Role of Management Accounting in Forecasting Budget

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  • Level: High school
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Question :

Some of the main questions which are needed to be answered are like:

  • What is management accounting and what are their roles?
  • What are the methods of management accounting in the  Alpha Limited company?
Answer :
Organization Selected : Sainsbury and Tesco plc.


Management accounting is a form of accounting which is linked to systematic procedure of acquiring monetary and anti-monetary information from different sources. This gathered information is being used by accountants in order to produce internal managerial reports. These reports are applied by management department for taking crucial decisions of different aspects. This accounting has different characteristics and role for businesses such as it is not necessary to implement by companies (Otley, 2016). As well as it does not follow any accounting rules and regulation in process of preparing internal reports. The objective of report is to demonstrate understanding regards to management accounting, and its importance for companies. In report Alpha limited company is chosen that is associated in manufacturing of pizzas. The report covers detailed information regards to various MA reports, planning tools and its importance for business entities.


P1. Management Accounting and its Types.

MA- It is linked to process of preparing internal report for managers so that they can take suitable decisions as accordance of need of business.

  • Cost accounting system- It is linked with a systematic procedure of predicting possible expenses. It helps to finance department of businesses so that they can become able to keep an effective control over expenses and costs. This accounting system contributes in tracking those activities which are leading to higher cost for companies. In addition, it is essential for business entities in order to minimise overall expenses in an effective manner. Alpha limited company, implemented it by their finance department so that the cost of their operations can keep below standard costing (Hopper and Bui, 2016).
  • Price optimisation system- This starts with process of gathering information from customers regards to products demand, perception and many more. This collective information is being used by sales department of companies in price setting which may lead to higher sales. It is beneficial to companies which are unable to generate higher amount of revenues due to lack of sales. Hence, it is useful in order to revise or set the pricing of products and services at an effective level. In Alpha limited company, this is being used by their sales department in order to set the prices of their pizzas.
  • Inventory management system- This accounting systems' meaning can be understood by its name as it is linked with process of tracking the quantity of all forms of material in businesses. Generally, in a manufacturing entity a vital range of stock is acquired for production selling and for many other purposes. In this aspect, this is compulsory for analysing quantity of materials regularly (Burritt, 2017). It is so because if they will do so then it can be beneficial for them to utilise available raw materials in an effective manner. Thus, it is essential for companies to tracking of all forms of materials on a daily basis and guiding purchase team to buy more goods. In addition, under this various kinds of techniques are used for assessing quantity of goods such as LIFO, FIFO and many more. In Alpha limited company, their managers implement it for assessing the quantity of raw material stored in their warehouses timely.
  • Job order costing system- This is linked to process of assessing cost of each individual activity by assigning cost of job separately. Under this accounting system the manager of companies evaluate cost of each job assigned to a particular activity or function for a particular time period (Hall, 2016). Hence, this is compulsory for businesses to track cost of each job that is being allocated to any specific activity. In the above company, they use this accounting system in order to set the cost of job individually so that their finance manager can track the cost of each job.

P2. Various Methods Used for Management Accounting Reporting.

MA reports- MA reporting plays a vital role in protecting companies and evaluating their efficiency (Singhvi and BODHANWALA, 2018). These documents are compiled in the accounting time according to the specifications. Such documents provide valuable information on various transactions or operations as well as income.

Types of reports:

  • Inventory reports- Organizations generate physical products, and inventory management documents play a key role in centralizing data related to stock costs or other overhead costs involved in both raw material procurement and production processes. Such a report is a design document that includes source, location and product information. This report covers all the information, like how much raw material is produced in the company and when and how much it takes for the production process. In the above company, this report is used for managing total raw materials.
  • Performance report- It is designed for the purpose of keeping records of operational results in separate time frames. Use performance reports, each entity's managers offer rewards along with incentives to work according to their efforts to achieve business goals. The Alpha limited company benefits from evaluating employee performance and assessing increasing worker performs well in contrast to which does not perform. Higher performers are rewarded more where more training courses are offered as under performers.
  • Budget report- One of the main documents is the budget study, which helps to understand and monitor cost in order to assess the quality of companies. Using the budget report, to assess the costs, actual figures are matched with the pre-established estimate. Management use the expenditure statement to assess the successful use of monetary resources. Alpha Ltd Company's activities including production, sales and marketing are reported in this document.
  • Account receivable ageing report- The document used in the accounting period to monitor credit purchases as well as assess due transactions. It is usually chosen by organizations performing credit-related operations and routinely recording all credit transactions along with date, lender name and sum (Makrygiannakis and Jack, 2016). It is used by the top corporate management to assess the collection performance and credit functionality. Such as in the above company, it is being used by companies in order to manage their credit records.

