Unit-5

Management Accounting

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 Table of Contents
Introduction:....................................................................................................................................3

LO 01:..............................................................................................................................................4

P1 Explain management accounting and give the essential requirements of different types of
management accounting systems:................................................................................................4

P2 Explain different methods used for management accounting reporting:................................8

M1 Evaluate the benefits of management accounting systems and their application within an
organizational context:.................................................................................................................9

LO 02:............................................................................................................................................10

P3 Calculate costs using appropriate techniques of costs analysis to prepare an income

statement using marginal and absorption costs:........................................................................10

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

financial reporting documents:..................................................................................................13

LO 03:............................................................................................................................................14

P4 Explain the advantages and disadvantages of different types of planning tools used in
budgetary control:......................................................................................................................14

M3 Analyses the use of different planning tools and their application for preparing and
forecasting budgets:...................................................................................................................17

LO 04:............................................................................................................................................18

P5 Compare how organizations are adapting management accounting systems to respond to

financial problems:....................................................................................................................18

M4 Analyses how, in responding to financial problems, management accounting can lead

organizations to sustainable success:.........................................................................................21

Conclusion:....................................................................................................................................22

References:....................................................................................................................................23

Appendix:......................................................................................................................................25

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Introduction:
The managerial accounting techniques and the utilization of different tools of managerial
accounting are very much important in bringing the most outstanding performance of the
organization, which is why understanding the managerial accounting concept and the related
principles and theories of managerial accounting are effectively important for all of the
organizations(Zango, 2012). RESINCOAT has been selected as the organization to utilize
the theoretical aspects and analysis of the managerial accounting techniques. The report starts
the discussion with the depiction of managerial accounting and the essential requirements for
different types of managerial accounting tools, depicting different types of manager reporting
systems alongside. Hypothetical data have been used in the formulation of income statements,
while an illustration has been provided about the budgetary planning tools that could help the
manager to effectively manage the cost and revenue.

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LO 01:

Management accounting:

One of the very popular accounting systems that are used to analyses, scrutinize, identify,
determine, examine, interpret and experiment the accounting outcome of the organization by the
managers of the organization only, not making the outcome information of the analysis available
for the external parties(Škorecová and Farkašová, 2008). The main objective of the accounting
system is to fulfil the accounting activities in a way that effectively helps to achieve the objective
of the accounting systems. The well-known accounting bodies which are chartered institute of
management accountants are considered this accounting system as an integral method of
accounting, that is used in a way that effectively helps the management of the organization to
formulate the strategy, utilize the available resources and bring out the accounting results that
helps in making effective decisions.

Differences between management accounting and financial accounting

Although managerial and financial accounting has been used interchangeably in the financial
institutions, a business person needs to know what the differences between them are. Managerial
accounting and financial accounting are the roots of the accounting system, based on which the
future of the businesses depends(Zango, 2012). So, it is necessary to know when to use
managerial accounting and when to use financial accounting. Some of the key differences
between these two-accounting systems has been shown below:

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 Financial accounting Managerial accounting

Financial accounting is related to depicting Managerial accounting does not require that
financial analysis of the firm such as preparing firms should prepare financial statements
financial statements i.e. Income statements, strictly followed by lawWeißenberger and
profit and loss account, balance sheet, etc. Angelkort, 2011).

Management of the firm has to follow financial There is no requirement to follow strict rules of
accounting strictly, as instructed by law. If preparing the financial statements, it could be
there is any breakdown of the rule and prepared in a rough format. The main purpose
regulations by the firm when preparing the of preparing the financial statements under this
financial statement, the law enforcing authority accounting method is to measure the financial
will take steps against the firmVesty and outcomes.
Oliver, 2014).

This accounting system provides the outcomes The results of the accounting findings are not
of financial activities for both the internal and published for outside parties, it is used for
external parties. inside parties onlyUsatenko, 2015). Thus, the
competitors could not guess the current status
of the firm but the inside managers do.

While preparing the financial statements, it As this accounting system prepared financial
requires that firms should obey the principles, analysis only for internal usage, there is no
rules and regulations, procedures, standard, etc. requirement to follow principles, standards,
etc.

