three Rivers DC website. This will improve
access to information and eliminate delays in publishing information through traditional
methods.
Why the way in which the information is presented must be

understandable
The Understandable information must be easily to get ideas when users can be read. And this
information gives how to planning, how to control and also how to organize for the decision
making. Understanding is a brief, complete and clear explanation for the information provided in
the report. The Information relating to the relationship is essential to users in understanding
financial statements. The legitimate background of business activities represents the
understanding of the data the financial quality that can be understood from they people with
knowledge.
The main things are we consider the understandable presented information, there are:
Information must be understandable by its users.
Main two external users are Investors and Creditors.
Users are assumed to have reasonable comprehension of, and ability to study, the
accounting, business, and economic concepts needed to the underattended information.
However, by understanding its fundamental problems, each of them will not fully understand the
complex information. Instead of providing a system, the information must be published correctly.
Different types of managerial accounting reports
RAHMEE 8
Managerial accounting reports help small business owners and managers monitor the
company's performance and are prepared frequently throughout accounting periods as needed.
Depending on the type of project and the time-sensitivity of the information, an owner or
manager may request reports quarterly, monthly, weekly or even daily.
Budget Report
Budget reports help small business owners analyze their company's performance and, if the
business is big enough, managers analyze their department's performance and control costs.
The estimated budget for the period is usually based on the actual expenses from prior years. If
the small business as a whole or a specific department was substantially over budget in a
previous year and cannot find feasible ways to trim costs, the budget for future years may need
to be increased to a more accurate level. Owners and managers can also use budget reports to
provide incentives to employees. In this case, some of the funds budgeted may be given out up
as bonuses to employees for meeting specific financial goals.
Accounts Receivable Aging Reports
The accounts receivable aging report is a critical tool for managing cash flow for companies that
extend credit to their customers. This report breaks down the customer balances by how long
they have been owed. Most aging reports include separate columns for invoices that are 30
days late, 60 days late and 90 days late or more. A manager can use the aging report to find
problems with the company's collections process. If a significant number of customers are
unable to pay their balances, the company may need to tighten its credit policies. Periodically
analyzing the accounts receivable aging also keeps the collections department from overlooking
old debts.
Job Cost Reports
Job cost reports show expenses for a specific project. They are usually matched with an
estimate of revenue so the company can evaluate the job's profitability. This helps identify
higher-earning areas of the business so the company can focus its efforts there instead of
wasting time and money on jobs with low profit margins. Job cost reports are also used to
analyze expenses while the project is in progress so managers can correct areas of waste
before the costs escalate.
Inventory and Manufacturing
Companies with physical inventory can use managerial accounting reports to make their
manufacturing processes more efficient. These reports generally include items such as
inventory waste, hourly labor costs or per-unit overhead costs. The manager can then compare
different assembly lines within the company to see where one can improve or to offer bonuses
to the best-performing departments.
RAHMEE 9
LO2. Apply a range of management accounting techniques

P3. Calculate costs using appropriates techniques of cost analysis to
prepare an income statement using marginal and absorption costs.
A.Cost
In business and accounting, cost is the monetary value that a company has spent in order to
produce something. Cost denotes the amount of money that a company spends on the creation
or production of goods or services. It does not include the markup for profit. From a seller’s point
of view, cost is the amount of money that is spent to produce a good or product. If a producer
were to sell his products at the production price, his costs and income would break even,
meaning that he would not lose money on the sales. However, he would not make a profit. From
a buyer’s point of view the cost of a product is also known as the price. This is the amount that
the seller charges for a product, and it includes both the production cost and the mark-up, which
is added by the seller in order to make a profit.
B. Different Classification cost such as,
Fixed Cost
A periodic cost that remains more or less unchanged irrespective of the output level or sales
revenue, While in practice, all costs vary over time and no cost is a purely fixed cost, the
concept of fixed costs is necessary in short term cost accounting. Organizations with high fixed
costs are significantly different from those with high variable costs. This difference affects the
financial structure of the organization as well as its pricing and profits. The breakeven point in
such organizations (in comparison with high variable cost organizations) is typically at a much
higher level of output, and their marginal profit (rate of contribution) is also much higher.
EX- insurance, interest, rent, salaries
Variable Cost
A variable cost is a cost that varies in relation to either production volume or services provided.
If there is no production or no services are provided, then there should be no variable costs.
EX- Bonus, wage cost
Direct Cost
A direct cost is a price that can be completely attributed to the production of specific goods or
services. Some costs, such as depreciation or administrative expenses, are more difficult to
assign to a specific product and therefore are considered to be indirect costs.
EX-Direct material, Direct labour
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Indirect Cost
Indirect costs are costs that are not directly accountable to a cost object (such as a particular
project, facility, function or product). Indirect costs may be either fixed or variable, But some
overhead costs can be directly attributed to a project and are direct costs.
EX--Indirect material, Indirect labour
Material Cost
Direct materials cost the cost of direct materials which can be easily identified with the unit of
production. For example, the cost of glass is a direct materials cost in light bulb manufacturing.
The manufacture of products or goods required material as the prime element.
Labor Cost
Labor cost is wages that are incurred in order to produce specific goods or provide specific
services to customers. The total amount of labor cost is much more than wages paid. It also
includes the payroll taxes associated with those wages, plus the cost of company-paid medical
insurance, life insurance, workers' compensation insurance, any company-matched pension
contributions, and other company benefits.
Inventory Cost
Inventory cost includes the costs to order and hold inventory, as well as to administer the
related paperwork. This cost is examined by management as part of its evaluation of how much
inventory to keep on hand. This can result in changes in the order fulfillment rate for customers,
as well as variations in the production process flow.
C. Different Costing system such as,
Marginal Costing System
Marginal cost is the cost of one additional unit of output. The concept is used to determine the
optimum production quantity for a company, where it costs the least amount to produce
additional units. If a company operates within this "sweet spot," it can maximize its profits. The
concept is also used to determine product pricing when customers request the lowest possible
price for certain orders.
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Absorption Costing System
Variable costing is a methodology that only assigns variable costs to inventory. This approach
means that all overhead costs are charged to expense in the period incurred, while direct
materials and variable overhead costs are assigned to inventory. There are no uses for variable
costing in financial reporting, since the accounting frameworks (such as GAAP and IFRS)
require that overhead also be allocated to inventory.
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Job Costing System
A job costing system involves the process of accumulating information about the costs
associated with a specific production or service job. This information may be required in order to
submit the cost information to a customer under a contract where costs are reimbursed. The
information is also useful for determining the accuracy of a company's estimating system, which
should be able to quote prices that allow for a reasonable profit. The information can also be
used to assign inventoriable costs to manufactured goods.
Batch Costing System
Batch cost is the cluster of costs incurred when a group of products or services are produced,
and which cannot be identified to specific products or services within the group. For cost
accounting purposes, it may be considered necessary to assign the batch cost to individual
units within a batch. If so, the total batch cost is aggregated and divided by the number of units
produced to arrive at a unit cost.
Process Costing System
A process costing system accumulates costs when a large number of identical units are being
produced. In this situation, it is most efficient to accumulate costs at an aggregate level for a
large batch of products and then allocate them to the individual units produced. The assumption
is that the cost of each unit is the same as that of any other unit, so there is no need to track
information at an individual unit level.
The classic example of a process costing environment is a petroleum refinery, where it is

