UNIT - 5

Management accounting
Student Name:

Student ID:

1
Table of Contents
Introduction:....................................................................................................................................3

Part 1................................................................................................................................................4

Management accounting..............................................................................................................4

Role:.............................................................................................................................................4

Management accounting systems:...............................................................................................4

Different types of management accounting systems:..................................................................5

Preparing an income statement using marginal and absorption cost:..........................................6

Integration of management accounting within the organization:................................................8

Benefits of management accounting in the organization:............................................................9

Reflection of the application of managerial accounting:...........................................................10

Part 2..............................................................................................................................................12

Planning tools of management accounting:...............................................................................12

Effectiveness of management accounting to prevent financial problems:................................16

Applicable methods for achieving sustainable business success:..............................................18

Conclusions:..................................................................................................................................18

References:....................................................................................................................................19

2
Introduction:
Management accounting, used for internal purposes, concerned with creating statements. It
provides essential reports and documents to help the managers making important decisions. It
focuses on maximizing profit and minimizing losses. Management account has some unique
tools and technique to achieve outstanding organization success. For getting advantages in this
competitive business world, understanding management accounting is more important (Horngren
et al., 2015). Here, The British Millerain Company has been selected for contextual purposes and
utilizing theoretical aspects and analysis of accounting techniques. The report starts with a
discussion on management accounting principles and systems. Then it is discussed on
management accounting tools and techniques to reduce financial problems. Some hypothetical
data have been taken to clarify the formulation of income statements.

3
Part 1

Management accounting
Management accounting is mainly concerned with accounting information that helps a manager
to take effective decisions for fulfilling organizational objectives. It helps the management team
to perform all its functions. Management accounting identifies measures, analyzes, interprets,
and communicates financial information to make better business decisions (Horngren et al.,
2015). The main focus of management accounting is to prepare financial and accounting
information in a manner where professional skills and knowledge are needed. But it has no fixed
structure and format. It follows some techniques and tools to make decisions. The foremost
objective of management accounting is to make better decisions that will help to grow the
company. For this, a company has to focus on its strategy and utilize available resources. It can
be said that management accounting provides information to managers. So, they can plan,
control operations and make effective decisions.

Role:
In an organization like British Millerain, a Management accountant plays an important role in an
organization. They make budgets based on the financial data they have collected. The accountant
also records and reports about the financial data. Making a budget led to successful expenditure
guidelines for the company. The budget includes the estimated cost of raw material, labor,
manufacturing, selling and advertising costs, offline or online marketing costs, and internal
operation cost (Kaplan, 2017). A management accountant always is in connection with other
departments. He analyzes functional capital and funds availability. Then he or she reports all the
information to the directors. Thus, management can make effective decisions.

Management accounting systems:

Management accounting sounds like financial accounting in some cases. But, taking a broader
look, we can see financial accounting concentrated on formulating information, not for internal
parties. These are mainly stockholders, public regulators, and lenders. On the other hand,
managerial accounting gathers financial information of the company and makes reports for use
internally by managers (RS et al., 2016). In the British Millerain company, these reports help the
managers to take effective decisions and achieve company objectives. These reports are made
based on statements, reports, and documents.

4
Different types of management accounting systems:
Several systems are necessary to utilize the accounting systems properly. But here are some of
the major managerial accounting systems that are essential for an organization like British
Millerain Company.

Inventory management system:

The inventory system is a process. In this process, inventory is managed systematically. Tracking
the goods throughout the entire supply chain, purchasing the goods, production to end sales all
are managed in this system. Inventory management systems are a primary discipline (Rajeev,
2018). Inventory management specifies the shape and placement of the stocked goods. It can be
located in different places based on the supply network. In companies like British Millerain, they
manage their inventory based on production facility and supply network.

