Learner Name Zahira Banu Zafarullah

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Qualification Title Business Management

Unit Reference No. L/650/1154

Unit Title Management accounting and decision-making

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1
 Management accounting and decision-
Qualification Title Business Management Unit Title
making
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 OTHM Level 5 Extended Diploma in Business Management (Qualification Number: 610/0335/9)

Finance and Accounting (R/650/1147)

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Learning Outcome – Assessment Criterion – Pass/Refer Assessor Comments

The learner will: The learner can:
1. Know about the context 1.1 Explain the purpose of finance and accounting.
and purpose of finance and 1.2 Explain the regulatory and legal influences on a
accounting. business’s finance and accounting function.
1.3 Explain how the finance and accounting function
supports a business’s decision making.
2. Be able to prepare financial 2.1 Differentiate between different financial statements.
statements for different 2.2 Prepare financial statements for a sole trader.
types of businesses. 2.3 Prepare financial statements for a partnership.
2.4 Apply techniques to make adjustments to financial
statements.
3. Be able to interpret 3.1 Calculate financial ratios from a set of business
financial statements. accounts.
3.2 Compare organisational performance using historical
financial data.
4. Be able to prepare a 4.1 Differentiate between different types of budgets.
budget. 4.2 Prepare different types of budgets.

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TABLE OF CONTENTS
Executive summary 5
Task 1
1.0 What is management accounting? 6
1.1 what is decision-making? 6
1.3 The differences between management accounting and financial accounting 6
1.4 Different management accounting concepts 7-9
1.5 Different tools and techniques used in management accounting 9-10
Task 2
2.0 Management techniques to solve business problems………………………………………11-12
2.1 Management accounting techniques to inform business decision making……………….13-15
Conclusion……………………………………………………………………………………………….15
References……………………………………………………………………………………………….16

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EXECUTIVE SUMMARY

Identification, measurement, analysis, interpretation, and communication of financial information

to managers for the pursuit of an organization’s objectives are all part of management
accounting. Decision-making is a strategy of action that is consciously chosen from among
several options in order to accomplish organizational or managerial objectives or goals. The
intended users of the information are the main distinction between management accounting &
financial accounting. Management accounting information is meant to assist managers within
the firms in making knowledgeable business decisions, whereas financial accounting serves the
purpose of delivering financial information to those outside the organization. Seven
management accounting concepts are explained; product valuation and costing, cash flow
analysis, analysis of inventory turnover, constraint analysis, measures of financial leverage,
accounts receivables (AR) management, and budgeting, trend analysis, and forecasting.
Financial planning, analysis of the financial statement, cost accounting, analysis of fund flow,
analysis of cash flow, standard costing, marginal costing, budgetary control, and ratio analysis,
are the different tools and techniques used in management accounting.

Management accounting uses a range of techniques, such as the following, to help businesses
accomplish their goals; analyzing the margin, analyzing the constraints, budgeting the capital,
pricing products & valuing inventories, forecasting & trend analysis, and standard costing. The
ability to make decisions is crucial in daily life, but it also may have a big impact on a team’s
long-term performance. Poor decisions, for instance, can cause the business to lose customers
or workers, which would ultimately cause it to fail. Fortunately, it’s simpler than it might seem to
make judgments as a manager. A few techniques must be used in order to make good decisions
such as; SWOT analysis, cost-benefitting analysis, Pareto analysis, brainstorming, force field
analysis, decision matrix, nominal group technique, root cause analysis, scenario planning, and
Multicriteria decision analysis.

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Task 1 of 1

1.0 WHAT IS MANAGEMENT ACCOUNTING?

Identification, measurement, analysis, interpretation, and communication of financial information

to managers for the pursuit of an organization’s objectives are all part of management
accounting. Since the intended aim of management accounting is to support internal users
within the company in making an informed business choice, it varies from financial accounting.
(Investopedia)

1.1 WHAT IS DECISION-MAKING?

Decision-making is a strategy of action that is consciously chosen from among several options
in order to accomplish organizational or managerial objectives or goals. Management is
considered to have decision-making as its core responsibility.