impossible to track the cost of a specific unit of oil as it moves through the refinery.
ABC Costing System
Activity-based costing (ABC) is a methodology for more precisely allocating overhead to those
items that actually use it. The system can be used for the targeted reduction of overhead costs.
ABC works best in complex environments, where there are many machines and products, and
tangled processes that are not easy to sort out. Conversely, it is of less use in a streamlined
environment where production processes are abbreviated.
1.Calculate the unit cost under marginal costing & absorption costing techniques.
Marginal Costing
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Unit cost (Working 01)
Direct materials 8.00
Direct labor 5.00
Variable production o/h’s 3.00
Unit cost 16.00.
Value of inventory (Working 02)
May June
Opening FG 0 [200 units x €16] =

€3,200
+ Production [500 units x €16]= [380 units x €16] =
€8,000 €6,080
- Closing FG [200 units x €16] = [80 units x €16] =
€3,200 €1,280
2. Prepare the income statement by using the marginal costing and absorption costing
techniques.
Income statement of Galway PLC (Marginal)
May May June June

Sales 15000 25000
VP cost of sales
Opening FG 0 3200
Production 8000 6080
Close FG (3200) (4800) (1280) (8000)
Differences 10200 17000
-Other VC (750) (1250)
contribution 9450 15750
-Fixed cost(4+2+4) (10000) (10000)
Profit (550) 5750
Absorption method
Unit cost (Working 03)
Direct materials 8.00
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Direct labor 5.00

Variable production o/h’s 3.00
Fixed production o/h [€4,000/400 units] 10.00
Full production cost 26.00
Value of inventory (Working 04)
May June
Opening FG 0 [200 units x €26] =

€5,200
+ Production [[500 units x €26] = [380 units x 26] =
€13,000 €9,880
- Closing FG [200 units x €26] = €5,200 [80 units x €26] = €2,080
RAHMEE 15
Income statement of Galway PLC (Absorption)
May May June June

Sales 15000 25000
cost of sales
Opening FG 0 5200
Production 13000 9880
Close FG (5200) (7800) (2080) (13300)
Gross Profit 8200 11800
-admin (6750) (7250)
/selling/other
expanses
Net profit 1450 4550
(+/-) over/ under 1000 (200)
absorption
Profit 450 4350
Assumption: standard and actual fixed production over heads are equal.
Under/ over absorbed FPOH (Working 05)
May June
Actual Fixed production o/h €4,000 €4,000
Fixed o/h absorbed €5,000 [500*€10] €3,800 [380 units *€10]
€1,000 (over absorbed) €200 (under absorbed)
3. Prepare the profit reconciliation statement
May June
Profit under absorption €1,450 €4,550
FPOH p/u (€2,000) [200 units * €10] €1,200 [120 units * €10]
Profit under marginal costing (€550) €5,750
RAHMEE 16
LO3. Explain the use of planning tools used in management

accounting.
P4. Explain the advantage and disadvantage of different types of planning

tools used for budgetary control.
a. Budget
A budget is an estimation of revenue and expenses over a specified future period of
time; it is compiled and re-evaluated on a periodic basis.
Budgetary control
A system of management control in which actual income and spending are compared
with planned income and spending, so that you can see if plans are being followed and if
those plans need to be changed in order to make a profit.
b. Different types of budgets
Capital Budget
Capital budgeting is the process in which a business determines and evaluates potential
expenses or investments that are large in nature. These expenditures and investments
include projects such as building a new plant or investing in a long-term venture. Often
times, a prospective project's lifetime cash inflows and outflows are assessed in order to
determine whether the potential returns generated meet a sufficient target benchmark,
also known as "investment appraisal."
Operational Budgeting
A detailed projection of all estimated income and expenses based on forecasted sales
revenue during a given period (usually one year). It generally consists of several sub-
budgets, the most important one being the sales budget, which is prepared first. Since
an operating budget is a short-term budget, capital outlays are excluded because they
are long-term costs.
Master Budget
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A master budget is an aggregate of a company's individual budgets designed to present

