P1.

Explain Management accounting and explain different types of management accounting

systems & their essential requirements.

Management accounting is the interpretation, analysis, identification, and presentation of

accounting information which is gathered through the help of financial accounting and cost
accounting. Management accounting assists business managers in the formulation of policies,
decision-making processes and in the everyday operations of a business (Kaplan and Atkinson,
2015).

Applications of Management Accounting

Measurement of Performance

This helps an organization in measuring employee performances and efficiency

measurement. The system operates as a comparison of actual performance with the that of
standardized performance which sets the difference on which necessary actions should be
implemented and considered.

Assessment of risk

Another advantage of management accounting is that is determines and assesses the risk
factors within the business which can be minimized through effective management.

Allocation of resources

Businesses can reach efficient and effective utilization of resources through the assistance of
proper allocation of resources through various divisions and department of the business. This
enables organizations goals along with the long-term sustainability goals (Hart, et al., 2012)

Financial Statement Presentation

Management accounting gives proper presentation of the financial position of the business
with essential information and data. Various cost data and financial data eases the presentation of
goods and tact financial reports that acts as key determinants for decision-making.

Roles and Principles of Management Accounting

Influence

Communication is the heart which enables insight that is influential. Management accounting
relates with the effectiveness of communication as it elevates decision-making with the availability of
all the essential information at different stages of decision-making. This ensures integrated mindsets
and efficient decisions (Hugh, et al., 2016).
Relevance

All information must be relevant. Management accounting considers the best available
relevant data available with the enterprise that can enhance the quality of decision-making for the
employees and, as well, enhance their decision style or process being utilized,

Value Generation

Management accounting accounts analysis of information along with the value generation
path while exploiting opportunities and focuses on costs, risks, and value generation opportunities.

Trust

Practitioners involved in management accounting processes are expected to be skillful,

ethical, and accountable while ensuring governance and social requirements. This allows the
decision-making more objective and accountable (Hugh, et al., 2016).

Management accounting vs. Financial accounting

Users

Management accounting is mainly internal with managers and employees involved whereas
external users relates with financial accounting including shareholders, creditors, banks etc.

Regulations

There are no direct application of accounting standards or external factors is implemented in

management accounting whereas financial accounting is proportional with multiple sets of
regulations and standards as applicable to the company.

Sources

Both financial and non-financial data is utilized by management accounting however financial
accounting uses financial data and draw from the organization core transaction-based accounting.

Nature

The nature of information is historical, current and future-oriented in management accounting

while information and nature are historical related to the past performance in financial accounting.

Different types of management accounting

Job Costing System – this is a system to manufacturing costs to each individual product while
keeping track on expense monitoring. Job costing accounting contains:
 - Receiving Enquiry: the consumer is worried about the quality of the material. Price of
material and time took to complete the order.
- Estimate price of job: the job costing is done by the accountant who keeps in mind
customers tastes and preferences.
- Order receiving: the order will be placed if the consumer is assured the price.
- Production order: the production order is executed to begin the production process.
- Cost recording: every aspect of the cost in the production is recorded.
- Completion of job: on completion, a report is handed to accounts department for final
costing.

Price optimizing System – this is utilized to control the prices of resources. Price optimizing system
can be utilized in deciding the prices of multiple products. The function assists in determining how
demand will fluctuate at difference price levels (Weygandt, et al., 2015).

Cost Accounting System – this system assists the business to estimate the cost of the product
while analysis can be conducted of organizational profitability, inventory and cost control. Two core
accounting systems are job order costing and process costing. The two important factors for good
cost accounting systems are:

- Cooperation and participation of executives required by departments – this ensures

appropriate attendance and participation in the generating steps of cost accounting system
which can assist the management in appropriate ascertainment of the cost of products.
- Flexible and simple – the cost accounting system generated must be flexible and east to
understand and use. It must also meet the demand of multiple users and adapt according to
the company’s wants and needs.

Inventory management system – this management accounting system is concerned with the
supervision and management of stock and non-capitalized assets of the business. This system can
be integrated with any business to reach efficient and effective flow of inventory within the
organization and at the point of sale.