Financial accounting analysis could not be There is no obligation relating to the timely
done any time the firm wants, rather it has to preparation of financial statements under this
be prepared after a specified timeShima and method, managers could prepare the financial
Nakamura, 2018). statements any time they feel the need to

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 prepare them.

Where financial and managerial accounting may overlap:

Although there are differences between these two accounting systems, in some situations where
these two systems may overlap with each other. For example, in case of a reduction of risks,
these two accounting systems might overlap because both the accounts under the system have the
responsibility to choose these kinds of projects that have minimum risk(SCHROTH, 2018) .
Again, the analysis done by those two accountants is also similar in many cases, because both the
accountants have to go through a certain calculation process to achieve the results. In the case of
the collection of capital and resources, these two accounting systems have to perform some kind
of activity. They have to identify the resources required, capital amounts, sources from which the
capital could be collected, etc. Because in these following cases the accounting process may
overlap with each other, it is important for both the accountants to know their responsibilities.

Essential requirements for different types of management accounting systems:

Different management accounting systems have several benefits as well as disadvantages that are
required to be well known by the managers who are going to utilize the steps of accounting
systems. Here are some of the major managerial accounting system that is important for an
organization like RESINCOAT:

Job costing system:This accounting system is related to the accumulation process of the cost of
a specified type of production of service activity of the business. During the time of the
production process performing the business activities, it involves a lot of activities to complete
the formulation of final products(Murphy, 2008) . If each of the activities is specified as a
particular type of job, and the calculation and analysis of the job are done, then it is possible to
understand the cost in each type of activity involved with the production process. This is how the
job costing system of the managerial accounting works. In RESINCOAT, the job costing
analysis system could be determined by involving personalities and specific employees with the
respective jobs to monitor and track the cost of the particular activities and prepare financial
statements based on the jobs involved. The benefit of this system is that after the end of each

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period, the management of the organizationcan determine what type of cost structure is
contributing what type of advantages and what is causing the cost structure to rise.

Inventory management system:This type of management accounting system is related with the
calculation and analysis of the inventory of the firm, the wire the main objective of the system is
to track down the inventory continuously and provide the necessary inventory to make the
production process a continuous process(Han, Jin, Kang and Lobo, 2014) . With the help of
effective management of the inventory system, RESINCOAT would be able to continuously
produce the products without the requirement of any cease. In the inventory management process
of RESINCOAT, the company requires using the EOQ system, they should reorder the inventory
level according to the requirement and demand of the final products. Also, the inventory
management system requires to have a close relationship with the suppliers so that a continuous
movement of raw materials could be ensured. The benefit of this management system is that it
provides the manager with the ability to make ceaseless production, formulation and
transformation of the raw materials into the final products.

Price optimizing system:This process of management accounting system is involved with the
increase of the price of the product in a stage that is enough for the organization to generate
target profit as well as keeping the consumers satisfied. This process of price optimization is
related to the activity of cost and revenue analysis, the demand for the particular product and
how customers considered the product and the value of the firm(Dashtbayaz and Mohammadi,
2016) . In RESINCOAT, a company requires to use the breakeven analysis process that will help
the company to determine a price that effectively increases the profit and at the same time
ensures a great satisfaction of the customers.

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There are a lot of methods that could be utilized in the reporting process of managerial
accounting analysis and information, why the manager of RESINCOAT needs to understand
why and what type of reporting system should be utilized. Here are some of the reporting system
that could be used in RESINCOAT:

Budget reports:These types of reports are prepared with the purpose of helping the
organization achieve its objectives course it formulates the target and aims of the organization
and helps it understand the accomplishment after the end of the period(Braun, 2013). There are
different types of budget reports that could be prepared for RESINCOAT, some of them that
could benefit the organization most are production budget, inventory budget, wages budget,
salary budget, marketing budget, sales budget etc. These budgets are prepared by the insertion of
the data that is related to the particular type of category by specific employees, especially the
ones with accounting knowledge. The major challenges of this type of batting technique are that
specifying the budget that would be possible to achieve soon is sometimes difficult, also the
analysis and technical knowledge is important which may not be possible to provide by an
organization such as RESINCOAT as it is small and has limited resources.

