Unit-05

Management Accounting

Student Name:
Student ID:
 Table of Contents

Introduction.....................................................................................................................................1
LO1. Demonstrate an understanding of management accounting system...................................2
P1. Mr. Zang has a very little knowledge of the functions of accounting and finance in the
organization. Explain to him, what are the management accounting and the difference
between management accounting and finance accounting. For him to understand the
importance of management accounting in the organization explain him the cost accounting
system and price optimizing system...........................................................................................2
P2. Explain Mr. Zang following different types of managing accounting reports.....................8
LO2. Apply a range of management accounting techniques.......................................................11
P3. Calculate costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption cost........................................................................11
LO3. Explain the use of planning tools used in management accounting..................................13
P4. Explain Advantages and Disadvantages of different types of planning tools used for
budgetary control......................................................................................................................13
LO4. Compare ways in which organizations could use management accounting to respond to
financial problems.........................................................................................................................16
P5. Compare how organizations are adapting management accounting system to respond to
financial problems.....................................................................................................................16
Conclusion:....................................................................................................................................18
References.....................................................................................................................................19
Introduction

Management Accounting system generally collect, calculate and analyses data related to a
business. To run a business properly, managers need to take effective decisions. Accounting
system explains the situation of any activity with numbers and calculations. Manager studies
different accounting reports and try to make a decision which has the highest possibility to solve
a problem or to update the performance of a company. In this assignment I will discuss about
the management accounting principle with example. The difference between management
accounting and financial accounting will also be shown. I will introduce Cost accounting system
and price optimization system with detail explanation. A solution of problem will be given here
for better understand. Methods of management accounting system will be discussed. Besides
that the budgetary control system and management accounting system benefits will be given
will proper explanation.
LO1. Demonstrate an understanding of management accounting system.

P1. Mr. Zang has a very little knowledge of the functions of accounting and
finance in the organization. Explain to him, what are the management
accounting and the difference between management accounting and
finance accounting. For him to understand the importance of management
accounting in the organization explain him the cost accounting system and
price optimizing system.

Mr. Zang has a very little knowledge of the functions of accounting and finance in
the organization. Explain to him, what are the management accounting and
the difference between management accounting and finance accounting. For
him to understand the importance of management accounting in the
organization explain him the cost accounting system and price optimizing
system.

Management Accounting:
Management accounting is often defined as a system that provides useful information for
managers in terms of decision making, planning, control and performance evaluation. (Dury,
2011)
The process of identification, measurement, accumulation, analysis, preparation, interpretation,
and communication of information (both financial and operating) used by management to plan,
evaluate and control within an organization and to assure use of and accountability for its
resources. (CIMA)
A value-adding continuous improvement process of planning, designing, measuring, and
operating both nonfinancial information systems and financial information systems that guides
management action, motivates behavior, and supports and creates the cultural values necessary
to achieve an organization’s strategic, tactical, and operating objectives. (Atkinson, 2010)
Management accounting involves preparing and providing timely financial and statistical
information to business manager so that they can make day to day and short time managerial
decisions. Management accounting or Managerial accounting includes-

 Information of the cost of organization’s product and service.

 Budget.
 Performance Reports.
  Other information for assisting managers.

Principle of Management accounting:

Principles of management account are helpful to make effective managerial decisions.
Organization’s internal business support, decision, customer value and capacity etc. can be
figured out through management accounting system.
Principles of Causality:
Causality means a relationship between cause and effect. That means that, an effect cannot
produce without a cause. If there is a cause, there will an effect in the future. The cause and
effect relationship is like the manager’s strategic decisions and company’s outcome. For a
specific project or task manager take different steps and sometimes they know that what effect
it going to bring. Sometime means not all the time managers know the effects. Some effects can
be for extraneous variables.
If the knowledge about a step or cause is not up to the mark then the effects will arrive
suddenly. So before taking steps it is necessary to gather as much information as the manager
can. This type of causality is called determined cause effect relationship. In this category some
negligible actions can bring huge effect in a business environment.
In another category which is called probabilistic cause and effect relationship managers know
that they prediction of any outcome is not perfect. But with information and environment they
can decide the percentage of success in the project. In this category the conditions are-
Example – I-phone’s latest version has a notch in its display. At first the notch was unacceptable
to the customer. But slowly they are accepted by all the customers and other smart phone
companies are coping it right now. Apple earned 150 billion dollar with that one slight display
change. The decision has a huge impact on the other smartphone companies too.

