Use of Management Accounting for Sustainable Success

The assignment emphasizes the importance of management accounting techniques in identifying key performance indicators (KPIs), evaluating business success, and developing necessary strategies for improvement. It also highlights the benefits of using management accounting systems in achieving sustainable growth and development, including budgetary control, financial reporting, and effective decision-making.

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Management Accounting

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Solution to P3:
Information Given
Direct Material cost per unit 13 per unit
Direct labour cost 10 per unit
Variable expenses 7 per unit
Fixed indirect manufacturing cost 92000 per year
Other overheads:
Distribution Expenses 24000 per year
Administrative Expenses 89000 per year
Interest Expenses
Year 1 1100
Year 2 1000
Year 3 nil
Tax Rate 19%
Sales
Year 1 2600 units
Year 2 3500 units
Year 3 3200 units
Sale Price per unit 85 per unit

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Production
Year 1 3500 units
Year 2 3800 units
Year 3 3650 units
Working Note
Total Variable cost per unit
Direct Material cost 13
Direct labour cost 10
Variable expenses 7
Variable cost per unit 30
Income Statement Under Absorption Costing
Year 1
Particulars Amount Amount
Sales (2600*85) 221000.00
Less: Cost of Goods Sold
Opening Stock ( 0 units) 0.00
Production (3500 units * 30) 105000.00
Less: Closing Stock (900 units *30) -27000.00

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Less: Fixed Indirect manufacturing cost 68342.86
(92000 * 2600/3500)
Total cost of goods sold 146342.86
Gross profit 74657.14
Less: Other Overheads
Distribution Expenses 24000
Administrative Expenses 89000 113000
Net loss before interest and taxes -38342.86
Less: Interest expenses 1100
Net Loss before tax -39442.86
Add: Tax @ 19%
-
7494.1429
Net loss -31948.71
Income Statement Under Absorption Costing
Year 2
Particulars Amount Amount
Sales (3500*85) 297500.00
Less: Cost of Goods Sold
Opening Stock ( 900 units) 27000.00
Production (3800 units * 30) 114000.00

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Less: Closing Stock (1200 units
*30) -36000.00
Less: Fixed Indirect manufacturing cost
Opening (900/3500) *92000 23657.14
Production (2600/3800)*92000 62947.37
Total cost of goods sold 191604.51
Gross profit 105895.49
Less: Other Overheads
Distribution Expenses 24000
Administrative Expenses 89000 113000
Net loss before interest and taxes -7104.51
Less: Interest expenses 1000
Net Loss before tax -8104.51
Add: Tax @ 19%
-
1539.8571
Net loss -6564.65
Income Statement Under Absorption Costing
Year 3

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Particulars Amount Amount
Sales (3200*85) 272000.00
Less: Cost of Goods Sold
Opening Stock ( 1200 units *30) 36000.00
Production (3650 units * 30) 109500.00
Less: Closing Stock (1650 units
*30) -27000.00
Less: Fixed Indirect manufacturing cost
Opening (1200/3800) *92000 23657.14
Production (2000/3650)*92000 50410.96
Total cost of goods sold 192568.10
Gross profit 79431.90
Less: Other Overheads
Distribution Expenses 24000
Administrative Expenses 89000 113000
Net loss before interest and taxes -33568.10
Less: Interest expenses 0
Net Loss before tax -33568.10
Add: Tax @ 19% -

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6377.9393
Net Loss -27190.16
Income Statement Under Marginal Costing
Year 1
Particulars Amount Amount
Sales (2600*85) 221000.00
Less: Variable expenses
Opening Stock ( 0 units) 0.00
Production (3500 units * 30)
105000.0
0
Less: Closing Stock (900 units
*30) -27000.00
Total variable expenses 78000.00
Contribution 143000.00
Less: All Fixed Expenses
Fixed Indirect manufacturing cost 92000.00
Distribution Expenses 24000.00
Administrative Expenses 89000.00 205000.00
Net loss before interest and taxes -62000.00
Less: Interest expenses 1100.00

