Introduction to Management Accounting

This document provides an introduction to management accounting and its importance in decision-making. It covers topics such as cash budgeting, behavioral aspects of budgeting, contribution per unit, break-even point, and more. The content includes practical and numerical tasks to help managers assess the actual position and make informed decisions.

Introduction
to Management
Accounting

Contents
INTRODUCTION...........................................................................................................................4
MAIN BODY..................................................................................................................................4
Question 1: Woodrock Limited...................................................................................................4
a. Preparation of cash budget:.....................................................................................................4
b. Comment on the cash position within the business, analyzing what Woodrock Limited
could do to improve cash flow:...................................................................................................8
c. Critically examine those issues of relevance in behavioral aspects of behavioral aspects of
budgeting which may lead to problems in a business entity.......................................................8
Question 2: Plaistead Plc.................................................................................................................9
a. Calculation of contribution per unit.........................................................................................9
b. Calculation of break-even point and margin of safety...........................................................11
c. Calculation of profit at 48000 tables at £13 per shelf............................................................12
d. If Plaistead require £90,000 profit, how much electric kettles should they require to make
and sell, if the selling price is £13 per electric kettle?...............................................................13
e. Price should Plaistead Plc to sell 53,000 electric kettles for making profit of £90,000:.......13
f. New Strategy:.........................................................................................................................14
g. Briefly discuss the underpinning assumptions attached to the break-even model:...............15
Question 4: Jayrod Plc...................................................................................................................16
Columnar statement:..................................................................................................................16
Purposes of standard costing, its key values and limitations linked with application of variance
analysis:.....................................................................................................................................17
CONCLUSION..............................................................................................................................19

INTRODUCTION
Management accounting framework is vital to the activity of production businesses as it
includes the expense details essential for decision-making. This covers all the major aspects of
accounting as well as managerial process to enable an organization to operate effectively.
Management accounting is way to acquire prepared management analyses and documents that
provide directors with reliable and timely financial and observable details to create a current
moment and long-term decisions. It recognizes, tracks, breaks down, integrates, and transmits
knowledge to enable an organization to achieve its goals (Ax and Greve, 2017). MA varies from
budgetary record keeping. Although monetary bookkeeping offers information to individuals
within the organization and, more specifically, to people outside the organization, MA is often
used to assist managers inside the organization with practical governance. The study covers
various vital aspects of managerial accounting through practical and numerical tasks which help
managers in assessing actual position and generate information for decision making.
MAIN BODY
Question 1: Woodrock Limited
a. Preparation of cash budget:
Desk Cabinet
Selling Price (£) 30 50
Materials (£) 10 12
Labour Hours
(Minutes)6
30 40
Forecast Demand
Month
1 700 400
2 500 300
3 600 350

4 800 400
5 1000 650
6 1100 800
Rent 12000 for
first six
month
Lease Cost 2500 per
month
Marketing and advertising
costs
8000
Manager's Salary 3000 p.m.
Insurance 4000
Labor rate 12 per hour

Month 1 Month
2
Month 3 Month 4 Month 5 Month 6
Desk
Demand
700 500 600 800 1000 1100
Cabinet
Demand
400 300 350 400 650 800
Labor Hour Worked
Desk 350 250 300 400 500 550
Cabinet 266.6667 200 233.3333 266.666
7
433.3333 533.3333
Sales (demand * sales per
unit)
Desk 21000 15000 18000 24000 30000 33000
Cabinet 20000 15000 17500 20000 32500 40000
Material Purchases (Sales * Material
purchase rate)
Desk 7000 5000 6000 8000 10000 11000
Cabinet 4800 3600 4200 4800 7800 9600
Cash Budget:
Month
1
Month
2
Month
3
Month
4
Month
5
Month
6
Cash Sales Receipts:
Desk 21000 15000 18000
Cabinet 20000 15000 17500
Cash Payments:
Material Purchases

Desk 7000 5000 6000 8000
Cabinet 4800 3600 4200 4800
Labor Wages @ 12 7400 5400 6400 8000 11200 13000
Rent 12000
Lease 2500 2500 2500 2500 2500 2500
Marketing and advertising
costs
2000 2000 2000 2000
Manager Salary 3000 3000 3000 3000 3000 3000
Insurance 4000
Net Cash Flows -30900 -12900 -25700 16900 3100 4200