Management accounting system:

Management accounting system focuses on figuring out various ways or activity of getting
maximum return per unit in a product or service. The system measure various ways by
analyzing decision making, performance, planning, financial report of a company. It can
provide a detailed information based on activity, plans, operations and tasks. (Gitman, 2013)

Advantages:
Management accounting system increases the efficiency of a company. It evaluates different
financial calculations and figures out the right direction to get a healthy amount of profit.
Through the system a proper technical report can be made. (Drury, 2013)
The management accounting system can maintain the funding process. In case of any
emergency the funds can be used as a defense. Besides that proper budget planning, cost
controlling and future prediction can be made also.

Disadvantages:
Based on the financial calculation, Management accounting system can suggest a certain
action but it cannot measure its effectiveness.
The decision of activities can be found based on the high cost or big budget. The system itself
is costly and not suitable for small scale industries. (Drury, 2013)

Cost Accounting system:

Cost accounting system is a process which a company can estimate the cost of their product to
figure out the profit, inventory and cost analysis. Through this method any firm can figure
whether overall a product out is profitable for them or not.

Activity Based costing system:

Activity Based Costing is based on the activity and related resources. It identify the activities of
an organization and find the actual cost of the product. Actual cost means related product,
service and cost consumption by each person. This ABC method helps to turn the indirect cost
into direct cost with clear data and related factors. Activity Based costing helps to figure out
fixed cost, variable cost and overhead cost separately.

The activity based cost of the Manta Sleep mask and charcoal air purifier is calculated:
= (1* 19000) + (2*6000)
= 19000 + 12000
= 31000
W.A.O.C = 30000/31000
= 0.967
Manta = 3 + 0.967 = £ 3.967
Charcoal = 6 + (2*0.967) = £ 7.935
A company manufactures A and C, two types of product. Now-

Activity Product A in Product C Total cost

dollars
Set Up 300 290 590
Material Handling 120 80 200
Inspection 40 30 70
Total 460 400 860
Budget units 20 20
Overhead per unit 46 20

Product A Product C
Direct 18 10
Material
Labour 20 17
Variable 6 3
Total 44 30

Product A Product C

Variable cost 44 30

Overhead 46 20

Total 90 50

Profit 10% 9 5

Price 99 55
Traditional Costing system:
Tradition costing system is used to allocate the factory overhead to product. It is basically based
on the resources and ingredients related to production. It figures out how much machines or
direct Labour hour needed to produce a product. Some factory overhead can be larger than the
allocation. But now a days machineries are being to produce a particular product. (Kaplan,
2015)
Example- Like for a company to produce “X” product they need 4 hours of work daily. Now the
charge of each hour of Labour is 40$. But for some external or internal company’s reason one
day the Labour has to work 6 hours. So for 2 more hours the cost increased 80$ for a Labour.

Job costing system:

Job costing system tracks and calculates data related to cost and revenue related to a job. It also
calculate how much profit it is gaining for a particular company. To track the job cost the related
work should be tracked first. Direct material and Labour effort, indirect factors etc. are being
calculated also. A job costing system draws an overall profit and loss picture related to an
activity. Manager can see the overall condition of an activity in terms of financial condition.
Example- Suppose a company produces “A” product, its selling price is 2800$. So the job costing
system will be-

Direct Labour cost 400

Indirect Labour cost 280

Advertising 50

Raw materials 100

Total $830

Price Optimization System:

Price optimization system means finding a way to maximizing a products price according to the
customer demand. Company use this method to determine the demand and ten with
information they recommend prices that will improve the profit. First company collects data
related to volume, units, cost, conditions, pricing related to product in a market area. Then,
Select a price optimization model and note the desired and real output. Guide the model and
update it with new information and changes. Monitoring the accuracy of this model is a regular
work. Companies use price optimization method like-
Initial Price Optimization: It works for the long term based products like- medicines, grocery
items.
Promotional Price Optimization: It helps to set a temporary price for a larger life cycle of the
product. Like- New products, bundle products.
Markdown Optimization: For selling short life cycle trendy seasonal products.