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Net Loss before tax -63100.00
Add: Tax @ 19% -11989.00
Net loss -51111.00
Income Statement Under Marginal Costing
Year 2
Particulars Amount Amount
Sales (3500*85) 297500.00
Less: Variable expenses
Opening Stock ( 900 units) 27000.00
Production (3800 units * 30)
114000.0
0
Less: Closing Stock (1200 units
*30) -36000.00
Total variable expenses 105000.00
Contribution 192500.00
Less: All Fixed Expenses
Fixed Indirect manufacturing cost 92000.00
Distribution Expenses 24000.00
Administrative Expenses 89000.00 205000.00

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Net loss before interest and taxes -12500.00
Less: Interest expenses 1000.00
Net Loss before tax -13500.00
Add: Tax @ 19% -2565.00
Net loss -10935.00
Income Statement Under Marginal Costing
Year 3
Particulars Amount Amount
Sales (3200*85) 272000.00
Less: Variable expenses
Opening Stock ( 1200 units) 36000.00
Production (3650 units * 30)
109500.0
0
Less: Closing Stock (1650 units
*30) -49500.00
Total variable expenses 96000.00
Contribution 176000.00
Less: All Fixed Expenses
Fixed Indirect manufacturing cost 92000.00
Distribution Expenses 24000.00

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Administrative Expenses 89000.00 205000.00
Net loss before interest and taxes -29000.00
Less: Interest expenses 0.00
Net Loss before tax -29000.00
Add: Tax @ 19% -5510.00
Net loss -23490.00

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Solution to P4:
Budgets refer to the future forecast of the financial results and financial position of the
organization, generated using the past events and financial performance. The main purpose for
preparing the budget is to help the management in future planning and measuring performances.
It can be used to take decisions regarding the expenditures for fixed assets, decision for rolling
out new product, expansion plans, sales position, advertisement expenses etc. Budgets are
formal statements that are created using the past estimations with the help of various planning
tools such as ratio analysis, variances analysis and benchmarking. Some of the important budget
statements prepared by an organization are income statement, statement of financial position,
sales forecast, expenditure budgets, and cash budgets (Bromwich and Bhimani, 2005).
Budgetary process involves some more complex process in addition to preparing of
budgets. It also involves the use of proper planning tools and application of budgetary controls in
preparation of budgets. Budgetary controls is the process by which budgets are arranged for the
future period and actual results for that period are compared with the budgeted results in order to
find out the variances. The comparison of the budgeted figures with the actual figures helps the
management to find the variances and take corrective actions for the future period. It also helps
in performance evaluation of the various business processes in order take necessary actions for
better performance (Davies and Crawford, 2011).
Advantages and Disadvantages of Budgets
Budget preparation is an important financial process in an organization as it helps in
gaining an estimate of the future financial performance and also helps in determining the
variances between the expected and actual results. The comparison of the actual outcomes

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achieved to the expected results helps the management in identifying the variances. The
identification of variances will provide assistance to managers for gaining an understanding of
the key problematic areas and development of strategies for their resolution. The process of
budgetary control enables a business organization in controlling the production costs and thereby
leading to profit maximization. It defines the business plans, goals and policies of a company and
thereby determining the action plan for carrying out the overall operational activities of an
organization. The individual business department has a clear direction of attaining the specific
targets and goals as per the process of budgetary control. As such, it can be said that the process
of budget preparation helps in effective management of different business activities and attaining
a proper coordination between the various business departments. It also helps in determining the
different responsibilities of business personnel as per the budgetary targets and objectives. The
reduction in the overall production cost through the process of budgetary control helps in
improving the overall economic performance and efficiency of a business organization (Lalli,
2011).
On the other hand, there are also some drawbacks associated with the process of budget
preparation and budgetary control. The most prominent drawback is that a budget can provide
misleading information under the situations of inflation. The budget prepared under the
inflationary situations might provide unrealistic outcomes and therefore can misguide the
management in determination of business goals and objectives. Also, the restricted support from
top management can impact the success achieved by a business organization in improving the
financial performance through the process of budgetary control (Rasmussen et al., 2003).
Advantages and disadvantages of variance analysis

