Management Accounting and Strategic Decision Making

This assignment provides a comprehensive overview of management accounting research, covering topics such as strategic management accounting, performance measurement, and risk management. The references listed are from various books and journals, including articles by authors such as Cadez, Guilding, and Merchant. The assignment aims to provide insights into the importance of management accounting in decision-making processes within organizations.

Advance Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................3
Overview of company. ....................................................................................................................3
LO1: Analyse the purpose for developing and presenting financial information........................3
LO2:Evaluate the use of management accounting technique to support organisational
performance.................................................................................................................................5
LO3 Analyse actual and standard cost to control and correct variances.....................................7
LO4: Evaluate how a changing business environment impact on management accounting.....13
CONCLUSION .............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
In present competitive environment every organisation wants to reduce cost while
maintaining quality of product, however in practical term it is very difficult task for organisation.
To achieve their objectives while maintaining quality at competitive price managers or cost
accountant use various analytical tools and methods and prepares budgets (Richardson, 2012). In
this report to understand the importance advance management accounting southern window is
selected. This report exhibits cost analysis, cost-volume profit analysis, cost variances and
methods of costing along with practical solutions of given financial information under activity
one and two. This report covers all aspects of costs and variances that is necessary for decision-
making activities.
Overview of company.
Southern Window is one of the leading company in UK that use to manufacture beautiful
and designer doors and windows that makes an office, houses and building attractive and
wonderful. Company was established 35 years ago and have its headquarter in London that
started manufacturing PVC and aluminium windows. Recently Southern Window started
manufacture the latest in aluminium window and door systems and specialise in structural
glazing solutions. Large number of workforce and specialist they are able to mix various
techniques with innovative glass technology to create beautiful and functioning glass structures
and deliver visionary architectural glazing systems.
LO1: Analyse the purpose for developing and presenting financial information
Financial information is consider to be a crucial information that is needed by the HOD
or BOD in order to make valuable decision. Manager of companies use to collet useful
information that gives the detail understanding about overall business activities in an accounting
year. There are different kind of statement that are prepared by internal manager that are
presented to to management in order to take decision. Some main kind of financial statement are
balance sheet, cash flow statement and income statement that is further provided to external
stakeholders that help them to make useful decision. In Southern Window manager use to
prepare such statement in order to determine the overall growth within a year and for evaluation
total expenses and income. Types are discussed below:

Balance sheet: This is also known as the statement of financial potion for company as it
is a summarize form of assets, liabilities and capital reserve of firm within an financial year. It
shows the detail balance of income and expenses over a period of time. Management of Southern
Window use to create a formal balance sheet that discloses the balance of total liabilities, reserve
and total debts, assets for an accounting year that help to take meaning full decision.
Income statement: A profit or loss account is also one of the crucial fiscal document for
company as it shows the total revenues and expenditure during a particular period. The main
purpose of preparing income statement is to indicate the manner that shows the transformation of
of revenues into net income and profit. Internal manager of respective company use to maintain a
descriptive income statement that help to determine the balance of net income or loss in a
specific period of time.
Cash flow statement: This is also knows as the statement of cash flows that help to
displays the changes in balance sheet accounts and income affects cash and its equivalents.
Manager use to calculate actual balance of cash by considering operating, investing and
financing activity.
Purpose of financial information: The essential purpose of financial information are
defined below:
Provide financial information: The main advantage of financial reporting is that it
deliver valuable financial information to internal as well as external party. Generally financial
statements are created on the bases of IFRS that is internation financial reporting standard.
Furthermore, financial statement of any company includes balance sheet that is statement of
financial position, cash flow statement and income statement that includes profit or loss incurred
by company.
Act as a source of decision making: As the financial statement disclose the data related
to asset, liabilities, profit as well as loss of company. Thus, helps the user of financial
information like creditors to gain the information from financial statement and utilise it in their
favour to make efficient decision. Hence, these information are presented either in Annual report
or Chairman's statement.
Assist existing as well as potential investors: Investors make the use of information
gained from target company and then makes decision whether they need to invest or withdraw