The difference between Management accounting and financial accounting -

Management Accounting Financial Accounting

Definition Management accounting is process Financial accounting is the process of

of identification, measurement, recording, summarizing and reporting
accumulation, analysis, preparation, the huge number of transactions
interpretation, and communication resulting from business operations
of information used by management over a period of time.
to plan, evaluate and control within
an organization and to assure use of
and accountability for its resources

Number of Individual company products. Concerns the whole company.

product

Efficiency Report on the cause of the problem Report on business efficiency and
and a solution of it. profitability.

Aggregation Reports about every detail of a Reports on the entire business

product like- unit, types, customers, product.
sales etc.

Information Based on estimates and probability. Any suggestion based on correct

financial statement
Purpose Reports are made for only company’s Reports distributed inside and outside
inside purposes. of the company.

Focus Checks the overall system and steps Only calculation and numbers about
to make a profit. profit.

Time Consider budget and forecast, a sort Consider what a company already
of future orientation. achieve, a historical orientation.

Making time Reports are made frequently with Reports are made end of an
new information and updates. accounting period.

Valuation Only focus on the productivity. Focus on asset, liability and loss profit.

Requirement No special requirements to make Reporting requirement, law and timing

these reports. It cover almost what a are maintained.
company need to do.

P2. Explain Mr. Zang following different types of managing accounting reports.

Management account report is generally used by the manager to take any decision correctly.
Accounting report contain calculation of actual data which can measure the exact condition of a
company. For management accounting report different methods can be used, they are
described below-
Budget Report:
Budget accounting report is used to take all the relevant decision. Without a proper budget
other decision cannot be made properly. Budget report generally based on profit, loss,
company’s revenue, donations and quality. If a products earns huge amount of profit, the
budget increases for its related activities. Managers also see the data and calculation to check if
any where the budget need to be increased or decreased. Example-
ABC Company
Overhead budget Report
For the End of the year 2017

Flexible budget Actual Budget Variance Favorable or

Unfavorable
Production unit 6,000 6,000

Variable cost

Indirect Material 500 400 100 Favorable

Indirect Labour 300 450 150 Unfavorable

Utilities 1000 1400 400 Unfavorable

Total V.C. 1800 2250 450 Unfavorable

Fixed cost

Supervisor 2000 2000 0 Favorable

salary
Rent 1200 1100 100 Unfavorable

Depreciation 200 200 0 Favorable

Total fixed cost 3400 3300 Favorable.

Total overhead 5200 5500 300 Unfavorable

Cost Managerial accounting reports:

Cost managerial accounting collects all the indirect and direct factors data related to a product.
Variable cost, overhead cost, Labour cost, advertisement cost, resources, profit, loss etc. are
being noted in the report. The report also provide a clear idea about the actual price of a
product or service. Related activities data are being measured and calculated to observe if the
price is right or not. A product profit needs to be measured overall otherwise a huge loss can
happen. (Jiambalvo, 2009)

Performance report:
Performance report means monitoring the performance level of production related factors. To
produce a expected amount of product, the performance of Labour and machine need to be
higher. The performance report contains the working hours of each Labour, the productivity of
them and how much they are taking to do a job. The machine working hour, how much pressure
it can handle etc. are also being noted. They take data of each activity and measure it to figure
out the performance level.
XYZ Company limited
For the End of the year 2017

Profit and loss Actual budget Budget Variance

Sales 60000 55000 5000

Cost of sales 4000 3500 500

Gross profit 56000 52500

Other income 5000 4500 500

Expense 6000 6000

Net income 55000 51000

Job costing Report:

Job costing report contains the cost and revenue data related to an activity. Job costing system
helps to figure out the exact impact of direct and indirect Labour. It also figures out the variable
cost, overhead cost, resources, material and other cost. Manager can find out the effectiveness
and impact of an activity by studying this report. Example-
Job task detail

task Quantity Price (Pound) Total amount Total cost Variance

Call service 1 0 0 0 0

Troubleshoot 2 150 180 40 140

Replace 1 80 80 67 23
Turn-up Engine 1 80 80 30 50

Total 340 137 213

Account Receivable aging:

This report contains the credit of customers in a business. Managers can figure out the problem
related to customers’ collection process. They can also find out the reason of not paying at the
right time. It can help managers to take the decision of make new rulers related to credit facility.