- Forecasting and replenishing strategies – this allows businesses to be ahead in

management and planning of cost requirements and strategic plans of the company.
- Management of inventory both physically and monetarily – Benefits like cost reduction
and appropriate inventory management is achieved through this.

P2. Explain different methods used for management accounting reporting.

 Multiple management accounting reports assist a business’ management to prepare for
appropriate management reports which counts on their forecasts for rendering critical business
decisions. Accounting reports provide managers with accurate and reliable statistical and financial
information. Multiple reports prepared by management and their benefits are:

Budget Reports

Budgetary reports set out plans to analyze a company’s performance while evaluating about
various department’s performances and control costs. For budget preparation, actual expenditure
occurred in the past periods are utilized. These budget reports are used to generate incentives
towards employees that motivates them to reach their desired objectives. Forecasting future budget
based on these data reports also helps the business to integrate the efforts of multiple departments
towards the overall objective of the business.

Accounts Receivable Aging report

This report is aimed towards managing account receivables for specific companies which are
involved in extending the credits to their consumers. Appropriate segregation of invoices is done for
consumer’s balances about how long they have been owed. It indicates the problems associated
with the company’s collection process. This ensures reduction of old bad debts and maintaining
liquidity of the company.

Job Cost Reports

This report is concerned about the cost, expenses, and profitability of each present job in a
business. An evaluation can be conducted about the earning aspect of the projects so that each
business can present its efforts on those concerned while diminishing their efforts on less profitable
business activities. These reports also evaluate the cost while projects are in progress, so areas of
waste can be noted of and the project can still be made profitable.

Inventory and Manufacturing Reports

Businesses who are involved with manufacturing processes take part in these types of
reports to ensure their manufacturing and inventory process can become more effective. These
reports consist of labor costs, per unit overhead costs and wastages concerned with inventory which
provides managers the difference between assembly lines and to view the opportunities for
improvement which can be exploited by multiple departments.

Performance Reports
 The difference calculated on a comparison of actual results with budgeted performances are
analyzed and data regarding this are presented in performance reports. These are prepared
annually however, can also be done monthly or quarterly.

Order Information Report

This report assists management to overview the trends in the market they are in. Different
types of reports prepared in this type of reporting aids in integrating management operations to
attain low cost on placing of orders and their management.

A Business Situation or Opportunity Reports

These types of reports are prepared for management for them to be aware of the occurrence
of a specific event. The preparation of well-drafted situations and opportunities report assist the
management with noting important business decisions regarding the event.

M1. Benefits of Management accounting systems in the context of Magiting PH.

System Advantages
Job Costing System - This will help Magiting PH in the
estimation of all the types of costs
throughout the production process.
- Helps in the evaluation of the quality of
the product and work done.
Inventory Management System - Magiting PH can improve the accuracy
of its inventory orders with the help of
this system.
- It will elevate the efficiency and
effectiveness and helps in saving time
and money.
Price Optimizing System - Magiting PH can identify the attitude of
consumers based on different price
range.
- Helps in maximizing operating profit
along with best prices.
- Creates segmentation for consumers.
 Cost Accounting System - Magiting PH can measure efficiency in
processes and then aid in creating
improvements with this system.
- Helps in reducing company fixation and
prices.

D1. Critically evaluate how management accounting systems and management accounting
reporting is integrated within organizational processes.

Type of reporting Integration with organizational processes

Budgeting Reports The integration of budgeting reports and
organizational processes of Magiting PH makes
a path for the business activities to focus on
specific results and objectives efficiently
(Corpuz, 2019).
Job Cost Reports The activities of Magiting must be directed
towards the achievement of cost objectives and
cost reports that can ease the decision making
of pricing strategies and reduction of the overall
cost of their product.
Accounts Receivable Aging Report The integration of Magiting’s organizational
processes to these reports enables the
business to achieve more through extra efforts
towards timely collection of accounts
receivables and the creation of correct
collection policies that must be monitored every
now and then for flexibility and accuracy
(Novas, et al., 2017).
Performance Reports The integration of this reports and Magiting’s
organizational processes can aid managers to
direct the future of productions and cost
increases will soon lead to cost reduction and
higher profitability.
Inventory and Manufacturing Reports These reports can improve the current
management of inventory of Magiting and

Business Situation or Opportunity Reports
Order Information Report
manufacturing costs while estimating the
required level of purchase orders.
When these reports are integrated, it enables
Magiting to critically analyze the situations and
act accordingly for the decisions that are to be
made.
This will help Magiting’s owners with an
analysis of sales order information and render
multiple reports to track the order of customers
and their fulfillment on time.