their part of investment from given company. Therefore, financial statement is the primary
source that assist existing as well as potential investors to gain informative information.
Information of stakeholder: There are various types of stakeholders that are the part of
an organisation. For all of them it is very important to gather financial information of the
company. The internal and external stakeholders of Southern Window are as follows:
Internal Stakeholders: All the members of an organisation who are responsible for the purpose
of decision making and planning are considered as the internal stakeholders. For Southern
Window all of them are as follows:
 Managers: These are the persons who manages all the operational and executional
activities. Financial information is very important for them so that they can make plan to
enhance financial performance of the company.
 Shareholders: The person who put their money in a business are called shareholders.
Financial information is vital for them in order to analyse that their money is
appropriately utilised by the organisation or not.
External Stakeholders: All the external parties who invest their money, provide credit and buy
products or services are known as such type of stakeholders. For Southern Window all of them
are as follows:
 Customers: All the people who buy products of the organisation are known as customers.
Financial information is very important for them because with the help of such data they
can analyse that they are buying products of a profitable company or not.
 Investors: The individuals who invest money in the company are known as investors.
Financial information is very important for them because it can help them to estimate
possible rate of return which can be acquired by them on their money.
LO2:Evaluate the use of management accounting technique to support organisational
performance
Management technique refer to the systematic method that help the firm in making
informed decision:
Cost Analysis:
Cost Analysis refers to process of creating and evaluating information or data related to
cost out of specific segment and forecasting any enhancement and allocation of available
resources in order to provide basis for existing and potential business activities or actions. Cost

analysis is used by management as a decision making tool to classify and analyse requirement of
resources by considering cost forecast and expected or required rate of return in business. Cost
analysis provides potentials to explore things related to aspects about expenses incurred to
produce product or to promote product (Cadez and Guilding, 2012). Such process of
classification and allocation of various costs is a major part of business, causing identification
and evaluation of each and every possible costs. Cost analysis assists in preparation of budget.
This analysis contain a systematic comparison of normal costs and possible outcomes that helps
in business to achieve a sustainable growth. Business, specially manufacturing units have
different types of expenses and details at a low level, but a cost analysis arrange all activities and
tasks in a systematic manner.
Cost-volume profit analysis:
Cost-volume profit (CVP) analysis is a systematic approach or method of cost accounting
that emphasises on the significant changes in costs and volume in particular business
organisation. Under this analysis break-even point for different sales volumes and cost structures
is calculated, that helps managers in decisions making activities. In Cost-volume profit analysis
it is assumed that sales price, fixed costs and variable cost per unit are constant and several
comparison is made for price, cost and other variables by using graph. In simple terms this
analysis exhibits change in profit due to change in cost and volume that helps manager to search
level of sales at which there is no-profit no-loss situation (Cuganesan, Dunford and Palmer,
2012). Such no-profit no-loss situation often called as break-even point. This analysis assist
management to find out highest sales volume to mitigate losses, and sales volume at which
predetermined targets are achieved, and to find the favourable and most reliable mixture of costs
and volume. Mangers in an organisation mostly uses CVP analysis to anticipate and check out
effects of his decisions about fixed costs, marginal costs, sales volume and selling price for its
profit plans.
Flexible Budgeting:
It is a type of Budgeting in which budget is prepared while considering different level of
activities. Flexible budget prepared in flexible budgeting shows budgeted amounts for each level
of activity in an organisation and covers all costs, revenues and profits through analysis of
various level activities. Flexible budget is prepared to change in accordance with the level of
activity actually attained (Merchant, 2012). Such budget assist an organization to anticipate

performance and results at particular level of activity. It helps to analyse effects occurred due to
fluctuation in sales and production levels. It enables organisation to make comparison of actual
performance and budgeted performance for actual level in a systematic manner and to attain the
objective of cost reduction and better cost control. It assists in measuring the capacity utilization
of plant or labour force, at a particular level of activity.
Cost Variance:
cost variance refers to difference between actual cost and budgeted cost amount. Cost
variances helps to analyse items of expenses, usage of material, efficiency of labour (Tappura,
2015). Cost variances are part of management reporting system which shows data as favourable
or adverse. Variances in cost are shown as favourable or unfavourable. The following are some
major cost variances which management use in reporting, as follows:
 Fixed overhead spending variance
 Direct material price variance
 Variable overhead spending variance
 Purchase price variance
 Labour rate variance
Variance analysis and corrective actions to correct variance:
Under variance analysis a favourable cost variance shows that actual cost incurred is
lower than the budgeted amount and an unfavourable cost variance shows that the actual cost
incurred is greater than the budgeted amount. Practically by using these variances management
identifies the main reason due to which variances occurred and give suitable directions to
minimise the size of the variance in the future (Kihn. and Ihantola, 2015). Not all unfavourable
cost variances are considered as dangerous for business because if in an organisation, spending
more money in one area may create a favourable cost variance. For an organisation review of
cost variances is necessary to take cost control decision. Organisation should re-design the
process of cost in which variance occurred to correct variance in such cost. Also management
should make strategy as per the nature of variance whether favourable or unfavourable in order
to correct variance.
Evaluation of management accounting techniques:
From above discussion it has been evaluated that techniques of management accounting
is significant to manage activities and analyse any problem involved in processes. All techniques