M1. Benefits of MAS.



Cost accounting system

This is aligned to procedure of reducing cost of various operation and functions below standard costs (Samuel, 2018). In above company, they apply this for tracking cost each activity as well as to keep an effective control over costs.

Price optimisation system

It is related to procedure of setting the price of product and service as accordance of need of various shareholders. In above company, their sales department implement to set price of their manufactured Pizzas.

Inventory management system

It helps to track quantity of stored materials in warehouses in an effective manner. Under Alpha limited company, they use it for making better utilisation of their stored raw material.

Job costing system

It helps in tracking cost of each job separately. Alpha limited company use it for calculating cost of job that is allocated to different activities and operations.

D1. Integration of MAS and Reports to Organisational Process.

In the business entities, there are wide range of functions which are performed by different departments. In this aspect MAS links with various activities and functions of companies (Rikhardsson and Yigitbasioglu, 2018). Like in Alpha limited company, their different departments are linked to MAS. Like finance department is integrated to cost accounting system, sales department with price optimisation system etc. Similar as MA reports are also linked to business operations and process. It can be understanding by example of above company, as the account receivable ageing report is linked finance department. This overall indicates that MAS and MA reports are aligned to process of companies.


P3. Preparation of Income Statement by Help of Absorption and Marginal Costing.

Problem 1.

Income statement under marginal costing technique:

Cost card (Marginal costing)




Unit Variable Price


Marginal Cost




Selling price


Less- Marginal cost




Working Note:

Scenario 1. Machine is not installed:

Scenario 2. If machine is installed:

2d. Should company install machine?

As per the above calculation, this can be recommending that company should install the machine because in the case of without installation of machine they may face loss of -£18,000.00. On the other hand, if they install machine then there will be profit of £1,04,000.00. Hence, the installation of machine can be beneficial for above company.

M2. Role of Accounting Techniques to Produce Income Statements.

There are different methods to produce income statements and many other financial statements. Such as in the context of above calculations two costing technique are used to prepare income statement of given data. These techniques are absorption and marginal costing. In marginal costing, fixed and non-fixed costs are considered in a different manner (Herschung, Mahlendorf and Weber, 2018). In this technique fixed cost is taken as cost of period and non-fixed cost is assigned as cost of unit. While, in absorption costing technique, all types of occurred cost considered in a similar manner as cost of unit.

D2. Interpretation of Produced Financial Statements.

In above part of report various types of calculation is being done on the basis of given data. Mainly, there are two income statements are produced under absorption and marginal costing. Like in the context of absorption costing technique, there is net profit of 175000, 130000, 220000, 175000, 140000 and 200000 for month of April, May, June, July, August and September. While under marginal costing, the net profit is different which is of 175000, 100000, 250000, 175000, 150000 and 200000 for similar time period. In the context of preparation of income statement, the data is same in both of techniques but amount of net profit is variable. It is so because of consideration of cost in a different manner under absorption and marginal costing technique.


P4. Advantages and Disadvantages of Different Planning Tools of Budgetary Control.

Planning methods are tools which are used as an effort, system or intervention by the particular type of company to take appropriate measures. Such resources offer comprehensive information about the services of the organization and how to be effective with proper use of certain tools. The Alpha limited company apply different types of planning tools such as:

Zero-based Budget

It is a form of budgeting in which all the expenditures reported from the beginning period are presented. Upon evaluating all departments properly, preceding budget is not used as a basis and all functions are performed in Alpha Ltd.

  • Through this budget, gather information from various divisions and have detailed knowledge of their strengths and weaknesses (Järvenpää and Länsiluoto, 2016).
  • Based on this plan, Alpha Ltd will take strategic decisions that facilitate the achievement of quick-term goals in a specific time frame.
  • It is intended for small period as it does not work for a long period of time.
  • ZBB is beneficial in a critical way, not in a reasonable way.

Cash Budget

This is an estimate of the organization's cash in and outflow in a certain amount of time. The cash plan is primarily used by the company to estimate the leverage status and have sufficient quantities of money sustaining routine activities. In above company, their accountant prepares this budget to make an effective use of their cash.

  • Optimal utilisation of cash- Alpha Ltd knows about the cash position through the cash plan and understands where to spend cash to be successful. If there is any question so that all remedies are implemented accordingly.
  • All divisions operate together by this budget and assess the corporate environment.
  • Lack of flexibility: Build numbers to plan the budget and distribute numbers to the managers in this budget process. There is no improvement after getting the management feedback because there is no versatility.
  • The effectiveness of the Alpha Ltd cash budget relied largely on the commitment and collaboration of the workers.

