Management Accounting Techniques and Planning Tools

This report discusses the use of management accounting techniques and planning tools in organizations to respond to financial problems and achieve sustainable success. It covers topics such as cost analysis, income statements, budgetary control, pricing strategies, and more.

B07544
Management
Accounting

INTRODUCTION...............................................................................................................1
TASK 2...............................................................................................................................2
L.0.2: Apply a range of management accounting techniques...........................................2
P3 Calculate costs using appropriate techniques of cost analysis to prepare an
income statement using marginal and absorption costs................................................2
M2 Accurately apply a range of management accounting techniques and produce
appropriate financial reporting documents.....................................................................6
L.O.3: Explain the use of planning tools used in management accounting......................7
P4 Explain the Advantages and disadvantages of different types of planning tools
used for budgetary control:............................................................................................7
M3. Analyze the use of different planning tools and their application for forecasting
budgets...........................................................................................................................9
L.O.4: Compare ways in which organizations could use management accounting to
respond to financial problems..........................................................................................10
P5. Compare how organizations are adapting of management accounting systems to
respond to financial problems and sustainable success:............................................10
M4. Analyze how, in responding to financial problems, management accounting can
lead organizations to sustainable success:.................................................................14
CONCLUSION:................................................................................................................15
REFERENCES................................................................................................................16

INTRODUCTION
The objective of this report is introducing the management accounting fundamentals
which can be practice in the wider business environment. This project report will
investigate about uses of management accounting financial data to get planning
decisions and the monitoring and control of finance within organizations.
This project report consists of two types of Income statement; Income statement
through marginal costing and Income statement through absorption costing methods.
How to solve financial problems of the business is discussed in this report. To
understand how marginal and absorption costing methods work, calculations has been
done which shows treatment of direct and indirect costs. There are many financial
problems and issues like low credibility, less revenue, poor cost estimation,
mismatching of data’s in financial statement and high debts taken from the market.
These threats can weak Company’s wealth. To handle such threat there are some tools
and techniques of management accounting systems which help business to overcome
from these financial issues. How these tools solve firms problems are shown in the
project. Additional to solving threats, the concept of sustainable success also discussed
in respect with management accounting systems.
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TASK 2
L.0.2: Apply a range of management accounting techniques
P3 Calculate costs using appropriate techniques of cost analysis to prepare an
income statement using marginal and absorption costs.
Quarter 1 & 2
First we need to calculate product cost per unit:
Quarter 1 Quarter 2
Variable Cost
(78000 × 0.65) 50700 42900
+ Fixed Cost 16000 16000
= Total Product
Cost 66700 58900
÷ Total Units
Produced 78000 66000
= Product Cost
Per Unit 0.85 0.89
After that the product cost per unit used to create the absorption income statement. The
Units sold on the income statement (and not units produced) taken to determine sales,
cost of goods sold and any other variable period costs.
Income Statement (Absorption)
Quarter 1 Quarter 2
Sales (66000 × £1/ unit)
6600
0 Sales (74000 × £1/ unit)
7400
0
- COGS (66000 × 0.85)
5610
0 - COGS (74000 × 0.89)
6586
0
Gross Profit
990
0 Gross Profit
814
0
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Less: Operating
Expenses: Less: Operating Expenses:
Selling & administ.
Expenses 5200 Selling & administ. Expenses 5200
Net Operating Income
470
0
294
0
Note: 1. Selling cost / unit is assumed to be £1/unit.
2. Variable cost/ Unit = Total variable cost/ No. of units produced
= 52000/80000 = £0.65/ unit
3. COGS = Cost of goods sold
Income statement through Variable costing technique:
Quarter 1 Quarter 2
Sales (66000 × £1/unit)
6600
0 Sales (74000 × £1/unit) 74000
Less: Variable Cost Less: Variable Cost
Cost of Goods Manufacturing
(78000 × 0.65) 5070
0
Cost of Goods
Manufacturing (66000 ×
0.65) 42900
Less: Closing Stock (12000 ×
0.65) 7800
Add: Opening stock (12000
× 0.65) 7800
Less; Closing Stock (4000
× 0.65) 2600
Contribution Margin
2310
0 Contribution Margin 25900
Less Period Expenses Less Period Expenses
Fixed Manufacturing cost
1600
0 Fixed Manufacturing cost 16000
Fixed Selling and Admin.
