Management Accounting: Calculation of Costs and Budgetary Control

This document discusses the calculation of costs using appropriate techniques of cost analysis, such as marginal and absorption costs, and the advantages and disadvantages of different types of planning tools used for budgetary control in management accounting. It also explores the effectiveness of management accounting systems in responding to financial problems. The case study is based on Prime Furniture, a UK-based company.

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 2............................................................................................................................................1
P3) Calculation of costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costs......................................................................1
TASK 3............................................................................................................................................5
P4) Advantages and disadvantages of different types of planning tools used for budgetary
control.....................................................................................................................................5
TASK 4............................................................................................................................................8
P5) Effectiveness of management accounting systems to respond on financial problems....8
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Management accounting is the analysis of budgets and expenses that administrators
inside the company need to be available. The main aim of this study to collect all the relevant
information in regard of business. This is the method of the identification, classification and
analysis of the records and details (Arroyo, 2012). This report based on the Prime furniture
which is situated in UK and provides their services to design effective furniture. It provides
facility to people to design their furniture according to their interest. In this report consist of
various techniques to calculate numerical problems and analysis the importance of management
accounting in regard of decision making procedure. Additionally, use different budgets as
planning tools to forecast future results that help in gain good return on capital. There are
identifying various problems that can sort out through accounting systems and tools use to
identify these problems.
TASK 2
P3) Calculation of costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costs
Different types of techniques
Cost: It indicates the large amount of money that is produced company interest for the
development of goods and services. This is important in all companies because it helps to
determine the costs of production operations.
Absorption technique: It is a costing approach that assigned fixed and variable costs to
the cost center whereby consumption patterns are compensated for. It means the reasonable
expenses can be recovered from quality of service sale rates. It helps to measure the exact cost of
company operations to improve competitiveness. Such as, Prime furniture select this method to
calculate the both quarter net profit after that reconcile them effectively (Grabner and Moers,
2013).
Quarter 1
Particulars Amount
Sales 66000
Less: Cost of sales
Production Cost (78000* 50700
1

0.65)
Semi variable (78000 *
0.20) 15600
Total variable cost 66300
Less: Closing stock 10200 56100
Gross Profit 9900
Less: Expenses 400
9500
Selling and distribution as
fixed 5200
Net Profit 4300
Interpretation: As per the calculation it is getting that from the absorption costing get result of
4300 net profit and 9900 gross profit.
Quarter 2
Particular Amount
Sales 74000
Less: Cost of sales
Opening stock 10200
COGS (66000*.20) 13200
Production cost
(66000*0.20) 42900
Total variable cost 66300
Less: Closing stock 3400 62900
Gross Profit 11100
Less: Selling expenses 2800
8300
Fixed expenses 5200
2

Net profit 3100
Reconciliation
Variable costing profit 1900 4700
Opening inventory 0 7800
Closing stock 7800 2600
Absorption costing profit 4300 3100
Opening inventory 0 10200
Closing stock 10200 3400
Marginal Technique: This is the ascertainment, by defining the difference between fixed
cost and variable cost. In marginal costing, costing are mainly classified in to fixed and variable
cost. It focuses on different elements like office and administration expenditure, selling and
distribution and manufacturing expenses that defines cost of production. It helps to make profit
plan with the help of break even charts and profit graphs. It helps to make profit plan with the
help of break even charts and profit graphs (Hilton and Platt, 2013). In Prime furniture applied
this method to calculate the net profit with the helps to contribution.
Quarter 1
Particulars Amount
Sales 66000
Less: Cost of sales
Opening inventory 0
Production cost
(780000*0.65) 50700
Less: Closing stock
(12000*0.65) 7800
42900 42900
Contribution 23100
Less:
Fixed overhead 16000
3