b. Comment on the cash position within the business, analyzing what Woodrock Limited could
do to improve cash flow:
Due 90 days credit sales of will be collected from debtor after 90 days and supplies have
provided 60 days credits so payments are made after 90 days. Due to Rent and insurance in first
month there is higher cash outflows. However, cash outflow level has been declined to 12900 in
next month. In month 3 there is also payments to suppliers made for purchased made in first
month. Due to increased sale and decline in cash expenses there is positive increased cash inflow
in month 4 which changed to be changed to 3100 and 4200 based on fluctuation in sales units.
Overall trend in cash budget is incremental except in month 4.
c. Critically examine those issues of relevance in behavioral aspects of behavioral aspects of
budgeting which may lead to problems in a business entity.
Here are certain issues relating to relevance of behavioral aspects of budgeting as listed below:
 Budgeting is focused on a series of suppositions that also, in particular, not far
from conditions of operation under which this has been established. If the market
environment shifts to some significant extent, then the sales or cost structures of the
organisation will shift so dramatically that immediate facts will quickly deviate
from expectations outlined in budget. Where there is sudden economic slump, this
position is a particular problem, as budget allows for certain level of expenditure which is
no longer actually bearable under suddenly lowered level of income/revenue.
 During budget formulation phase at ending of year, budgeting process mainly
emphasizes management's attention on policy. There's really no procedural dedication to
revisiting the plan for the remainder of year. Therefore, if there is paradigm switch
in market only after budget has been executed, there's no mechanism in effect to
systematically analyse the circumstance and undertake adjustments, putting a business at
a massive drawback with its more agile rivals (Ameen, Ahmed and Abd Hafez, 2018).
 Creating a budget could be time-consuming, particularly in an inadequately structured
setting where several versions of budget might be necessary. If there is well-designed
budgeting system in place, workers are used to process, and organisation employs
budgeting software, time needed is less. If business environment is

changing constantly, work required can be more substantial, which asks for frequent
incarnations of budget model.
 The essence of budget is numerical, so management emphasis appears to be focused
on quantitative dimensions of a company; this typically means concentrating on
enhancing or sustaining profitability. In fact, clients do not value about company's
profits-they will only purchase from corporation as longer as they receive quality service
and well-built items at a reasonable price. Unfortunately, this is quite challenging,
because they qualitative in essence, to incorporate these principles into budget. Therefore,
the idea of budgeting doesn't really inherently support client ’s needs (Langfield-Smith,
Thorne and Hilton, 2018).
Question 2: Plaistead Plc
These information are already given in situation:
Particulars Amount (£)
Selling price 13
Actual production units 70000
Budgeted production units 53000
Variable cost (per unit):
Materials 5.25
labour 2.95
Variable overheads 1.85
Fixed costs:
Production 59000
Selling 47600
a. Calculation of contribution per unit
Contribution for actual production units (£)
Particulars Amount (£)
Total units 70000

Total sales revenue 910000
Total variable costs (materials +labour + overhead) 703500
Contribution 206500
Contribution per unit 2.95
Contribution per unit = (Total sales revenue – Total variable costs) / total units
Contribution for budgeted production units (£)
Particulars Amount (£)
Total units 53000
Total sales revenue 689000
Total variable costs (material +labour + overhead) 532650
Contribution 156350
Contribution per unit 2.95
Interpretation: Contributions per unit is measured for both actual and budgeted units
provided in task, as shown in above tables. Overall units are provided, and the total revenue from
selling is measured applying units and the £13 sale price. Contribution is derived by subtracting
variable costs from total revenues. Contribution each unit is derived by splitting the overall
contribution into units sold.

b. Calculation of break-even point and margin of safety
Break-even point for actual production units (£)
Particulars Amount (£)
Fixed costs 106600
Sales price per unit 13
Variable cost per unit 10.05
Break-even point in units 36135
Break-even point in £ 469755
Break-even point for budgeted production units (£)
Particulars Amount (£)
Fixed costs 106600
Sales price per unit 13
Variable cost per unit 10.05
Break-even point in units 36135
Break-even point in £ 469755
Margin of safety for actual production units (£)
Actual sales 70000
Break-even point 36135
Margin of safety 33865

Margin of safety for budgeted production units (£)
Budgeted sales 53000
Break-even point 36135
Margin of safety 16865
Break-even point in units = Fixed costs / (sales price per unit – variable cost per unit)
Margin of safety = Actual sales – Break-even point
Interpretation: For both existing units as well as budget units, break-even level in
units produced. A summation of production including fixed costs would determine the overall
fixed costs. Then after accumulation of supplies, staff, including variable-overheads, variable
costs each unit arrives. Safety margin following break-even level is also measured.
c. Calculation of profit at 48000 tables at £13 per shelf
Profit = contribution – fixed costs
Calculation of profit at 53,000 electric kettles
Particulars Amount (£)
Sales revenue 689000
Less: Variable costs 532650
Contribution 156350
Less: fixed costs 106600
Profit 49750
Interpretation: When companies produce 53000 electric kettles, net profit amount is
calculated, which also results in a transition in sales revenues. In addition, there are variable
costs and contribution.

