Introduction to Management Accounting

This document provides an introduction to management accounting and covers various techniques such as cash budgeting, contribution analysis, and variance analysis. It includes a detailed analysis of Woodrock Limited's cash position and suggestions for improving cash flow. The document also discusses the behavioral aspects of budgeting and provides calculations for break-even point and margin of safety. Additionally, it includes a columnar statement for cost analysis and a discussion on the underpinning assumptions of the break-even model.

Introduction to
Management
Accounting

Contents
Contents...........................................................................................................................................2
INTRODUCTION...........................................................................................................................1
QUESTION 1..................................................................................................................................1
Preparation of the Cash Budget for Woodrock Limited the first six months of trade.................1
Comment on the cash position within the business, analysing what Woodrock Limited could
do to improve cash flow..............................................................................................................3
Critical examination those issues of relevance in behavioural aspects of budgeting which may
lead to problems in a business entity...........................................................................................3
QUESTION 2..................................................................................................................................4
A. Contribution that each electric kettle makes towards covering fixed costs if it is sold for
£13...............................................................................................................................................4
B. Calculation of BEP and margin of safety in revenues and units.............................................4
C. Calculation of profit Plaistead Plc makes if it produces and sells 53,000 electric kettles at
£13 per kettle...............................................................................................................................5
D. Calculation of sales at profit of 90000....................................................................................6
E. Calculation of price of units if 90000 profits is desired by selling 53000 units.....................6
F. Analysis of suitability of strategy to the organisation.............................................................6
G. Brief discussion of the underpinning assumptions attached to the break-even model...........7
QUESTION 4..................................................................................................................................7
A. Prepare a columnar statement showing, by element of cost...................................................7
B Variances for direct material and direct labour........................................................................8
C Discuss the purposes of standard costing, highlighting some of the key values and
limitations associated with the use of variance analysis............................................................12
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Management accounting could be defined as the technique which is used to determine
performance of the organisation so that strategic decisions for future could be formulated. If an
entity will not be focused with it then it may result in unachieved objectives of business. Apart
from this, all the reports that are generated under this approach are provided to internal
stakeholders so that they can determine that business is progressing or not (Abednazari, 2018).
Present report is based upon analysis of different techniques of management accounting. The
questions that are selected to cover under this report are 1, 2 and 4. Different topics that are
covered under this assignment are formulation of cash budget, discussion and calculation of
BEP, contribution, margin of safety etc. Apart from this, columnar statement is also formulated
along with calculation of variances are also covered under this assignment.
QUESTION 1
Preparation of the Cash Budget for Woodrock Limited the first six months of trade
Cash budget: It could be defined as the statement in which details of all the cash
transactions of the organisation are mentioned. With the help of it, actual liquidity of the
business could be determined. If the entity will not be able to generate it systematically then it
can help to analyse actual cash which is available to business (Leotta, Rizza and Ruggeri, 2016).
The cash budget for Woodrock Limited is as follows:
Particulars Month 1 Month 2 Month 3 Month 4 Month 5 Month 6
Opening balance Nil Nil Nil -31914 -24430 -23156
Receipts
Receipts from clients Nil Nil Nil 41000 30000 35500
Total A 0 0 0 9086 5570 12344
Payments
Payments to suppliers Nil Nil 11800 8600 10200 12800
Rent 12000 12000 12000 12000 12000 Nil
Payment of lease for machinery 2500 2500 2500 2500 2500 2500
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Marketing and advertising 8000 8000 8000 8000 Nil Nil
Salary to manager 3000 3000 3000 3000 3000 3000
Insurance 4000 Nil Nil Nil Nil Nil
Payment to labour 7416 5412 6414 8016 11226 13032
Total B 36916 30912 31914 33516 28726 18532
Closing balance (A-B) -36916 -30912 -31914 -24430 -23156 -6188
Working notes:
Calculation of receipts from customers
Particulars Month 1 Month 2 Month 3 Month 4 Month 5 Month 6
Desk (30 per
unit) 21000 15000 18000 24000 30000 33000
Cabinet (50 per
unit) 20000 15000 17500 20000 32500 40000
Total receipts 41000 30000 35500 44000 62500 73000
Calculation of payment to supplier
Particulars Month 1 Month 2 Month 3 Month 4 Month 5 Month 6
Desk (10) 7000 5000 6000 8000 10000 11000
Cabinet (12) 4800 3600 4200 4800 7800 9600
Total payments 11800 8600 10200 12800 17800 20600
Calculation of labour hours
Particulars Month 1 Month 2 Month 3 Month 4 Month 5 Month 6
Desk (0.5 hour
per unit) 4200 3000 3600 4800 6000 6600
Cabinet (0.67 3216 2412 2814 3216 5226 6432
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per hour)
Result 7416 5412 6414 8016 11226 13032
Comment on the cash position within the business, analysing what Woodrock Limited could do
to improve cash flow
By analysing cash flow statement of the Woodrock Limited it has been analysed that the
cash position of the organisation is not good as the cash budget is showing negative closing
balance of cash within the organisation. It is very important for the management to make sure
that it is taking effective actions to deal with this situation (Bondar, Iershova and Chaika, 2019).
