Management Accounting

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Table of Contents
Introduction......................................................................................................................................4
LO1- Demonstrate an understanding of management accounting system......................................5
P1- Explaining management accounting and essential requirements of different types of
management accounting systems.................................................................................................5
Elements of subjectivity in management accounting..............................................................5
Identifying the key function of management accounting systems...........................................5
Financial accounting systems and its rules and procedures.....................................................5
Accounting information systems and internal control.............................................................6
Auditing...................................................................................................................................6
The cost accounting systems...................................................................................................6
Management accounting systems............................................................................................6
The tax accounting process......................................................................................................6
P2- Explaining different methods used for management accounting reporting..........................6
Cost-accounting systems.........................................................................................................7
Inventory management systems...............................................................................................7
M1- Evaluating the benefit of management accounting system and its application in an
organizational context..................................................................................................................8
Explaining the comparison of MIS (Management Information Systems) and DSS (Decision
Support System).......................................................................................................................8
The reason for why information needs to be relevant, reliable, up to date, accurate and
understandable.........................................................................................................................8
LO2- Applying a range of management accounting techniques.....................................................9
P3 & M2- Calculating cost by applying appropriate techniques of cost analysis to prepare an
income statement by using marginal cost and absorption costing methods................................9
Calculating cost and preparing an income statement by using marginal cost method............9
Calculating cost and preparing an income statement by using absorption cost method.........9
Explaining differences in marginal and absorption costing method.....................................10
LO3- Explaining the use of planning tools used in management accounting...............................11
P4- Explaining the advantages and disadvantages of different types of planning tools for
budgetary control.......................................................................................................................11
Explaining the behavioral implication of budget...................................................................13
M3- Analyzing the use of different planning tools and their application for preparing and
forecasting budget......................................................................................................................14

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 Preparing and forecasting of a budget according to case -3..................................................14
LO4- Comparing the ways in which organizations could use management accounting to respond
to financial problems.....................................................................................................................15
P5- Comparing the ways about how the management accounting can be adopted by the
organizations to respond in financial problems.........................................................................15
M4- Analyzing the ways by which management accounting can lead the organization to the
goal of sustainable success by responding in the financial problems........................................16
Identifying the skills of the management accountants...........................................................16
Conclusion.....................................................................................................................................17
References......................................................................................................................................18

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Introduction
Management accounting is an accounting which is providing information to the managers based
on which the managers can take decision about the organization. It enables the managers to make
frequent but accurate decision about the organizational management. A management accountant
should have some skills that may enable him to make decision, creating budgetary plans,
investment decisions and other decisional work that are helpful for an organization to continue
and be successful in the long run.