a complete picture of its financial activity and health. The master budget combines
factors like sales, operating expenses, assets, and income streams to allow companies
to establish goals and evaluate their overall performance, as well as that of individual
cost centers within the organization. Master budgets are often used in larger companies
to keep all individual managers aligned.
Cash Flow Budget
A cash flow budget is a means of projecting how and when cash comes in and flows out
of a business within a specified time period. It can be useful in helping a company
determine whether it's managing its cash wisely. Cash flow budgets consider factors
such as accounts payable and accounts receivable to assess whether a company has
ample cash on hand to continue operating, the extent to which it is using its cash
productively, and its likelihood of generating cash in the near future. A construction
company, for example, might use its cash flow budget to determine whether it can start a
new building project before getting paid for the work it has in progress.
Financial Budget
A financial budget presents a company's strategy for managing its assets, cash flow,
income, and expenses. A financial budget is used to establish a picture of a company's
financial health and present a comprehensive overview of its spending relative to
revenues from core operations. A software company, for instance, might use its financial
budget to determine its value in the context of a public stock offering or merger.
c. Advantage and Disadvantage of budgeting
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Advantage
Forecasting
A business budget not only helps you project annual expenses but lets you see costs as
they will occur. For example, averaging your insurance premiums per month helps you
set average monthly revenue goals. Budgeting the exact amount of money to pay
premiums in the months they come due helps you manage your cash flow to ensure you
have money on hand to pay your bills each month. Budgets also let you forecast your
annual bottom line using more than one revenue scenario.
Price Setting
Market conditions such as your competitors’ prices aren’t the only parameters you need
to set your fees, rates and prices. You must know your manufacturing and overhead
costs before you set your prices. A budget lets you project your utility, health care,
marketing, rent, wages, debt service and other costs so you can learn the true cost per
unit of making your products or delivering your service. Once you know this, you can set
your prices to make the profit you want. If this price is too high for you to be competitive
in your marketplace, you can use your budget to identify areas where you can reduce
your costs.
Capital and Credit Procurement
Few venture capitalists, banks, suppliers or other lenders will give you money or credit
unless you have financial data to demonstrate you are a going concern. Unless you
have assets you can use as collateral, you’ll need to show financial statements that
prove you are stable. If you are a new business, or are expanding, a budget will show
potential partners how their participation will affect your sales and profits.
Flexibility
A budget lets you track your business’ performance throughout the year, allowing you to
make necessary changes to rein in costs or increase spending to take advantage of
growth opportunities. If your marketing is effective, a budget will let you know if you have
funds available to increase your advertising to grow your sales. If your sales are slow, a
budget identifies areas where you can cut discretionary costs to make you more
competitive or tide you through slow periods.
Disadvantage
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Only considers financial outcomes.
The nature of the budget is numeric, so it tends to focus management attention on the
quantitative aspects of a business; this usually means an intent focus on improving or
maintaining profitability. In reality, customers do not care about the profits of a business
– they will only buy from the company as long as they are receiving good service and
well-constructed products at a fair price. Unfortunately, it is quite difficult to build these
concepts into a budget, since they are qualitative in nature. Thus, the budgeting concept
does not necessarily support the needs of customers.
Blame for outcomes
If a department does not achieve its budgeted results, the department man ager may
blame any other departments that provide services to it for not having adequately
supported his department.
Expense allocations
The budget may prescribe that certain amounts of overhead costs be allocated to
various departments, and the managers of those departments may take issue with the
allocation methods used. This is a particular problem when departments are not allowed
to substitute services provided from within the company for lower-cost services that are
available else where.
Use it or lose it
If a department is allowed a certain amount of expenditures and it does not appear that
the department will spend all of the funds during the budget period, the department
manager may authorize excessive expenditures at the last minute, on the grounds that
his budget manager may authorize excessive expenditures at the last minute, on the
grounds that his budget tends to make managers believe that they are entitled to a
certain amount of funding each year, irrespective of their actual need for the funds.
Time required
It can be very time-consuming to create a budget, especially in a poorly-organized

environment where many iterations of the budget may be required. The time involved is
lower if there is a well-designed budgeting procedure in place, employees are
accustomed to the process, and the company uses budgeting software. The work
required can be more extensive if business conditions are constantly changing, which
calls for repeated iterations of the budget model.
d. Alternative methods of budgeting

Zero based budgeting
In a dynamic business it often makes sense to 'start afresh' when developing a budget
rather than basing ideas too much on past performance. This is appropriate to Kraft
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because the organization is continually seeking to innovate. Each budget is therefore