1.2 THE DIFFERENCE BETWEEN MANAGEMENT ACCOUNTING & FINANCIAL

ACCOUNTING

The intended users of the information are the main distinction between management accounting
& financial accounting. Management accounting information is meant to assist managers within
the firms in making knowledgeable business decisions, whereas financial accounting serves the
purpose of delivering financial information to those outside the organization.

Certain requirements, such as generally accepted accounting principles (GAAP), must be met
by financial accounting. To keep their status as publicly listed corporations, all publicly held
businesses must complete their financial statements in line with GAAP. Since management
accounting is not meant for external users, it can be changed to suit those users’ requirements.
This may differ significantly from business to business or even department to department. For
instance, managers in the manufacturing department could like to have financial data shown as
a percentage of the number of units produced during the period.

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1.3 DIFFERENT MANAGEMENT ACCOUNTING CONCEPTS

Product valuation and costing

Calculating the entire expenses associated with producing a good or service is the subject of
product costing. Subcategories of costs, such as variables, fixed, direct or indirect costs, are
possible. In addition to allocating overheads to each type of product produced by the
organization, cost accounting is utilized to qualify and identify those costs. Management
accountants distribute and calculate overhead costs to determine the total cost involved in
producing a good. The distribution of overhead costs may be determined by the volume of
commodities produced or by other factors that affect production, such as the facility’s size.

Management accountants employ direct costs in addition to overhead costs to accurately value
inventory that can be at various stages of manufacturing as well as the cost of goods sold. The
effect of producing one more unit on a product’s cost is known as marginal costing, often known
as cost-volume-profit analysis. For making short-term financial decisions, it is helpful.

Cash flow analysis

Cash flow analysis is carried out by management accountants to assess the financial
implications of the business choices. Most businesses use the accrual foundation of accounting
to record their financial data. Recognizing the true cash impact of a single financial transaction
is more difficult with accrual accounting, despite the fact that it gives a more accurate picture of
a company’s underlying financial status. Using working capital management techniques, a
management accountant can improve cash flow and make sure the business has enough liquid
assets to pay short-term obligations. When doing a cash flow analysis, a management
accountant would take into account any financial inflows or outflows caused by particular
business decisions. For instance, if a department manager is thinking about getting a business
car, he may have the choice of paying cash or taking out a loan.

Analysis of inventory turnover

The number of times a corporation has sold and replaced inventory during a specific period of
time is known as inventory turnover. Businesses can improve their decisions about pricing,
production, marketing, and the acquisition of new inventory by calculating inventory turnover.
The amount of money a business incurs to store unsold goods is known as the carrying cost of
inventory, which can be determined by a management accountant. Efficiency enhancements

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could be implemented to save storage expenses and free up cash flow for other business needs
if the organization is carrying too much inventory.

Constraint analysis

The examination of product-line or sales-process restrictions is another concept of management

accounting. Management accountants assist in locating bottlenecks and calculating how these
restrictions affect revenue, profits, and cash flow. Then, managers can utilize this knowledge to
make adjustments and boost productivity in the manufacturing or sales process.

Measures of financial leverage

Financial leverage is the use of borrowed funds by a business to make asset purchases and
boost its rate of ROI. Management accountants can give management the resources they need
to analyze the balance between the company’s debt and equity and make the best use of
leverage by using balance sheet analysis. Before relying on these numbers from external
sources, management can identify important information regarding borrowed capital with the aid
of performance measures like return on equity, debt to equity, and return on invested capital. To
properly respond to inquiries from its board of directors, investors, and creditors, management
must periodically evaluate ratios and figures.

Accounts Receivables (AR) management

Accounts receivable (AR) management done right can improve a business’s bottom line. AR
invoices are categorized according to how long they have been past due in an aging report on
the AR. An AR aging report, for instance, would display all outstanding receivables that are less
than 30 days old, 30 – 60 days, 60 – 90 days, and 90+ days old. Management accountants can
alert the proper department managers if specific customers are developing credit hazards by
reviewing the outstanding receivables. If a customer consistently pays late, management might
think twice about continuing to do business with them on credit in the future.