Expenses 5200
Fixed Selling and Admin.
Expenses 5200
Net Operating income 1900 Net Operating income 4700
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Explanation:
Cost of goods manufacturing Prime Furniture is calculated by multiplying total
production with variable cost per unit (£0.65/Unit). Cost of Goods manufacturing is
expense so it is subjected to be subtract from Sales revenue. On the other hand Closing
stock is subtracted from total variable cost because this stock has not been sold and
should not be subtracted from Revenue.
Difference in Profit & Loss or Income statement 0f Prime Furniture calculating by
Absorption and Variable techniques:
Absorption costing Variable Costing
Quarter 1 Quarter 1
Sales (66000 × £1/ unit)
6600
0 Sales (66000 × £1/unit)
6600
0
- COGS (66000 × 0.85)
5610
0 Less: Variable Cost
Cost of Goods
Manufacturing (78000 ×
0.65) 50700
Less: Closing Stock
(12000 × 0.65) 7800
Gross Profit 9900 Contribution Margin
2310
0
Less Period Expenses
Less: Operating Expenses: Fixed Manufacturing cost 16000
Selling & administ.
Expenses 5200
Fixed Selling and Admin.
Expenses 5200
Net Operating Income 4700 Net Operating income 1900
Interpretation: As from the above figure, the clear difference between Net operating
incomes from both the method is shown. The major reason behind this difference is that
in absorption costing technique cost is calculated only of those products of Prime
Furniture which has been sold, while in variable costing method total cost is calculated
for total products produced.
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Absorption costing Quarter 2 Variable Costing Quarter 2
Sales (74000 × £1/ unit) 74000 Sales (74000 × £1/unit)
7400
0
- COGS (74000 × 0.89) 65860 Less: Variable Cost
Cost of Goods
Manufacturing (66000 ×
0.65) 4290
0
Add: Opening stock
(12000 × 0.65) 7800
Less; Closing Stock
(4000 × 0.65) 2600
Gross Loss
814
0 Contribution Margin
2590
0
Less Period Expenses
Less: Operating
Expenses:
Fixed Manufacturing
cost
1600
0
Selling & administ.
Expenses 5200
Fixed Selling and Admin.
Expenses 5200
Net Operating income
294
0 Net Operating income 4700
Additional to the Income statement; BEP (Break even point analysis) is a strong tool to
identify the units at which Prime Furniture can attain a situation of no profit no loss. BEP
of above case is calculated below:
Break even point (In Units) = Fixed costs / (revenue per unit – variable costs per unit)
= £16000 / (£ 1/unit - £0.65/ unit)
= £16000 / £ 0.35/unit
= 45714 units
These 45,714 units is the total production required by a firm to attain no profit no loss
situation. BEP can also express in pounds:
Break-even point (Sales in £) = Sales price per unit × BEP in units
= £1/unit × 45714 units
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= £45714
Interpretation: Prime Furniture should generate 45714 pound sales revenue to attain no
profit no loss situation.
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M2 Accurately apply a range of management accounting techniques and
produce appropriate financial reporting documents.
There are various management accounting techniques which helps company in
achieving its objectives, these are discussed below:
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Management
accounting
techniques
Constraint
analysis
Trend
analysis
Capital
budgeting
Inventory
valuation
Margin
analysis

1. Margin Analysis: This technique helps company in avoiding overproduction
situations. It helps company in knowing the unit to be produced to attain no
profit no loss situation through breakeven point analysis.
2. Constraint analysis: This technique helps company in evaluating the hurdles
which stops company in achieving optimum production and increased
revenue. It also states the reason behind this hurdle and provides suitable
solution.
