Unit 05

Management
Accounting
Contents
LO1 Demonstrate an understanding of management accounting systems ................................................. 4
Define what a management accounting system is and then explain any three management accounting
systems used by your department, specifying their requirements .............................................................. 4
Role of different management accounting system in an organisation......................................................... 5
Benefits of managerial accounting ............................................................................................................... 6
LO2 Apply a range of management accounting techniques ......................................................................... 7
Costs calculations .......................................................................................................................................... 7
LO3 Explain the use of planning tools used in management accounting ..................................................... 9
Usage of different budgetary planning tools .............................................................................................. 12
LO4 Compare ways in which organisations could use management accounting to respond to financial
problems ..................................................................................................................................................... 12
P5. Organisations are adapting management accounting systems to respond to financial problems.. 12
M4. Management accounting in response to financial problems can lead organisation to sustainable
success. ....................................................................................................................................................... 14
D3.Various planning tools to resolve financial problems. .......................................................................... 15
LO1 Demonstrate an understanding of management accounting systems

Define what a management accounting system is and then explain any

three management accounting systems used by your department,
specifying their requirements
Managerial accounting (also known as cost accounting or management accounting) is a branch of
accounting that is concerned with the identification, measurement, analysis, and interpretation of
accounting information so that it can be used to help managers to make necessary decisions to
efficiently manage a company’s operations.

Types of managerial accounting

Cash Flow Analysis

Managerial accountants perform cash flow analysis in order to determine the cash impact of business
decisions. Most companies record their financial information on the accrual basis of accounting.
Although accrual accounting provides a more accurate picture of a company's true financial position, it
also makes it harder to see the true cash impact of a single financial transaction. A managerial
accountant may implement working capital management strategies in order to optimize cash flow and
ensure the company has enough liquid assets to cover short-term obligations.

When a managerial accountant performs cash flow analysis, he will consider the cash inflow or outflow
generated as a result of a specific business decision. For example, if a department manager is
considering purchasing a company vehicle, he may have the option to either buy the vehicle outright or
get a loan. A managerial accountant may run different scenarios by the department manager depicting
the cash outlay required to purchase outright upfront versus the cash outlay over time with a loan at
various interest rates.

Inventory Turnover Analysis

Inventory turnover is a calculation of how many times a company has sold and replaced inventory in a
given time period. Calculating inventory turnover can help businesses make better decisions on pricing,
manufacturing, marketing, and purchasing new inventory. A managerial accountant may identify
the carrying cost of inventory, which is the amount of expense a company incurs to store unsold items.
If the company is carrying an excessive amount of inventory, there could be efficiency improvements
made to reduce storage costs.

Constraint Analysis
Managerial accounting also involves reviewing the constraints within a production line or sales process.
Managerial accountants help determine where bottlenecks occur and calculate the impact of these
constraints on revenue, profit, and cash flow. Managers can then use this information to implement
changes and improve efficiencies in the production or sales process.

Financial Leverage Metrics

Financial leverage refers to a company's use of borrowed capital in order to acquire assets and increase
its return on investments. Through balance sheet analysis, managerial accountants can provide
management with the tools they need to study the company's debt and equity mix in order to put
leverage to its most optimal use. Performance measures such as return on equity, debt to equity,
and return on invested capital help management identify key information about borrowed capital,
prior to relaying these statistics to outside sources. It is important for management to review ratios and
statistics regularly to be able to appropriately answer questions from its board of directors, investors,
and creditors.

Role of different management accounting system in an organisation

Helping Forecast the Future:

Forecasting aids decision-making and answering questions, such as: Should the company invest in more
equipment? Should it diversify into different markets? Should it buy another company? Management
accounting helps in answering these critical questions and forecasting the future trends in business.

Helping in Make-or-buy Decisions:

Is it cheaper to procure materials or a product from a third party or manufacture them in-house? Cost
and production availability are the deciding factors in this choice. Through management accounting,
insights will be developed which will enable decision-making at both operational and strategic levels.

Forecasting Cash Flows:

Predicting cash flows and the impact of cash flow on the business is essential. How much cost will the
company incur in the future? Where will its revenues come from and will the revenues increase or
decrease in the future? Management accounting involves designing of budgets and trend charts, and
managers use this information to decide how to allocate money and resources to generate the
projected revenue growth.

Helping Understand Performance Variances:

Business performance discrepancies are variances between what was predicted and what is actually
achieved. Management accounting uses analytical techniques to help the management build on positive
variances and manage the negative ones.

