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Contents
Introduction ..................................................................................................................................... 2

The report ........................................................................................................................................ 3

1.0 Essential requirements of management accounting systems............................................ 3

2.0 Management accounting systems ..................................................................................... 7

3.0 Benefits of Management Accounting Systems & their applications ............................... 9

4.0 Different methods used for management accounting reporting ..................................... 11

5.0 Calculating costs of variable costing and absorption costing ........................................ 13

6.0 Producing income statements and interpreting data ....................................................... 14

Conclusion .................................................................................................................................... 17

References ..................................................................................................................................... 18
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Introduction
Recently, management accounting has affirmed an important role in economic organizations in
general and in production and business enterprises in particular. Management accounting is an
effective and useful tool for managers at companies (Suong, 2018). Management accounting uses
activity-based costing to decide what to produce, how much to spend on a product, how much it
will cost to service a customer, and what customers and products are profitable.

This report is written with aim that create an understanding of Management Accounting systems.
It also discusses the uses of various planning tools used for budgetary control as a measure of
enterprise performance appraisal that will help understand the application of a range of
management accounting techniques in preparing and forecasting budgets.

Report requires pointing out the Principles of governance accounting for a group of line managers
to promote understanding among different parts of the company. The report includes a critical
summary of management accounting with requirements of explaining management accounting and
identify the essential elements of different types of management accounting systems. It includes
the definition, purpose, role, principles of management accounting and the distinction between
Management and Financial accounting. The second requirement is evaluating the benefits of
management accounting systems and their application within the company. Next, explaining
different types of management accounting reports with examples. Critically evaluate how
management accounting reporting is integrated within the company processes. Finally, calculating
costs using appropriate techniques of marginal and absorption costing, producing the income
statements prepared under both marginal and absorption costing principles.
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The report
1.0 Essential requirements of management accounting systems
1.1 Definition

Management accounting, also called managerial accounting, is the process of identifying,

measuring, accumulating, analyzing, preparing, interpreting and communicating information
about economic activity within organizations (Trong, 2018). It for use by managers in planning,
performance evaluation, and operational control (Karmakar, 2018). Management accounting helps
the business managers in the formulation of policies, decision-making process and in the day-to-
day operations of the enterprise. Management accounting generates monthly or weekly reports for
an organization's internal audiences such as department managers and the chief executive officer.
(Kenton, 2019)

1.2 Purpose

Primary purpose of management accounting is to supply accounting information for use within an
entity but that information may also be of interest to external parties such as banks, credit rating
agencies and the government. (Dyson, 2010)
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1.3 Roles

Planning

Planning is preparation for the achievement of the objectives in advance. Planning is done with
the goal of achieving the organization's short-term as well as long-term goals (Sherman, 2018).
Therefore, management accounting helps in forecasting the budgets so that estimations for the
expenses and incomes can be done in advances and through this management accounting systems
helps in analyzing the relevant information so that goals of the organization can be achieved.

Organizing

Organizing refers to the proper organization of people in the organization. Therefore, a proper
framework can be established and roles and responsibilities of each department can be assigned.
Management accounting helps to make decisions that involve assigning roles and responsibilities
to be able to maintain an appropriate job hierarchy within the organization (Thompson, 2013). In
management accounting system, organizing also plays a very major role in measuring the
performance of the people of management so that operations of the organization can be adjusted
in proper ways.

Controlling

Controlling is the process of measuring actual performance and then comparing it to the estimated
performance to be able to establish control in organizations so that the overall performance of the
organization can be improved (Fontinelle, 2017). This could be done through management
accounting and management accounting system. Management accounting helps in providing
relevant information to the organization so that measurement of performance can be done properly
and management accounting system helps in defining the information which is relevant for this
purpose.

Decision making

The main role of management accounting and management accounting system is providing
effective decision making to the organization so management accounting helps the management
to take better decisions for the organization. (Novas, 2016)
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1.4 Principles

Influence

Communication provides insight that is influential. The role of management accounting begins as
well as ends with communication. The utilization of management accounting is depending upon
how well the information has been communicate (Butt, 2017). Hence, the major principle of
management accounting is communication because the influence of management is depending
upon the communication and better communication leads to good decision making. So, it is very
necessary for every organization to focus on communication of management accounting
information in proper way so that it can influence the management.

Relevance

Information is relevant. Management accounting can lead to better decision making when the
information provided to the management is relevant. Management accounting includes all type of
information that is related to the organization whether they are financial or not, whether they are
relating to the social and cultural issues of the organization (David, 2015). In other words, all the
information that are related to the organization and can affect the decision making must be included
in the management accounting as all these information are relevant for the organization.