3. Capital budgeting: This is very helpful tool or techniques which helps
company in taking strategic decisions related to capital expenditures. In this
method NPV (net present value) of all investments is calculated to know
which expenditure can give more returns.
4. Inventory valuation: This technique helps operation managers to know what
the actual cost is related with inventory. In this method direct and indirect
cost of production is separated to get the amount which directly impact
inventory production.
5. Trend Analysis: In this technique future estimation about revenue and
expenses is done to know how much fund is required to achieve desired
sales.
L.O.3: Explain the use of planning tools used in management accounting
P4 Explain the Advantages and disadvantages of different types of planning
tools used for budgetary control:
1. Budget control:
Advantages and Disadvantages of Budgets:
Budgetary control
Advantages Disadvantages
Coordinates important information
across staff managers.
It applies mechanically and rigidly
Interpret strategic plans and put
them into action.
Due to lack of participation,
employees can de-motivate.
Provides record of different Perception unfairness situation
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organizational activities. arises.
Improves relations with employees
through sound communications.
Politics and resources competition
arises.
Improves resource reallocations of
Prime Furniture
A rigid structure decreases initiative
and advancement at lower levels,
making it impossible to get cash for
another new project for Prime
Furniture.
Provides corrective action tools.
2. Cost volume profit analysis:
Cost volume profit analysis
Advantages Disadvantages
Simplicity of figuring, utilizes a lot of
standard recipes, numbers can be
changed rapidly to decide changes in
factors.
Accuracy: it accept all expense are
fixed, anyway there are blended cost
that changes with creation.
Planning: the breakeven point assists
supervisors with assessing future
spending and entire creation influence
the targets of the business.
Accept deals stays steady yet interest
for an item can change after some
time.
3. Pricing strategy:
Pricing Strategy
Advantages Disadvantages
Client base valuing takes a look at the
objective whether client is happy to pay
for the item to decide the perfect cost,
this outcomes sets the price to be
charged from customer.
The executives valuing, the item is
estimated at what the organization
perceive not what actually customer
can pay. This creates a gap between
actual price and what price should be.
Cost based pricing accepts and deals
stays steady yet interest for an item
can change after some time by Prime
Furniture.
Cost base pricing confuses Prime
Furniture managers and they fixed the
price more than competitors.
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M3. Analyze the use of different planning tools and their application for
forecasting budgets
There are various planning tools used by company:
1) Budget control: The budget is a quantitative as well as fiscal articulation
of approach for a characterized future period.
Application: It applied to forecast arranged incomes and costs for request
to accomplish the organization's objectives. In this manner, it is related to
the administrative and bookkeeping capacity of the business.
2) Cost volume profit analysis: Cost volume benefit examination is utilized
by the executives as arranging instrument to assess income from deals,
cost and benefits, this is finished by utilizing a scientific assessment that
ascertains whole changes to deals volume and cost influence benefit in a
future period.
Application: Cost volume benefit investigation is applied by the executives
to forecast the equal initial investment purpose of an item this is the point
that benefits from pay rises to the expense to deliver an item along these
lines there is no misfortune no benefit now.
3) Pricing strategy: Deciding standard price is difficult task for every
business, because company requires experts who have perfect knowledge
of customer demands, latest trends of the market and can do cost analysis
at different level of operations. The basic steps involved in deciding price
is searching price charged by competitors for similar product.
Application: It is applied to forecast how firm can minimize its cost to meet
competitive price and finally implement this strategy under experts’
supervision. Then the goal is decided, management pick an approach
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mulling over interest, cost, contenders costs and offers, and valuing
strategy. In budgetary control pricing strategy helps in getting the sales
revenue figure (Sales per unit × Units produced).
L.O.4: Compare ways in which organizations could use management
accounting to respond to financial problems
P5. Compare how organizations are adapting of management accounting
systems to respond to financial problems and sustainable success:
There are various tools which are helpful in facing financial problems of the
company and achieving sustainable success. These management accounting tools
are discussed below:
1. Demand forecasting: It is the craftsmanship just as the study of foreseeing the
imaginable interest for an item or administration later on. This forecast depends
on past standards of conduct and the proceeding with patterns in the present.