are used by managerial personnel to solve particular problem and all have its own significance
such as cost analysis is used for optimisation of cost, cost volume is effective to analysis
relationship of cost and volume of production, Flexible budgeting is used to analyse cost at each
activity level and cost variances provides main reason of under and over budget. However main
purpose is to achieve profitability and attain sustainable growth.
LO3 Analyse actual and standard cost to control and correct variances
Standard cost:
It is prepared to achieve the objective of organisation by controlling cost of firm. It is
basically used to calculate cost of all three product element that is direct material, direct labour
as well as overhead cost. Generally, managers make the use of standard cost to plan and control
management process liker budget planning development and product costing. Therefore, once
the standard cost for product or services are determined in advance and then it is compared with
actual cost to calculate the variance.
Actual cost:
It simply refer to the actual cost incurred by firm to acquire asset like direct material,
direct labour as well as overhead. Hence, the gap between actual cost as well as standard cost is
known as variance. It simple states real amount of paid by organisation for acquisition of assets.
It helps to define actual position of asset in organisation. Organisation using actual value of asset
asses the amortised or any other deduction in cost over the period.
Absorption Costing:
Absorption costing is method of costing which is purely based on assumption that all of
the manufacturing costs are absorbed by the units produced and cost of a finished goods includes
direct materials, direct labour, and both variable and fixed manufacturing overhead. Under
absorption costing variable selling and administrative and fixed selling and administrative are not
included in cost of finished goods. In Absorption costing all costs of production such as fixed
costs of operation, factory rent, and cost of utilities in the factory are considered (Vosselman,
2014). Absorption costing provides more complete and authentic results then the variable costing
method. Following are the major costs or expenses considered while calculating cost of products
under an absorption costing system, as follows:
 Direct materials includes all direct expenses related with raw material and work in
progress.

 Direct labour includes all direct expenses such as direct wages, workers overtimes and
other labour related expenses.
 Variable manufacturing overhead includes costs to operate a manufacturing facility,
which changes with production volume.
 Fixed manufacturing overhead includes costs to operate a manufacturing facility, which
do not changes with production volume.
Marginal Costing:
Marginal costing is method of costing in which marginal cost is assigned to cost of
product and fixed cost for the period is completely written off against contribution. Under
marginal costing method marginal cost includes Direct material, Direct labour, Direct expenses
and variable overheads. Under marginal costing while calculating cost of finished goods only
variable costs are considered, however the variable selling and distribution overheads are not
included in cost of finished goods. Under this method variable cost is considered as the product
cost while the fixed cost is deemed as a period cost (Nitzl, 2016). Marginal Costing helps
management in decision making activities, such as whether to replace any machine, whether it is
appropriate to discontinue any operation or segment etc. It also helps the management in
determining efficient level of activity, through break even analysis, that shows effects of
changes in production level, on net profit.
Activity 1.
 Calculation of total production hours based on standard time per unit:
Product
Standard
Time Per
Unit
Budgeted
Units
Total
Standard Hour
Actual
Production
Units Total Production Hour
A 3 3000 9000 1800 5400
B 4 2000 8000 800 3200
Q 5 500 2500 400 2000
Flexible Budget:
Budgeted Hours
Variable Cost Product A Product B Product Q
Cost Item Per Hour 9,000 8,000 2,500

