Unit: 05

Management accounting

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Contents
Introduction......................................................................................................................................3

Task 1...............................................................................................................................................4

1.0 Management Accounting Systems (P1, M1, and D1)...............................................................4

Types of management accounting systems......................................................................................7

Benefits of Management Accounting Systems to Crest Dairy......................................................12

Management Accounting Reporting Techniques..........................................................................14

Integration of management accounting systems and management accounting reporting within

organizational processes................................................................................................................17

Cost calculations and preparation of income statement (P3).........................................................19

2.1 Application of management accounting techniques: Variances and BEP (M2)......................23

3.0 Explanation of the advantages and disadvantages of different types of planning tools used for
budgetary control (P4)...................................................................................................................24

3.1 Analysis of the use of planning tools and their application for preparing and forecasting
budgets (M3)..................................................................................................................................27

4.0 An evaluation of how organizations are adapting management accounting systems to respond
to financial problems (P5).............................................................................................................29

4.1 An analyze how, in responding to financial problems, management accounting can lead
organizations to sustainable success (M4).....................................................................................31

4.2 An evaluation of how the use of management accounting planning tools can solve financial
problems to lead organizations to sustainable success (D3)..........................................................32

Conclusion.....................................................................................................................................33

References......................................................................................................................................34

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 Introduction

Management accounting is the process of evaluating a situation and proving the necessary
information for those situations. In this report, result evaluation will be based on the present
situations of the organizations as management accounting is a part of the bookkeeping section.
Essential management accounting reports are discussed in this report and their techniques and
purposes also. Moreover, how organizations are adopting management accounting to solve
financial problems are briefly explained in this report.

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 Task 1

1.0 Management Accounting Systems (P1, M1, and D1)

Management accounting is a process of analysis, interpretation, identification, and presentation

of financial information that is obtained by financial accounting and cost
accounting[ CITATION Gaz06 \l 1033 ]. Management accounting helps an organization
manager in the formation of policies and decision making and in business activities.

Purpose of management accounting

Measurement of performance – It helps a company to measure employee performances and

efficiency. This process includes a comparison of real performance and predetermined
performance and this helps to find the deviations and from that companies can take some
preventive measures.

Assessment of risk – Another purpose of management accounting is that it identifies and

evaluates the risk factors in the organization[ CITATION Mar15 \l 1033 ].

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Allocation of resources – Companies have become able to attain efficient and productive
application of resources with the help of appropriate allocation of resources to the different
departments in the company. This helps the organization to achieve the goal of the organization
and made some efforts for long-term sustainability.

Financial statement presentation – Management accounting provides an appropriate

presentation of the financial position of the companies and it is done by management accounting
information and data. Different cost information and financial data make it simple for the
organizations in the presentation of good and quality financial reports that help the organization
in decision making.

Management accounting systems: Managerial accounting consider an organization's financial

data and information and prepare reports for internal management for making decisions and
recognizing a path for running the organization more efficiently. These processes information
and reports are based on an organization's informational needs and that includes budgeting,
breakeven charts, etc.

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Purpose of management accounting systems
There are many purposes of management accounting systems but the prime one is to help the
management to improve the decision making of the organization. This process helps the
managerial team with financial data for operating business activities more productively. There
are some other purposes of management accounting systems like it helps the management in
planning and controlling business operations and they also help in organizing the business
activities and they assist in understanding financial data and they allow to identify business
problem areas and in making strategic management.

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Types of management accounting systems

Cost accounting systems: In this type of accounting system, production activities are recorded
by the manufacturers using a perpetual inventory system [ CITATION Coh11 \l 1033 ]. Another
way, the cost accounting system is designed for manufacturers for tracking the movement of
inventory continuously. There are several purposes of this system and those are discussed below-

 This system will build appropriate cooperation and participation in the organization and this
will help them to correctly ascertain the cost of the product.
 The cost accounting system is very flexible and easy to understand and executable and it also
meets the necessities of the users and adapts according to an organization's requirement.