d. If Plaistead require £90,000 profit, how much electric kettles should they require to make and
sell, if the selling price is £13 per electric kettle?
Profit 90000
Add: Fixed costs:
Production 59000
Selling 47600
Contribution required 196600
Contribution per unit 2.95
Units required to sell for desired profit 66644.07
e. Price should Plaistead Plc to sell 53,000 electric kettles for making profit of £90,000:
Variable Costs
Material 5.25 53000 278250
Labour 2.95 53000 156350
Variable Overheads 1.85 53000 98050
Total Variable Costs 532650
Fixed costs
Production 59000
Selling 47600
Total Fixed Costs 106600
Selling price = (Desired Profit + Variable Costs + Fixed Costs) / Desired number of sales units
= (90000 + 532650 + 106600) / 53000 = 13.75943 or 13.76

f. New Strategy:
Net profit under current scenario:
Net profit if selling units are 53000
Particulars Amount (£)
Sales revenue (53000*13) 689000
Less: Variable costs 532650
Contribution 156350
Less: fixed costs 106600
Net profit 49750
Marketing and advertising: 45000
Selling price: Increased by 9%
Selling units: Increased by 17%
Particulars Rate Units Amount
Sales 13 +
13*9
% =
14.17
53000+53000*17%
= 62010
878681.7
Variable Costs
Material 5.25 62010 325552.5
Labour 2.95 62010 182929.5
Variable Overheads 1.85 62010 114718.5
623200.5
Fixed costs
Production 59000

Selling 47600
Marketing and advertising 45000
151600
Profit 103881.2
Interpretation: Net profit must be measured according to the above facts, in order to evaluate
strategy. Plaistead Plc aims to spend £ 45,000 towards advertising & marketing in line with this
strategic approach. Sales prices are thus also increasing by 9% and sales price about 17%. First
of all, net profits for budgeted units of 53000 is calculated. Then, Total revenue with 62010
units is then calculated. sThe study above indicates that this is successful strategy because profit
figure in the new case is higher.
g. Briefly discuss the underpinning assumptions attached to the break-even model:
Break-even model is an effective tool for evaluating how profitable a company, or new
products or service, would be at which level. Put differently, in order to at minimum cover the
expenses, this a financial measure used to calculate the amount of goods or services one need to
deliver (Bromwich and Scapens, 2016). Business don't risk money or make money when they
break even, because all expenses are covered.
 This analysis doesn't account at semi-variable expenses, only overall costs that are
split as variable versus fixed costs are regarded.
 The cost and revenue structures remain linear.
 Fixed costs stay unchanged or will not alter, regardless of the volume generated.
 The price of the item is unchanged.
 Volume of production as well as sales volume being equivalent.
 Variable expense of constant rate changes.
 Technology aspect is stable, as is the productivity of labour.
 There really is no shift in price factor.
 No shift in prices of input.
 When a business is producing multi-products, there's consistency in the product mix
(Bogt and Scapens, 2019).
 The efficiency each labour is identical.

 The overall price trend is stable, too.
Question 4: Jayrod Plc
Given Information:
Standard
Direct Material 20 kilograms @ £3
per kg
60
Direct Labour – 3 hours @ £15 per
hour
45
Variable Production Overhead 12
Budgeted Fixed Production Overhead per month: 200000
Budgeted Production of Product PK65 10, 000 units per
month
Actual Scenario
Direct Materials purchased and
used
190000 kg 579500
Direct Labour 30500 hours 451400
Variable Production Overhead 106000
Variable Production Overhead* per unit 12
Actual Units 8833.333
Fixed Production Overhead Incurred 202000
Columnar statement:
Variances
Origina
l
Budget
Flexibl
e
Budget
Actual Original
Budgeted -
Flexible
Flexible Budget
- Actual Costs
Incurred
Original Budget
- Actual Costs
Incurred

Budget
Units 10000
Direct
Materia
l Cost
600000 570000 579000 30000 -9000 21000
Direct
Labour
Costs
450000 457500 451400 -7500 6100 -1400
Variabl
e
Product
ion
Overhe
ad
120000 108000 106000 12000 2000 14000
Fixed
Product
ion
Overhe
ad
200000 180000 202000 20000 -22000 -2000
Purposes of standard costing, its key values and limitations linked with application of variance
analysis:
In reporting, standard costing framework is a method for budgetary planning , cost monitoring
and supervising, and quality cost management assessment. Standard costing method includes
predicting costs of production process that are required. prior to start of accounting period,
however, establish the requirements and set them with respect to the volume and expense
of direct materials needed for production process as well as the volume and wage rate of direct
labour needed for production. Furthermore, to prepare a plan for the manufacturing process, such