There are various steps which could be taken by the enterprise for the purpose of improving cash
flow. The discussion of all of them is as follows:
 The organisation can offer discounts to the clients who are ready to make early payments
it can help to increase cash inflow within the organisation.
 It has been recommended to the organisation that it should conduct customer credit
checks on regular basis as it can help to determine that all the clients are making
payments on time or not.
 The management can increase the prices of the products as it can help to generate more
revenues and increase cash inflow which is improve position of the company.
Critical examination those issues of relevance in behavioural aspects of budgeting which may
lead to problems in a business entity
There are various types of issues of relevance in behavioural aspects of budgeting that
may result in problems for business. The discussion of all of them is as follows:
 Budgeting may provide inaccurate results if the managers will not be able to record
accurate information in the books. Due to this issue, the enterprise will face the problem
of inappropriate liquidity.
 The time required to perform budgeting activities is very high and sometimes it may
result in difficulties for the managers to complete the work of budgets. Due to this, their
attention towards their other responsibilities gets decreased (Braumann, 2018).
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QUESTION 2
A. Contribution that each electric kettle makes towards covering fixed costs if it is sold for
£13
Calculation of contribution for 70000 units
Particulars Per unit cost Amount
Sales 13 910000
Less: variable costs
Material 5.25 367500
Labour 2.95 206500
Overheads 1.85 129500
Contribution 2.95 206500
Calculation of contribution for 53000 units
Particulars Per unit cost Amount
Sales 13 689000
Less: variable costs
Material 5.25 278250
Labour 2.95 156350
Overheads 1.85 98050
Contribution 2.95 156350
B. Calculation of BEP and margin of safety in revenues and units
Formula for units = Fixed cost / contribution per unit
Formula for revenues = Fixed cost / profit volume ratio
In units = 106600 / 2.95
= 36135.59 or 36136 units
In revenues = 106600 / 22.69%
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= 469810.49 or 469810
The BEP in units will be around 36136 and in revenue it will be 469810. Therefore in
order to reach at the situation of no profit and no loss the entity will be required to generate
revenues of at least 469810 and sale at least 36136 units.
Working notes:
Calculation of PV ratio = Contribution / sales * 100
= 2.95 / 13 * 100
= 22.69%
Calculation of margin of safety:
Formula for units: Current sales – BEP sales
= (70000 * 13 ) - 469810
= 910000 – 469810
= 440190
Formula for revenues: Current selling units – BEP units
= 70000 – 36136
= 33864
C. Calculation of profit Plaistead Plc makes if it produces and sells 53,000 electric kettles at
£13 per kettle
Particulars Per unit cost Amount
Sales 13 689000
Less: variable costs
Material 5.25 278250
Labour 2.95 156350
Overheads 1.85 98050
Contribution 2.95 156350
Less: Fixed costs
Production 59000
Selling 47600
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Profit 49750
If the organisation will be producing 53000 kettles then it will be able to generate 49750
as profits.
D. Calculation of sales at profit of 90000
Formula: Sales in amount = Fixed cost + desired profit / PV ratio
= 106600 + 90000 / 22.69%
= 196600 / 22.69%
= 866460.99 or 866461
Sales in units = Fixed cost + desired profit / PV ratio
= 106600 + 90000 / 2.95
= 169900 / 2.95
= 66644.07 or 66644
While planning to generate profits of 90000 then the organisation will be required to sale
at least 66644 units and the revenues that will be required to be created will be around 866461.