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Inventory Management Systems: Inventory management system is all about specifying the
shape and placement of supplied goods. It will be required in various locations in a facility or in
many locations of a supply network to check regularly and planned production and stock of
materials. There are several purposes of this system and those are discussed below-

 This system helps an organization to forecast the future requirements and to replenish their
strategies.
 Different types of benefits like reduction in cost and proper inventory management are
achieved with this system.

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Job Costing Systems: Job costing system is assigned the expenditure of a particular job that the
management or the organization are involved with. This system is vastly used in the construction
industry and it identifies the costs of individual construction projects at an organization. There
are several purposes of this system and those are discussed below-

The Job costing system is completed by the accountant keeping in mind the customer's tastes and
preferences.

The order of the product will be placed if the customer is assured of the price.

The production order is placed for beginning the production process.

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Price-optimization Systems: Price optimization is the process of identifying that pricing sweet
spot or maximizing price against the willingness to pay off a customer. Companies up and down
in the supply chain, both in B2B and B2C system, appropriately bestow a huge amount of time in
price optimization to ensure that products will be sold easily and they will make a profit.

This system will help an organization in determining pricing structures for promotional and
initial and discount pricing.

Price optimizing system thinks about factors such as product life cycle, category goals, and
competitor's pricing strategies while deciding the price of a product.

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Benefits of Management Accounting Systems to Crest Dairy

There are various benefits of Management Accounting Systems to Crest Dairy and those are
explained below-

Job costing system

 It will help Crest Dairy in the determination of all types of costs.

 It will prevent a repetition of work activities.
 It will help in the evaluation of the quality work.

Price optimizing system

 Crest Dairy can determine the attitudes of customers based on different prices of their
products.
 It will help Crest Dairy to maximize operating profit.
 It will help Crest Dairy to segment the customers.

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Cost accounting system

 Crest Dairy can determine efficiency in processes and help in making improvements.
 It will help Crest Dairy to fix and reduce the prices.
 It will provide Crest Dairy essential information for making plans.

Inventory management system

 Crest Dairy can maintain the exactness of its inventory orders.

 It will help Crest Dairy to improve efficiency and effectiveness and will help in saving time.

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Management Accounting Reporting Techniques

There are different kinds of management accounting reporting techniques that help an
organization to prepare appropriate management reports which assist in their determination of
making critical business decisions. Different kinds of management accounting reporting
techniques are discussed below-

Budgeting Reports – Budgeting reports make a plan to examine an organization’s performance

by making evaluations of the department’s performance and expenditure. In the preparation of a
budget, real cost occurred in the past are utilized. This report used to provide encouragement to
employees so that they can be motivated to achieve the goal of the organization.

Accounts receivable aging report – This type of report is worried about managing account
receivables in the companies who do business in credit. Proper data and information are made on
this report about the customer's whole credit and the due time. It gives an assessment of the errs
of the organization's collection process. Here an analysis of the credit policy can also be made
and can give suggestions about the necessity to tighten the credit policy. This will help the
organization to minimize the bad debts and maintaining liquidity in the organization.

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Job cost reports – Job cost reports are worked in the aspects of identifying cost, expenses, and
profitability of a particular job. An evaluation can be made on all projects about their earning
capability and with this, every organization will be able to know which project is best for them
and they will give focuses on the most profitable project and reduce efforts on the less profitable
projects. In this reports cost are also evaluated and by this an organization can identify their
wastage areas and can make the project more profitable and workable by reducing those
wastages.

Inventory and manufacturing reports – To make manufacturing and inventory processes more
productive, organizations that involved in manufacturing processes use this type of report. In this
report items like labor cost, per unit overhead cost and wastages are included and this helps the
management to make a comparison between diverse assembly lines and to find the chances of
improvement.

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Integration of management accounting systems and management accounting
reporting within organizational processes.

Management accounting is one of the most essential tools to be used by many manufacturing
organizations. The crucial principles of management accounting are the encouragement which is
made by communication. An appropriate flow of information can be made across the
organization by communication. That information is used in all the departments in the
organization. For example, the operational department used the information to produce products.
The marketing departments can use this information to minimize their expenditure. In the context
of Dairy Crest, information’s provided by management accounting will be appropriately related
to the context.