Budgeting, trend analysis, and forecasting

Budgets are frequently utilized to convey the business’s operational strategy in numerical terms.
Performance reports are used by management accountants to highlight the difference between
actual and projected results. Budget-to-actual variations, which can be either positive or
negative, are examined in order to make the necessary adjustments moving ahead.
Management accountants review and disseminate data pertaining to investment choices. This
involves using common capital budgeting measures to help decision-makers decide whether to

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start capital-intensive projects or acquisitions, such as net present value and internal rate of
return. It also specifies payback times so that management can forecast future financial gains.

The trendline for certain expenses is also reviewed in management accounting, and any odd
variances or deviations are looked into. Since expenses that differ noticeably from what is
generally anticipated are frequently questioned during external financial audits, it’s crucial to
evaluate this information on a regular basis. The calculations and projection of future financial
information in this area of accounting also include data from prior periods. Utilizing previous
prices, sales volume, geographic regions, consumer preferences, or financial data may fall
under this category.

1.4 DIFFERENT TOOLS AND TECHNIQUES USED IN MANAGEMENT ACCOUNTING

 Financial planning

Profit maximization is the core goal of any commercial firm. By performing proper or effective
financial planning, this goal is attained. As a result, the best instrument for attaining corporate
goals is financial planning.

 Analysis of financial statement

The balance sheet and the profit and loss account are crucial financial statements. These
claims are examined over various time periods. This kind of analysis aids management in
determining the rate of company concern growth. Comparative financial statements, common
size statements, and ratios are used in this examination.

 Cost accounting

Cost accounting displays cost data in a variety of ways, such as products, processes,
departments, branches, and so on. This cost information is contrasted with the present one.
With the help of this cost comparison, management may determine what factors contributed to
the variance in these expenses.

 Analysis of fund flow

The flow of funds from one time to another is discovered through this examination. Additionally,
this study is highly helpful in determining if the fund is used appropriately or not in a given year

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when compared to the prior year. This study also reveals changes in working capital and funds
from operations.

 Analysis of cash flow

Through this analysis, it is possible to determine the flow of money from one period to the next.
Also discovered the causes of variations in the cash balance between the two periods. It
investigates the movement of money through time and cash generated by operations.

 Standard costing

Costs are established in standard costing. It offers a standard by which actual performance can
be judged. If any deviations occur, it is used to determine the cause.

 Marginal costing

The marginal costing technique is employed to determine the selling price, choose the optimal
sales mix, make the best use of scarce raw materials or resources, decide whether to create or
buy, accept or reject bulk orders and overseas orders, and perform similar tasks. Based on the
contribution, fixed cost, and variable cost.

 Budgetary control

Future financial needs are predicted and organized on an orderly basis using budgetary control
strategies. It is employed to regulate a company’s financial results. A preferred path is taken for
business activities.

 Ratio analysis

Management employs it to carry out its fundamental duties of forecasting, planning,

coordination, communication, and control. By conducting an evaluation of both the physical and
monetary aims, it prepares the path for effective control of business operations.

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Task 2 of 2

2.0 MANAGEMENT TECHNIQUES TO SOLVE BUSINESS PROBLEMS

Instead of emphasizing external users of financial information, management accounting

concentrates on the internal requirements of an organization. Solutions might be challenging
because these issues differ from business to business, even within the same industry. What
worked for one company might not work for another. Management accounting uses a range of
techniques, such as the following, to help businesses accomplish their goals:

o Analyzing the margin

The incremental benefits of production optimization are what margin analysis focuses on most.
In management accounting, margin analysis is one of the most crucial and fundamental
methods. The best sales mix for the business’s products is calculated as part of this process,
which also includes the breakeven point calculation.

o Analysis of constraints

A production line’s main bottlenecks are identified, along with the inefficiencies they cause and
how they affect the business’s capacity to produce sales and profits, through examination of the
product lines of that business.