Investment appraisal reports:These reports of managerial accounting are very much beneficial
in terms of helping the organization achieve its goal because this type of report is related with the
investment and the achievement and return of the investment within a specific period. These
types of reports are prepared with the purpose of determining and measuring the outcome of the
investment and how effectively the organization will be able to get back the investment with the
help of different types of analysis tools(AHMED and DUELLMAN, 2012). For example,
RESINCOAT as a process of investment appraisal reporting system, it could use an accounting
rate of return system, payback period system or the calculation of net present value which will
provide enough information and understanding about the time and the amount RESINCOAT the
is going to make from the investment. Thus, it benefits the organization in determining and
specifying the period and the amount that it is going to get back from the investment which helps
the manager to make better decisions.

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Aged receivables analysis report:This is another form of accounting reporting system which is
used to analyses and understand the accounts receivables effectively and efficiently. With the
help of this reporting system, RESINCOAT determines the account receivables that it is going to
make within a certain period and also categorizes the receivables incomes of the probability of
getting back. This analysis method works by categorizing the account receivables in different
categories and in terms of the time the condition is going to receive them. Therefore, it helps
RESINCOAT to determine within the next week what percentage and what amount of account
receivables it is going to get.

There are different types of benefits of the utilization and usage of managerial accounting
techniques and tactics which is very much efficient for increasing the value of the organization
and helping it to activate goals.

The managerial accounting system that is frequently used and helps the organization in most of
the cases is the inventory management system which provides specific timely alerts to the
inventory management department about the necessity and requirement of inventory(Škorecová
and Farkašová, 2008). This way the manager of the department efficiently manages the flow of
inventory that is required for the continuous production process, which ensures a specific and
continuous production and fulfils the demand of the consumers. The uses of the job costing
system help the manager of the organization to determine the cost that is related to activities
involved in different parts of the production and distribution process. This is when the manager
understands and prioritizes the type of job that is important and also determines and excludes the
jobs that are less important and increases the cost structure. Usage of the price of the imaging
system helps the management by increasing the price of the products in a stage where the
organization becomes scheduled to maximize its profit and at the same time keep a balance in the
satisfaction level of the consumers.

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LO 02:

As part of the accounting technique, managerial accountants of RESINCOAT could prepare the
income statement using marginal costing and absorption costing method(Zango, 2012). Based on
the hypothetical data relating fixed cost, the variable cost, production units, sales units, opening
production unit etc. Hypothetical income statement for both of the process have been prepaid
below:

Cost of each unit of product under absorption costing:

The calculation process of each unit of product x for the two years of RESINCOAT had
been shown below:

According to the calculation of product x for both of the years of 2019 and 2020, and its costs
have become £14 under the absorption costing method. This information would be used in the
calculation of income statements under this method.

Cost of each unit of product under marginal costing method:

Marginal costing method excludes the production and manufacturing item from the per-unit cost
calculation, so the cost for each of the units of product x has become:

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The outcome of the calculation from the per-unit cost of product x in both the year 2019 and
2020 has become £10.

Absorption costing income statement:

To prepare the income statement under this method, the calculation has been made in the
following way as shown below:

RESINCOAT

Income statement under the absorption costing method

2019 and 2020

Marginal costing income statement:

This method of preparing income statements has included the variable items in the calculation of
marginal cost while keeping the fixed item after the calculation of contribution
margin(Weißenberger and Angelkort, 2011). The income statement has been shown below:

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 RESINCOAT

Income statement under marginal costing method

2019 and 2020

According to the income statement of both of these methods, it has been found no difference in
terms of the net income under this method. There has been a similar source of net loss under both
of these methods, which are £220,000 and £345,000 for the year 2019 and 2020. Although in
terms of net income there was no significant difference, in terms of gross profit and the
contribution margin, there was a huge difference in the earning capability of RESINCOAT of the
product x.