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LO1- Demonstrate an understanding of management accounting
system
P1- Explaining management accounting and essential requirements of
different types of management accounting systems.
Management accounting: The management accounting is a branch of accounting which is
involves in the process of acquiring information from different types of business events,
analyzing, preparing management reports and accounts that provide various financial and
statistical information that are required by the managers in their day to managerial activities and
short term or long-term decision making (Mallouk, 2013). In management accounting, the
managers can prepare monthly even weekly statement to provide required information to the
internal audience of the organization such as the line managers, production managers and so on
to help in in the decision-making purpose. The statements that are prepared by the managers in
the context of management accounting provides different types of information such as the
present condition of the available raw materials, amounts of sales revenue, amounts of account
payables and account receivable and so on.
Elements of subjectivity in management accounting
Accounting is not providing objective or accurate result all the time. In management accounting
the scope of subjectivity is higher than any other accounting branch (Mowen et al., 2013).
Because the management accounting does not follow any accounting standards or guidelines.
There are no fixed guidelines for management accounting as it prepares for only the internal
purpose. So, the managers can manipulate the result when they want it.
Identifying the key function of management accounting systems
Management accounting is an accounting procedure that provides information to the internal
audiences of an organization. There are some key functions of management accounting. These
are identified below:
 Provide data: One of the main functions of management accounting is to provide data to
the managers of the organization. The managers of any organization have to take a lot of
decisions and the management accounting provide them with required information.
 Analyses and interpret data: In management accounting different types of data are
analyzed and interpreted to make those perfect for the decision-making purpose
(Horngren, 2016).
 Providing qualitative and quantitative information: The management accounting
provides different types of quantitative and qualitative information for the managers in
the purpose of decision-making process.
Financial accounting systems and its rules and procedures
Financial accounting is branch of accounting which identify, record, report and present financial
information of an organization to its interested users (Chillingham and McGahran, 2010). The
interested users can be both of the internal and external users. In the United Kingdom, the IFRS
are followed which are developed by the IASB as the standard of financial accounting.
According to those rules, there are 4 types of statements are prepared by the companies to record
their financial information. These are income statement, balance sheet, cash flow statement and
the statement of change in equity. For example, all the documents of purchases for an
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organization in a particular period of time are identified, recorded and reported by the financial
accounting.
Accounting information systems and internal control
Accounting information system is a system of collection, storage, and process various types of
financial data by the management of an organization to provide information to the investors,
creditors, tax authorities and other interested users (Garrison et al., 2012). For example, an
organization can keep their own database from which they offer various information to their
related parties and also store all kinds of information for the internal user of an organization. By
keeping a good accounting system, the internal control system of an organization can be
managed in an efficient way.
Auditing
The auditing is the process of systematic checking or examining the books, accounts, financial
statements, internal management process of organization by the qualified persons to provide a
true and fair view about the organization. The auditing procedures are done by the auditors who
are examining the financial statements of an organization according to a suitable criterion.
The cost accounting systems
Cost accounting is a system by which an organization can estimate the cost of their production
system, analyze the cost benefit of producing a certain products or products lines, analyzing
profitability of the operation and estimating the accurate price of the products. It can be one of
these two types,
Product costing: Product costs are those costs which are incurred to produce a product. Direct
materials, direct labors, direct other cost are included in the product cost. And this overall
process costing method is called product costing.
Activity based costing: In activity-based costing, all the related activities with products are
identified and then assign all the cost of producing a product to those activities.
Management accounting systems
The management accounting system helps managers to manage their organization. It is a
supporting tool in the decision-making process for the managers. Management accounting
provides different information to the managers that are necessary for the decision-making
purpose. It is also useful for the managers in making investment decision. In which project the
company can invest that can be determined by the management accounting process.
The tax accounting process
Tax accounting process is a system that calculate the required tax amount for an organization,
individuals and so on (Eldenburg and Wolcott, 2013). Different methods of tax are applied for
calculation of tax for the individuals, partnership business and corporations. In the context of
international taxation, the law of tax for different countries have to be implemented.
P2- Explaining different methods used for management accounting reporting
There are different types of management accounting reports. All those reports are prepared by
the management of an organization to provide information to the managers for decision making
purposes. The management accounting reports are discussed below:

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Trading and profit and lose account: The trading account is reporting the gross profit or lose
for an organization. Trading means buying and selling of goods. In the trading account the cost
of goods sold is subtracted from the net sales amount to find out the gross profit or lose.
Income statement: In the income statement, the net profit or lose of the business operation is
identified. This statement provides the financial result of the operation. In the income statement,
all the operating expenses are deducted from the income of the operation to find out the amount
of net profit or loss.
Balance sheet: Balance sheet presents all the assists, liabilities and equity items of an
organization to evaluate the financial condition of the organization. All the assets such as current
assets, fixed assets are reporting first. The sum of all the current and non-current liabilities and
equity items must be equal to the amount of net assets in the balance sheet.
Cash flow statements: Cash flow statements presents the net amount of cash inflow and outflow
in an organization within a particular period of time generally one year. There are three main
function of a cash flow statement. These are cash flow from the operating activities, cash flow
from investing activities. Cash flow from financial activities.
Cost-accounting systems
Cost accounting system involves in determining cost of an operation. This total system tries to
estimate the cost of the production, revenue systems, amount of profit that can be added with the
product price ect. For example, the total costing process of a product line that is produced mobile
phone accessories.
Inventory management systems
Inventory management system involves in the management of inventory within an organization.
It is a branch of supply chain management which is dealing with the amount of stock, controlling
the number of inventories, their recording process etc. For example, a manufacturing company’s
inventory management is very important because any shortage of inventory can slow down their
production or any extra amount of inventory can increase their holding cost.
Job-costing systems: Job costing or job order costing is a system of assigning cost of
production on a particular type of product (Drury, 2011). It is used when all the items of a
production process can be identified separately and each and every cost has significance. For
example, in an oil refrainer, crude oil is separated into different types of oil. Each of the oils can
separately identified and costs are added with them separately.
Price-optimizing system: Price optimizing system is a mathematical process which will
determine the customers response to various price offering of a particular product by the seller of
that product. It also helps the producer of the product to find out the accurate price of the
product. For example, for setting price of a new mobile phone the company can run price-
optimizing process among its key customers.