So, earlier it was said that information will be provided that is totally connected with the
performance of an organization. If the relative information is not found then it can hamper the
performance of an organization. Management accounting does provide relative information’s and
that is completely connected with the context of decision making. In this way, management
accounting systems and reporting methods can be integrated within context Dairy Crest
operational processes. In all the decision-making parts, management accounting will add extra
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value to every activity. If the information is used appropriately the proper decision can be taken
and this additional value. In this way, management accounting systems and reporting are
integrated with organizations like Dairy Crest.

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Cost calculations and preparation of income statement (P3)

Marginal costing method: Marginal cost is an extra cost that is encompassed by producing one
extra unit. To make strategic decisions, management accounting is used by all organizations.
Marginal costing is a portion of management accounting. It is necessary to explain marginal
costing as it is essential to analyze and calculate the extra cost of producing an extra
unit[ CITATION Klo09 \l 1033 ].

Principles of marginal costing method:

 The sale of an additional unit of product results in the below way-

o Total revenue and cost will increase.
o In fixed costs, there will be no change.
o Profit will enhance by the quantity of contribution per unit.
 In the case of a reduction in sales, profit will reduce by the amount of contribution.

Absorption costing method: The total manufacturing cost for the unit that is produced is the
absorption costing method[CITATION AnI11 \l 1033 ]. It is used for both analyses of
manufacturing expenses and in the calculation of the cost of materials and labors.
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Principles of absorption costing method:

 Used in financial reporting.

 All types of manufacturing costs are included.
 Some costs are not affected by-products and it can be misleading.
 Fixed manufacturing overhead costs are applied to units produced and units sold.
 An income statement shows that: sales – the cost of goods sold = gross margin – operating
expenses = net income

Marginal costing:

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Absorption costing:

Income Statement: Marginal Costing Method

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Income Statement: Absorption Costing Method

Analysis of the profits

In the marginal costing method, the profit is £310000 but in Absorption Costing Method the
profit is £126000. So, in the marginal costing method, the profit is high.

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2.1 Application of management accounting techniques: Variances and BEP
(M2)

Material Price Variance: Material Price Variance is the variance between standard price and
actual price for actual quantity of materials used in production.

Material price variance formula- MPV = (Standard Price – Actual Price) x Actual Quantity

Material Usage Variance: Material Usage Variance is the variance between standard quantity
specified for actual production and actual quantity used at the standard purchase price.

Material usage variance formula- MUV = (Standard Quantity – Actual Quantity) x Standard
Price

Labour Rate Variance: The labor rate variance measures the variance between actual and
expected cost of labor.

The formula is: (Actual rate - Standard rate) x Actual hours worked = Labor rate variance

Labour Efficiency Variance: The labor efficiency variance measures the ability to utilize labor
in accordance with expectations.

The formula is: (Actual hours - Standard hours) x Standard rate = Labor efficiency variance

BEP in units: A business’s break-even point is a stage where revenues equal costs.

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3.0 Explanation of the advantages and disadvantages of different types of
planning tools used for budgetary control (P4)

Budgetary control is a process and used to safeguard that an organization's real revenues and
costs are very close to their financial plans.in this system, setting personal goals of managers ae
involved and those goals are based on their budget and set some rewards that motivate them to
be goal-oriented[CITATION Osc13 \l 1033 ].

Advantages of budgets:

 It makes coordination of business activities across departments.

 Budgets implement the strategic plan into real action.
 A good record of organizational activities can be known from the budgets.
 Communication among employees increased for the budgets.
 Appropriate resource allocation can be ensued by budgets.

Disadvantages of budgets

 In applying mechanically and rigidly., budgets face some problems.

 For lack of participation of the employees, budgets can demotivate them.
 It can create an insight into injustice.
 It can create competition for resources among different departments.

Advantages of SWOT Analysis

 This analysis gives information about strategic planning.

 It builds an organization’s strengths.
 With this analysis, weaknesses can be reversed.
 It can maximize an organization's opportunity.
 With the help of this analysis, threats can be overcome.
 It helps to identify major competencies for the organization.

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Disadvantages of SWOT Analysis

 Price increases for this process.