Product costing systems:

Product costing systems are generally called cost accounting systems. This is a framework that is
used for estimating the cost of a product, controlling the cost, inventory analysis, and
profitability analysis (RS et al., 2016). In the British Millerain company, the cost accounting
system works along with inventory management systems. This is an accounting system that is
designed for manufactures. For this accounting method, they can track the flow of inventory with
production effectively. Companies use this system to control the cost, minimize the cost and
increase productivity with minimum resources.
Job costing systems:

Job costing systems are accumulated calculations of cost for the different types of jobs in an
organization. Different types of activity to produce the final product can occur in an
organization. Every specific job has a specific costing. Different activities of a company
considered as a job. Companies can calculate and analyze these costing of this different job, and
then the company will get a concise cost of production. This is how job costing systems should
work (Rajeev, 2018). In the British Millerain Company, they assign a skilled person with a
specific job. Then they calculate the whole costing of that activity with the person associated
with it. In this process, they track the small activity costing. This helps them to accumulate the
whole costing of production. Now they can control or minimize the whole production costing.
5
Price optimization systems:

Price optimization helps the organization to set a concise price of a product rather than guessing
the price. When companies get crystal clear data of other costing with market data they can set a
more accurate price. It increases the possibility of picking up a product or service by its
customers. This optimal price point helps the company to be more profitable. Through this
process, a company achieves additional goals like improving market share or expanding
unexplored markets (RS et al., 2016). For price optimization, a company like British Millerain
gathers various market data with product costing analysis to set a price for the product. Price
optimization helps the organization to set the most effective pricing for a product or service. It
ensures to the company that the product will be sold quickly with a decent profit margin.

Preparing an income statement using marginal and absorption cost:

Using techniques and methods, the managerial accountant of The British Millerain Company
could prepare a hypothetical income statement using marginal and absorption costing methods
(Rogalski, 2019). The process has been shown below:

Each unit cost of the product under absorption costs:

The calculations process of product X of The British Millerain Company had been shown below.

According to the calculations, the price of product X has become £14 under the absorption cost
method both in 2019 and 2020.

6
Each unit cost for the product under marginal costs:

The marginal cost method excludes fixed cost from the per-unit cost calculation.

Here per unit product cost has become £10 both in 2019 and 2020.

Income statements (Absorption costing):

The calculation has been made in the following way shown below.

The British Millerain Co.

Income statement under the absorption costing method

2019 and 2020

7
Income statement (Marginal costing):

Income statement in marginal costing method includes variable items. In this method, the fixed
item remains after the calculations of contribution margin. The income statement has shown
below.

The British Millerain Co.

Income statement under marginal costing method

2019 and 2020

According to both income statements, no differences have been found in terms of net income.
There has been a similar net loss under both of these methods, which are £220,000 and £345,000
for the years 2019 and 2020. But there were huge differences in terms of gross profit and
contribution margin of product X of The British Millerain Company.

Integration of management accounting within the organization:

Management accounting continuously improves the organization by developing and integrating
cost management systems. But once, there was no need for management accounting. It was the

8
19th-century industrial revolution when owners realized the need for financial accounting
procedures. At that time the debt was little, there was no need for financial reports. But in the
time of the industrial revolution, the organization needed more capital to expand (Horngren et
al., 2015). To raise capital, they went to many suppliers of capital. But they needed a document
that could summarize the financial conditions of that organization. So, the owners showed them
audited financial reports. Gradually, they realized the importance of well defined corporate
financial reports. As a result, decade by decade, management accountant focuses on financial
accounting requirements and releases financial reports on time. This is how management
accounting is integrated within the organization.

Benefits of management accounting in the organization:

There are so many benefits of management accounting in an organization. First of all,
management accounting increases revenue for the organization. Management accounting helps
the organization by giving them useful and important information. For this, an organization can
take effective decisions (Chenhall et al., 2015). It reduces conflicts among managers, employees
and organizations. That is how whole productivity gets a boost. British Millerain company are
being benefited many ways by management accounting. That list is given here,

Profit maximization:

Using the method of management accounting an organization can maximize its profits. There are
some tools like budgetary control and capital budgeting tool that help the organization to
minimize operating and capital expenditures (Horngren et al., 2015). That’s how the British
Millerain company set a more accurate price for the product and can enjoy much more profit.