o Budgeting for capital

The analysis of the data needed to determine the appropriate capital expenditure decisions is
the focus of capital budgeting. Management accountants perform capital budgeting analysis and
compute the net present value (NPV) and internal rate of return (IRR) to assist managers in
making new capital budgeting decisions.

o Pricing products & valuing inventories

Identification and analysis of the true expenses related to the business’s products and inventory
constitute inventory valuation. The process often entails the computation and distribution of
overhead expenses as well as the evaluation of the direct costs associated with the cost of
goods sold (COGS).

o Forecasting & trend analysis

Trend analysis and forecasting are largely concerned with recognizing patterns and trends in
product costs, as well as recognizing patterns and trends in products costs, and with

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recognizing with the recognition of unexpected deviations from the anticipated values and the
causes of such deviations.

o Standard costing

It’s a technique for replacing real costs with predicted costs in accounting records. The historical
cost data is kept for inventory items that are in stock in this alternative to the cost layering
method. For various company-wide activities, this requires the establishment of estimated
expenses. When it takes too long to determine the exact cost, this technique is used to estimate
costs fairly.

2.1 MANAGEMENT ACCOUNTING TECHNIQUES TO INFORM BUSINESS DECISION

MAKING

The ability to make decisions is crucial in daily life, but it also may have a big impact on a team’s
long-term performance. Poor decisions, for instance, can cause the business to lose customers
or workers, which would ultimately cause it to fail. Fortunately, it’s simpler than it might seem to
make judgments as a manager. There are several management accounting techniques that a
business can employ to make a wiser choice as long as it has strong decision-making abilities.
These techniques involve challenging presumptions, acquiring data, doing research, weighing
business options, and coming to decisions. They can assist businesses in recognizing various
viewpoints on a subject, exercising critical thought when considering crucial elements, and
arriving at wise judgments. With the aid of these techniques, a business can enhance its ability
to make decisions and advance as a manager in general. A few techniques must be used in
order to make good decisions. Below are some of the techniques that help management
accountants make outstanding decisions:

 SWOT analysis

One of the most well-known decision-making processes, SWOT analysis entails assessing both
internal and external aspects of an organization in order to guide decision-making. Managers
can use this technique to identify and rank the most important problems and variables that affect
their decision-making. The advantage of SWOT analysis is that it offers a disciplined framework
for analyzing many factors and coming to wise judgments. This technique can be used for a
variety of tasks, such as project management, problem-solving, and strategic planning.

 Cost-benefit analysis

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This management accounting technique used for making decisions entails weighing the costs
and advantages of a proposed course of action to see if it is a workable alternative. Utilizing this
technique enables managers to weigh prospective costs and advantages and make well-
informed decisions regarding whether to pursue a specific course of action. This technique has
the advantage of allowing managers to make deliberations that are based on complex data
rather than views and are therefore objectives. Resources may be allocated, projects can be
managed, and financial decisions can be made using this technique.

 Pareto analysis

The 80/20 rule, which claims that 80% of effects result from 20% of causes, is one of the
decision-making techniques that involve ranking possibilities in order of importance. This
technique assists managers in concentrating their efforts on the most important aspects and in
selecting the best course of action. The advantage of utilizing Pareto analysis is that it allows
managers to focus on the most important issues and prioritize their efforts, resulting in more
effective decision-making. This technique can be used in quality control, resource allocation,
and issue resolution.

 Brainstorming

Using a huge number of ideas and solutions in a group context, brainstorming is one of the
decision-making processes. Utilizing their team’s combined creativity and exploring many
choices is made easier for managers with the aid of this technique. The advantage of
brainstorming is that it promotes teamwork and creativity, which results in more informed and
efficient decision-making. Strategic planning, problem-solving, and product creation can all
benefit from this technique.

 Force field analysis

This technique for making decisions entails assessing the driving and restraining forces that
may affect a particular choice. Managers can use this technique to recognize and comprehend
the critical elements that will either help or impede their decision-making. Making informed
decisions by taking into account both positive and negative elements is one of the advantages
of adopting force field analysis for managers. The application of this technique is possible in
problem-solving, conflict resolution, and change management.