Inventory reports: An inventory report is the report about all the items related to business,
organization and industry. It a clear, simple and executive report about supply and stoke of
different items.
Features of inventory reports:

 Hand report

 Location report
  Dimensional report

 Incoming stoke report

Advantages:

 The accuracy of inventor orders.

 Organized warehouse support.

 Increases efficiency and productivity.

Disadvantages:

 Focus on inventory report can harm the service and product quality.

 Some decision can be made base on the inventory report. For external situation
company has to produce more products.

Cost Calculation by using LIFO and FIFO methods-

FIFO LIFO

Date 60 euro 70 euro 80 euro Date 60 euro 70 euro

3.11.18 30 3.11.18 30

5.11.18 -20 5.11.18 -20

11.11.18 40 11.11.18 40

14.11.18 -10 -10 14.11.18 -20

21.11.18 30 21.11.18

22.11.18 -20 22.11.18

24.11.18 -10 -10 24.11.18 -10

Remaining 0 0 20 10 10

Total FIFO 1600 euro LIFO

LO2. Apply a range of management accounting techniques.

P3. Calculate costs using appropriate techniques of cost analysis to prepare an

income statement using marginal and absorption cost.

Marginal cost:

Marginal cost is the increase or decrease of a total cost when company add an extra unit of
product or service facility. Marginal cost can be figured out by total change in costs of producing
more goods and dividing that by the change in the quantity of good produced. Variable cost
includes Labour, Materials and fixed costs. Marginal cost of any product can be identified by it.
Production and change in units how it puts impact on the profit that is shown by marginal cost.
Production of one unit puts effect on total cost that is the main theme of marginal costing. In
marginal cost, all the fixed are related to product related cost.

Cloth £ 0.35
Foam £0.20
Elastic Band £0.15

Packaging £0.45 £1.15

Labour £0.83
Total Marginal costing £1.98

Absorption Cost:

Absorption cost means all the cost need to manufacture a particular unit of product. In the fixed
material cost it includes direct material, direct labor, variable and fixed manufacture overhead.
Manufacturing cost in the process is regarded as fixed and variable cost. Absorption cost
method is a sort of tradition way. In the absorption costing, the variances between the stock at
the beginning and the end will show its effect by increasing and decreasing per unit cost of a
product..

Fixed Cost £32000

Quantity £100000
Average Fixed Cost £0.32

Total avg. cost = Marginal cost + Avg. fixed 1.98+0.32 = £2.30

cost

Difference between Marginal cost and absorption cost

Topic Marginal cost Absorption cost

Meaning A decision making costing system Apportionment of total cost to the
for ascertaining the total cost of cost center in order to
production. determining the total cost of
production.
Cost data Presented to cover the outline Presented in conventional way.
cost of a product.
Highlights Per unit contribution Per unit profit.
Variances Variance do not put effect on It affects the cost per unit.
opening and closing stoke.
Profitability Measured by profit volume Inclusion of fixed cost can affect
ration. the profitability.
Classification Variable and Fixed cost. Production, selling, distribution
cost.

LO3. Explain the use of planning tools used in management accounting.

P4. Explain Advantages and Disadvantages of different types of planning tools
used for budgetary control

Budgetary control is a management system in where actual income and spending are compared
with planned income and spending. In the Budgetary control system there are planning tools
like- financial budget, costing method, performance measure etc. The advantages and
disadvantages of these tools are given below-
Financial Budget and Operating Budget:
Financial budget is the picture of income and outflows of an organization for long term or short
term. Operating budget show how much a company has revenue for spending next week,
month or year. The advantages and disadvantages of them are given below-
Advantages:

 Operating cost includes a starting point about office rent, salaries etc. Operating cost can
bring some cost point which can be reduced and save the overall cost process. Like-
office supplies, electricity bills etc.
 Operating cost gives a proper view of past experiences. Organization can find out in
which area they have spent excess money. Next time, organization can cut the cost or
invest it somewhere else to get a better result.
 Operating cost budget can give an idea about saving, planning and investing money for
some sudden circumstances. Some environmental changes can cause business to take a
different decision. For that decision organization need to have some budget.
 Financial budget show exactly where and how much money is spend each month or year
in an organization. So Business can find out the loss, profit issues and take proper
decision according to it. It is generally called cash budget.
 Capital expenditure budget is a kind of financial budget it is for new plant, land or
machinery. This financial budget is made for a company to improve their facilities in a
proper way.
 The balance sheet budget helps to make a proper budget which can be beneficial for the
organization in terms of interest.