Analyzing the Rate of Return:

Before embarking on a project that requires heavy investments, the company would need to analyze the
expected rate of return (ROR). If given two or more investment opportunities, how should the company
choose the most profitable one? In how many years would the company break even on a project? What
are the cash flows likely to be? These are all vital questions that can be answered through management
accounting.

Benefits of managerial accounting

Planning

A key focus of managerial accounting is planning for the future. Managerial accountants develop reports
that are more detailed than financial accountants. They can include information about specific products,
market reach and regional information. Based on the information obtained from reports such as
surveys, budgets or competitor analysis, managers can set objectives and outline how they will be
achieved.

Controlling

The information obtained from managerial accounting gives managers a greater sense of control over an
organization's success. Since the information provided in managerial accounting reports are only used
internally, they do not have to adhere to generally accepted accounting principles, or GAAP. Therefore,
managers can choose what areas of the company require additional investigation and which areas can
be examined later. During the controlling phase, managers examine quantitative and qualitative
feedback from managerial accounting and make additional decisions.

Decision-making

Management accounting also considers how certain decisions may affect a manager's behavior. A
manager makes long-term decisions that have a lasting impact, so managerial accounting is used to
develop plans and convey information with the goal of improving management decisions. Budgets are
an important aspect of managerial accounting, but they are not included in financial accounting because
of its focus on historical data. Therefore, managerial accounting has the advantage of providing a more
detailed analysis.

Problem-solving

Contrary to financial accounting, which focuses on historical reports, managerial accounting considers
actual performance and compares it to goals and future outlooks. This information is used to identify
issues that may arise in budgets or production changes and develop alternatives. Sometimes, the
accounting information that a company currently has may not be sufficient in solving a problem, so
managerial accounting gives managers the option of requesting additional information with limited time
constraints.

Goal Setting
Managerial accounting helps with goal setting by making the numbers transparent. Managers can
measure and note performance while setting goals and making adjustments to motivate employees with
the ultimate goal of driving revenue.

LO2 Apply a range of management accounting techniques

Costs calculations
Sales price variance Sales quantity variance

(Actual quantity sold × Actual sale price) (Actual quantity × standard price)

Actual quantity sold × Standard sale price) (Standard quality ×standard price)

1200×306 1200×300

1200×300 1000×3000

$7200 $60000

Material Variance

Material price variance Material quality variance

Actual quality used × actual price Actual quality× Standard price

22000 × 12 22000×9

22000×9 21000×9

$66000 $9000

Labor Variance

Labor rate variance Labor efficiency variance

Actual hours used × Actual rate Actual hours used × Standard rate

Actual hours used× Standard rate Budgeted hours allowed × Standard

rate

6800×15 6800×12
6800×12 7000×12

$20,400 2,400

Variable production overheads

Variable Production overhead rate variance Variable production O.H

efficiency variance

Actual hours worked× Actual rate Actual hours worked× Standard

rate

Actual hours worked× Standard rate Standard hours allowed ×

Standard rate

6800 ×4.85 6800 ×6

6800 ×6 7000 ×6

$7,820 $1,200

Fixed overhead Variance

Budgeted fixed overheads _ Actual fixed overheads

1500 _1800

3000

Budgeting reconciliation statement

Actual gross profit of the year

$ $
Sales 1200× $306 367200
Direct material 22000×12 264000
Direct labor 6800× $15 1020000
Variable production 33000
overhead
Fixed production 18000
overheads
Closing stock 200×240 48000
369000
Actual gross profit/loss 1800

Reconciliation Statement

$ $
Budgeted profit 1000×60 60,000
Sales volume variance 12,000F
Sales price variance 7,200F
Direct material variance 66,000A
Direct material usage 9000A
variance
Direct labor rate variance 20,400A
Direct labor efficiency 2400F
variance
Variable OH expenditure 7800F
variance
Variable OH efficiency 1200F
variance
Fixed OH expenditure 3,00OA
variance
Fixed OH volume variance 6,000F
Actual gross profit/loss 1800

LO3 Explain the use of planning tools used in management accounting

Advantages and disadvantages of different types of planning tools used by budgetary control

Budgetary Control

Advantages Disadvantages

Coordinates activities across departments. Major problem occurs when budgets are
 applied mechanically and rigidly

Translate strategic plans into action. Can demotivate employees because of lack of
participation. If the budgets are arbitrarily
They specify the resources, revenues, and
imposed top down, employees will not
activities required to carry out the strategic
understand the reason for budgeted
plan
expenditures, and will not be committed to
them