P3. Calculate costs using analysis to prepare an income statement using marginal and
absorption costs.

Costs refers to the value of money which has been utilized to generate anything and
represents the monitory evaluations of materials, natural resources, efforts, risks incurred, time and
utilities used and the opportunity costs in production and delivery of the product and service (Drury,
2013).

Fixed and Variable Costs

Fixed cost represents the part of the cost that stays constant for a certain period of output
and does not fluctuate. However, per unit fixed cost of the product does decrease with the increase
in production. It basically includes miscellaneous fees. While variable costs refer to the part of the
cost that differs with the variation in production directly. It has a direct relationship with production,
therefore it increases and decreases when the level of output increases and decreases (Weygandt,
et al., 2015).

Opportunity and Outlay Costs

Outlay costs or actual costs are real and actual expenses obtained by the firm for labor,
machinery, raw materials etc. These are all based on accounting cost concept and represented
through books of accounts. On the other hand, opportunity costs entail the costs in terms of earnings
foregone to select the next best alternative, has the first option been chosen. This concept is used
for long-term decisions and capital budgeting decisions (Novas, et al. 2017).

Historical and Replacement Costs

 This is the sum of the capital which was paid when purchase during the past and gets
considered as a base for financial accounts. However, a replacement cost is a current price that
must be paid at present for replacing assets. Replacement cost or can also be called relevant cost
concept is used for adjusting inflation within the financial statements (Novas, et al., 2017).

Out of Pocketbook Costs

This involves current cash payment for the expense incurred and known as explicit costs.
These are actual payments paid for the product or service. However, book cost or implicit cost does
not need immediate payment – it bodies the cost of self-owned factors of production and includes
unpaid interest, depreciation and salary of the owners. Both are considered for taking financial
decisions and generating financial reports (Drury, 2013).

Avoidable and Unavoidable Costs

Avoidable costs embody the part of the cost that can be controlled or reduced by downsizing
business events related with the type of cost and by regulating executives concerned with that costs.
On the other hand, unavoidable costs are those costs which can not be decreased with the reduction
of business activities and are considered as sunk costs (Drury, 2013).

Incremental Sunk Costs

These are also known as differential cost or additional cost generated because of the change
in business activities or the nature of the activity. This is calculated by measuring the cost incurred
on generating extra units of output. Sunk costs are those which do not change due to anything and
remains stable. These represents the portion of the cost that has already been incurred and can not
be regained. Sunk costs are not relevant for future planning purposes as they are past the costs
(Manyaeva, et al., 2016).

Total, Average and Marginal Costs

From the term total cost, all costs are included in it whether it is variable or fixed which is
used in production. While average costs are costs which are acquired for per unit output. Lastly,
Marginal costs or the cost of marginal unit produced because it is that cost which gets incurred for
producing the final unit (Novas, et al., 2017).

MARGINAL COSTS

Since this is relevant for decision-making purposes, it can be defined as the accounting
system where variable costs are distributed to the cost units but fixed costs for the period is written
off fully to the accumulated contribution (Delis, 2015). This can also be described as the cost of a
marginal unit of output produced.

This method is not similar to process costing or job costing rather is a simple method or
procedure for the analysis of cost information by the management through efforts to discover its
impact on the organization’s profitability due to the change in level of production or output. In the UK,
marginal costing is famous level and it consists the concept of dissemination (Shepherd, 2015).

ABSORPTION COST

This takes into consideration all the resources and expenses analog to the cost of production
and hence considers all cost of production as production cost. The cost here includes direct material,
direct labor, and fixed and variable overhead costs. However, absorption costing is a portion of the
fixed overhead cost that is allocated to each unit of the product along with the variable
manufacturing costs.

The identification of this cost can assist the business’ management in utilizing costs
information easily for decision making purposes. This considers all costs related to the
manufacturing of the product (Shepherd, 2015).