E. Calculation of price of units if 90000 profits is desired by selling 53000 units
= Sales to generate profit / units
= 866461 / 53000
= 16.35
When the organisation will required to generate the profits of 90000 and the units that
will be sold to generate this amount of profit will be 53000 then the company will be required to
set the sales price as 16.35.
F. Analysis of suitability of strategy to the organisation
Particulars Per unit cost Amount
Sales (81900) (13 + 9 %) 14.17 1160523
Less: Variable cost
Material 5.25 429975
Labour 2.95 241605
Overhead 1.85 151515
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Contribution 337428
Less: Fixed costs
Production 59000
Selling 47600
Marketing and advertising 45000
Profit 185828
By analysing the strategy of the organisation it has been analysed that the profits which
will be generated by the entity with the help of this strategy will be around 185828. It
demonstrates that this strategy is very beneficial for the organisation.
G. Brief discussion of the underpinning assumptions attached to the break-even model
BEP model is considered as the strategy which is used by the businesses for the purpose
of determining the point where the organisation will be able to cover all the costs (Burger and
Middelberg, 2018). There are various assumption of this model which are as follows:
 Total cost could be classified in two different aspects which are fixed and variable and all
the semi variable costs are ignored in the calculation of BEP.
 The price which is used in the calculation of BEP is assumed as constant.
 It is also assumed in calculation of BEP that the volume of sales and production will
always be equal.
 The price of the product is assumed as fixed in BEP.
QUESTION 4
A. Prepare a columnar statement showing, by element of cost
Original budget: Original budget implies the Guarantors and Creditors' comprehensive,
forward-looking integrated plans including profits and losses results, financial statements and
statement of cash flows, and also published estimates for the first twenty-four months after the
completion of this Arrangement (Chaudhry, Asad and Hussain, 2020).
Flex budget: A flexible budget is a budget which changes to a corporation's operation or
quantity amounts. In comparison to a static budget, that does not vary from the quantities set
whenever the budget was developed, a flexible budget continues to "flex" with the cost
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fluctuations of an organisation. With variations in the number of actual revenue received, a
flexible budget or "flex" expenditure differs. In its simplest terms, instead of the normal set
figures, the flex budget would use amounts of income for such expenditures. This enables an
endless sequence of shifts in actual amount that are related to the amount of sales. This is a more
valid method than a static budget, because a flexible budget reacts to shifts in the amount of
actual revenues. This method, though, avoids adjustments to other expenses that do not adjust in
compliance with small alterations in sales. Subsequently, as such larger revenue adjustments
arise, a more complex design may often require revisions to such added expenses, thus
accounting for phase costs. A organisation would have a mechanism for contrasting real to
values estimated at many levels of organisation by incorporating these adjustments to the
schedule (Christensen and Himme, 2017).
Variances Original Flexed Actual Total
Units 20000 18500 18500 57000
Direct material 480000 444000 442650 1366650
Direct labour 140000 129500 129940 399440
Variable production
overhead
60000 55500 58800 174300
Fixed production
overhead
100000 100000 104000 304000
Total 780000 729000 735390 2244390
B Variances for direct material and direct labour
Variance analysis: The role of cost accounting norms is to expose variations between
permissible cost control and reported real costs. Differences are described by the Chartered
Institute of Management Accountants (UK) as the difference between a normal price and the
corresponding real price accrued over a period. Variance analysis can be explained as the method
of calculating the sum of, and alienating the trigger of differences between real costs and cost
accounting.
Direct material variance: The variance between the normal cost of products arising from
manufacturing operations and the real expenses incurred is the direct material variation.
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Throughout the time sustained, the direct material difference is usually equipped to the cost of
products produced (Datar and Rajan, 2018).
Direct labour variance: The disparity between the real cost of direct labour and the regular cost
of direct labour used over a period is determined by the Direct Labour Rate Variance. Labor
significant compared on raw resources is regarded as direct labour to turn them into final
products. This involves work carried out by staff and warehouse workers clearly connected to the
processing of raw materials to finished products (Chung and Chen, 2016).