Provide an excellent record of organisational Can cause perceptions of unfairness

activities

Improves communication with employees Can create competition for resources and
politics

Improve resource allocation, because all A rigid budget structure reduces initiative and
requests are clarified and justified innovation at lower levels, making it impossible
to obtain money for new ideas

Provide a tool for corrective action through

reallocations

Cost volume profit analysis

Advantages Disadvantages

Ease of calculation, uses a set of standard Accuracy - it assumes all cost are fixed however
formulas, numbers can be changed to quickly there are mixed cost that changes with
determine changes in variables production
Planning - the breakeven point helps managers Assumes sales remains constant but demand
estimate future spending and how production for a product can change over time
will affect the objectives of the business.

Pricing - helps managers decide on the price for It only takes into account the period specified,
a product the highest and lowest price they can after this period the results may be unreliable
offer in relation to the competition

Budget preparation - estimates the volume of Separation of total cost into variable and fixed
sales to achieve profit targets. Managers can cost is parts is not easy to do.
prepare budgets based on the cost and
expected revenues at any point of production
level

Pricing Strategy

Advantages Disadvantages

Customer base pricing looks at what the target Management pricing, the product is priced at
customer is willing to pay for the product to what they believe it should cost and not what
determine the ideal price, this results in the customer is willing to pay, this will result in
increase sales the loss of sales

Cost based pricing allows management to know Cost base pricing may lead to products being
the gross margin and cost are covered priced competitively

Demand pricing allows management to Demand pricing can lead to loss in profits by not
optimise prices taking into account overall cost and the price
the customer is willing to pay
Penetration pricing - uses low prices to gain Penetration pricing low prices may not lead to a
market share and discourage competitors profit and customers may stop buying when
prices start to go up

Usage of different budgetary planning tools

Budgetary control helps in describing transparent picture of any business through proper use of
available techniques and tools that assists in preparation and formulating of future financial goals and
performance through proper analyses of past budgets. These tools help and control activities of
Capricorn Wealth Management Limited for making better plan in order to achieve results and financial
position for future periods of time by proper analysis of present as well as past budgets. There are
various types of planning tools for preparation and forecasting budgets such as Contingency planning,
Flexible budgets and forecasting tools. Here, Contingency planning is used for formulating different back
up plans, strategies and schedules to removes hurdles in daily performing operations and reduction of
unfavorable situations arise in the enterprise. Flexible budgets are used for preparation of different
budgets for operations that are variable in nature. Similarly, Forecasting tools are used to provide
proper guidance to the managers for estimating future need and requirement through analysing
financial statements, calculating the ratios the past financial information or available historical data. All
tools helps in describing planning tool for preparation and forecasting budgetary activities that helps in
making profitability and financial positions in competitive environment

LO4 Compare ways in which organisations could use management

accounting to respond to financial problems
P5. Organisations are adapting management accounting systems to respond to financial
problems.
Financial problems: Financial problems are the financial pressure which an organisation suffers to meet
its basic requirements. There are various financial issues or difficulties which directly affects the
profitability or operational efficiency of any organization. At the same time various strategies are
formulated to overcome those situations for efficient achievement of efficiency along with profits. The
Capricorn Wealth Management Limited makes various provisions to deal with its financial problems.
Some of its financial problems are as follows:

Problem of cash flow: Such a problem arises when an organisation does not have the required cash to
pay its liabilities. The main reasons for such problems are low profits or more losses. The Capricorn
Wealth management Limited faces such problem as more capital expenditure is done to promote its
brand as well as is not able to pay back their debt to creditors. Much expenditure is done by the
organization such as paying taxes to the governments, incentives and remuneration payment to the
employees and many more.

Risk management: A very important factor for sustaining in the competitive environment is
management of the uncertain risks involved in the performance of various organisational activities. All
organisations formulate various strategies to manage and eliminate the risks associated in the
operations. Risky situation leads to financial uncertainty or instability in performance management. The
Capricorn Wealth management Limited formulates various strategies and actions to manage the risk but
fails at some situations.

Money management: Money management is a technique of tracking, budgeting, spending and saving
the available monetary resources within the organisation. It helps in managing the available resources in
various different activities to achieve maximum profit. The Capricorn Wealth management Limited
formulates various provisions for efficiently management of the money in different departments in the
organization.