Master Budget:

It is regarded as the reduced-level budget that has been built into various operational areas by companies and consists of different kinds of financial statements, forecasting cash situation and a spending plan (Bouma, 2017). The above company, prepares this budget in order to manage their various kinds of activities and operations.

  • This report gives an overview of the business environment as it is known as a description of all budgets. Therefore, through this review of the operation of the budget throughout the entire corporate situation.
  • Alpha Ltd is funded by the master budget to consider challenges and plan for future growth.
  • Lack of specify: This is a key drawback that detailed information about the various items included in master budget is not given.
  • Difficult to read and update: It's another downside that's hard to patch. The products are included in various categories so that it is not easy to describe the budget in Alpha Ltd.

M3. Use of Planning Tools in Order to Prepare and Forecasting of Budgets.

Different types of forecasting tools that help achieve results over a larger time frame are used to produce and predict the budget needed. The Zero-based plan aims to meet all the data from the organization in depth and all the quick-term goals. The master plan is used by the company to summarily gather information about the entire budget. In addition to applying the money plan to learn the cash's role on various business operations.


P5. Role of Management Accounting in Solving Financial Issues.

Financial Issues

It is important for companies to operate their business activities without facing any issue. These monetary issues occur in business entities because of lack of finance in order to complete different types of activities and operations on time (Horton and de Araujo Wanderley, 2018). In this aspect, the role of management department becomes crucial because it is their responsibility to find out alternatives to sort the issues. For this purpose, there are vital range of accounting systems and techniques. Herein, below some key financial issues are mentioned that are as followings:

Lack of Sales Revenues

This issue occurs in business entities because of lower sales. In other words, under this issue companies fail to sell out more number of quantity of goods. As a result, total sales revenue starts to minimise and this issue occurs in companies. In the context of Sainsburry they are facing this issue and unable to generate higher amount of revenues.

Increased Expenditures

This is an issue that incurs in companies because of lack of control over total expenses. In broad manner, the main reason of this issue is the poor management and allocation of financial resources into different activities. In the aspect of Tesco plc, they are facing this issue because their expenditures are increasing in a significant manner while revenues are decreasing.

Identification of Financial Issues

Ratio analysis – This is related with process of identifying monetary issues by help of calculating various ratios (Alyousef and Mickan, 2016). In the context of Tesco plc, they use this technique in order to find issue of higher expenditures. They compute sales turnover ratio with an objective of efficiency of sales activities. In addition, they assess the strengths and weakness of various departments by help of this technique.

Activity-Based Costing

It is related with procedure of allocating cost separately to various number of activities. The key aim of this technique is to minimise total number of cost as much as possible. In the Sainsburry company, they implement this technique to find out the actual issue of higher cost.

Financial Governance

This works as evaluating plan for companies assessing actual level of deficiency (Nuhu and Appuhamilage, 2017). It is a form of approach that is regarding to collecting company’s financial information in an effective way so that actual level of deficiency can be find out.





Financial issue

This company is facing the problem of lack of sales outcome. They do not have enough amount of funds to make payment of different activities and operations. As a result, they are not able to beat their competitors.

The company is facing the problem of higher amount of expenditures. As a result, they are not able to manage their overall available resources and getting lower return on invested funds.

Accounting system

The company is applying price optimisation system to solve issue. It becomes possible because by help of this accounting system they revised their pricing strategies and set at a level that can generate higher revenue. After implementation of this accounting system their sales revenues increased and issue has been sorted out.

This company is using cost accounting system to sort the issue of higher expenses. It is helping them in order to tracking overall expenditures and guiding to minimise the costs. By applying this accounting system, their expenditures reduced and issue has been resolved in an effective manner.

M4. Management Accounting to Solve the Monetary Issues.

There are various types of accounting systems such as stock management system etc. All these systems help to sort the issue in less time and expenditures. Such as in the above Sainsbury and Tesco company, their monetary problems have been sorted out by help of cost accounting and price optimisation system.

Related Article: Management Accounting System and Their Types 

D3. Planning Tools to Solve Financial Problems.

Apart from MAS, planning tools also play a key role in sorting monetary issues. It becomes possible because by help of these planning tools, executives of businesses get enable to forecast possible number of income and expenditures (Alsharari and Youssef, 2017). Like in above company, they are using various planning tools like cash budget, master budget etc.


As per of above report it has been articulated that role of MA is too wide and it relays on businesses that how well they use all accounting systems. The report concludes about various accounting systems as cost accounting system, stock management system as well as MA reports like performance report, budget report etc. In further part of report, computation is done according to given data such as income statement, BEP calculation and many more. In addition, planning tools like cash budget, master budget is also mentioned under report. In the end role of this accounting system to sort issues of Sainsbury and Tesco plc.

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