Fixed selling expenses 5200 21200
Net profit 1900
Interpretation: As per the above calculation it has been analyzed that there are getting results of
1900 in the quarter 1 after submit all the items and put in the formulas and get results.
Interpretation: From the above
table it understands that from the marginal
costing method get results in quarter 2 that
4700. It is getting after the calculate
contribution which is calculating through
sales less cost of sales. There are
reconciling the in both quarters and get
effective results.
TASK 3
P4) Advantages and disadvantages of
different types of planning tools used
for budgetary control
Use of various planning tools are
made by an organisation to maintain a
stable and growing financial position in
order to retain an adequate level of liquidity
and cash that facilitates smooth functioning
(Barros and da Costa, 2019). Effective
planning is a backbone of every
organisation that facilitates better control
and check over various activities which
includes use of various budget and planning
tool to ensure effective budgetary control.
4
Quarter 2
Marginal
Sales
Less: Cost of sales
Opening inventory
(12000*0.65) 7800
Production cost
(66000*0.65) 42900
Less: Closing stock
(4000*0.65) 2600
48100
Contribution 25900
Less:
Fixed overhead 16000
Fixed selling expenses 5200 21200
Net profit 4700
Reconciliation
Variable costing profit 1900 4700
opening profit 0 7800
Closing stock 7800 2600
Absorption costing profit 4300 3100
Opening inventory 0 10200
Closing stock 10200 3400

Budget- It is basically a financial tool or plan prepared for a specific time and depicting
information about all expected and forecasted expenses and income which may includes sales
volumes, revenues, cash flows, etc. Thus, Budget is a financial report that is used by managers to
provide relevant and required information about operations and current performance that
facilitates better financial decision making.
Budgetary control- It is mainly associated with a system of controlling cost that includes
preparation of various budgets coordinating departments through comparing actual performance
with budgeted level and timely addressing and acting upon the results in order to achieve
maximum profitability.
Planning tools used for budgetary control- Use of planning tools are made by an
organisation to control and monitor different business operations and activities of a company in
order to maintain a significant level of financial stability (Bollinger, 2019). The different
planning tools that can be used and applied by Prime Furniture to ensure financial stability and
better performance are provided below together with their advantages and disadvantages that
facilitate better comparison and contrast between them.
Cash Budget
A cash budget is a basically a plan or report that provide information about expected cash
receipts and forecasted expenses and disbursements for a specified period of time. The cash
inflows and outflows that are included in a cash budget involve sales revenues collected, total
expenses paid, and amount of loans receipts and payments. Thus, it can be evaluated that a cash
budget provides an estimated projection and information about current as well as future cash
position of company (Burritt and et. al., 2019). Use of cash budget should also be made by Prime
Furniture as it facilitates better check and control over day to day cash inflow and outflow to
ensure availability of sufficient cash and financial aspects to maintain financial stability in the
organisation. The expected advantages and drawbacks of cash budget in context of Prime
furniture is provided below:
Advantages Disadvantages
It promotes better cash planning for Prime
furniture through maintaining proper cash
records and also leads to reduction in amount
of debts through proper management and
The biggest drawback associated with cash
budget is that it only includes cash transaction
and ignore the non financial transaction thus,
does not show the true the financial position of
5

control of cash inflow and outflow. Prime Furniture.
Timely preparation of cash budget by Prime
furniture ensures a smooth and uninterrupted
day to day operation through keeping an
adequate an amount of cash and facilitates
better balance between working capital and
funds that helps in maintaining financial
stability.
Excessive control and check over cash flows
limit the purchasing and spending power of an
organisation that will ultimately hamper its
production capacity (Clifton and et. al., 2019).
Master budget
It is basically an integrated budget provides an aggregation or combination of various
lower-level budgets that are prepared by an organisation for its various functional units (Richards
and et. al., 2019). The main components and budget includes in a master budget involves
expected financial statements, forecasted cash budget and all components of financing plan thus,
provides a better comparison and holistic view of all activities of Prime Furniture that ensures
better control and financial stability. The other advantages and disadvantages associated with
application of master budget in Prime Furniture is provided below:
Advantages Disadvantages
Master budget provides better integration and
coordination among various functional units
through combing their financial summary and
other aspects thus, ensures easy and better
control over all the activities of Prime
Furniture.
The biggest advantage associated with master
budget is that it is quite complex budget thus,
application of this budget is time consuming
for Prime furniture as it is difficult to aggregate
all the information of various budget (The
Advantages and Disadvantages of a Master
Budget, 2019).
Master budget provides all relevant
information at single place thus, facilitates easy
calculation of profit for Prime furniture.
It is difficult and time consuming to make
rectification and modification in Master budget
as similar changes are need to be posted in
respective lower level budget.
Zero base budgeting
6