constructed without much reference to previous budgets. In this way, change is built into
budget thinking.
Strategic budgeting
This involves identifying new, emerging opportunities, and then building plans to take full
advantage of them. This is closely related to zero based budgeting and helps Kraft to
concentrate on gaining competitive advantage.
Rolling budgets
Given the speed of change and general uncertainty in the external environment,
shareholders seek quick results. US companies typically report to shareholders every
three months, compared with six months in the UK. Rolling budgets involve evaluating
the previous twelve months' performance on an ongoing basis, and forecasting the next
three months' performance.
Activity based budgeting
This examines individual activities and assesses the strength of their contribution to
company success. They can then be ranked and prioritized, and be assigned
appropriate budgets.
e. Approaches budgets
Zero Based Budget
In ZBB the budget for any activity at the start of each year is set at zero. All expenditure
must be justified on a cost/benefit basis, including justification of continuing existence.
Top-Down Approach
It is called top-down approach because the budgets are made by the top executed and
then the money is passed down the line to various departments. This approach is
applied in affordable method percentage of sales, competitive parity method and Return
On Investments (ROI)method of budgeting.
Bottom-up Budgeting
In this method promotion adjectives are set for the tasks to be performed. All the
necessary activities to achieve the objectives are planned. The cost of these activities is
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as curtained and budgeted. The total promotion budget is then approved by top
management. This is also knowing the build-up approach of budgeting.
Base Budget
A recurring set of funds provided to a department at the onset of each budget period.
The base budget is used to keep the department functioning, and is derived from the
previous year's spending and adjustments such as inflation. It is not designed to fund
special projects. See also non-base budget.
Incremental Budget
Incremental budgeting is budgeting based on slight changes from the preceding period's
budgeted results or actual results. This is a common approach in businesses where
management does not intend to spend a great deal of time formulating budgets, or
where it does not perceive any great need to conduct a thorough re-evaluation of the
business. This mindset typically occurs when there is not a great deal of competition in
an industry, so that profits tend to be perpetuated from year to year.
f. Pricing
The amount of money charged for product or service, or the sum of value that consumer
exchange for the benefits of having or using the product or service.
g. Pricing Strategy
A business can use a variety of pricing strategies when selling a product or service. The
price can be set to maximize profitability for each unit sold or from the market overall. It
can be used to defend an existing market from new entrants, to increase market share
within a market or to enter a new market.
Types
Price Skimming
Designed to help businesses maximize sales on new products and services, price
skimming involves setting rates high during the introductory phase. The company then
lowers prices gradually as competitor goods appear on the market.
One of the benefits of price skimming is that it allows businesses to maximize profits on
early adopters before dropping prices to attract more price-sensitive consumers. Not
only does price skimming help a small business recoup its development costs, but it also
creates an illusion of quality and exclusivity when your item is first introduced to the
marketplace.
Psychology Pricing
RAHMEE 22
With the economy still limping back to full health, price remains a major concern for
American consumers. Psychology pricing refers to techniques that marketers use to
encourage customers to respond on emotional levels rather than logical ones.
For example, setting the price of a watch at $199 is proven to attract more consumers
than setting it at $200, even though the true difference here is quite small. One
explanation for this trend is that consumers tend to put more attention on the first
number on a price tag than the last. The goal of psychology pricing is to increase
demand by creating an illusion of enhanced value for the consumer.
Penetration Pricing
A few companies adopt these strategies in order to enter the market and to gain market
share. Some companies either provide a few services for free or they keep a low price
for their products for a limited period that is for a few months. This strategy is used by
the companies only in order to set up their customer base in a particular market. For
example France telecom gave away free telephone connections to consumers in order
to grab or acquire maximum consumers in a given market. Similarly the Sky TV gave
away their satellite dishes for free in order to set up a market for them. This gives the
companies a start and a consumer base.
In the similar manner there are few companies that keep their product cost low as their
introductory offer that is a way of introducing themselves in the market and creating a
consumer base. Similarly when the companies want to promote a premier product or
service they do raise the prices of the products and services for that particular time.
Value Pricing a Product
Let me first be clear about what value pricing means, value pricing is reducing the price
of a product due to external factors that can affect the sales of the product for example
competition and recession; value pricing does not mean that the company has added
something or increased the value of a product. When the company is afraid of factors
such as competition or recession affecting their sales and profits the company considers
value pricing.
For example McDonalds the famous food chain has started value meals for their
consumer since they have started facing competition with other fast food chains.
They offer a meal or a combination of a few products as a lower price where the
consumer feels emotionally content and continues to buy their products.
h. How do competitors determine their prices?
Pricing Strategy Options
RAHMEE 23
Competitive pricing is one of four major pricing strategies. Other options include cost-
plus pricing, where a set profit margin is added to the total cost of a product -- including
materials, labor and overhead. Markup pricing is where a percentage is added to the
wholesale cost of a product. Demand pricing is determined by establishing the optimal
relationship between profit and volume; a smaller per-unit profit is acceptable if volume
is increased significantly. Competitive pricing is charging a price that is comparable to
other vendors selling the same item.
Factors to Consider
Product prices determine the revenue stream of a business. Prices must be sufficient to
cover the costs of product production, company overhead and profit. Before lowering
prices it's preferable to lower costs to maintain a stable profit margin and a stable cash
flow into the business. Any pricing strategy must be chosen to ensure a maximum of
profit. Knowing your market and customer base are key elements to choosing the right
pricing strategy.
About Competitive Pricing
Vendors use a competitive pricing strategy when several other businesses sell the same
product and there is little to distinguish one vendor from another. A market leader will
generally set the price for the product and other vendors will usually have no option but
to follow suit in order to remain competitive. Vendors will either match the pricing of the
market leader or set prices within a comparable range.
Establishing Competitive Pricing
Vendors who are not market leaders can use the accepted price as a starting point.
From there they can opt to charge slightly more on the basis of factors such as superior
customer service or an extended warranty on a product. Retailers must be fully informed
of the prices their competitors charge and also know how discerning their customers are
on price alone. Once price is established, sales volume must be monitored to see if the
strategy is working.
Risks of Competitive Pricing
For many small businesses in particular, competitive pricing results in a narrowing of

profit margins. This makes the business vulnerable to a sudden rise in costs. Therefore,
independent retailers competing with high-volume, big box stores may choose an
alternative pricing strategy that affords them a larger cushion on their profit margin and
justify it on the basis of their niche advantage -- for example, being local and customer-
focused.
i. Supply and Demand considerations.
RAHMEE 24
Supply and demand, in economics, relationship between the quantity of a commodity

that producers wish to sell at various prices and the quantity that consumers wish to buy.
It is the main model of price determination used in economic theory. The price of a
commodity is determined by the interaction of supply and demand in a market. The
resulting price is referred to as the equilibrium price and represents an agreement
between producers and consumers of the good. In equilibrium the quantity of a good
supplied by producers equals the quantity demanded by consumers.
Illustration of the relationship of price to supply (S) and demand (D)