Henceforth, it isn't just speculating the future interest yet is assessing the interest
experimentally and equitably. Through forecasting demand Prime Furniture get
information about latest trends of the market and built product accordingly to
match the demand.
Solution to financial problem: Through forecasting demand Prime Furniture can
solve financial problems like shortage of funds, underperformance, under
valuation of assets and decrease in revenue through giving information in
advance. There are different types of methods by which financial problems can be
solved:
 Buyer’s choice survey
 Collective opinion method
 Barometric method
 Market experiment method
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 Expert opinion method
 Statistical method
 Least square methods
Comparison: These planning tools are mostly used manufacturing organizations
to avoid the situation of overproduction. Organizations which are in wholesaling
don’t have much use of this.
2. Make or buy decisions: Make or buy decisions commonly rise when a firm that
has developed a thing or part or basically adjusted a thing or part is encountering
trouble with current suppliers, or has diminishing breaking point or advancing
solicitation. It is not an easy task to take such decisions normally, Prime Furniture
requires lots of analyses like preparing zero based budgeting, seeing future
relations with suppliers and evaluating whether Prime Furniture has enough
capacity to produce specific product or not. Additional to this, it is also required to
find whether the product which company wants make or buy effect core business
of the business if Yes then it should go for making that stock otherwise it should
buy or acquire particular business.
Factors that compelling Prime Furniture to buy product from outside:
 Technical experts are not available
 Suppliers have strong network and good enough to do research or
suppliers are stronger than buyer
 Product is available at less cost.
 Products required for shorter period.
 Capacity is not enough to do production.
 Company doesn’t want direct managerial control.
 Time is less for delivery.
 Brand preference
 Less valued item or non core product.
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Solution to financial problem: Financial problems like over expenditure, delay in
processing time, etc. Can be solved through estimating cost on whether to make
or buy product, Prime Furniture fulfilled demand on time and also increase its Net
revenue through minimizing overall costs.
Comparison: It is most suitable for manufacturing organizations as they need
to decide whether to produce or buy the product. Service organizations not use
this tool because they only provide services like reselling, customer service,
hospitality, etc.
3. Activity based costing: Activity based costing (ABC) is a costing system that
dispenses over headed and underhanded costs to related things and
organizations. This accounting procedure for costing sees the association
between costs, different expenses activities and manufactured items, sharing out
underhanded costs to items less valuable than regular costing strategies. In any
case, some variant expenses, for instance, the administrators and office staff pay,
are difficult to give out for each product manufactured. Through this instrument
Prime Furniture isolate all the exercises or procedure on costing bases. It takes
less costing activity on the top and high costing activity on bottom to focus on
each activity separately.
Solution to financial problem: Activity based accounting will help Prime Furniture
in solving financial problems such as priority based accounting and preferential
accounting of different valued based product.
Comparison: This tool is useful for all type of organizations, especially
organizations doing assembly of parts. Manufacturing organizations use this
method to know which production unit is their core inventory, on the other hand
service sectors uses this method to identify their core selling products cost.
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4. Controlling and reporting: It is the main duty of financial accountant of Prime
Furniture to analyze various statements such as income statement, balance sheet
and ratio analyses before preparing report because strategic decisions will be
take on the basis of managerial report. Controlling costs and other factors to
maintain authenticity of report is also necessary for junior accountants. Actual or
real cost analyses important for right decisions.
Solution to financial problem: Management accounting solves financial problems
in following way:
 It helps in developing a strong relationship between Prime Furniture’s
strategies and firm’s important decisions.
 It ensures whether the ethical value of business is followed properly, code
of conduct is suitable for employees.
 Promote leadership among employees, also help managers in controlling
employees through performance analysis.
Comparison: This planning tool is equally important for all types of
organizations; through regular reporting manufacturing organizations gets
information’s which costs it should reduce to decrease price, on the other hand,
Prime Furniture applies this tools to know which branching is performing well
and which is not and it controls their costs accordingly.