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Preparing reports for the financial reporting under the management accounting system required
the concentration of benefits and the disadvantages that the accounting manager might receive
from different sources of accounting reporting techniques(Vesty and Oliver, 2014). Here is a
range of appropriate initial reporting documents that could be utilized in RESINCOAT as part of
the managerial accounting technique:

The utilization and preparation of absorption costing method require the consideration of both
types of costing of RESINCOAT, which are fixed cost and variable cost items. Under this
method, the calculation process includes both of these items in both the case of per-unit cost and
the calculation of net income. This is the organization to determine the gross benefit that the firm
is going to receive from the business and provides a brief view of how the farm is generating
profit in both the case of fixed cost and variable cost items. But in the case of marginal costing
methods, those two types of cost are not included under the consideration in the same way as the
absorption costing method(Usatenko, 2015). A separate calculation is made to assess the impact
of variable cost and fixed cost items on the net profit of RESINCOAT. Hence in the calculation
process of per-unit cost and income statement, a separate calculation is made in both the case of
fixed cost and variable cost.

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LO 03:

The budgetary control system is used as the planning process of the firm that has the
organization achieve its goal with the proper utilization of resources and the analysis of the cost
and revenue and the outcome from the investment within a specific period(Shima and Nakamura,
2018). Under the budgetary control system of managerial accounting, different types of analysis
tools such as variance analysis, responsibility budgeting, standard costing, time series analysis
etc. could be used. In this portion a discussion has been provided about the advantages and
disadvantages of these types of tools:

Variance analysis:

From the name itself, it speaks about the characteristics and the process of these analysis
techniques that is it determines the difference of outcomes from a standard mean value which
helps the firm to determine how far it stays from the standard outcomes.

Advantages: Disadvantages:
One of the major advantages of this technique is One of the disadvantages of this analysis process
that it provides the manager with enough evidence is that the outcomes could not be determined after
about the achievement of the goal by showing it the end of the period that means the organization
how far the firm is staying in achieving the has to run the business activities for a specific
standard outcome (SCHROTH, 2018). Also, this period so that the achieved outcome and the
tool helps make better decisions as it shows the budgeted outcome would be differentiated under
manager the real picture and diverted the situation the method. Another problem with this process is
of the firm. In addition to that, it is important for that the organization messages difficulty in using
the firm like RESINCOAT as it provides detailed different statistical, financial and mathematical to
outcomes and specifies the responsibilities to be which are more complex and complicated for the
imposed on which departments more. general people to understand(Murphy, 2008).

Responsibility budgeting:

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Another accounting tool that could be utilized by the management of RESINCOAT is the
responsibility budgeting technique which considers the expenses and revenues of the
organization in terms of the responsibilities performed by each of the members of the respective
tasks(Han, Jin, Kang and Lobo, 2014). There are several advantages and disadvantages under
the budgeting techniques, which has been shown below:

Advantages: Disadvantages:
Among the advantages of responsibility budgeting Under the accounting system, one of the
techniques, the most important one is the disadvantages of this cutting tool is that it
assignment of responsibility in each of the required a sound and organized organization
individuals and making them accountable for the structure with specific principles and regulations
activities they have to perform for the strictly followed which is not possible for the
organization(Dashtbayaz and Mohammadi, 2016). small and medium-sized organization like
Another advantage of this tool is the improvement RESINCOAT. So, it is a system of reporting
of the performance of the organization because, in accounting to small and medium-sized
case of the responsibility budgeting, the organizations. Also, under the system, different
responsibility of each of the individuals are types of cost and revenue are classified into
specified clearly which make it visible and broader sections which makes it complex and
understandable for all of the employees of what difficult for the analysis and understanding of the
type of activities and performance they have to be related parties(Braun, 2013) .
done. In the preparation of the cost planning
process, this accounting tool is also helpful by
providing information and analysis about the cost
of the firm.

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Time series analysis:

This analysis tool is very much different from the other useful tools of accounting because under
this method the reporting activities are done with the consideration of the specific
period(AHMED and DUELLMAN, 2012). Most of the time under this method, the analysis
includes a period which has several equal separate spaces between them, showing the outcomes
and the results of each of the time to help the managers to understand in which period
organization did base and in which period organization did worst.