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M1- Evaluating the benefit of management accounting system and its
application in an organizational context.
Management accounting helps managers to give decision within an organization on different
matters. It provides them with the relevant information. Some of the benefits of management
accounting are given below:
 It helps in the planning process of a business
 It helps in controlling the management activities
 It provides information for the purpose of decision making
 It is an essential tool for problem solving purpose (Davis and Davis, 2014)
Explaining the comparison of MIS (Management Information Systems) and DSS (Decision
Support System)
A comparison between MIS and DSS is providing below:
Management Information System Decision Support System
It supports structured decision making It supports non-structured decision making.
It provides information for the whole internal It provides information to take decision on a
management of an organization. particular problem and situation.
It uses a large amount of data. It uses small amount of data.
It provides summary of a report It provides analysis for a report.

The reason for why information needs to be relevant, reliable, up to date, accurate and
understandable
All the information that are provided to the management need to be relevant and reliable to make
the right decision. If the decision cannot make the perfect decision on a situation, it can not be
called relevant. All the information should be up to date to make the decision accurate for a
given situation on the right time. All the presented information needs to be understandable to the
user.

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LO2- Applying a range of management accounting techniques
P3 & M2- Calculating cost by applying appropriate techniques of cost analysis
to prepare an income statement by using marginal cost and absorption costing
methods.
Calculating cost and preparing an income statement by using marginal cost method
Marginal costing method: Marginal production costing is a type of cost of the production
which can be avoided if the particular unit or volume of product are not produced. According to
the marginal costing method, the accumulated variable cost is charged against the unit of
products that are produced in a production process. The fixed costs are fully written of for the
entire period of production
XYZ Plc
Cost card(Marginal costing method)
Particulars Per Unit
Direct Material 30
Direct Labour 40
Production overhead 12
Total 82

XYZ Plc
Profit statement
Particulars Amount
Sales Revenue 495000
Less: All Variable Cost
Variable Cost of Good Sold 369000

Contribution Margin 126000

Less: All Fixed Cost

Fixed Production Overhead 40000

Net Income 86000

Calculating cost and preparing an income statement by using absorption cost method
Absorption costing method: The absorption costing is a costing method of management
accounting which involves in expensing all the cost incurred that are associated in the process of
production of a particular product or services (Benjamin, Muthaiyah and Marathamuthu, 2011).
It includes all the direct cost that are involved in the production process of a product.

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 XYZ Plc
Cost card(Absorption costing method)
Particulars Per Unit
Direct Material 30
Direct Labour 40
Production overhead 20
Total 90

XYZ Plc
Profit statement
Particulars Amount Amount
Sales Revenue 495000

Less: Cost of Goods Sold

Beginning Inventory 0
Cost of Goods Manufactured 450000
Less: Ending Inventory 45000
405000
Gross Profit 90000
Less: Operating Expense 0
Net Income 900000

Explaining differences in marginal and absorption costing method

Product costing involves in the costing process of a product. There are different techniques of
product costing. Here for the case 1 & 2, marginal and absorption costing method is applied.
Some of the differences between these two methods are given below:
Marginal costing method Absorption costing method
Only the variable costs are applied to the Both of the variable and fixed costs are
inventory. applied to the inventory.
The rate of profitability is higher in this The rate of profitability is lower in this
method. method
For measuring profit, contribution margin is For measuring profit, gross margin is used.
used.
Overhead costs are added for the whole Overhead costs are added on each product at
period at a time. the time of production.

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LO3- Explaining the use of planning tools used in management
accounting
P4- Explaining the advantages and disadvantages of different types of
planning tools for budgetary control.
Different budgeting tools can be used budgetary control and planning. These tools include zero
based budgeting, incremental budgeting, cash flow budgeting, capital budgeting and operating
budgeting. All of these possesses some positive aspect as well as negative aspect in budgetary
system.
Zero-based budgeting: In management accounting, zero-based budgeting involves in preparing
a budget with zero base. In zero-based budgeting all the expenses are reporting on the basis of
the actual expense of the period.
Advantages and disadvantages of zero-based budgeting
Advantages:
 This process starts a budget planning from a bottom level without any prior data
consideration. So planning is most judgmental and accurate (Crosson and Needles, 2014).
 Traditionally cost grows over period of times. In zero based budgeting there is a scope of
cost cutting and increase profit.
 It is simple and need less time as it doesn't consider prior data.
Disadvantages:
 Zero based budgeting is a short-term process. So long term profitable entity is not
focused here.
 It reviews all the components rather than justify them from previous data. It makes a
scope of error in the budget planning.
Incremental budgeting: Incremental budgeting is a budgeting which is prepared on the basis of
previous period budget.
Advantages and disadvantages of incremental budgeting
Advantages:
 Incremental budget ensures the continuity of existing fund without any complex
judgement or consideration.
 It helps to find out the loop holes in previous budget and bring a correction in current
budget.
 It is easy to implement and easy to calculate.
Disadvantages:
 As previous budget is used as a base here, budget may include some unnecessary
expense.