5. Performance evaluation system: A performance evaluation system is an efficient
method to get information about how well an employee is performing their tasks.
Through this system Prime Furniture can evaluate or valued the efforts of the
employees in their work. Also it can remove wastage of time or resources at work.
Solution to financial problems: There are four reasons why a precise performance
evaluation system ought to be executed for solving financial problems
 This process motivates positive performance and attitude.
 It satisfies employee’s curiosity and queries about how well they are
performing in their job.
 It is an employee developing tool.
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 It provides a base for taking legal disciplinary actions, promotion
related decisions, and counseling for underperforming employees
and highlighting best employee’s to set a benchmark for other
workers.
Comparison: This planning tool is mostly applied by service sectors especially
digital marketing organizations to evaluate whether their marketing team
achieves assigned target or not.
M4. Analyze how, in responding to financial problems, management
accounting can lead organizations to sustainable success:
Sustainable success: It means a success which stays for a longer period of time.
In this changing world the concept sustainable success seems to be difficult.
Through solving financial issues, company can achieve sustainable success in
following ways:
 Recognize the social and natural patterns which will affect on the
association's capacity to fabricate an incentive.
 Produce reports which remember data for maintainability impacts to
advise evaluating and planning choices, vital arranging and speculation
examinations.
 Build up KPIs which bolster reasonable and vital objectives.
 Enjoying supportable corporate difficulties to the system of the
organization, execution viewpoint, and plan of action and permit to work.
 Apply devices and strategies of the executives bookkeeping like common
asset accessibility situation arranging, carbon foot-printing and lifecycle
costing to help consolidate supportability issues into the procedure of
dynamic.
 Portray the effect of the manageability issues in solid business terms
containing how and when they would influence the organization.
 Build up the announcing procedure which joins supportability matters to
guaranteeing that applicable non-money related and budgetary data is
uncovered.
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CONCLUSION:
An association having a privilege administrative bookkeeping framework is significant as
picking the correct executive for Prime Furniture. As the administrative bookkeeping
framework is would have liked to offer administration with solid and precise data,
chairmen need to ensure that the correct structure for their model of business is picked
for usage. The administration bookkeeping study helps understudies clearly show;
teachers can't maintain any blooper. The primary explanation is that bookkeeping is
viewed as the foundation of Prime Furniture and along these lines needs exactness.
Giving reasonable diagram and tables of money related bookkeeping is the basic issue
which bookkeeping understudy experience recorded as a hard copy a task. The
motivation behind why people require the board bookkeeping study help. Bookkeeping
is a justifiable yet pragmatic control which subtleties the exchanges of account
identifying with associations or business. The understudies need to look at a great many
exchanges which an organization can perform all through a particular time range. It gets
hard for them to amass that information and coordinate them.
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REFERENCES
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<https://www.softwareadvice.com/accounting/budgeting-forecasting-software-
comparison/>
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<https://www.capterra.com/budgeting-software/>
Management Accounting – Meaning, Advantages & Functions, 2020, Online available
through: <https://cleartax.in/s/management-accounting>
What Is a Management Accounting System?, 2020, Online Available through:
<https://bizfluent.com/facts-5460765-management-accounting-system.html>
What Is a Management Accounting System?, 2020, Online Available through:
<https://www.freshbooks.com/hub/accounting/management-accounting>
Sustainable Success, 2020, Online Available through:
<https://corporatecoachgroup.com/blog/sustainable-success>
Sustainable Success, 2020, Online Available through:
<https://www.huntsman.com/corporate/a/Careers/About%20us/Sustainable
%20Success>
Risk management, 2019, Online available through: <https://www.heflo.com/blog/risk-
management/what-is-the-risk-management-process/>
The 5 Step Risk Management Process, 2018, Online Available through:
<https://www.clearrisk.com/risk-management-blog/bid/47395/the-risk-
management-process-in-5-steps>
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