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Variance analysis is the method to compare the actual result with the budgeted results for
measuring the performances and thus taking corrective actions for future growth. Variance
analysis helps in achieving budgetary control through minimizing the deviations between the
actual and expected results. The main aim for having the lower deviations from the budgeted
results is that it helps the managers to make detailed and forward looking budgetary decisions.
Thus, it can be said that main advantage of variance analysis is to help in performance
measurement through identifying the difference in actual and budgeted performance. It promotes
responsibility accounting through making the managers accountable for their actions and
optimum utilization of resources. It can be used as control mechanism as large deviations
indicates the problematic areas that the management must investigate for identifying the possible
root causes in order to improve the business performance. The use of variance analysis helps in
assigning the responsibilities to the managers and applying the different control mechanism on
departments as it is required (Lumby and Jones, 2007).For example, if material variance is
unfavorable then it is the responsibility of production manager to find out the root cause of such
variance and take corrective actions to reduce or eliminate the variances.
On the other hand, there are some limitations associated with the use of method of
variance analysis. The most significant drawback is that it incorporates the use of past financial
information and therefore is not an accurate method to determine the current gap in business
performance. Also, there are numbers of factors that impacts the results produced by the variance
analysis. These include change in material price, government regulations and technology
changes having large impact on the results attained through the method. Thus, there is a need to
make the adjustment while calculating budgeted variances through the use of this method.
Advantages and disadvantages of ratio analysis

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Ratio analysis is also an important planning tool used in the budgetary process. This
planning tool has its own advantage and disadvantages. The major advantage of the ratio analysis
is that it helps in forecasting and planning the budgets through use of trend analysis and past
year’s financial performance of company. Ratio analysis is based on actual financial data that
makes it more reliable tool for predicting the financial performance of an organization. The
major limitation of the ratio analysis is that it provides results from the use of financial data of
the general purpose financial statements. However, the financial statements suffers from the
number of limitations that impacts the quality of ratio analysis (Moles and Kidwekk, 2011).

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Solution to P5:
Use of Management Accounting Systems for Responding to Financial Problems in Business
Organizations
The concept of management accounting refers to providing assistance to the business
leaders for managing the financial performance of a company. It can be regarded as the process
of measuring, identifying, analyzing and interpreting the financial information of a company for
achieving its goals and objectives. Management accounts provide timely and accurate financial
information to the managers that assist them in taking effective decisions regarding the daily
business operations. The business managers incorporates the use of different management
accounting systems such as inventory management, cost accounting system and job costing
system for resolving the various financial problems in business organizations. The cost
accounting system used by the businesses refers to allocating the cost to the products in order to
predict the profitability achieved and gaining cost control. The system enables the business
managers to gain an analysis of the overall production cost that consist of both variable and fixed
costs. It is a major technique used by the management accountants for budgetary and inventory
control and thereby resolving the financial problems by providing a comparison between the
input outcomes to the actual results (Weygandt et al., 2015).
On the other hand, the inventory management system is used by business corporations for
gaining control over the inventory levels, orders, sales and deliverables. It is the technique used
by the business managers for managing the quantity of finished goods for sales in order to reduce
the inventory cost and thereby increasing the profitability levels. Thus, the system helps in
resolving financial problem of inventory management by maintaining sufficient inventory level

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and thereby improving the bottom line of the company. In addition to this, the system of job
costing enables the business manager to attribute the overall production costs to the individual
item or batches in order to determine the accurate prices of the company’s products. The
information gained by the managers through the use of job costing system helps in assigning the
inventorial costs to the products manufactured. Therefore, the system helps in determining the
accurate prices of the products for achieving profitability and thus ensuring the company’s
sustainable growth and development (Warren et al., 2016).
As such, it can be said that the system of management accounting enables a company to
maintain an effective financial governance system for managing and controlling all the financial
issues. The system helps in timely reporting of the financial information to all the departments
within a business organization that leads to its effective management and control. The business
managers through gaining timely and accurate information about the financial performance of
the company can take effective decisions about optimum use of resources. The various financial
issues can be identified by the management and thus the business managers can develop and
implement the effective strategies and systems for overcoming the identified financial issues and
problems (Weygandt et al., 2015).
Use of Management accounting for leading Organizations to Sustainable Success
The appropriate use of the techniques of management accounting will lead to
sustainable growth and development of a business organization. This can be achieved by a
business organization through timely identification of the financial issue and development of
effective strategies for overcoming the financial problems. The management accounting systems
helps a company in identification of its key performance indicators (KPI’s) for supporting its