Analysis

This principle is also known as value. Impact on value is analyzed. Management accounting helps
the management to analysis the provided information properly so that management can evolve
better decision making for the organization (Bramwell, 2014). So, right analysis is very necessary
for every organization because analysis of the management accounting information reflects the
decision making of the organization. Management should analysis the information properly so that
they can understand the environment of the organization and can take better decisions.
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Trust

Stewardship build trust. This principle focuses on the working of management accountants that
these persons must be ethical and accountable to the organization (Bramwell, 2014). Management
accountants must be trust worthy person that they should analysis the management accounting
information in right ways so that they can take effective decisions for the organization.
Management accountants must consider the trust of stakeholders and also they should be
responsible for betterment of the organization through better decision making. They should fulfill
all their responsibilities so that this could have a positive impact on the growth of the organization.

1.5 The distinction between Management and Financial accounting

Management Accounting Financial Accounting

1. Users Internal persons who plan for and External persons who make
control an organization financial decisions (shareholders,
(managers). investors and regulators).
2. Time focus Future emphasis. Historical perspective.
3. Verifiability Emphasis on relevance for Emphasis on verifiability.
versus planning and controlling.
relevance
4. Precision Emphasis on timeliness. Emphasis on precision.
versus
timeline
5. Subject Focus on segments of an Primary focus is on the whole
organization. organization.
6. GAAP Need not follow GAAP or any Must follow GAAP and prescribed
prescribed format. format.
7. Requirement Not Mandatory. Mandatory for external reposts.
(Ivan, 2018)
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2.0 Management accounting systems

2.1 Definition

Management Accounting System is the system for planning, controlling, and accounting for the
acquisition, use, issuing, and disposition of material (Woodruff, 2018). It may be manual or
automated. It may be stand-alone system or integrated with planning, estimating, engineering,
purchasing, inventory, accounting or other system. (Surum, 2019)

2.2 Types of management accounting systems

Job costing system

This is a system to assign manufacturing cost to each individual product while keeping track on
expense monitoring (Saleem, 2018). Companies can use this system when the products are
identical to keep track of order expenses. Job costing accounting procedure include:

- Receiving enquiry: The customer is concerned 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 keeping in mind
customers tastes and preferences.
- Order receiving: The order will be placed if the customer is assured of the price.
- Production order: The production order is placed for beginning the production process.
- Cost recording: Every aspect of the cost in the production process is recorded.
- Completion of job: On completion, a report is given to accounts department for final
costing of the job. The comparison is made with reference to estimated cost.

Price optimizing system

Price optimizing system is used to take control of the prices of resources. Price optimizing system
can be used in deciding the prices of the multiple products at a time. The system helps in
determining how demand will fluctuate at different price levels. Companies can use this system
for tailoring the prices for customer segments by simulating their responses to different price
levels. (Woodruff, 2018)
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Cost accounting system

The system helps the organization to estimate the cost of the product while analysis can be made
of organizational profitability, inventory and cost control (Surum, 2019). The two basic cost
accounting systems are job order costing and process costing. The two essentials for good cost
accounting system are:

- Cooperation and participation of executives required by various departments: This will

ensure appropriate cooperation and participation in the building process of cost
accounting system which can help the management in correct ascertainment of the cost
of products.
- Flexible and simple: The cost accounting system developed should be flexible and easy
to understand and execute. It should also meet the requirements of various users and
adapt according to company’s requirement.

Inventory management system

This type of management accounting system is concerned with supervision and management of
stock and non-capitalized assets of the enterprise (Saleem, 2018). Organizational processes can be
integrated with this type of system to achieve efficient and effective flow of inventory within the
organization and at the point of sale. Two essentials are:

- Forecasting and replenishing strategies: This helps the organization in advance

management and planning of cost requirements of the company.
- Management of inventory both physically and monetarily: Various benefits like cost
reduction and appropriate inventory management is achieved with this.
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3.0 Benefits of Management Accounting Systems & their applications

Management accounting does not usually follow any national accounting standards. Business
owners can design management accounting systems according to their company’s business
operations or management’s need for business information. Management accounting has several
advantages (Gartenstein, smallbusiness, 2018). These advantages usually coincide with the ability
for companies to improve operations and overall profitability. Business owners can also create a
competitive advantage by developing cost allocation processes in their management accounting
function.