Critical decision making in Business:

It’s hard to make a decision. It is very hard when the decisions are critical within an organization
like The British Millerain. Making a wrong decision can affect much more. Here, management
accounting plays a role. Through the accounting management systems, it becomes so much
easier to make effective decisions (Adler et al., 2018).

9
Efficiency increasing:

The efficiency of operation of a company can be increased through management accounting.

Management accounting follows the scientific system. It evaluates and compares the
performance of the organization (Horngren et al., 2015). With this, the British Millerain
Company makes better decisions. When the performance will increase, the employee will be
motivated. Thus British Millerain Company increases their efficiency.

Financial statements become simplified:

For taking effective organizational decisions, provided data or reports should be clear and
concise. It also needed informative financial reports. In the British Millerain
Company, Management accountant provides this data first hand. He or she gives deep financial
and technical data or reports. Then the managers of the company take effective initiative for the
company's growth (Adler et al., 2018).

Reflection of the application of managerial accounting:

The management accounting system depends on the company structure. Management of any
company can design this system according to their business operations. These advantages lead a
company to achieve the company`s goals. It has some application in The British Millerain
Company. Some are discussed below.

Reducing the expenses:

By using the method of managerial accounting, the accountant gets a clear idea of cost
management, financial statement, budget, KPI etc (Guibin et al., 2016). For getting this valuable
information, The British Millerain Company knows how much money is needed to run a venture.
The firm also knows where to invest. Besides, business owners can control their product costs.

Business decisions:

The business owner decision-making process can be improved by management accounting.

Management accounting provides quantitative analysis (Creţu and Iova, 2017). So, The British

10
Millerain Company can take more concise decisions. Many tools help a management accountant
to get clear data on different sectors.

Increase financial returns:

Management accounting systems and tools can be used to increase financial returns. The
accountant can make reports on customer demands, potential sales or the effect of price (Guibin
et al., 2016). The British Millenair company can use this information to produce more goods and
meet the market at reasonable prices.

11
Part 2

Planning tools of management accounting:

There are various planning tools in management accounting. Here, some planning tools have
been discussed with their effectiveness.

Analysis of financial statements:

Financial statement analysis is a process. This process is done to make better financial decisions.
There are some important financial statements. Like, profit and loss statements and balance
sheets are some of the major financial statements (Weygandt et al., 2018). It is so effective for an
organization like British Millerain Company. Finacial people like stockholders get an image of
the overall health of the organization. There are some cool techniques to analyze financial
statements. They are horizontal, vertical and ratio analyses. These statements are assets for daily
decisions making. The performance of the company can be assumed by seeing these financial
statements. So, these statements have much more importance.

Advantages: Disadvantages:
Financial statements are one of the main tools of Though financial statements have so many
management accounting. Here, a management advantages. But it is not free from limitations. Yes,
accountant shows four types of statements, they are it shows the company's financial conditions. But it
income statements, balance sheets, cash flow does not say anything about the current situation. It
statements and fund flow statements. Through does not overview cost price level changes.
these statements, managers can easily understand
the health of the organization (Hilton et al., 2019).
They can make more accurate decisions. As well
as, internal and external stockholders get the data
of the company's financial profile.

12
Analysis of cost accounting:

Cost accounting represents different cost data on a different activity base. These activities can be
the product, price, department or branch wise. Then this data is used for comparison with
predetermined data. After comparison of two costs data, firms get a difference (Lanen et al.,
2019). This difference says a lot of words. Cost accounting is a powerful tool for the
manufacturing firms like British Millerain. This is the very reason why cost accounting is
developed for manufacturing firms.