It is a method or process of budgeting in which a justification is required before making
any expenses each new period as this budget assumes to starts from a "zero base," and starch
level and operation and expense is analyzed on the basis of its needs and costs to make better
decision (Saona and Muro, 2018). Use of Zero base budgeting can be applied by Prime Furniture
as it facilitates better and strategic decision making on the basis of current requirements and
circumstances thus, ensures better financial stability and control. The other advantages and
disadvantages associated with use of zero base budgeting are provided below in context of Prime
furniture:
Advantages Disadvantages
It improves the overall efficiency of Prime
furniture through facilitating better decisions
making on the basis of current circumstances
irrespective of past facts and figure.
Highly trained and well educated mangers are
required to prepare Zero base budget thus, it is
an expensive tool.
Use of zero base budgeting by Prime Furniture
ensure better check and control over expenses
as proper verified justification is required for
making any expense and also ensure improved
allocation of income thus, facilitates better
financial stability.
This budget streets firm starch or zero level and
justification is required for all expenses, thus, it
is time consuming process to apply zero base
budgeting in Prime furniture.
TASK 4
P5) Effectiveness of management accounting systems to respond on financial problems
Financial problems are mainly associated with the situation when organisation face
difficulties in meeting and managing its day to day expenses due to lack of funds or shortage of
cash supply (Scott and et. al.,2018). The various financial problems that are faced by Prime
furniture and creating a financial instability are as follows:
Late payment by customers- Prime furniture is facing difficulties in getting turnover
payments from customers and clients to whom credit was offered that has created difficulty in
maintain adequate amount of finance and cash to met its day to day operation.
7

Poor accounting system- An issue of lack of skilled and experienced staff is also faced by
Prime Furniture that has lead to poor accounting system which is adversely affecting its
operations and financial stability. Many unwanted and unnecessary expenses are also made by
this organisation that is creating more financial issues in Prime furniture.
Various tools and approaches are facilitated by management accounting to overcome and
address these financial issues, a description of which is provided below:
Key performance indicator (KPI)- It is tool that is used by an organization to keep and
check and monitoring on performance of employees and efficiency level of activities. Use of KPI
facilitate comparison between current and desired level of performance so that timely action can
be taken to fill the gap in performance (Steiss, 2019).
Variance analysis- It is tool that facilitates better comparison between budgeted and actual
data to find out the gap and loopholes that is known as variance. Positive value denotes effective
performance while negative variance is an indicator of inefficacy.
Benchmarking- Under this approach of management accounting a highest level of
performance is set as a benchmark to motivate and guide employees to achieve that level through
enhancing their efficiency and performance (Barros and da Costa, 2019).
To evaluate the application and use of these approach and management accounting
system in addressing financial issues of organisation, a comparison between Prime Furniture and
Mega Furniture Ltd is provided below:
Mega Furniture ltd Prime Furniture
Financial
problem
Issue of low sales and high
expenses is faced by this
organisation.
Issue of late payment by customers and
poor accounting is faced.
Approach Use of Benchmarking approach
of management accounting is
suitable for Mega furniture as it
ensures better motivation in
employees to achieve the higher
level of performance that will
solve the issue of low sales and
also reduce the chances of
Use of variance approach is suitable for
prime Furniture to encounter the issue
of late payment as it facilitates better
check and monitoring on day to day
operations. Further, KPI approach is
effective in eliminating the issue of
poor accounting through ensuring
better monitoring on efficiency and
8