 Government legislation can be changed and it may create problems.
 The economy can be changed and that can create problems.
 It can face problems due to insufficient research and development facilities.
 Lack of skilled and efficient labor can make problems for this process.

Advantages of PESTEL

 It is a simple and easy-to-use framework.

 This involves various skills and expertise.
 It helps to minimize potential threats for an organization.
 It helps to encourage the development of strategic thinking.
 It helps to assess the consequences of entering into a new market.

Disadvantages of PESTEL

 An organization can generalize information that is used in decision-making.

 This process needs to be done on a regular basis and it may need many investments.
 For gathering too much information an organization can forget the objective of this tool.
 This technique's effectiveness can be reduced if an organization often restricts who is
involved and cost considerations.
 Because of the cost and time needed to organize it, access to external information is often
circumscribed.

Advantages of Balance Score Card

 It helps to make an integrated strategic plan.

 It ensured the transformation of strategy into action.
 It helps to expand processes.
 It provides an inclusive picture of business activities to the management.

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  It improves communication and understanding of strategic goals and plans at all
departments on the organization.

Disadvantages of Balance Score Card

 This term is misleading.

 In this term, no focus is given on external factors and competitors.
 Risk Analysis is not considered here.
 Lack of time measurement in this method.
 Good leadership is required to use this method.

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3.1 Analysis of the use of planning tools and their application for preparing
and forecasting budgets (M3).

Budget planning tools are used in the business organizations in various ways like managing,
planning and forecasting an organization's budget and those will be implemented and managed to
attain the goals of an organization[ CITATION Mil09 \l 1033 ].in this modern world,
organizations are taking advanced steps in planning their strategies and for this, they shift the use
of old-style budgeting tools towards cloud-based budgeting tools. There is various type of
planning tolls like SCORO and Prophix and these are discussed below with their application for
preparing and forecasting budgets-

SCORO– This panning tool helps the organization to combine different features of budgeting
with other tools to maintain the whole organization in one system and for the organization, it
provides an integrated plan as a whole[ CITATION Cap19 \l 1033 ]. The main characteristic of
this tool are discussed below-

 The core concept of this tool is to make planning and forecasting of budgets.
 In the evaluation of the target budgets and real performance, financial reports and
analysis help the organization.
 On the project budgets, there is no limit.
 Full automation in invoicing and professional services.
 For better forecasting and planning, this tool provides a mechanized revenue torrent from
invoices and helps the organization.

Prophix – To manage corporate performances, this tool is formed as a software

solution[ CITATION Sof19 \l 1033 ]. This means that in this tool, various smaller tools are
involved for the managers of resources available to the business and budget planning. The main
characteristic of this tool is discussed below-

 This tool helps the management in managing, planning, and forecasting.

 This tool helps to prepare appropriate financial, statutory and management reporting and
this helps in improved decision-making and performance evaluation.

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 In the planning of accurate cash flows, this tool helps the management and this ensures
the liquidity part of the company.

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4.0 An evaluation of how organizations are adapting management accounting
systems to respond to financial problems (P5)

Management accounting is a segment of bookkeeping and results from analysis and it is said
before and this process provides information to the management and an organization to rely and
focus on that. Every organization is making trust in the whole organization by making a
connection with the operations department and there is also the accounting and finance
department. In this way, management accounting can help to solve the financial problems. With
proper management, financial problems can be dealt with well and can prevent financial
problems.

Variance analysis

In every organization's application of the variance analysis may be very helpful to solve the
financial problems and also can prevent those. To find out the gaps between the standard and
normal form of the plan. Variance analysis can be very useful. Organizations have their own
budget and they use it to explain the ideas of finding the errors and solutions. For example, with
the help of variance analysis, the change between the standard budget and real costing can be
found. After knowing the differences, it can provide information about the reasons for the
difference. Financial problems can be easily solved by this way[ CITATION Bra19 \l 1033 ].

Key Performance Indicator

Financial and non-financial performance can be known by key performance indicators. The
financial performance is concerned about the organization to achieve more market share. There
are many financial key performance indicators for example expenditure, profit, and market share.
Every organization is trying to hold a noteworthy level of performance in these places. All the
organizations want to maximize the profit and minimize the cost. Both of these factor’s handling
will help the organization to solve the financial problems in the widespread situation.