Advantages: Disadvantages:
The cost accounting tool is mainly used for cost Like any other management accounting tool, cost
control, inventory and profitability. An accounting is not free from drawbacks. Cost
organization can be benefitted from cost accounting accounting is organization depended. It is different
tools. The British Millerain Company uses this from other organizations (Lanen et al., 2019).
technique very much. They adapt it, sometimes Besides, To adjust cost accounting, constant
tinker with it or simply implement it according to adjustments are needed. That is sometimes much
the change of business environment. Besides, more complex. Employees have to be extra trained.
through cost accounting, a company can estimate That is money and time-consuming.
the marginal productivity of an individual
employee (Vanderbeck, 2017). Through cost
accounting, labor costs can be easily identified.

Budgetary control:

A budget is an estimation of probable revenue and expenses. It is reviewed periodically. Budget

is a report but budgetary control is a continuous process. Budgetary control is a result of the
budget. This helps the organization to be more planned and coordinated. In the budgetary
control, actual income and spending are compared with planned (Weygandt et al., 2018). The
British Millerain company uses different types of analysis tools like analysis of variance,
responsibility budgeting, analysis of time series etc. Here, a discussion is provided with the
advantages and disadvantages of these tools of budgetary control.

13
Analysis of variance:

Variance analysis is a tool of budgetary control. It says how far the actual event is from planned
or targeted events. The variance analysis process is so simple. It just compares with actual events
(Lanen et al., 2019).

Advantages: Disadvantages:
The major advantage of variance analysis is that it One of the advantages of variance analysis is that it
gives actual proof of achievement of the company`s is time-dependent. The British Millerain company
objectives. It measures the performance of the will not get the result until the period ends. To get
company. The British Millerain company uses this the actual result, the company has to run its activity
method to do responsibility accounting for a specific period. There is always a fear of the
(Vanderbeck, 2017). As every company is wrong assumption. Another drawback of variance
structured in different segments. Through variance analysis is that it is more complex to understand for
analysis resources can be reposed to specific care the general people.
and can be measured the productivity through this
tool.

Responsibility budgeting:

It is another accounting tool that could be utilized by The British Millerain Company. It is
concerned with the revenues and expenses of the organization. But in this case, the responsibility
of a task is clearly defined on an individual employee. It has some advantages and disadvantages
that are shown below.

Advantages: Disadvantages:
The British Millerain Company management takes Under this accounting method, it will not possible
initiative to make proper structure of the company if the organizational structure is not sound set.
and make an employee responsible for every Sometimes, this method is costly for medium-sized
activity. Like, a manager is responsible for the enterprises. For proper responsibility deviation,
output of his department. So, employees of that highly skilled managers are needed. If somehow of
department become more attentive and engaged the company can`t identify the goals and
with those activities. This system makes them more responsibilities to the correct person then it is a
responsible and serious about their works (Jones waste of money and time (Vonasek, 2017).

14
 and Thompson, 2015). As well as, it gives the
management of The British Millerain company
better control over the operating activities.

Analysis of time series:

Time series analysis is a cool accounting method. That is slightly different from any other
method mentioned above. Here a manager has to understand specific periods. This could be
anything like stock price, inventory figures, annual sales and much more (Bao et al., 2015). The
British Millerain company forecast past observation and make predictions of the future probable
event if all patterns remain the same. Although this tool is aesthetic it has some drawbacks too.

Advantages:
Time series analysis helps the manager to identify
patterns. These patterns are mainly time specific.
As it gives the brief outcome of the performance, it
is considered one of the important tools of
management accounting. Based on this data, one
can predict the probable future of the organization.
Hence, day by day it is becoming more accurate
and specific. The British Millerain company uses
this technique to predict and make a budget.
Disadvantages:
The main disadvantage of this tool is that it is time-
consuming. To understand the real picture of an
organization, it is required to wait until the period
ends. It is more complicated when trying to
understand the outcomes of each period using
statistical and mathematical tools (Bao et al., 2015).

So, Based on the above discussion, it becomes easy to understand that The British Millerain
Company, they have to apply different accounting tools for the growth and benefits. They have
to use a mixture of accounting reporting tools.