wasteful expenses through
enhancing efficiency of
operations.
performance of employees (Bollinger,
2019).
Management
accounting
system
Use of prise optimisation system
is suitable for Mega Furniture
Ltd as it lead to better pricing of
products to cater and attract
larger customers to solve the
issue of low sales.
Use of cost accounting system is
suitable for Prime Furniture as it
facilitates better control over all income
and expenses through maintaining
proper record. It also yield a better tool
for employees to improve their
accounting skills and knowledge to
keep better check and control over
expenses.
Management accounting and their importance
Management accounting departments among all companies use various forms of records
for income reporting purposes. Business organization’s managers make strategic decisions about
financial and non-financial results. It is essential for organizations to better manage the
transactions by accumulating bookkeeping data and making remedial business decisions. It
considers as an inner framework that actually makes money by implementing various forms of
accounting management method (Fadzil and Rababah, 2012). It is utilized for the short term as
well as long term decisions in which consist of all financial health of a business. It supports a
manager in make operational decisions intended to supports increase the organization’s
performance that also supports in shorter as well as longer investment decision. The prime
furniture apply this accounting to take help in long tern investment activities in proper manner.
CONCLUSION
As per the above report is understanding that management accounting can provide all the
specific information through accounts and reports in order to take right decision. It is required to
understand the importance of MA because it helps to top executives to take shorter and longer
investment decision. There are taking different tools like zero, cash and many others to prepare
budget that guide for future activities and accordingly take further steps for get success. Along
with identify different problem that identify in the business after that apply effective tools like
9

KPI and benchmarking to recognize in the business. To sort out these problems apply effective
systems then compare with other organisation to select right strategy.
REFERENCES
Books and journal
Arroyo, P., 2012. Management accounting change and sustainability: an institutional
approach. Journal of Accounting & Organizational Change. 8(3). pp.286-309.
Barros, R. S. and da Costa, A. M. D. S., 2019. Bridging management control systems and
innovation. Qualitative Research in Accounting & Management.
Bollinger, S. R., 2019. Creativity and forms of managerial control in innovation processes: tools,
viewpoints and practices. European Journal of Innovation Management.
Burritt, R. L., and et. al., 2019. Diffusion of environmental management accounting for cleaner
production: Evidence from some case studies. Journal of Cleaner Production. 224.
pp.479-491.
Clifton, M. B and et. al., 2019. Target costing: market driven product design. CRC Press
Fadzil, F. H. B. and Rababah, A., 2012. Management accounting change: ABC adoption and
implementation. Journal of Accounting and Auditing. 2012. p.1.
Grabner, I. and Moers, F., 2013. Management control as a system or a package? Conceptual and
empirical issues. Accounting, Organizations and Society. 38(6-7). pp.407-419.
Hilton, R. W. and Platt, D. E., 2013. Managerial accounting: creating value in a dynamic
business environment. McGraw-Hill Education.
Richards, G., and et. al., 2019. Business intelligence effectiveness and corporate performance
management: an empirical analysis. Journal of Computer Information Systems. 59(2).
pp.188-196.
Saona, P. and Muro, L., 2018. Firm-and Country-level attributes as determinants of earnings
management: an analysis for Latin American firms. Emerging Markets Finance and
Trade. 54(12). pp.2736-2764.
10

Scott, T. and et. al.,2018. Implementing an electronic medical record system: successes, failures,
lessons. CRC Press.
Steiss, A. W., 2019. Strategic management for public and nonprofit organizations. Routledge.
Online:
The Advantages and Disadvantages of a Master Budget. 2019. [Online]. Available through:
<https://bizfluent.com/info-7796881-advantages-disadvantages-master-budget.html>.
11