Direct Labour $2.00 18,000 16,000 5,000
Variable
Overhead $4.00 36,000 32,000 10,000
Total Variable
Costs $6.00 $54,000 $48,000 $15,000
Actual Production Hours
Variable Cost Product A Product B Product Q
Cost Item Per Hour 5,400 3,200 2,000
Direct Labour $2.00 10,800 6,400 4,000
Variable
Overhead $4.00 21,600 12,800 8,000
Total Variable
Costs $6.00 $32,400 $19,200 $12,000
Actual Production Hours
Variable Cost Product A Product B Product Q
Cost Item Per Hour 5,400 3,200 2,000
Direct Labour $2.17 11,700 6,933 4,333
Variable
Overhead $3.33 18,000 10,667 6,667
Total Variable
Costs $5.50 $29,700 $17,600 $11,000
Variances between price and quantity:
Direct Labour Rate Variance = Actual Hours x Actual Rate - Actual Hours x Standard Rate
Product A = 5400*2.17-5400*2
= 918
Product B = 3200*2.17-3200*2
= 544
Product Q = 2000*2.17-2000*2

= 340
Direct Labour Efficiency Variance = Actual Hours x Standard Rate - Standard Hours x Standard
Rate
Product A = 5400*2.17-9000*2
= -6282
Product B = 3200*2.17-8000*2
= -9056
Product Q = 2000*2.17-2500*2
= -660
VOH Spending Variance = ( SR × AU ) − Actual Variable Overhead Cost
Product A = 4*5400-40000
= -18400
Product B = 4*3200-40000
= -27200
Product Q = 4*2000-40000
= -32000
Activity 2.
(a) Calculations for Standard Product Sheet for one unit:
Direct Material Price Variance = Actual qty. (Std. price – Actual price.)
15000 = 150000(Std. Price- 1.4)
So, Std. Price = 1.5
Direct Material Usage = Std. price (Std. qty. – Actual qty.)
-9000 = 1.5 (Std. Qty. – 150000.)
So, Std. Qty. = 144000
Direct Labour Rate Variance = Actual Hours x Actual Rate - Actual Hours x Standard Rate
-8000 = 32000 x 4.25 – 32000 x Standard Rate

So, Std. Rate = 4.5
Direct Labour Efficiency Variance = Actual Hours x Standard Rate - Standard Hours x
Standard Rate
16000 = 32000 x 4.5 - Standard Hours x 4.5
So, Std. Hours = 28444
Variable production overhead expenditure Variance = ( SR × AU ) − Actual Variable
Overhead Cost
-6000 =(SR x 18000) – 38000
So , SR = 1.78
Standard Product Sheet for one unit
Particulars Per unit Cost
Marginal Cost:
Standard direct material cost 1.5
Standard direct labour rate 4.5
Variable production overhead 1.78
Total Standard product cost based on marginal costing 7.78
(b)Types of standard cost:
Standard is a measure of what is expected to take place under the current or anticipated
situations. In other words it is predetermined by the management which actual outcomes equate
to standards (Senftlechner and Hiebl, 2015). It is an important quantitative tool in hand of
management which allows management to measure of performance of business operations. There
are various kinds of standard that can be used for standard costing system are as follows:
Basic standard:
The standards which are basic in nature and remain unchanged for a long period of time
are part of basic standards. As when business operations change make significant affecting very
basic foundations of entity and nature of business than these standards are being altered.
Standard assists for comparing business operations over a long period of time. As basic standards

are not only helpful to analyse the actual results but also current expected results. These basic
standards can not be used for long term period by the organisation. So if any organisation is
planning to use the basic standard and make updates according to latest situation than it would
not be possible for that organisation because this standard work more efficiently in long term
(Fourie, 2015). It can be said that basic standards work as a standard for other standards.
Expected Standards:
The expected standards are those which are based on current conditions and situation and
represents what can be achieved or attained with present setup in place and if current condition
prevail. As current standards can be set lower or easier to achieved but manager always try to
accomplish those goals which are attainable and no resources is left unused. It is very important
for business that there should be proper utilisation of resources for accomplishing pre set goals.
The expected standards are target for manager which needs to be achieved within given period of
time(Gates, Nicolas and Walker, 2012). An attainable standards are representative of the
potential that business has capacity to accomplish. For example, a machinery is expected to run
for 5000 hours where it can run for the 7000. Therefore, current standard of machinery is 5000
hours and where as attainable is 5000 hours. These are very useful for organisation as it helps
management to evaluate their performance and use the unused potential at when needed.
Normal Standard:
These types of standards are consider to be normal which are expected under the normal
circumstances obtain in the current situation. In general the term normal stands for the natural or
modal conditions within the current or actual business. It is also focused that there must be no
changes or there must be absence of any unpredicted fluctuations (either approving or harmful)
in the business situation that may be the main reason for the reduction of profitability and
productivity. It is also stated that normal conditions for future and normal standards of business
are consider to be hypotactic in nature (Bobryshev, 2015). This is because it is not easy and thus
actuality cannot be sufficiently foreseen with all its fluctuations and modification in advanced. It
is also observed that, condition may modify in such a manner that element that manager thought
were to be manageable are actually not controllable this may reduce the overall performance of
different business project operating in company. Thus it has been controlled application in
today’s business organization environment. Yet, normal standards acts as a good standard that