15
Effectiveness of management accounting to prevent financial problems:
Gradually the organization is adopting the management accounting application. Management
accounting applications can prevent financial problems in the organization. To better understand
it, we can take another company named, Hawthorn International to compare the adaptation of
managerial accounting systems (Tappura et al., 2015). Here, the discussion will show how
different types of financial information help to reduce financial problems.

Here, a hypothetical assumption has been taken that both The British Millerain and Hawthorn
international companies are facing a shortage of current assets and liquidity problems. Now, the
management accounting tools help both companies in the following ways.

Management Accounting The British Millerain Hawthorn International

Systems
Balanced Scorecard The Balanced scorecard is a The balanced scorecard set a
measurement that boosts up strategic map for a company. By
performance. It works from four applying this beautiful method,
perspectives. They are financial Hawthorn International can set
outlook, customer perspective, goals and action plans. They can
internal process perspective, and also take the effective initiative
learning and growth perspective. to find out problems and solve
By using this method, the British them (Kasurinen, 2016).
Millerain Company gets a clear
vision of the future. Also, they
can set strategic objectives
(Tappura et al., 2015).

Benchmarking For the shortage of assets, The Benchmarking also provides

British Millerain Company can benefits to Hawthorn
use internal benchmarking. In International Company to solve
this method, cost accountant the shortage of assets and
collects past performance data liquidity problems. Because they
and set future standards. Like, a can set the benchmark from the

16
 manager can analyze past five viewpoints of its major
years data, and then set a competitors (Coe, 2015). The
standard of the average of five British Millerain. By setting
years data. From the particular standards, they can
benchmarking score, The British make effective decisions.
Millerain Company can
understand how far it is from the
standard point (Elnathan and
Young, 2016).
Key Performance Indicators Key Performance Indicators is a With the help of KPI, Hawthorn
(KPI) supreme technique in International Company can
management accounting. It’s a understand where the assets are
quantifiable measurement. The being wasted. Also, they can
performance is measured based solve the liquidity problem by
on time for specific business identifying the actual origin of
objectives (Lanen et al., 2019). that problem (Cai et al., 2019).
By utilizing this method, The
British Millerain Company can
understand different structures
like revenue structure, cost
structure, profitability etc. They
can solve the shortage of assets
by identifying non-valuable
sectors or can take different
decisions.
Activity-Based Costing For getting a more accurate With the usage of activity-based
costing of a product/service, costing, The Hawthorn
activity-based costing is required. international will determine the
That helps to take more accurate cost of each particular activity.
pricing decisions. By utilizing So, if they want, now they can
this method The British Millerain reduce or increase the cost which
company can get a clear idea of will affect the liquidity problem.
cost. It helps to minimize the cost
of production and reduce the

17
 requirements of liquidity (Cooper
and Kaplan, 2018).

Applicable methods for achieving sustainable business success:

For achieving sustainable business success and solving the different financial problems, Utilizing
different types of financial tools can be very much beneficial for the organizations like The
British Millerain.

The tools mentioned above can solve problems in first hand. Tools like Benchmarking, Balanced
scorecards, Key Performance Indicators and Activity-based costing are so much effective to
solve different financial problems. For example, by using a balanced scorecard, the firm can
make proper use of cash balance by investing in the right projects and can take strategic
decisions for future moves (Kasurinen, 2016). By using the key performance indicators (KPI),
the firm can get quantifiable measurements of performance. As well, the firm gets the whole
structure. Now, the firm can make more precise decisions (Lanen et al., 2019). The firm can
control the cost. Benchmarking is another tool that sets a standard for revenue and expenses. It
influences the revenue and profitability of the company. By utilizing these tools, the
management accountant can take more precise decisions (Elnathan and Young, 2016). This will
prevent them from wasting money on the wrong projects. So, the investment will be more
profitable.

