Management Accounting Techniques and Budgetary Control

This study material provides an in-depth understanding of management accounting techniques and their application in solving financial issues. It covers topics like cost analysis, budgeting, financial reporting, and planning tools. The advantages and disadvantages of different planning tools used for budgetary control are also explained.

B11190
MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................3
LO.2: Apply a range of management accounting techniques.........................................................3
P3. Calculate costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costs...........................................................................3
M2. Accurately apply a range of management accounting techniques and produce appropriate
financial reporting documents.....................................................................................................8
LO.3: Explain the use of planning tools used in management accounting using budgets for
planning and control......................................................................................................................10
P4. Explain the advantages and disadvantages of different types of planning tools used for
budgetary control.......................................................................................................................10
M3. Use of different planning tools and their application for preparing and forecasting budgets
...................................................................................................................................................12
LO.4: Compare ways in which organizations could use management accounting to respond to
financial problems.........................................................................................................................13
P5. Compare how organizations are adapting management accounting systems to respond to
financial problems.....................................................................................................................13
M4. Analyze how, in responding to financial problems, management accounting can lead
organizations to sustainable success..........................................................................................13
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
Management Accounting is the process of decision making after analyses of various data’s
and information’s like income statement, balance sheet, cash flow statement and working
capital statement. This is the advanced version of accounting in which manager’s uses
financial information and reports to take relevant decision for the development of
organization. This report consists of case study of Prime Furniture and importance and
application of management accounting in solving financial issues. This report also covers
the range of techniques used by management accountant like budgeting, price optimization,
value based accounting and cost based accounting techniques. Advantages and
disadvantages of different types of planning tools with the context of Prime Furniture will
reflect application of this technique in the company. Effectiveness of management
accounting tools facing and preventing financial problems in organization will expose
various techniques which can be applied according to given situation.
LO.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
Cost: These are the reductions from sales revenue to get net earnings in the form of
gross profit and net profit. Costs are the part of every organization; as business can
run without spending cash into it.
Different costs and cost analysis:
Costs are of two types; variable and fixed costs, where variable expenses changes
with increase or decrease in sales revenue; while fixed costs are permanent
expenses which not affected by any change in sales revenue (Budgeting software,
2020). Costing can be through two methods to get net earnings:

Marginal costing: This technique also known as contribution margin costing; as all
types of variable costs whether direct or indirect deducted from sales revenue to get
contribution margin. This costing method helps company in identifying Break Even
Point at given sales price and variable cost per unit.
Absorption costing: In this method of cost analyses; all costs whether variable,
fixed or mixed associated with manufacturing activities are deducted to get gross
profit during the year.
Quarter 1 & 2
Calculation of product cost per unit:
Quarter
1
Quarter
2
Variable Cost (78000 ×
0.65) £50,700 £42,900
+ Fixed Cost £16,000 £16,000
Total Product cost £66,700 £58,900
÷ Total Units Produced £78,000 £66,000
product cost per unit £0.86 £0.89
Income Statement (Absorption)
Quarter 1 Quarter 2
Sales (66000 × £1/
unit) £66,000
Sales (74000 ×
£1/ unit) £74,000
COGS (66000 ×
0.85) -£56,100
COGS (74000 ×
0.89)
-
£65,860
Gross
Profit £9,900 Gross Profit £8,140
Less: Operating
Expenses:
Less: Operating
Expenses:

Selling & administ.
Expenses £5,200
Selling &
administ.
Expenses £5,200
Net Operating
Income £4,700 £2,940
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
Interpretation: On the basis of preparation of income statement through absorption
costing; it was found that quarter 2 gross profit and net profit is reduced due
absorption of unsold manufacturing costs (Types of cost/ classification of costs,
2019).
Income statement through Variable costing technique:
Quarter 1 Quarter 2
Sales (66000 ×
£1/unit)
£66,00
0
Sales (74000 ×
£1/unit)
£74,00
0
Less: Variable Cost Less: Variable Cost
Cost of Goods
Manufacturing
(78000 × 0.65) £50,70
0
Cost of Goods
Manufacturing
(66000 × 0.65) £42,90
0
Less: Closing Stock
(12000 × 0.65)
£7,800
Add: Opening stock
(12000 × 0.65) £7,800
Less; Closing Stock
(4000 × 0.65) £2,600
Contribution
Margin
£23,10
0
Contribution
Margin
£25,90
0
Less Period
Expenses
Less Period
Expenses
Fixed Manufacturing
cost
£16,00
0
Fixed Manufacturing
cost
£16,00
0

Fixed Selling and
Admin. Expenses £5,200
Fixed Selling and
Admin. Expenses £5,200
Net Operating
income £1,900
Net Operating
income £4,700
Interpretation: Cost of goods manufacturing is determined by duplicating all out
creation with variable expense per unit (£0.65/Unit). Cost of Goods producing is
cost so it is exposed to be subtracting from Sales income. Then again Closing stock
is subtracted from absolute variable expense since this stock has not been sold and
ought not to be subtracted from Revenue (What Is a Management Accounting
System?, 2020).
Difference in Profit & Loss or Income statement calculating by Absorption and
Variable techniques:
Absorption costing Variable Costing
Quarter 1 Quarter 1
Sales (66000 × £1/
unit) £66,000
Sales (66000 ×
£1/unit) £66,000
- COGS (66000 ×
0.85) £56,100 Less: Variable Cost
Cost of Goods
Manufacturing
(78000 × 0.65) £50,700
Less: Closing Stock
(12000 × 0.65)
£7,800
Gross Profit £9,900
Contribution
Margin £23,100
Less Period
Expenses
Less: Operating
Expenses:
Fixed
Manufacturing cost £16,000
Selling & administ.
Expenses £5,200
Fixed Selling and
Admin. Expenses £5,200