standards are being used. Using the actual quantities and prices of direct materials at the
ending of accounting period. To equate it with the previously defined criteria, then use the real
quantities and pay scales of direct labour (Leotta, Rizza and Ruggeri, 2017). It helps managers to
search for areas to enhance cost controlling, cost savings, and operating performance as to
compare actual costs with standard costs as well as analyse the variations among them. Standard
costing is main technique for controlling business expenses/costs in which standard costs are
calculated for each unit and for every cost portion. After that, to see if their expense is below our
normal cost, use variance analysis. Company is effective in their task if their actual costs
are smaller than their standard cost. Here following are certain points which highlights this
technique’s key values and purposes, as follows:
For Fixing Responsibility: Organization should fix liability/responsibility of their workers when
there is adverse variation after variation evaluation in the standard costing. Assume that standard
labour cost is lower and actual labour cost is higher. That implies, business paid more for the
personnel. It's their huge letdown here. Who is liable to pay salaries to staff. This individual has
to provide a response to this.
Management by Exceptions: With standard costs, organization can conveniently use
management with key exceptions. Management through exception suggests that large company
tasks are centralized rather than small and limited management. k Through standard costing,
entity can make cost standards. Then, feel comfortable to do what 's occurring and just review
and contrast material, labour and overheads cost outcomes (Hiebl and Richter, 2018).
Assistive in production policy: The single objective of standard costing technique is to assist in
production policies. Entity only generate better standards if entity know the full variance study.
In the standard costing procedure, this report could be accessible.
Easy Delegation of Powers: In this method, delegation of different powers is very simple
since entity will promote employee whose productivity would be best. How do entity assess his
achievement. Simply verify the variance. Assume it's his responsibility to buy things. If material
costs variation indicates positive variation, and after analysis, managers found that owing to the
effective purchasing strategy of this same employee, their actual material costs are much lower.

They will make him purchasing department head by delegating certain powers to him (Qian,
Hörisch and Schaltegger, 2018).
There are certain limitations linked with standard coting in context of use of variance analysis, as
described below:
1. A very challenging job is developing standards. A number of scientific studies like period-
study, movement-study, fatigue research, etc. are necessary and thus quite expensive. Small
businesses can find this system quite challenging to manage.
2. Standards are quite static figures and therefore are not altered for a long period once
established. This renders the expectations in many sectors, which face volatility in commodity
prices attributable to standard shifts in materials and worker costs, extremely impractical.
However it is not straightforward to revise standards; expenses will be large in the event of a
modification.
3. The usefulness of the study of variance relies even more on standards collection. While a
strictly set standards can be mocked, the extremely high expectations in minds of employees can
create resentment. It is also quite reluctant to achieve the proper standards within a specified time
(Li, 2018).
4. For enterprises manufacturing non-standardized goods, it is not appropriate. In terms of work
or contract prices, this is of no significance. It is also complicated to implement this method
where further than 1 accounting cycle is needed for production.
5. It becomes very complex to pinpoint accountability to a single entity, system or output and it
might not be feasible to effectively distinguish controllable and non-controllable variables.
6. Since they see it as a challenge to their autonomy of operation, the system is generally
strongly resisted by administrators as well as others. Standards also may have detrimental
psychological consequences on executives and employees who run the system (Maas,
Schaltegger and Crutzen, 2016).

CONCLUSION
From above study this has been articulated that Management accounting is approach to
prepare the reporting and documents of the manager that offer managers accurate and timely
cash-related and observable details to make shorter and longer-term decisions. This recognises,
tracks, breaks down, decodes, and adds knowledge to enable an organisation to achieve its goals.
MA contrasts with record - keeping related to cash. Although budgetary bookkeeping offers
information to individuals within the organisation and, more significantly, to others
outside organisation, bookkeeping for managers is often used to assist bosses inside quality
administration system.

REFERENCES
Books and Journals:
Ax, C. and Greve, J., 2017. Adoption of management accounting innovations: Organizational
culture compatibility and perceived outcomes. Management Accounting Research, 34, pp.59-74.
Ameen, A.M., Ahmed, M.F. and Abd Hafez, M.A., 2018. The Impact of Management
Accounting and How It Can Be Implemented into the Organizational Culture. Dutch Journal of
Finance and Management, 2(1), p.02.
Langfield-Smith, K., Thorne, H. and Hilton, R.W., 2018. Management accounting: Information
for creating and managing value. Sydney: McGraw-Hill Education.
Bromwich, M. and Scapens, R.W., 2016. Management accounting research: 25 years
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Li, W.S., 2018. Strategic Management Accounting. Management for Professionals.
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Qian, W., Hörisch, J. and Schaltegger, S., 2018. Environmental management accounting and its
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