Advantages: Disadvantages:
The advantage of this system is that it is Under the disadvantages of these analysis
considered as one of the effective phenomena of methods, it is time-consuming and requires the
the managerial accounting system because it end of the period to understand the real picture
provides a brief outcome of the performance of and performance of the firm. This analysis
the firm in each of the period which is technique is much more complicated when using
understandable by anyone(Weißenberger and statistical and mathematical tools to analyses the
Angelkort, 2011). Also, it has the preparation and outcome of each period with the help of financial
prediction of the prospect of the organization and analysis.
in the preparation of the future budget that
becomes much more accurate and specific. Hence
in the decision-making process, they are based in
bringing out outstanding outcomes.

Based on the discussion of the portion of the report, it becomes clear that for the benefits and
the implication of the budgetary controlling system, RESINCOAT requires to use a mixture of
the accounting reporting tools in this case(Vesty and Oliver, 2014).

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The different budgetary planning process helps the organization like RESINCOAT to determine
the cost and revenue as well as the probability of achieving the goal by making better and
effective decisions. The influence of the utilization of different types of budgetary tools such as
variance analysis, responsibility budgeting, time series analysis has been discussed below:

The usage of variance analysis provides a better outcome to the organization which produces a
huge percentage of products and services that are different in nature and characteristics. The
usage of the variance analysis shows the organization how it is doing in terms of the average
outcome and performance, which opens the decision-making process and makes it much easier
and more effective(Usatenko, 2015). The usage of responsibility budgeting tools helps the
organization like RESINCOAT by making each of the parties involved with the production
process much more responsible. Therefore, the usage of this budgeting tool in all of the function
of the business charges production, marketing, sales, revenue making process etc. provides a
good result. Again, the usage of time series analysis helps predict the future trend by the
concentration of outcomes provided under the time series analysis. In all of the activities of the
firm which use the time series analysis could use it to understand how the firm would be doing in
response to other years.

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LO 04:

To compare the adaptation of the managerial accounting systems in response to two different
types of financial problems, another organization named OTTLEY has been used to show the
difference of how different types of managerial accounting tools help to cope up from different
financial problems(Shima and Nakamura, 2018).

To specify the utilization of the management accounting to in both off the RESINCOAT and
OTTLEY, the hypothetical financial problem has been assumed that the organization is facing,
which is the shortage of current assets which is causing liquidity problems. Now the utilization
of different financial tools helps both of the organization in the following way:

Management
accounting RESINCOAT OTTLEY
systems

Benchmarking With the help of benchmarking, Benchmarking also provides benefits to

RESINCOAT would be able to OTTLEY in solving the shortage of
determine the derivation of its current assets and eradicating liquidity
outcome from some of the problems because under this method it
benchmark scores. For example, provides benefits in determining the
with the help of benchmarking, benchmark scores of its major
RESINCOAT would be able to competitors such as RESINCOAT.
understand how far it requires to After the end of the period, OTTLEY
inject money in the current could understand the differences it has
account to keep a proper balance with the major competitors and makes
to face the liquidity problem the decisions to increase the current
(SCHROTH, 2018). asset amount(Murphy, 2008).

Key This accounting technique uses By the utilization of key performance

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performance some supreme performance indicator, OTTLEY who assess the
indicators indicators that are vitally differences of its performance from the
important to understand how the other indicating performance that is the
firm is doing in comparison to industry average in terms of
the performance indicators(Han, profitability, generating revenue,
Jin, Kang and Lobo, 2014). With capturing customers, popularity and
the help of performance brand value etc. This will help the
indicators, RESINCOAT could organization to decide upon which type
understand its revenue structure, of activity is required to be emphasized
cost structure, profitability etc. to reduce the security
And compare it with other problem(Weißenberger and Angelkort,
respected companies’ 2011).
performance as the recognition of
the day performance indicators.

Balance This managerial accounting The utilization of balanced scorecard

scorecard system is used as a strategic technique so benefits OTTLEY
performance management tool introducing the uncertainty in terms of
which specifies the performance liquidity issue because it helps the
of the organization in terms of organization to keep a proper balance in
making proper balance about the the current and fixed assets, making it
outcomes(Vesty and Oliver, important to maintain each of the
2014). For example, by the activity related with the liquidity issues
utilization of a balanced effectively and efficiently.
scorecard system, RESINCOAT
would be able to make a proper
balance in the wages and salaries
earned by the employees working
in the organization.