Budgeted hours
Standard hour per-unit Budgeted output
= 45
= hours
Standard cost-per-hour £60
=
Standard cost per-unit output (5x 3) £15.00
Actual hour per-unit = 45
=
Actual rate per-hour £451400/30500
= 5.2
standard cost per-unit output = 3.1 x 5.2
= 16.1
Note: (A) = indicates the performance is worse than the budget
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(F) = indicated the performance is better than the budget
Total direct wages variance consists of wage/labour rate variance and labour efficiency
variance
Labour total variance:
Labor total variance
= Actual direct labor cost £
15190.00
= Standard direct labor cost £
14110.00
£
1,230.00 (A)
Labor rate variance
= (actual hour x actual rate) - (actual hour x
standard rate)
Actual hours x standard rate £ 16500.00
Actual hours actual rate £ 18120.00
- £
1620.00 (A)
Efficiency variance
Actual unit x standard hour 1900
Actual hour 30500
= labor efficiency hours -3 (A)
Standard rate per-hour 4
Labor efficiency variance - £
450.00 (A)
Material variance
Material total variance
Total material variance
9000 units should have cost £15 £ 1080,000.00
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Actual material cost £ 259100.00
Material total variance - £
820900.00 (F)
Material price variance
Material price variance
19000 kg at £10kg £ 19000.00
Actual material cost £ 20,900.00
Material price variance £
-1,900.00 (A)
Material usage variance
Material usage variance
1000 units at 2kg 2000
Actual material purchase and used 2200
Material usage variance -200 (A)
Standard price per-kilo 20
Material usage variance (£) -4000 (A)
(Actual price * Actual quantity) – (Standard price * Actual quantity)
= 11350 (Favourable)
= 3.90
Material quantity variance:
(Standard price * Actual quantity) – (Standard price * Standard quantity)
= 10000 (Unfavourable)
= 111,000
C Discuss the purposes of standard costing, highlighting some of the key values and limitations
associated with the use of variance analysis.
Standard costing is a method which uses some standards for costs and revenues with the
purpose of control through variance analysis. The objective of standard costing is to provide
formal basis for assessment of the performance and efficiency in company. It involves setting of
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predetermined costs in order to furnish a base for comparison with actual costs (Feng and Ho and
2016). The companies use variance analysis for measuring whether the actual cost is less than
standard cost or not. When it is less than then standard cost then the mission of company is
meant to be successful. The following are some points which explains the purpose of standard
costing in clear way:
 For fixation of responsibilities- If there is an unfavourable variance after variance
analysis in standard costing then company can fix responsibilities of employees for such
purposes. For example if the standard cost of labour is less and the actual cost of labour
is more then company would pay more to its employees.
 Management by exceptions- Company can use management by exceptions easily with
the help of standard costing. This means the concentrating on big projects of company
rather than following small supervision. With standard costing company makes standard
of its costs. After such things companies relax and then after happening of activities it
checks and compares the results which may relate to material, labour and overhead costs.
 For study of time and speed- For calculating standard cost, the study of time and speed
is also important. When the study is conducted the knowledge of new ways to increase
the speed at lowest time can be measured by company. That is who standard costing
promotes innovation (Lai and Samkin, 2017).
The process of comparing, budgeted to actual and the calculation and analysis of differences of
all major heads is the variance analysis of costs. Apart from various advantages, the following
are some limitations of variance analysis:
 Subjectivity- Variances are only analysed when they are subjective topic which involve
judgements of management as the amount is considered worth for consideration. Many
conflicts may arise in company due to various judgements involved in determination of
materiality limit. In addition to this, entire budget plan is prepared by compiling predicted
data on the bases of financial statements.
 Manipulation of variances- The employees can manipulate the variances on their own
use. The company may take incorrect measures to get favourable variance or to avoid
adverse variance of enterprise. For example, company has purchased higher units of low-
quality material at cheaper price so that material usage variance could be favourable but
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the workers conceal negative variances to hide their inefficiencies so that they can get
personal benefits (Lebedev, 2019).
 Technological industry- Variance analysis is not so suitable for dynamic industry one of
which is technology. If the production processes requires revisions frequently due to
change in dynamics of technology then a new budget is prepared every time when change
happens. All this may cause high budget management for which company would require
lots of resources and time.
CONCLUSION
As per the above report it has been concluded that management accounting is important part
of any business which is used for prepared report in regard of business and supports to assure
about the short as well as long decision. From the above discussion it is analysed that company
use cash budget to analysis the position of cash and improve cash flow within the business.
Along with use break even model and their assumptions to know selling point of the business.
Moreover, different budget use by business to analysis the position of business in different
department after that take right decision in regard of organisation in profitable manner. Analysis
the reason standard costing with the values of and limitations of variance analysis t know
marginal costing system efficiently.
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