 Decision matrix

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Using a decision matrix, a business can weigh several possibilities according to predetermined
criteria. This is one of the management accounting techniques for decision-making. By taking
into account many variables and allocating priority to each option, this technique aids managers
in making wise decisions. The advantage of adopting a decision matrix is that it gives managers
a systematic and objective framework for making decisions, allowing them to make educated
decisions based on complicated data. Resources allocation, project management, and strategic
planning can be all done using this technique.

 Nominal group technique

The nominal group technique is a type of management accounting technique for making
decisions that comprise systematically getting feedback from a large number of people. With the
aid of this application, managers may take into account many viewpoints and generate data-
driven judgments. The advantage of employing the nominal group technique is that it allows
managers to draw on the collective knowledge of their team, resulting in more informed and
efficient decision-making. It is possible to use this method for solving issues, allocating
resources, and developing a team.

 Root cause analysis

Understanding the underlying causes of an issue rather than focusing only on its symptoms is
what root causes analysis entails. With the aid of this technology, managers can locate the
source of an issue and decide how to fix it with greater knowledge. The advantage of employing
root cause analysis is that it empowers managers to address issues at their root, resulting in
long-term fixes and a decreased likelihood of reoccurring issues. Finding solutions, quality
control, and ongoing improvement can all be accomplished with this technique.

 Scenario planning

Creating and analyzing several potential future scenarios is one of the management accounting
techniques for decision-making techniques. This technique is used to guide decision-making.
With the use of this technique, managers can think about alternative scenarios and base their
decisions on those scenarios’ potential results. The advantage of scenario planning is that it
enables managers to be ready for upcoming events and to make educated decisions while
taking various outcomes into account. Forecasting, managing risks, and scenario analysis are
three areas where this technique can be used.

 Multicriteria decision analysis

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This is the other management accounting technique used in decision-making. This involves
assessing possibilities based on a number of criteria to help make decisions. This technique
aids managers in taking into account many elements and determining their relative importance
while making decisions. By taking into consideration a number of variables and giving each
alternative priority, multicriteria decision analysis helps managers make wise decisions.
Handling projects, distributing resources, and long-term strategy can all be done using this
technique.

CONCLUSION

Management accounting is crucial to management decision-making because it guarantees the

viability of the translation of inputs, through the production process, to output. Identification,
measurement, collection, analysis, preparation, interpretation, and communication of data are
all parts of the process of management accounting, which enables managers to achieve
organizational goals. The requirement for numerical financial information is addressed by
accounting. It is perceived as an economic language. By assembling all accounting data,
accounting eventually serves the objective of assisting someone in making judgments.

Businesses can acquire and improve their decision-making over time, but there are a number of
different decision-making approaches that can speed up the process and help the business to
make better judgments. A decision-making process consists of a number of steps that guide the
business as they make their choice. The business can analyze the choice and proceed with
their decisions in light of their findings. It is possible to accelerate the process of making better
decisions by employing decision-making tools like Swot analysis, matrix analysis, and Pareto
analysis.

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REFERENCES

Task 1 of 2

Tuovila, A. (2023, January 13). Managerial accounting meaning, pillars, and types.
Investopedia.https://www.investopedia.com/terms/m/managerialaccounting.asp#toc-managerial-
accounting-vs-financial-accounting

What is decision-making? (n.d.). https://www.managementstudyguide.com/what-is-decision-

making.htm

Interested parties of financial statements No Comments | Mar 12. (n.d.). Tools and techniques
of Management Accounting. Accountlearning. https://accountlearning.com/tools-and-
techniques-of-management-accounting/

Task 2 of 2

Managerial accounting. Corporate Finance Institute. (2023, May 14).

https://corporatefinanceinstitute.com/resources/accounting/managerial-accounting/

10 decision-making techniques that will help you make the right choices. Risely. (2023, March
9). https://www.risely.me/decision-making-techniques-that-will-help-you/#:~:text=These
%20techniques%20include%20questioning%20assumptions,factors%2C%20and%20make
%20informed%20decisions.

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