Demand Curve
The quantity of a commodity demanded depends on the price of that commodity and
potentially on many other factors, such as the prices of other commodities, the incomes
and preferences of consumers, and seasonal effects. In basic economic analysis, all
factors except the price of the commodity are often held constant; the analysis then
involves examining the relationship between various price levels and the maximum
quantity that would potentially be purchased by consumers at each of those prices. The
price-quantity combinations may be plotted on a curve, known as a demand curve, with
price represented on the vertical axis and quantity represented on the horizontal axis. A
demand curve is almost always downward-sloping, reflecting the willingness of
consumers to purchase more of the commodity at lower price levels. Any change in non-
price factors would cause a shift in the demand curve, whereas changes in the price of
the commodity can be traced along a fixed demand curve.
RAHMEE 25
increase in demand
Illustration of an increase in equilibrium price (p) and equilibrium quantity (q) due
to a shift in demand (D).
Supply Curve
The quantity of a commodity that is supplied in the market depends not only on the price
obtainable for the commodity but also on potentially many other factors, such as the
prices of substitute products, the production technology, and the availability and cost of
labour and other factors of production. In basic economic analysis, analyzing supply
involves looking at the relationship between various prices and the quantity potentially
offered by producers at each price, again holding constant all other factors that could
influence the price. Those price-quantity combinations may be plotted on a curve, known
as a supply curve, with price represented on the vertical axis and quantity represented
on the horizontal axis. A supply curve is usually upward-sloping, reflecting the
willingness of producers to sell more of the commodity they produce in a market with
higher prices. Any change in non-price factors would cause a shift in the supply curve,
whereas changes in the price of the commodity can be traced along a fixed supply
curve.
RAHMEE 26
decrease in supply
Illustration of an increase in equilibrium price (p) and a decrease in equilibrium
quantity (q) due to a shift in supply (S).
Market Equilibrium
It is the function of a market to equate demand and supply through the price mechanism.
If buyers wish to purchase more of a good than is available at the prevailing price, they
will tend to bid the price up. If they wish to purchase less than is available at the
prevailing price, suppliers will bid prices down. Thus, there is a tendency to move toward
the equilibrium price. That tendency is known as the market mechanism, and the
resulting balance between supply and demand is called a market equilibrium.
As the price rises, the quantity offered usually increases, and the willingness of
consumers to buy a good normally declines, but those changes are not necessarily
proportional. The measure of the responsiveness of supply and demand to changes in
price is called the price elasticity of supply or demand, calculated as the ratio of the
percentage change in quantity supplied or demanded to the percentage change in price.
Thus, if the price of a commodity decreases by 10 percent and sales of the commodity
consequently increase by 20 percent, then the price elasticity of demand for that
commodity is said to be 2.
The demand for products that have readily available substitutes is likely to be elastic,
which means that it will be more responsive to changes in the price of the product. That
is because consumers can easily replace the good with another if its price rises. The
demand for a product may be inelastic if there are no close substitutes and if
expenditures on the product constitute only a small part of the consumer’s income. Firms
RAHMEE 27
faced with relatively inelastic demands for their products may increase their total
revenue by raising prices; those facing elastic demands cannot.
Supply-and-demand analysis may be applied to markets for final goods and services or
to markets for labor, capital, and other factors of production. It can be applied at the level
of the firm or the industry or at the aggregate level for the entire economy.
RAHMEE 28
LO4. Compare ways in which organization could use

management accounting to respond to financial problems.
P5. Compare how in which organization are adapting management
accounting systems to respond to financial problems.
Benchmarking
Benchmarking is a process of measuring the performance of a company’s products, services, or

processes against those of another business considered to be the best in the industry, aka “best
in class.” The point of benchmarking is to identify internal opportunities for improvement. By
studying companies with superior performance, breaking down what makes such superior
performance possible, and then comparing those processes to how your business operates, you
can implement changes that will yield significant improvements.
That might mean tweaking a product’s features to more closely match a competitor’s offering, or
changing the scope of services you offer, or installing a new customer relationship management
(CRM) system to enable more personalized communications with customers.
There are two basic kinds of improvement opportunities: continuous and dramatic. Continuous
improvement is incremental, involving only small adjustments to reap sizeable advances.
Dramatic improvement can only come about through reengineering the whole internal work
process.
Key Benefits
In addition to helping companies become more efficient and profitable, benchmarking has other
benefits, too, such as:
 Improving employee understanding of cost structures and internal processes

 Encouraging team-building and cooperation in the interests of becoming more
competitive
 Enhancing familiarity with key performance metrics and opportunities for improvement
company-wide
In essence, benchmarking helps employees understand how one small piece of a company’s
processes or products can be the key to major success, just as one employee’s contributions
can lead to a big win.
RAHMEE 29
Key Performance Indicator(KPI)
A performance indicator or key performance indicator (KPI) is a type of performance

measurement. KPIs evaluate the success of an organization or of a particular activity (such as
projects, programs, products and other initiatives) in which it engages.
Often success is simply the repeated, periodic achievement of some levels of operational goal
(e.g. zero defects, 10/10 customer satisfaction, etc.), and sometimes success is defined in
terms of making progress toward strategic goals. Accordingly, choosing the right KPIs relies
upon a good understanding of what is important to the organization. [citation needed] 'What is
important' often depends on the department measuring the performance – e.g. the KPIs useful
to finance will differ from the KPIs assigned to sales.
Since there is a need to understand well what is important, various techniques to assess the
present state of the business, and its key activities, are associated with the selection of
performance indicators. These assessments often lead to the identification of potential
improvements, so performance indicators are routinely associated with 'performance
improvement' initiatives. A very common way to choose KPIs is to apply a management
framework such as the balanced scorecard.
Definitions of financial governance
Financial governance
NGOs exist for the benefit of their beneficiaries. The NGO’s governing body is entrusted with
responsibility for overseeing the organization on behalf of the beneficiaries. For this reason,
governing body members are often called ‘trustees’. They act as stewards, representing and
protecting the beneficiaries’ interests.
The board has ultimate legal, moral, and financial responsibility for the organization.
The governing body
The governing body may have different names, such as board of trustees, board of directors,
executive council, executive committee, etc. The board is often organized with a series of
permanent or temporary sub-committees – e.g. for Finance and Personnel matters. Advisory
committees are also frequently set up to provide support to a country programme or new
project.
The five roles of board members
RAHMEE 30
Board members should avoid getting too involved in day to day management of the
organization, although they do need to be aware of what is happening. Their five roles are:
Making sure that funds are used to help beneficiaries effectively