Activity-based By the utilization of an activity- OTTLEY on the other hand by the

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costing (ABC) based costing system, usage of an activity-based costing
RESINCOAT would be able to system would be able to determine the
determine the cost in each of the cost of each of the particular activities,
activities it performed in the take decisions on which type of activity
production process which helps it should reduce or increase the cost
to minimize the cost of which affects the liquidity
production, reducing the issue(Usatenko, 2015).
requirement of liquidity.

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To solve the financial problems, utilization of different types of managerial accounting tools
such as balanced scorecard method, key performance indicators, activity-based costing system
and benchmarking are beneficial for the organization like RESINCOAT.

By effectively using the tools to solve the liquidity issue that has been assumed that the firm is
facing, these tools could come handy in solving the problems. For example, by using the key
performance indicator, RESINCOAT would be able to determine the performance of the
company in terms of solving the liquidity issue(Shima and Nakamura, 2018). Again, with the
help of a balanced scorecard, the firm would be effectively able to make a proper balance
between the utilization of money at hand and the investment in different projects which will
make proper use of the cash balance. Benchmarking will also influence the profitability and
revenue structure because the managers should be able to make proper decisions by the outcomes
of the benchmarking analysis which will prevent them from watching much more money in the
unsuccessful projects, making the investment much more profitable and attractive.

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Conclusion:
This report on managerial accounting has provided enough evidence, including theoretical
discussion with the direction of different types of managerial accounting principles, tools and
methodologies that are effectively used in the organization to bring out the outstanding
performance of the organization without the utilization of financial accounting(Murphy, 2008).
The difference between managerial and financial accounting has shown why there are certain
benefits and equipment for the organizations which use managerial accounting in terms of a
competitive environment. Again, the utilization of different types of managerial reporting tools
and a mixture of them effectively help the organization bring the most out that is helpful is in
broadening the value of the organization. It is important to utilize the methods and tools of
managerial accounting effectively to obtain a competitive advantage in this competitive world.

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References:
AHMED, A. and DUELLMAN, S., 2012. Managerial Overconfidence and Accounting
Conservatism. Journal of Accounting Research, 51(1), pp.1-30.

Braun, K., 2013. Custom fabric ventures: An instructional resource in job costing for the
introductory managerial accounting course. Journal of Accounting Education, 31(4), pp.400-429.

Dashtbayaz, M. and Mohammadi, S., 2016. The effect of managerial overconfidence on

investment. International Journal of Accounting and Economics Studies, 4(1), p.21.

Han, S., Jin, J., Kang, T. and Lobo, G., 2014. Managerial Ownership and Financial Analysts’
Information Environment. Journal of Business Finance & Accounting, 41(3-4), pp.328-362.

Managerial Auditing Journal, 2010. Call for papers for Journal of Financial Reporting &
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Managerial Auditing Journal, 2010. Journal of Financial Reporting & Accounting. 25(4).

Murphy, J., 2008. International financial institutions and the new global managerial
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SCHROTH, J., 2018. Managerial Compensation and Stock Price Manipulation. Journal of
Accounting Research, 56(5), pp.1335-1381.

Shima, K. and Nakamura, J., 2018. Managerial Overconfidence, Conservative Accounting and
Corporate Investment. SSRN Electronic Journal.

Škorecová, E. and Farkašová, M., 2008. Social information in managerial accounting and
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Usatenko, O., 2015. Classification of Managerial Accounting to Develop the Managerial

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Vesty, G. and Oliver, J., 2014. Corporate strategy and accounting for sustainability in investment
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Weißenberger, B. and Angelkort, H., 2011. Integration of financial and management accounting
systems: The mediating influence of a consistent financial language on controllership
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Zango, A., 2012. An Appraisal of Current Cost Accounting Techniques for Enhancing
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조 범 석 and KyongMin Kim, 2014. The Market Assessment to Full Costing and Managerial
Discretion on Inventory. Korea International Accounting Review, null (53), pp.144-172.

Appendix:
Opening, sales and production units:

Hypothetical data for preparing income statements:

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