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  As it follows the traditional budget it may be difficult for the organization to cope with
any new situation.
Cash budgeting: It is a budget plan which estimate expected cash inflow and outflow for the
period. By this budgeting company estimate the amount of cash which will be injected in the
company in future.
Advantages and disadvantages of cash budgeting
Advantages:
 Cash budget helps the organization to ensure the liquidity and forecast surplus or deficit
of cash balance.
 Cash budget ensures the optimal utilization of cash balance in an organization.
 Cash budget is a tool for determining whether the organization go for capital financing or
not.
Disadvantages:
 There is a chance of manipulation. Financing item may be shown as cash collection for
showing cash surplus.
 Non-financial factor has a major impact on decision. A negative cash flow may have a
positive effect in the organization but cash budget may denote it as cash deficit.
Capital budgeting: It is involved with the long-term investment decision of a company. A
company prepares capital budgeting to judge that whether their taken long term investment
decision is feasible or not.
Advantages and disadvantages of capital budgeting
Advantages:
 It helps the organization to understand the risk of capital and the return on them.
 It helps the company to make long term investment decision.
 It abstains the organizations from making over payment or under investing.
Disadvantages:
 Capital budget is made for long term basis and generally it is irreversible in nature.

Operational budgeting: Operational budget is an annual based budget which involves in the
estimation of calculating the value of the company’s resources that will be needed for continuing
their operation.
Advantages and disadvantages of operation budgeting
Advantages:
 Operation budgeting manages the expense of an organization. It forecast the income and
plan expenses according to the expenses.

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  Operation budget projects the future expense. It evaluates the incomes and expenses of
previous balance sheet and make a projection of expenses more accurately.
Disadvantages:
 It may include expense that is inappropriate and increase the total expense of the
organization.
Explaining the behavioral implication of budget
Behavioral implication of budget involves two factors, such as budgetary slack and participating
budgeting (Shillinglaw and McGahran, 2010). Budgetary slack is the intentional reporting of
budget to show understated estimation of budget income and overstated estimation of budget
expenses. Participating budget involves in the participation of the employees in the budgetary
decision of the organization. it is a good budgetary system for increasing the employee’s
performance.

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M3- Analyzing the use of different planning tools and their application for
preparing and forecasting budget.
Preparing and forecasting of a budget according to case -3
XYZ Company
Cash flow budget
August September October November December
Particulars
Beginning cash balance 12000 26150 -17150 -60400 -58000
Sales 30000 70000
Aug 27000 63000
Sep 33000
Oct 36000
Nov 39000
Dec
Total cash collection 42000 53150 15850 45600 44000

Less: Cash Disbrasment

Purchase 50000 50000 70000 80000
Wages 5850 10300 14250 18600 23250
Overhead 10000 10000 12000 15000 15000
Total disbrasment 15850 70300 76250 103600 118250

Cash balance 26150 -17150 -60400 -58000 -74250

XYZ Company
Operational budget
Aug Sep Oct Nov Dec
Particulars
Sales 100000 90000 110000 120000 130000

Less: Cost of good sold

Purchase 50000 50000 70000 80000 100000
Wages 9000 11000 16000 20000 25000
Overhead 10000 10000 12000 15000 15000