Making sure that the organization has enough funding
Making sure that the organization has effective senior management
Making sure that the organization operates within the law
Making sure that the board can handle its responsibilities effectively
1. Making sure funds are used to help beneficiaries effectively
Ensuring the organization has practical strategies for analyzing and responding to social
problems
Monitoring if the organization is actually doing a good job, putting its strategy into
practice and achieving value for money
Approving an annual budget for expenditure, based on the cost of relevant activities
Making sure that the organization has appropriate internal controls and accounting
systems to ensure that funds are used properly
Regularly checking that internal controls are followed in practice (e.g. carrying out or
engaging internal audits)
Taking an active role in internal controls as necessary (e.g. authorizing large payments)
Regularly monitoring financial reports, including the income and expenditure statement
and the balance sheet
Monitoring whether the organization is being accountable to its beneficiaries (eg
presenting financial reports to them)
If there is no evidence of dialogue with beneficiaries, then your work may not be meeting
their real needs.
2. Making sure the organization has enough funding
Approving the income section of the annual budget

Monitoring the amount of income received
Actively working out how to ensure the organization will be sustainable, including
approving a financing strategy
Monitoring relationships with donors (e.g. if reports are submitted on time)
Monitoring fund balances including general reserves
If any fund balances are in negative, this could have serious implications for your credibility.
3. Making sure the organization has effective senior management
RAHMEE 31
Recruiting a chief executive with financial management skills for their role (or
supporting the Chief Executive to develop these skills)
Supporting the Chief Executive to develop a culture of good financial management (e.g.
leading by example and encouraging finance and programme staff to work together)
Making sure that the most senior finance manager is a member of the most senior
management team
Encouraging an open culture that recognizes problems and aims to learn from them
Holding senior managers to account for the results of the decisions that they take and
the initiatives they launch
Everything you want to achieve depends on the people employed to do it. Senior managers
have to inspire and support other staff.
4. Making sure the organization operates within the law
Understanding the NGO's legal requirements, including Labour laws, Tax laws and
Health & Safety legislation.
Making sure that the management team meets legal requirements (e.g. paying taxes,
filing annual reports).
Appointing external auditors and overseeing the audit.
Approving the audited accounts and annual reports.
Filing reports with government departments.
5. Making sure the board can handle its responsibilities effectively
Appointing a treasurer, with specific responsibilities for financial management and the
skills to carry them out.
Making sure that all board members understand their financial management
responsibilities and supporting them to develop appropriate skills.
Making sure there are no conflicts of interest between the organization’s operations and
board members' work or business interests
Making time at board meetings to discuss the financial management aspect of all major
decisions.
Mango has a one-day training course called Financial governance in practice, which can
be run as an in-house event for your board.
Management Accounting skill set
Planning & Reporting
RAHMEE 32
The competencies required to envision the future, measure performance, and report
financial results.
Decision Making
The competencies required to guide decisions, manage risk, and establish an ethical
environment.
Technology
The competencies required to manage technology and information systems to enable

effective operations.
Operations
The competencies required to contribute as a cross-functional business partner to transform

company-wide operations.
Leadership
The competencies required to collaborate with others and inspire teams to achieve
organizational goals.
Characteristic of an effective management accountant
Competence
Maintain an appropriate level of professional expertise by continually developing

knowledge and skills.
Perform professional duties in accordance with relevant laws, regulations, and technical
standards.
Provide decision support information and recommendations that are accurate, clear,
concise, and timely.
Recognize and communicate professional limitations or other constraints that would

preclude responsible judgment or successful performance of an activity.
Confidentiality
Keep information confidential except when disclosure is authorized or legally required.
RAHMEE 33
Inform all relevant parties regarding appropriate use of confidential information. Monitor
subordinates' activities to ensure compliance.
Refrain from using confidential information for unethical or illegal advantage.
Integrity
Mitigate actual conflicts of interest; regularly communicate with business associates to

avoid apparent conflicts of interest. Advise all parties of any potential conflicts.
Refrain from engaging in any conduct that would prejudice carrying out duties ethically.
Abstain from engaging in or supporting any activity that might discredit the profession.
Credibility
Communicate information fairly and objectively.
Disclose all relevant information that could reasonably be expected to influence an

intended user's understanding of the reports, analyses, or recommendations.
Disclose delays or deficiencies in information, timeliness, processing, or internal controls