Reduce Expenses

Management accounting can help companies lower their operational expenses. Business owners
often use management accounting information to review the cost of economic resources and other
business operations. This information allows owners to better understand how much money it costs
to run the business. Business owners can also use management accounting to conduct an analysis
on the quality of economic resources used to produce goods or services. If overall product quality
would not suffer by using a cheaper raw material, business owners can make this change to reduce
production costs. (Gartenstein, smallbusiness, 2018)

Improve Cash Flow

Budgets are a major part of management accounting. Business owners often use budgets so they
have a financial road map for future business expenditures. Many budgets are based on a
company's historical financial information. Management accountants will comb through this
information and create a master budget for the entire company. Larger business organizations may
use several smaller budgets for divisions or departments. These individual budgets usually roll up
into the company's overall master budget. The main purpose of budgets is to save the company
money through careful analysis of necessary and unnecessary cash expenditures. (Hutcherson,
2018)
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Business Decisions

Management accounting often improves the business owner’s decision-making process. Rather
than making business decisions based solely on qualitative analysis, business owners or managers
can use management accounting information as a decision-making tool. Management accounting
usually provides a quantitative analysis for various decision opportunities. Business owners can
review each opportunity through the prism of quantitative analysis to assure they have a clear
understanding relating to business decisions. (Karmakar, yourarticlelibrary, 2017)

Increase Financial Returns

Business owners can also use management accounting to increase their company’s financial
returns. Management accountants can prepare financial forecasts relating to consumer demand,
potential sales or the effects of consumer price changes in the economic marketplace. Business
owners will often use this information to ensure they can produce enough goods or services to
meet consumer demand at current prices. Companies also pay close attention to the amount of
competition in the economic marketplace. Competition can reduce the company’s financial returns
from business operations. (Hutcherson, 2018)
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4.0 Different methods used for management accounting reporting

Managerial accounting reports help small business owners and managers monitor the company's
performance and are prepared frequently throughout accounting periods as needed (Smith, 2017).
The various management accounting reports help management prepare appropriate management
reports which based on their forecasts to make important business decisions. Managerial reporting
includes any collection of data that provide managers with accurate and reliable financial and
statistical information. Depending on the type of project and the time sensitivity of the information,
an owner or manager may request reports quarterly, monthly, weekly or even daily (Sullivan,
2018). The various reports are prepared by management and their benefits are discussed below:

Budgeting reports

With many types of management accounting reports being used, the budget is a report that is of
utmost importance. Budget reports help small business owners analyze business performance and
managers analyze their department's performance and control costs. The estimated budget for the
period is usually based on the actual expenses from prior years to help make changes for the
purpose of future predictions (Seidel, 2018). Managerial accounting reports related to budgeting
can guide managers to offer better employee incentives which motivate them to achieve desired
objectives, cut costs and renegotiate terms with vendors and suppliers (Gartenstein, 2017).
Forecasting future budget based on these reports helps the organization to integrate the efforts of
various departments towards overall objective of the company. Therefore, a budget report is
critical to any business.

Accounts receivable aging report

This type of report is crucial for any business that offers credit to consumers (Hood, 2017). Proper
segregations of invoices are made for the customer’s balances about how long they have been
owed. It points out the problems associated with company’s collection process. If a significant
number of customers are unable to pay their balances, you may need to tighten its credit policies
(Sullivan, 2018). This ensures reducing old bad debts and maintaining liquidity of the company.
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Job cost reports

Job costs reports are concerned with identifying cost, expenses, and profitability of each particular
job. This report helps leaders evaluate the profitability of specific types of jobs and optimize their
operations by focusing on the jobs that are typically the most profitable overall (Hood, 2017). ob
cost reports are also used to analyze expenses while the project is in progress so you can correct
areas of waste before costs spiral out of control.

Inventory and manufacturing reports

Small businesses maintain a physical inventory or produces products can use managerial
accounting reports to make the manufacturing processes more efficient (Sullivan, 2018). These
reports generally include items such as inventory waste, hourly labor costs or per-unit overhead
costs. Companies can then compare different assembly lines within their business to highlight
areas for improvement or to offer bonuses to the best-performing departments.

Performance reports

Performance reports are created to review the performance of a company as a whole as well as for
each employee at the end of a term (Miley, 2018). Managers use these performance reports to
make key strategic decisions about the future of the organization. Individuals are often awarded
for their commitment to the organization and under performers are laid off or dealt with as required
(Smith, 2017). Performance reports are generally prepared yearly however they can be prepared
monthly or quarterly too.

