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Demonstrate an understanding of Management Accounting Systems

Principles of Management Accounting

The 4 Key principles of Management Accounting that every organization must follow for effective
management are:

I. Influence:
Communication provides insight that is influential

II. Relevance:
Information that is not over filled or that lacks major details. It should be relevant and useful

III. Value:

Impact on value should be analyzed.

IV. Trustworthiness:

The theological belief of stewardship aids in greatly in developing trust

How is it distinct from Financial Accounting?

The sole difference between Financial Accounting and Management Accounting is whether the focus is
on internal or external matters. As financial accounting focuses on evaluating financial statements that
are to be reported externally like investors and creditors. Whereas, conclusions and analytical data from
Management Accounting are kept for business leaders to use within the company for future decision
making as to what decisions are to be made in-order to run the firm more effectively. We can see this by
the example of our firm given below:

Below is the list of jobs that are needed to be done. Based on the nature of the job it will be decided
whether I or company’s Financial Accountant will be doing it:

 Budgeting
 Organization’s Tax preparation
 Reporting the Income Statement
 Cash flow statements
 Calculations that are to be performed in stockholder equity.

From all the tasks that are supposed to be done, the only tasks that Management Accounting will handle
are budgeting and taxes. Rest will be handled by the financial accountant. From this example we can
clearly see that all the external matters are dealt with Financial Accounting and Management
Accounting is responsible for all the internal matters occurring in an organization.

What is Management Accounting?

Management Accounting, also referred to as Cost Accounting or Managerial Accounting can be defined
as the process of analyzing the cost of business and operations in-order to prepare an internal financial
report, records and account to aid managers’ decision-making process to attain business goals. In
simpler words, it can be referred to as the act of putting together, financial and costing data, in-order to
obtain useful information for the management and officers from it. The job of the Management
Accountants is to look at the events that happen within a business while observing the needs of the
business. Using this, they come up with data and estimates. Management Accounting helps shape these
estimates and data knowledge in a way that come in handy for future decision making.

A number of different Management Accounting systems are used in this organization but the top three
which have proved to be the most effective are:

1. Cost Accounting System:

It is a framework that is used to estimate the product cost for analysis on profit, valuation of inventory
and cost control. This has proved to be vital for the department as profitable operations can only be
carried out within a firm if accurate and exact cost of their products is known. This way, it becomes
easier to distinct between the profitable and non-profitable products in the inventory. Things that are
required for the Cost Accounting System are the analysis of:

 profitability of individual products, jobs or services.

 profitability of different departments and
 cost behavior of various items of expenditure in the organization.

2. Inventory Management System:

It is the process of intelligently overseeing the maintenance and monitoring of stocked products using
technology. These stocked products can be the assets of the company, raw materials, or they can be the
finalized products that have been made shipping ready to be shipped to the vendor or end user. To
comply with this system, required things are:

 A barcode scanner to produce labels and tags on the items when they are being inventoried
 Mobile apps that can read and process barcode tags using the cell phone’s camera
 A software that serves as a central database, policies for labelling, documentation and reporting
like Just in Time, ABC Analysis and;
 Most importantly trained staff members who follow these policies and procedures

3. Price Optimization System:

It is referred to as ‘Maximizing price against the customers willingness to pay’. Finding that perfect
sweet spot for the pricing is what Price Optimization System is all about where an item is not priced too
high that it may not sell or the price is not reduced to a point where the company struggles to make any
profitable gains. Price optimization formula is used based on the overall demand of the product and
competitors in that area. This is referred to as a never-ending task as the relative values of goods
required keep on changing constantly. It requires:

 Historical data
 Profit volumes
 Prices and the amount of money company spends on promotions
 Competitor’s price
 Economic as well as seasonal condition of the said time period
 Variable and fixed cost details, and lastly
 The availability of the product.

Role and function of these Management Accounting systems and how it is integrated
As financial accounting focuses on the external affairs, management accounting provides quantitative
and qualitative on operational and financial performance. Tax dept makes sure that the tax laws are
being followed and the company is paying not a penny more than it is obliged to pay. It works to bring
all this information together as an integral part of the evaluating, planning and controlling & decision-
making activities that are taking place on day to day basis in an organization.

The sole benefit of Management Accounting is to the owner, managers and the investors of the
company as it assists them greatly in making decisions in a way that ensure profit maximization. As
financial accounting compiles the annual transaction in a way that is accessible to the public whereas
Management Accounting is specifically used to produce information for the decision makers within. It is
the Management Accounting that makes it possible to forecast the company’s future and to look into
decisions which guarantee maximized profit for the upcoming years.

Importance of presenting Financial Information using Management Accounting

Management Accounting has way too many benefits as it helps greatly in carving the future of the
company. As financial accounting deals with numbers, and everybody cannot manipulate that
information as not everybody has a commerce background, Management Accounting bridges that gap
as it portrays all the financial information in a simpler, understandable and easier to point out manner
for the decision makers. As this company has 8 main investors. Management Accounting helps them in
understanding financial data and identifies the business problem areas. The main purpose of it is to aid
in decision making process as it uses techniques from all fields like, economics, costing, stats etc. It
provides charts, tables, forecasts and various such analysis that makes the Decision-Making process a
smooth sail which is way more justified.
Importance of Management Accounting in our organization
One of the leading benefits is that Managerial accounting doesn’t have any strict rules, formulas or
timelines so it is easier for everybody to practice and to understand. Unlike the audit sessions for
financial accounting which takes place in a year or after 6 months, it is a continuous and an ongoing
process which can be molded and adapted to as per the needs at that specific time period. As during the
past year, there was a dip in the sale in northern region. Using data from Management accounting,
some extra effort was put into that region and it was brought equivalent to the leading sectors.
Moreover, there were a couple of products in inventory on which, the shipping charges incurring were
greater than other products even though they were not amongst the hottest selling products. Inventory
management system helped identify those products, sold the surplus which were in stock and advised
logistics to make one big trip in 6 months rather than making several small trips in-order to acquire
them. As funds-draining sectors were pointed out in the very initial stages it was easy to take control
over it.

As this company is in the retail business and it uses M.A to forecast inventory needs, keep a track of
profit margin and make future decisions based on financial information. It helps track the inventory cost
and review vendors to determine if cheaper inventory is available. ‘First in first out or last in first out‘ is
used when calculating inventory cost.