in conformance with organization policy and/or applicable law.
How can these skills be used to prevent and/or deal with financial problems
Find a Replacement for One Large Expense in Your Monthly Budget
RAHMEE 34
Cutting out an expense or changing a habit is easier if you replace it with something else. For
instance, if you want to quit buying expensive coffee on your way to work, plan how you can
replace this habit with a new one. You might buy yourself a new travel cup and purchase some
coffee that you enjoy drinking (and can make at home!). Then change your routine so that
you’re not tempted to stop for coffee anyways.
E.g. travel a different route to work.
Find one expense that’s taking a real bite out of your budget and find replacement solutions.
Cutting back on coffee is just one example. What about your entertainment costs, quitting
smoking or scaling back what you spend on hobbies and recreational activities? You’ll know that
you’ve passed this assignment when all of your bills are paid up to date and you’ve got a little
extra left in your bank account.
Identify Expenses You Can Reduce
Over the next month, identify areas of your budget that need some special attention. Look for
ways to decrease your spending with your utilities. Do your laundry with cold water instead of
hot; turn the heat down and the lights off when you’re not home. If you have a home phone as
well as a cell phone, decide if you need both. Routines can be hard habits to break.
Also identify products or services you no longer need but which you’re still paying for. Many
people simply let their bundled services renew from month to month, even when their needs
have changed. This might be because they’re too busy to look at their bills carefully, but taking
the time to go through your bills line by line and calling the companies to make changes to
service plans, or cancel services altogether, can find a lot of hidden cash.
If you haven’t guessed it yet, your fifth assignment is to identify what expenses you can reduce
and then create the plan to follow through with your changes. If you’re not sure where to start,
here’s a list of our most popular money saving tips. You’ll know you’ve passed this when your
bills get a little smaller.
Increase Your Spending Awareness
Consider what you learned about your spending habits by only using cash. Was it easier or
harder to part with cash than plastic? Did you only buy things you needed, or was there also
enough money to buy something that you wanted? How much did you have left at the end?
Some cases have found that people spend as much as 15% more per purchase when they use
plastic instead of cash. Spending more on every purchase adds up over the years, and if you
want debt solutions that last for life, be aware of how you spend your money.
Create a Spending Plan or a Budget to Solve and Prevent Financial Problems
Creating a monthly plan for your spending is one of the smartest things you can do for your
finances, yet it’s the most overlooked solution to most people’s financial problems. Having a
RAHMEE 35
spending plan or a budget (the technical name for a monthly spending plan) makes life so much
easier because you’ve given yourself a guide to decide how you want to spend your money.
Ironically, it’s also one of the things that you’ll likely never learn in a class at Cambridge or
Harvard. Not to pick on these universities though; most schools don’t teach students how to
create a budget. So to help with this lack of training, your third assignment is to outline your
budget.
If you’ve never created a household budget that works, here is a personal budget workbook to
get you started or you can try out this interactive budgeting resource that guides you through the
whole process. A budget based on real numbers sets you up for success, so use what you
learned when you tracked your spending.
If there’s an expense you want to cut out of your budget, start by reducing it by half. This will tell
you if you can stick it out for the long term. If you can make having a budget part of your life.
M1. Evaluate the benefits of Management Accounting systems

and their application within an organizational context.
RAHMEE 36
Management accounting does not usually follow any national accounting standards. Business
owners can design management accounting systems according to their company’s business
operations or management’s need for business information. Management accounting has
several advantages. These advantages usually coincide with the ability for companies to
improve operations and overall profitability. Business owners can also create a competitive
advantage by developing cost allocation processes in their management accounting function.
Reduce Expenses
Management accounting can help companies lower their operational expenses. Business
owners often use management accounting information to review the cost of economic resources
and other business operations. This information allows owners to better understand how much
money it costs to run the business. Business owners can also use management accounting to
conduct an analysis on the quality of economic resources used to produce goods or services. If
overall product quality would not suffer by using a cheaper raw material, business owners can
make this change to reduce production costs.
Improve Cash Flow
Budgets are a major part of management accounting. Business owners often use budgets so
they have a financial road map for future business expenditures. Many budgets are based on a
company's historical financial information. Management accountants will comb through this
information and create a master budget for the entire company. Larger business organizations
may use several smaller budgets for divisions or departments. These individual budgets usually
roll up into the company's overall master budget. The main purpose of budgets is to save the
company money through careful analysis of necessary and unnecessary cash expenditures.
Business Decisions
Management accounting often improves the business owner’s decision-making process. Rather
than making business decisions based solely on qualitative analysis, business owners or
managers can use management accounting information as a decision-making tool.
Management accounting usually provides a quantitative analysis for various decision
opportunities. Business owners can review each opportunity through the prism of quantitative
analysis to assure they have a clear understanding relating to business decisions.
Increase Financial Returns
Business owners can also use management accounting to increase their company’s financial
returns. Management accountants can prepare financial forecasts relating to consumer
demand, potential sales or the effects of consumer price changes in the economic marketplace.
RAHMEE 37
Business owners will often use this information to ensure they can produce enough goods or
services to meet consumer demand at current prices. Companies also pay close attention to the
amount of competition in the economic marketplace. Competition can reduce the company’s
financial returns from business operations.
M3. Analyze the use of different planning tool and their application for
preparing and forecasting budgets. (Please find the question 01 in
appendix)
A. Production budget for ABC Company for the next six months.
RAHMEE 38
Jan Feb Mar Apr May Jun Semi-annual
Sales unit 5,000 7,500 10,000 15,000 20,000 30,000 87,500
Add: Closing 2,250 3,000 4,500 6,000 9,000 10,500 10,500

Inventory
Less: Opening (1,200) (2,250) (3,000) (4,500) (6,000) (9,000) (1,200)

Inventory
Production 6,050 8,250 11,500 16,500 23,000 31,500 96,800
Unit
B. ABC Company direct material purchases budget for April
Production budget (Working 01)
April May
Sales in unit 800 850
Add: Closing inventory 850 925
Less: Opening inventory (1,200) (850)
Production Units 450 925
ABC Company DM purchase budget
April May
Production units 450 925
DM per Unit €5 €5
€2,250 €4,625
Add: Closing inventory €4,625 €5,000
€6,875 €9,625
Less: Opening inventory €2,250 €4,625
€4,625 €5000
Question 02
Jeet’s Palace cash budget for three months
RAHMEE 39
Receipts Month 01 Month 02 Month 03

Collection from debtors(Working 45,000 60,000 60,000
01)
Old equipment sell 1,200
45,000 61,200 60,000
Payments
Material purchase(Working 02) (15,000) (15,000) (15,000)
Labor cost (15,000) (15,000) (15,000)
Superannuation payment (5,200)
Annual rates payment (1,200)
Rent (4,000) (4,000) (4,000)
Lease payment (1,200) (1,200) (1,200)
Energy Bills Due (3,800)
9,800 17,000 23,600
Opening cash balance 5,000 14,800 31,800
Closing cash balance 14,800 31,800 55,400
Collection from debtors (Working 01)
Sales Month 01 Month 02 Month 03