Disadvantages:

 Financial budget or operating budget need a lot of time to create. Company has to
analyze all the past activities and calculation to make a decision. All the activities correct
data and calculation is must to make a proper budget which actually consumes a lot of
time.
  Budget whether it is financial or operating, it is a based on a proper assumption.
Company figures out the mistakes and over spending of previous year and make a new
budget. But there can be different situation, environment which can change the whole
process in a moment.
 Budget can get a company to take big steps at once. Like – if company sees over
spending on a sector, they can reduce or eliminate the particular activity.
 Budget only depend on calculation of sales, loss and profit. It cannot other qualities like
– quality of the product, business environment, relationship etc. Budget just consider
work and outcome numbers. But there are also some other factors which can influence
the expenses of a company.
 Operating budget is prepare for activities which is known. Some unknown activities can
arrive in the company for that purpose the budget has to make instant. The cost can put
an impact on other activities budget.
Performance measure for the revenue centers:
Revenue center measure the output after deducting the extra cost. The revenue center is
department where profit is identified from sales of goods and products. Examples- sales
office, amazon’s E-commerce, restaurant, telephone, gift shop etc.

Advantages:

 The performance of revenue center is measured by comparing actual income and

projected income. Quota and budget comparisons are also included in the
performance sector.
 Revenue center can figure out the maintenance cost like- rent, security, tax and
salary. They can figure out the exact amount without including any other issues.

Disadvantages:

 Revenue center concentrate on revenue of a product. So external cost are ignored.

Shipping cost, delivery cost which are not counted in the calculation.
 Revenue center are not involve in marketing center decision making. So revenue center
do not know the marketing related cost about a product. The performance in terms of
profit cannot measure exactly.
 Revenue center cannot ignore activity to calculate the exact profit. They can control
certain factors cost and expenses.
 In a particular area a product can be profitable. But there are some case where the
overall cost is much more than expected. So company cannot rely fully on a decision of
revenue center.
  Performance measure through revenue center is costly. Some companies do not have
revenue center they do it by the help of technology.

Job costing and process costing:

Job costing method keeps the record of manufacturing rather than the whole process.
Manufacturing data is required for business profit loss calculation, effectiveness and report
making purpose. Process costing is used for collecting and assignment a various amount of
produced products. Job costing is used for unique products and process costing is used for
standardized products. (Needles, 2011)

Advantages:

 Job costing allows a company to calculate profit on a particular task. This is suitable for
highly custom work like- construction, contractor work etc.
 Getting every detail information about a particular work. For continuous manufacturing
job costing the best choice.
 Process costing is based on statistical calculation a sort of assumption.
 Process costing is very effective when comparing a variety of homogenous products.
 Process costing can figure out if any unit of product is costing higher than other. Activity
of products production can also be deducted.
 Process costing gives a proper information about unfinished and unsold goods.
Disadvantages:

 Job costing needs to have all the detail information about a certain unit of product,
which is impossible and unnecessary sometimes.
 Process cost can include some costing factors which is not necessary in a manufacturing
method.
 Process costing cannot figure of individual products detail information.

LO4. Compare ways in which organizations could use management accounting to

respond to financial problems.
P5. Compare how organizations are adapting management accounting system to
respond to financial problems.

Management accounting is value-adding continuous improvement process of planning,

designing, measuring, and operating both nonfinancial information systems and financial
information systems that guides management action, motivates behavior, and supports and
creates the cultural values necessary to achieve an organization’s strategic, tactical, and
operating objectives. Originations today are using management accounting system a lot to
reduce or solve some financial issues-

 Management accounting helps a company to increase their efficiency. Every company

has a limited budget and resource. In that resource they have make a good quality
products and profit. Management accounting deals with individual products detail that
is why company can achieve a full performance and process summary. The can cut some
cost and invest is somewhere else to update that product quality. Toyota is realizing
more cars in Japan, North America and Europe. Because on their study they found that
most of their cars are selling in those areas.