Benchmarking

Benchmarking is one of the most useful ways to solve financial problems and assure financial
sustainability. In this method, the best practices of the organization are followed and

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implemented. Equal output can be gotten by the organization by following their best practices.
For example, an organization is benchmarking another organization's financial management
system and for this reason, their performance will be equal. But there are some problems like it
delays the continuous process development. Following this way, an organization cannot get its
ultimate development but if they understand and well places the benchmarking then it will be the
best method for an organization[ CITATION Ana03 \l 1033 ].

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4.1 An analyze how, in responding to financial problems, management
accounting can lead organizations to sustainable success (M4)

In responding to financial problems, the part of management accounting in the sustainable

success of an organization are discussed below-

 The strategic and sustainable goals need to be supported by the management and it will
be with strategies and good policies will be developed.
 In the integration of sustainable matters in the different decision-making processes,
management accounting tools and methods for example standard costing, marginal
costing, break-even analysis will help the organization.
 Management accounting will help the organization in the processing of reports and it
includes information about sustainability influences and this will help an organization to
understand the pricing of a product and to make budget decisions and to make strategic
planning.
 Management accounting will help the organization in the development of reporting
strategy and here the sustainability issues will be integrated and this will help the
organization to make a report about financial and non-financial information.

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4.2 An evaluation of how the use of management accounting planning tools
can solve financial problems to lead organizations to sustainable success (D3)

With the help of management accounting tools and techniques, different types of planning tools
help the management to identify the financial problems. To make strategic directions and taking
financial decisions, information collected from those planning tools helps the management and
also contributes to achieving the objective of the organization. They also help to take control and
implementation and in making investment decisions accordingly. The collected information and
financial data will help the management to make an external report which will ensure the
sustainable growth of the organization. If the management executes the planning tools then they
will have a noteworthy impact on its issues of sustainability. Management accounting contributes
at numerous levels of planning and strategic decisions and those are discussed below-

Planning and controlling – This is one of the important elements in management accounting
and an organization needs to make plans and set that in place to set a route for the organization
and control system to ensure that all the business activities are following the plan [ CITATION
Oeh09 \l 1033 ].

Implementing plans – With the use of management accounting methods, managers collect
different types of information like budgets, performance reports and expenditure on a daily basis
for implementing the plans that are prepared in budgeting. This helps the management of an
organization to distribute resources according to the requirements of different departments of the
organization.

Competitive edge – To create a competitive advantage of the company, well-managed

companies often focus on their strategies and objectives. For this reason, companies are making
strategies with the use of management accounting techniques to get a competitive advantage in
the market[ CITATION Hua15 \l 1033 ].

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 Conclusion

The organizational quality is getting amplified day by day. So, management accounting is a great
tool which is needed to be used for sustainable business. Tools of management accounting help
an organization to solve various types of problems. Management accounting is very crucial for
bringing efficiency and productivity in the organization. Cost reduction will be easy by using
management accounting techniques and this will help an organization to enhance the profit-
making ability. Moreover, management accounting helps every organization to solve financial
problems and get sustainable growth in the business.

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 References

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Journal, 10(3), pp. 257-291.

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Absorption Costing (EBAC). Journal of Applied Business Research (JABR), 25(6), pp. 99-102.

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Huang, K.-F., 2015. From Temporary Competitive Advantage to Sustainable Competitive

Advantage. British Journal of Management, 26(4), pp. 617-636.

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Markaryan, S., 2015. Purpose and Application Peculiarities of Management Accounting in

Insurance Companies. Mediterranean Journal of Social Sciences, 18(6), pp. 102-109.

Miller, G. J., 2009. Teaching Budget Tools. Public Administration Review, 69(6), pp. 1184-1186.

Oehlrich, M., 2009. Business Planning. Controlling, 21(12), pp. 673-676.

Oscar, M. J., 2013. Budgetary control. 1st ed. London: Hardpress Ltd.

Softwareconnect, 2019. Prophix | BI Tools | 2020 Software Reviews, Pricing, Demos. [Online]
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