Conclusions:
The report on management accounting has covered the principles of management accounting.
Different management systems and techniques are discussed here. The application of these
techniques is explained here in the organizational context. Without utilizing financial accounting,
just by utilizing managerial accounting is covered here with proper context, examples and
references (Horngren et al., 2015). How to discover outstanding performance based on
managerial accounting is discussed here. It can be said that different types of managerial
reporting tools or a mixture of them can lead the firm to ultimate success. And it is very much
important to utilize these tools to get a competitive advantage in this competitive world.

18
References:
Adler, R., Everett, A.M. and Waldron, M., 2018, June. Advanced management accounting
techniques in manufacturing: utilization, benefits, and barriers to implementation.
In Accounting Forum (Vol. 24, No. 2, pp. 131-150). Taylor & Francis.

Bao, D.H., Lewis, M.T., Lin, W.T. and Manegold, J.G., 2015. Applications of time‐series
analysis in accounting: A review. Journal of Forecasting, 2(4), pp.405-423.

Cai, J., Liu, X., Xiao, Z. and Liu, J., 2019. Improving supply chain performance
management: A systematic approach to analyzing iterative KPI accomplishment. Decision
support systems, 46(2), pp.512-521.

Chenhall, R.H. and Moers, F., 2015. The role of innovation in the evolution of management
accounting and its integration into management control. Accounting, organizations and
society, 47, pp.1-13.

Coe, C., 2015. Local government benchmarking: Lessons from two major multi government
efforts. Public Administration Review, 59(2), pp.110-123.

Cooper, R. and Kaplan, R.S., 2018. Profit priorities from activity-based costing. Harvard
business review, 69(3), pp.130-135.

Creţu, D. and Iova, R.A., 2017. The interdependence functions of managerial

accounting. Scientific Papers Series Management, Economic Engineering in Agriculture and
Rural Development, 11(2), pp.48-51.

Elnathan, D., Lin, T.W. and Young, S.M., 2016. Benchmarking and management accounting:
A framework for research. Journal of Management Accounting Research, 8, p.37.

Guibin, H.U.A.N.G., 2016. Reflections on Applications of Managerial Accounting in State-

owned Commercial Banks. Journal of Nanping Teachers College, p.02.

Hilton, R.W., 2019. Managerial accounting (p. 568). Irwin/McGraw-Hill.

19
Horngren, C.T., Sundem, G.L., Stratton, W.O., Burgstahler, D. and Schatzberg, J.,
2015. Introduction to management accounting. Upper Saddle River, NJ: Pearson Prentice
Hall.

Jones, L.R. and Thompson, F., 2015. Responsibility budgeting and accounting. International
Public Management Journal, 3(2), pp.205-227.

Kaplan, R.S., 2017. The evolution of management accounting. Readings in accounting for
management control, pp.586-621.

Kasurinen, T., 2016. Exploring management accounting change: the case of balanced
scorecard implementation. Management accounting research, 13(3), pp.323-343.

Lanen, W., Anderson, S. and Maher, M., 2019. Fundamentals of cost accounting. McGraw-
Hill Education.

Rajeev, N., 2018. Inventory management in small and medium enterprises: A study of
machine tool enterprises in Bangalore. Management Research News.

Rogalski, M., 2019. Activity Orientation of Cost Accounting According to GUTENBERG:

Fundamental Principles of a Dynamic Activity-based Marginal Costing. In Theory of the
Firm (pp. 300-318). Springer, Berlin, Heidelberg.

RS, R.K. and Atkinson, A.A., 2016. Advanced management accounting. Prentice-Hall Inc.

Tappura, S., Sievänen, M., Heikkilä, J., Jussila, A. and Nenonen, N., 2015. A management
accounting perspective on safety. Safety science, 71, pp.151-159.

Vanderbeck, E.J., 2017. Principles of cost accounting. Cengage Learning.

Vonasek, J., 2017. Implementing responsibility centre budgeting. Journal of Higher

Education Policy and Management, 33(5), pp.497-508.

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2018. Managerial accounting: tools for
business decision making. John Wiley & Sons.

20