shows challenging therefore possible results and can be used by governance in such environment
which is simple in nature and is not erect to large displace.
LO4: Evaluate how a changing business environment impact on management accounting
Due to changes in business environment that include external as well as internal factor
has directly caused an impact on management accounting process, and they are as follows:
External Factors affecting Management Accounting Process: External factors are
those factors that exists outside the organisation and affects it's process and activities related to
management accounting. These factors have great influence in organisation performance also
and sometimes create uncertainties and difficulties in formulation of strategy for management
accounting. Such external factors includes economic uncertainty, market competition, suppliers
monopoly, inflations, seasonal effects etc. These factors affects practices involved in
management accounting. External factors affects organisation activities and functions adversely
so management should keep eye on changes in markets, government policies and possible
economic events. However practically it is typical to trace these factors in continuously changing
environment.
Internal Factors affecting Management Accounting Processes: Organizations are
influenced by a multiplicity of interests whereby some interests are located primarily within the
organization. Internal factors are closely related with organisation and generally exists within the
organisation. These internal factors directly affects implementation of management accounting
process such as employees behaviour, size of organisation, type of organisational structure,
internal policies etc. Most of the internal factors are controllable by managers and owner but its
ignorance of these factors may cause adverse effects for organisation's performance and financial
condition. These factors are significant because these factors have direct influence on
organisation's strategy and business structure. Proper analysis of internal factors some times
helps to enhance competitive advantages.
Evaluation of impact of factors on management accounting:
From above explanation about internal and external factors it is evaluated that both
internal and external factors affects business organisation adversely only difference between
these factors are in term of their nature, control and extent. Primary responsibility to deal with
these factors of managers. Continuously tacking of these factors helps to achieve sustainability in
performance and to reduce complexities or problems. Some time these factors may put question

mark on survival of organisation so it is essential to analyse these factors effects on orgnisation
to avoid these type of conditions.
Types of changes
Incremental changes: This refers a small alteration or adjustment made towards a
referenced result. It impact on organisation growth and existing structure. For example, southern
window is a multinational company that is dealing in making windows and wants to bring some
incremental changes such to improve quality of windows by using decorative glass and
decorative designs.
Transformational changes: This refers rapidly alteration or changes towards a
referenced result that involves strategy, revolution, rethinking and big system of changes. For
instance, southern window that is dealing in window and planning to bring a big changes that is
new innovation such as wooden decorative door and wooden planks that helps to decorate a
house. It also includes a diversification in the business culture of an organisation by using
strategy and new technology.
Impact of changes and decision-making.
These changes will affect the business as well as the working culture which influence the
employees. These change can be positive or negative for the organisation because it will affect
the growth and structure of the business. On the basis of these changes manager of the company
take decision in respect of company's benefit. It will increase the profitability as well as
productivity of the organisation. It will help the organisation to reduce the cost of each unit
product.
CONCLUSION
From above prepared flexible budget it is concluded that cost incurred in Department D is
under the budget with respect to all products because total actual variable cost per unit is less
than budgeted variable cost per unit. However in terms of cost variances Direct Labour Rate
Variance shows favourable difference but Direct Labour Efficiency variance and variable
overhead Spending Variance shows adverse difference. In case of Direct Labour Efficiency
Variance shows changes in all three products due to level of activities, product Q has least
adverse variance but in case of variable overhead spending variance, product A has least adverse
variance (Edwards and Boyns, 2012). Due to adverse or negative cost variances it is

recommended that actual production hours should be increased for proper utilization of
efficiency of labour and for efficient allocation of variable overheads.
REFERENCES
Books and journal:
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Cuganesan, S., Dunford, R. and Palmer, I., 2012. Strategic management accounting and strategy
practices within a public sector agency. Management Accounting Research. 23(4).
pp.245-260.
Merchant, K. A., 2012. Making management accounting research more useful. Pacific
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