 Management accounting uses budgetary control system. Budgetary control system has
financial budget control and operation budget control system. Cash budget system helps
a company to note the output and input in a month, week or year. New plant and
machinery budget are being made and controlled by capital expenditure budget system.
Balance sheet budget helps to measure whether the spending meet the budget or not. It
calculates the overall interest of a company. Toyota Company has a huge budget of
2.9billion dollar. They are now try to brining more electric car in the market to reduce
the environment pollution.

 Operational budget control system helps a company to build a particular budget for
certain activities. Sales budget gives an overview about the future activity and related
costs. Expense budget estimates the expense of company in different strategy and
planning. Project budget helps to make a difference between sales and revenue. On the
basis of the environment sometimes company make variable budget to deal with a
sudden problems. Toyota Prius a Toyota hybrid car which was made for an affordable
range price, it sold 4 million units. In this model cars are not so too much expensive but
the features are good enough for the customers.

 Management accounting make details about a certain products and try to find out the
problems ad solution also. A product whether it is overpricing in manufacturing or
distributing that can be figure out through this process. In 2014 a lot of customer where
avoiding Toyota cars. The study found that customer have problem with the air bags. 7
million cars were called back and free repair service was given.
 Management accounting creates a technical report with the facts of financial
statements. In the technical report they show the process, progress and overview of a
product. It also recommend some solution about the product related issues. This helps
a company to take better decision regarding the fact. Technical report of Toyota car
selling units-

Japan 9.3 million

North America 9 million
Asia 1.2 million
Europe 3 million

On Asia they are releasing low price cars so that customer can afford.

 Organization have some reserve money for various activities, it is called monetary fund.
Management accounting helps to control the fluctuation of monetary fund. If a country’s
supply of money increase then money become more available. Then it is easy to take
loan or borrow money. Because the interest rate decrease a lot. So management
accounting system tell how much money customer are paying for a product and should it
need to be improved or not.

 Cost transparency combines the performances, progress and budget of a company to

make strategic decisions. IT sector of cost transparency track the cost to deliver in terms
of IT services. This sector of management accounting system helps a company through
various ways like –
o Collection of cost driver data
o Cost modeling interface
o Custom report and analysis
o Forecast and budget tracking versus actual and over time.
o Hypothetical scenario planning

 Financial report cannot predict the future possibilities and outcome. Financial report a
kind of thing which is made to show it inside and outside the organization. Management
accounting can be made with any kind of information and analysis which helps a
company to take strategic steps for future work conditions.

 Marginal costing is also possible for management accounting system. It is used to

determine the optimum production quantity for a company, where it costs the least
amount to produce additional units. Like- if a company products 300unit in 600pound
that means per unit it cost 2 pound. But if they product 1000 units it will cost
1600pound which means 1.6 pound per unit. (Gitman, 2013) Toyota Prius model were
 little chipper so company made a lot of them and launch it in the market since 1997. 4
million units were sold from then.
 Lean accounting: It is a kind of procedure to help in company’s management and
accounting system. Toyota is using it from 2008 to eliminate waste, accelerate the
process and minimize errors and defects and make the process clear and
understandable. This accounting system helped the company to increase sales volume
and increase the profit. The main motive of lean accounting is to improve the company's
profitability by actively engaging all employees in cost-cutting and improvement
operations.

Conclusion:

Company records and reports are measured to take future decisions. Management department
uses different account report to find the indirect and direct factors that has impact on the
performance of the company. Accounting system provides the exact condition of a company in a
particular time. Management accounting mainly focus on a particular products. It report about
every detail of a product. The reports are made through different method like- Job costing,
Performance, overhead cost method etc. In short Management accounting is a solution for
financial related problems of a company.
References

Holtzman. M. (2013). Managerial Accounting for Dummies. John Wiley and sons publications.
Jiambalvo. J. (2009). Managerial Accounting. 4th Ed. John Wiley and sons publications.
Gitman, L.J., (2013). 15th ed. Principles of Managerial Finance, Pearson UK.
Needles, B. and Crosson, S. (2011). Managerial Accounting, Cengage Learning
Drury, C.M., (2013). Management and Cost Accounting. Springer.
Aquinas. A. (2010). Organizational Structure and Design, 3rd Ed. South west Publications.
Kaplan, R.S., & Atkinson, A.A., (2015). Advanced management accounting. PHI Learning.