M2. Accurately apply a range of management accounting techniques and produce

appropriate financial reporting documents.

Caste Study

This is the cost of a company NewVoiceMedia Tech (US) who produces cloud customer
contact platforms for personal and professional use in UK.

$
Direct Labor 5
Direct Material 8
Variable Production overhead 2
Fixed Production Overhead 5
Fixed production overhead incurred
$ 15,000
actually
Fixed Selling & Distribution Expense $ 10,000 per month
Variable Selling and & Distribution
15% of sales value
expense
Selling Price 35
 Sales 2,000 units

Income Statement as per Absorption costing

Particular Working Amount (in $)
Sales 15,000*$35 52,500
Less Cost of Goods sold 15,000*20 30,000

Gross Margin 22,500

Less Selling and Administrative Expense
Variable selling and administrative
(15% of 52,500) 7,875
expenses
Fixed Selling and variable
10,000
administrative expenses

Net operating Income 4,625

Working Note:

Unit Product Cost

Particular Amount (in $)
Direct Material 8
Direct Labor 5
Variable Manufacturing overhead 2

Total variable production cost 15

Fixed Manufacturing overhead 5

Unit product cost 20

Income statement as per Marginal Costing Method

Particular Working
Sales 15,000*$35 52,500
Less Variable Expense
Variable production cost 15,000*$15 22,500
 Variable selling and administrative 15% of 52,500 7,875
expenses
30,375
Margin Contribution 22,125

Less Fixed Expenses

Fixed production overhead 15,000
Fixed Selling and administrative 10,000
expenses

Net operating Income -2,875

Working Note:

Unit Product Cost

Particular Amount (in $)
Direct Material 8
Direct Labor 5
Variable manufacturing overhead 2

Unit product cost 20

D2. Produce Financial reports that accurately apply and interpret data for a range of business
activities.

Both management accounting techniques use various costing methods for calculation of the
unit cost of the product (Delis, 2015). In marginal costing, fixed cost has been removed to the
contribution whereas absorption costing has used all the cost in the calculation of per unit cost.
Therefore, net operating cost based on marginal and absorption costing came out as ($ 2,875) and $
4,625 respectively for New Voice Media Tech.

These are the income reports that support the analysis above:

Income Statement as per Absorption costing

Particular Working Amount (in $)
 Sales 15,000*$35 52,500
Less Cost of Goods sold 15,000*20 30,000

Gross Margin 22,500

Less Selling and Administrative Expense
Variable selling and administrative
(15% of 52,500) 7,875
expenses
Fixed Selling and variable
10,000
administrative expenses

Net operating Income 4,625

Income statement as per Marginal Costing Method

Particular Working
Sales 15,000*$35 52,500
Less Variable Expense
Variable production cost 15,000*$15 22,500
Variable selling and administrative 15% of 52,500 7,875
expenses
30,375
Margin Contribution 22,125

Less Fixed Expenses

Fixed production overhead 15,000
Fixed Selling and administrative 10,000
expenses

Net operating Income -2,875

References

Delis, M., Iosifidi, M., &Tsionas, E.G., 2014. On the estimation of marginal cost. Operations
Research, vol. 62,no. 3, pp. 543-556.

Drury, C.M., 2013. Management and cost accounting. Springer.

Shepherd, R.W., 2015. Theory of cost and production functions. Princeton University Press.

Novas, J.C., Novas, J.C., Alves, M.D.C.G., Alves, M.D.C.G., Sousa, A., & Sousa, A., 2017.
The role of management accounting systems in the development of intellectual capital. Journal of
Intellectual Capital, vol. 18,no. 2, pp. 286-315.

Kaplan, R.S., & Atkinson, A.A., 2015. Advanced management accounting. PHI Learning. 
Manyaeva, V., Piskunov, V., &Fomin, V., 2016. Strategic Management Accounting of Company
Costs.

Hart, J., Wilson, C., & Fergus, C., 2012. Management Accounting: Principles & Applications,
New South Wales: Pearson Higher Education AU.

Weygandt, J.J., Kimmel, P.D., &Kieso, D.E., 2015. Financial & Managerial Accounting. John
Wiley & Sons.