Working capital: Working capital is the money available with the organization to manage its day to day
operations to meet its financial liabilities. In the shortage of such capital, various problems are faced by
the organizations. In other words, it means excess of liabilities over assets. The Capricorn Wealth
management Limited may faces such short term debts problems of lack of working capital which affects
its daily operations.

Financial governance: Financial governance defines the ways an organisation collects, manages,
monitors and controls the financial information. Good financial governance helps in management of the
challenges as well as looking for the future. It is the responsibility of higher managers to control the
accuracy of the organizational financial statements.

Management accounting approach: Management accounting approaches defines the use of accounting
techniques which helps in resolving problems in an organization. Such approach provides appropriate
information to managers and employees for the efficient utilization of available organizational
resources. The Capricorn Wealth management Limited resolves its financial issues by using the
appropriate management approach. Description of various approaches is given below:

KPI: Key Performance Indicator is used to measure the performance of an organisation by comparing
with the other organizations for the purpose of effectively achieving their short term as well as long
term goals. Effective KPI leads to focus towards the business processes and functions. Management sees
such approach as most important tool for measuring progress for meeting strategic goals and
performance targets. KPI technique benefits an organisation to set and compare their standard in order
to measure the progress, goal and performance of organisation.

Benchmarking: Benchmarking is a technique used by an organisation to measure its performance with

its various competitors. The organisation makes comparison on the basis of same measure, strategy,
programmed as well as quality with different organisation to determine the requirements in changes or
improvement. Such approach is done to identify the opportunities for improvement as well as wants to
reduce or close the gap with the competitors along with monitoring the performance on daily basis. The
selected approach focuses on clearly defining, measuring and interpreting the individual as well as
organizational performances towards the objectives.

Basis of
Dell Management HP Limited
Difference

The main problem faced by Dell

Management is poor or ineffective
money management. Company's
The problem faced by HP
revenue are running short in comparison
Limited is risk management and
to expenses. Such financial problems are
problem of cash flow. The
negatively affecting the working of the
Problem selected organization fails to
organisation. Thus, selected
analyse and formulate
organisation is facing various issue
strategies to minimize the
regarding insufficient money or lack of
uncertain risk.
working capital to pay the expenses of
company as well as poor money
management.

Management of HP Limited
The organization needs to overcome its
applies approach of
problems. For such they needs to apply
benchmarking in order to
approach of Key Performance Indicator
prepare the reports related to
for making the comparison and setting
Approach risk management as well as
effective strategies against its
formulating strategies to
competitors in order to manage its
manage its working capital to
working capital and money
reduce the competition with
management.
various competitors.

M4. Management accounting in response to financial problems can lead

organisation to sustainable success.
Management accounting approaches such as benchmarking and key performance indicators plays
crucial role in Capricorn Wealth Management Limited and Brightstar Financial Limited to achieve
sustainable success by formulating various strategies which helps in reducing all the financial issues
which leads them towards sustainable success. The Capricorn Wealth Management Limited apply
approach of key performance indicators to compare the activities, performances with the competitors
or same industry to reduce the hurdles towards success. Brightstar Financial Limited applies approach of
benchmarking in order to identify the opportunities for improvement as well as reducing or closing the
gap with the competitors along with monitoring the performance on daily basis.
D3.Various planning tools to resolve financial problems.
Planning helps in formulating strategies in advance for the future for maintaining smooth functioning of
the operations in any organisation. The Capricorn Wealth Management Limited and Brightstar Financial
Limited faces various problems because of unexpected situations. The management of the Capricorn
Wealth Management Limited uses various planning tools such as contingency planning, flexible budgets
and forecasting tools to predict and forecast various unexpected hurdles in order to enhance the
efficiency and improving profitability to resolve its financial problems effectively as well as efficiently

References

Corporate Finance Institute. 2019. Managerial Accounting - Definition and Techniques Used. [ONLINE]
Available at: https://corporatefinanceinstitute.com/resources/knowledge/accounting/managerial-
accounting/. [Accessed 12 December 2019].
Investopedia. 2019. Managerial Accounting Definition. [ONLINE] Available
at: https://www.investopedia.com/terms/m/managerialaccounting.asp. [Accessed 12 December 2019].
https://www.invensis.net/blog/finance-and-accounting/what-is-management-accounting-and-its-
importance/

https://yourbusiness.azcentral.com/advantages-managerial-accounting-21281.html

https://www.finance.admin.cam.ac.uk/policy-and-procedures/financial-procedures/chapter-2-
budgetary-planning-control

https://courses.lumenlearning.com/sac-managacct/chapter/introduction-to-budgeting-and-budgeting-
processes/