Profit 31000 19000 12000 5000 -10000

Here two budgetary techniques are used to preparing the budget for the XYZ company. One is
cash collection for the organization is calculated. For that the beginning cash balance is adjusted
with the current period and all others items are also adjusted to find out the net cash balance. In
the operational budget, cost of good sold is deducted from the sales amount to find the net profit
amount of the operation.
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LO4- Comparing the ways in which organizations could use
management accounting to respond to financial problems
P5- Comparing the ways about how the management accounting can be
adopted by the organizations to respond in financial problems
There are different ways for identifying financial problems of an organization. For identifying
financial problems, the financial report of 2018 of Sainsbury which is the second largest chain of
supermarket in the UK is evaluated. In 2018, their revenue is higher than 2017 but net profit is
decreasing which is a financial problem for them. Again, their earning per share ratio is also
decreasing. In 2018, their EPS was 13.3 pence which is lower than 2017’s 17.5 pence
(Sainsburys.co.uk, 2019). The Sainsbury’s current ratio is .76:1, which is a little bit alarming for
the company. Again, for the BREXIT, the company will face some financial problems such as
increasing cost, tax issues and so on. Management accounting can help managers of the company
to respond towards those financial problems. Some of those are discussed below:
Benchmark: By using benchmark that are previously set by the management of the organization
financial problems can be easily identified. The managers of the company may set some
financial benchmark which will help them to identifying those problems. After identifying those
problems, managers can use management accounting tools for solving those problems.
Key performance indicator: There are different types of key performance indicator such as the
net profit determined the financial performance of the organization and the performance of the
management (Bimini, 2012). It can be non-financial as well such as the amount of social
responsibility performed by the organization. Any deviation in these performance indicators can
create financial problems. The management accounting helps managers in collecting information
about all of these problems and solving those.

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M4- Analyzing the ways by which management accounting can lead the
organization to the goal of sustainable success by responding in the financial
problems.
In responding a financial problem like the decision of investing in a new equipment can be
solved by using the management accounting tools.
XYZ Company

Year Cash Flow Present Value

0 -230000 -230000
1 70000 63636.36364
2 130000 107438.0165
3 60000 45078.88805
4 50000 34150.67277
5 20000 12418.42646

NPV 492722.3674
Here by the using the NPV method, is can be easily determined that investing in the new
equipment will be a feasible project for investing. Because the amount of NPV is positive. So,
the company can invest in that project.
Financial governance: Financial governance is the overall process of collecting, analysis,
managing, monitoring and storing financial information (Adams, 2011). It also involves in the
total activities by which the management can use the financial information and how they disclose
all the information to the outsiders. Perfect financial governance can help the management to
identify the financial problems easily. After identifying the problems, the managers can use the
recorded information from their records to solve those problems. So, the financial governance is
maintained by each organization in an efficient way to prevent financial problems.
Identifying the skills of the management accountants
 They should have strong interpersonal and communicational skills in both of the oral and
written communication
 They must have the ability to deal with a problem at the root level and working jointly
with the entire management.
 They must have professional knowledge about accounting
 Skill of preparing budget plans for the organization
 Skills for the internal control system as well as the external reporting procedures
 They must have skills of taking invest decision and risk management
All of those skills will be used for identifying problems, communicating or discussing about the
problems with others, taking frequent but accurate decision in a problematic situation. A
management accountant must have to possess all of those skills to make his organization an
effective one.

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Conclusion
In summary, as a branch of accounting the management accounting provides the managers
various important and relevant information about the organizational performance. That
information is used by the mangers to take decisions. Some times the managers can not remain
objective in there working with management accounting because there are no established
guidelines for management accounting. But for solving financial problems, management
accounting is used as the most important tool.

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References

Adams, R. (2011). Governance and the Financial Crisis. International Review of Finance, 12(1),
pp.7-38.
Benjamin, S., Muthaiyah, S. and Marathamuthu, M. (2011). An Improved Methodology for
Absorption Costing: Efficiency Based Absorption Costing (EBAC). Journal of Applied Business
Research (JABR), 25(6).
Crosson, S. and Needles, B. (2014). Managerial accounting. [Mason, Ohio?]: South-
Western/Cengage Learning.
Davis, C. and Davis, E. (2014). Managerial accounting. Hoboken, NJ: Wiley.
Drury, C. (2011). Management and cost accounting.
Eldenburg, L. and Wolcott, S. (2013). Cost management. Hoboken, N.J.: Wiley.
Garrison, R., Libby, T., Webb, A., Noreen, E. and Brewer, P. (2012). Managerial accounting.
Horngren, C. (2016). Management Accounting. Melbourne: P. Ed Custom Books.
Mallouk, B. (2013). Managerial accounting. Toronto: Nelson Education.
Mowen, M., Hansen, D., Mitchell, G. and Tibbits, G. (2013). Management accounting. South
Melbourne, Vic.: Thomson Learning Australia.
Sainsburys.co.uk. (2019). Sainsbury's. [online] Available at: https://www.sainsburys.co.uk/
[Accessed 10 Feb. 2019].
Shillinglaw, G. and McGahran, K. (2010). Accounting. 4th ed. Homewood, Ill.: Irwin.

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