Order information report

Order information reports, project reports, competitor’s analysis and many other similar reports
are vital to every business (Sullivan, 2018). It helps management to see the trends in their business
efficiently and effectively. Various types of reports prepared in this type of reporting help
integrating management operations to achieve low cost on placing of orders and their management.

A business situation or opportunity reports

Reports prepared to manage can be aware of the occurrence of a specific event. The preparation
of the situation is well drafted or an opportunity is provided to help management make important
business decisions regarding events and their understanding. (Gartenstein, 2017)
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5.0 Calculating costs of variable costing and absorption costing

Workings

Working 1: The profit for the month if sales were as follows:

a) 10,000 units
Sales = 10,000 x 27 = 270,000 $
Closing stock = [(20,000-10,000)/20,000] x 256,976 = 128,488 $
b) 15,000 units
Sales = 15,000 x 27 = 405,000 $
Closing stock = [(20,000 - 15,000)/20,000] x 331,976 = 82,994 $
c) 20,000 units
Sales = 20,000 x 27 = 540,000 $
Closing stock = [(20,000 - 20,000)/20,000] x 406,976 = 0 $

Working 2:
a) Closing stock = [(20,000 - 10,000)/20,000] x 150,000 = 75,000 $
b) Closing stock = [(20,000 - 15,000)/20,000] x 225,000 = 56,250 $
c) Closing stock = [(20,000 - 20,000)/20,000] x 300,000 = 0 $

Working 3:
Mortgage interest = 100,000 x (10/100) = 10,000 $
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6.0 Producing income statements and interpreting data

INCOME STATEMENT USING ABSORPTION COSTING

'Al drone' as at the beginning of January 2018

$ $ $
10,000 units 15,000 units 20,000 units
Sales 270,000 405,000 540,000
Direct materials 40,000 60,000 80,000
Direct labour 50,000 75,000 100,000
VMOH* 30,000 45,000 60,000
VSDOH* 20,000 30,000 40,000
VAOH* 10,000 15,000 20,000
Variable costs 150,000 225,000 300,000
FMOH* 60,174 60,174 60,174
FS&DE* 26,744 26,744 26,744
FADE* 20,058 20,058 20,058
Fixed costs 106,976 106,976 106,976
Total variable costs 256,976 331,976 406,976
Closing stock (128,488) (82,994) -
COGS* 128,488 (128,488) 248,982 (248,982) 406,976 (406,976)
CM* 141,512 156,018 133,024
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INCOME STATEMENT USING MARGINAL COSTING

'Al drone' as at the beginning of January 2018
$ $ $
10,000 units 15,000 units 20,000 units
Sales 270,000 405,000 540,000
Direct materials 40,000 60,000 80,000
Direct materials 50,000 75,000 100,000
VMOH* 30,000 45,000 60,000
VSDOH* 20,000 30,000 40,000
VAOH* 10,000 15,000 20,000
Variable costs 150,000 225,000 300,000
Closing stock (75,000) (56,250) -
COGS* 75,000 (75,000) 168,750 (168,750) 300,000 (300,000)
CM* 195,000 236,250 240,000
FMOH* 60,174 60,174 60,174
FS&DE* 26,744 26,744 26,744
FADE* 20,058 20,058 20,058
Fixed costs 106,976 (106,976) 106,976 (106,976) 106,976 (106,976)
OI* 88,024 129,274 133,024
Less:
Depreciation 8,000 8,000 8,000
Mortgage interest 10,000 10,000 10,000
Bad debt provision 3,000 3,000 3,000

Bad debt 2,500 2,500 2,500

23,500 (23,500) 23,500 (23,500) 23,500 (23,500)
Net income 64,524 105,774 109,524
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Note (*)

VMOH = Variable Manufacturing Overheads

VSDOH = Variable Selling & Distribution Overheads

VAOH = Variable Administrative Overheads

FMOH = Fixed Manufacturing Overheads

FS&DE = Fixed Selling and Distribution Expenses

FADE = Fixed Administrative Expenses

COGS = Cost of Good Sold

CM = Contribution Margin

OI = Operating Income
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Conclusion
It can be included from the above report that report explained the management accounting and
identified the essential elements of different types of management accounting systems. It includes
the definition, purpose, role, principles of management accounting and the distinction between
Management and Financial accounting. It also evaluated the benefits of management accounting
systems and their application within the company, explained different types of management
accounting reports with examples. It also critically evaluated how management accounting
reporting is integrated within the company processes. Finally, it calculated costs using appropriate
techniques of marginal and absorption costing, produced the income statements prepared under
both marginal and absorption costing principles.
 P a g e | 18

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