Month 01
60,000*75% 45000
60,000*25% 15000
Month 02
60,000*75% 45000
60,000*25% 15000
Month 03
60,000*75% 45000
Collection from debtors 45,000 60,000 60,000
DM purchase budget (Working 02)
Month 01 Month 02 Month 03

Production (25% sales) 15,000 15,000 15,000
Add: closing stock 2,000 2,000 2,000
Less: Opening Stock (2,000) (2,000) (2,000)
DM Purchase 15,000 15,000 15,000
Mr. Surjeet can install a new tandoor oven at a cost of $12,000 in three months’ time since he
has a positive and enough cash inflow of $55,400 as per the forecasted cash budget.
RAHMEE 40
M4. Analyze how, in responding to financial problems, management

accounting can lead organizations to sustainable success.
Management accounting have basic objective to serve the management for decision making
purpose. In case of financial problems, management needs the information relating to
increasing. Today's question is how to establish their strategies, business models, and practices
to address social and environmental challenges while creating financial success and value for
their shareholders.
There are some of companies have the skills to meet these challenges and to compete in a
sustainable economy according to the Environmental Management and Assessment Institute.
The Management Report stands to show how many business entities have disappeared into
valuable intelligence and analysis by failing to gain accountability capabilities. This includes the
business environment for impact and analysis and reporting on the impact of environmental and
social factors on business performance.
Furthermore, 60% believe that the administrator is responsible for adding information and
analyzes to producers to resolve responsible environmental and social factors. However, only
45% of respondents are currently present. The unnecessary defect from the decision makers,
the main reason for the respondents, regardless of this information. Systems and processes
that do not support data are another common obstacle.
In this case, the senior responder may have information on this type of information. For
example, CFOs, CEOs and directors accounted for 52% of the issues related to decision-
making issues.
One of the major obstacles to identification in the surveys is that by 60% of the voters, there is
no need to get this kind of information from the producers. However, there are indications that it
RAHMEE 41
begins to change, and predicts two-thirds of the estimated predicted growth in the next two
years for environmental and social data.
1. Forecasting the cash flows
Cash flow forecasts can help predict upcoming cash surpluses or shortages to help you
make the right decisions. It can help in tax preparation, planning new equipment purchases
or identifying if you need to secure a small business loans.
You can also use it to see the effect of an upcoming business change or decision. If you're
considering hiring a new employee for example, you'd add the additional salary and related
costs into your forecast. The new figures in your cash flow forecast will tell you whether
hiring that additional employee is likely to place your business in a stronger position and
help you decide whether to hire them or not.
Report Management accounts report in many ways the firm can guide their companies
towards success:
Utilizing administrative accounting tools and techniques such as natural resource gain,
life cycle cost and carbon footprint, to assist in consolidating affairs in decision making
process.
Attach fixed business challenges to company strategy, business model, performance
overview, and licensing license.
Explain the impact of these stability issues in strong business terms.
Develop a statement strategy that integrates sustainability issues to ensure that financial
and non-financial information is revealed. An international example of international
coordinated report structure created by the International Coordinated Report Council.
Identify environmental and social trends that influence the company's ability to generate
value over time.
RAHMEE 42
Reference
RAHMEE 43

Management Accounting: LO1. Demonstrate An Understanding of Management Accounting Systems

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Management Accounting: LO1. Demonstrate An Understanding of Management Accounting Systems

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Management Accounting

LO1. Demonstrate an understanding of management accounting

P1. Explain management accounting and give the essential requirement of

Formulate Financial Strategies

Explain Financial Consequences of Decisions

The principle of management by exception is followed when presenting information to

Absorption of Overhead Costs

Control at Source Accounting

Accounting for Inflation

Management Accounting System

The different between Financial Accounting and Management Accounting

BASIS FOR COMPARISON FINANCIAL ACCOUNTING MANAGEMENT

Meaning Financial Accounting is an The accounting system

Information Monetary information only Monetary and non-

Objective To provide financial To assist the management

Format Specified Not Specified

Time Frame Financial Statements are The reports are prepared as

User. User Internal and external Only internal management.

Reports Summarized Reports about Complete and Detailed

Publishing and auditing Required to be published Neither published nor

P2. Explain different Methods used for management accounting reporting

Why information should be relevant to the user, reliable, up to date

Why the way in which the information is presented must be

Different types of managerial accounting reports

Accounts Receivable Aging Reports

Job Cost Reports

Inventory and Manufacturing

LO2. Apply a range of management accounting techniques

B. Different Classification cost such as,

EX- insurance, interest, rent, salaries

EX- Bonus, wage cost

EX-Direct material, Direct labour

EX--Indirect material, Indirect labour

C. Different Costing system such as,

Marginal Costing System

Absorption Costing System

Job Costing System

Batch Costing System

Process Costing System

The classic example of a process costing environment is a petroleum refinery, where it is

ABC Costing System

Unit cost (Working 01)

Direct materials 8.00

Direct labor 5.00

Variable production o/h’s 3.00

Unit cost 16.00.

Value of inventory (Working 02)

Opening FG 0 [200 units x €16] =

Income statement of Galway PLC (Marginal)

May May June June

Direct labor 5.00

Value of inventory (Working 04)

Opening FG 0 [200 units x €26] =

Income statement of Galway PLC (Absorption)

May May June June

3. Prepare the profit reconciliation statement

Profit under absorption €1,450 €4,550

Profit under marginal costing (€550) €5,750

LO3. Explain the use of planning tools used in management

P4. Explain the advantage and disadvantage of different types of planning

b. Different types of budgets

A master budget is an aggregate of a company's individual budgets designed to present

Cash Flow Budget