Net Operating
Income £4,700
Net Operating
income £1,900
Interpretation: Income through absorption costing shows less gross profit than
variable costing method; the main reason behind this difference is calculation of per
unit variable and fixed cost. Another reason for variance is variable cost of
manufacturing product; which is not considered by Variable costing method.
Absorption costing Quarter 2 Variable Costing Quarter 2
Sales (74000 × £1/
unit) £74,000
Sales (74000 ×
£1/unit) £74,000
- COGS (74000 ×
0.89) £65,860 Less: Variable Cost
Cost of Goods
Manufacturing
(66000 × 0.65) £42,900
Add: Opening stock
(12000 × 0.65) £7,800
Less; Closing Stock
(4000 × 0.65) £2,600
Gross Loss £8,140
Contribution
Margin £25,900
Less Period
Expenses
Less: Operating
Expenses:
Fixed
Manufacturing cost £16,000
Selling & administ.
Expenses £5,200
Fixed Selling and
Admin. Expenses £5,200
Net Operating
income £2,940
Net Operating
income £4,700
Interpretation: The translation for this figure is like above figure. Assimilation
costing incorporates all expenses, including fixed costs which are just identified

with creation, while variable costing just incorporates the variable expenses
legitimately acquired underway.
M2. Accurately apply a range of management accounting techniques and
produce appropriate financial reporting documents
Market is flooded with numerous accounting techniques but every technique not
work in the same way as it works for other organizations. Analyses of each
technique before application are required by Prime Furniture. These methods are
discussed below:
1. Financial Planning: This technique includes budgeting, project analysis,
planning for raising fund through mix of sources and forecasting sales.
Application of this technique will help Prime Furniture in setting sales and
costs target. Through performance appraisal unnecessary cost can be controlled
by company.
2. Financial statement analysis: This technique of financial assessment will help
Prime Furniture in converting various data’s and information’s into logical
reports with effective interpretation. Due to its easy terms report it can be read
and understand by person not having finance background; which make
analyses function of management accounting helpful in communicating
essential information’s to support decision making process.
3. Cost Accounting: It classifies cost related information according to product
type, departmentally, operational heads and value based. Cost accounting has
major role for Prime Furniture in preparing budget on past data basis. It will
also support company in identification of factors affecting overall cost of the
company.
4. Fund flow analysis: This technique will help Prime Furniture in tracking from
where the funds came from and utilized for running business operations. It has
great importance for company to get information like sources of funds and

application of fund; which clearly shows the current status of utilizing raising
fund for the development of firm’s market share.
5. Cash flow analysis: Like the fund flow statement this method will support
Prime Furniture in tracking real cash of business. As cash has its opening and
closing balance; this technique shows where the variation between opening and
closing balance has been used by company.
6. Standard Costing: It is the technique which sets default expenses as standard
costing to prepare budgeting or forecasting future sales revenue. Examples of
standard costing are direct material & labor per unit, fixed and variable
overheads and other costs which are easy to estimate.
7. Decision making accounting: This accounting technique will help Prime
Furniture in making decisions based on report provided through this method.
There are many cases when management accountant requires to take crucial
decisions like make or buy decisions, acquisition related decisions, selecting
project among various alternatives and selecting sources of finance. These
decisions are not that much easy to take; it requires timely and in-depth study
before coming up with conclusion. Today various DSS software’s are available
to support decision making function.
8. Management Information System: It works on Artificial Intelligence (AI); after
application of this software Prime Furniture can easily integrate various
functions such as marketing, financing, operations, marketing and recruitment
together through effective communication within organizations.
9. Management reporting: It is an effective skill of management accounting which
helps CEO of company to ease with decision making on the basis of short
summary of report by managers. It will help Prime Furniture owner in taking
well versed quick decisions without any error.

LO.3: Explain the use of planning tools used in management
accounting using budgets for planning and control
P4. Explain the advantages and disadvantages of different types of
planning tools used for budgetary control
Budgeting: It is the process of forecasting future sales revenues and expenses to get
estimated profit for next year. It provides a target to each department of firm and also
do performance appraisal by matching actual result with budgeted estimation
(Management Accounting – Meaning, Advantages & Functions, 2020).
Importance of Budget:
 Provides sales and net earnings target within company.
 Help in performance appraisal of actual result with budgeted one.
 Helps in controlling excess cost of the business.
 Prepare company for meeting additional requirement of working capital for
achievement of target.
 Facilitates record keeping, coordination and communication within functional
departments.
 It is natural complement to planning.
Types of Budgets:
1. Cash flow budget: It is anticipating of future money inflow and surge into the
business. It is set up for explicit timeframe which is one year. The components
taken with income spending plan are accounts payables and receivables.
2. Operating budget: These spending figures future operational exercises of the
professional selling and appropriation, paying pay rates, commercial and
showcasing costs. This spending support in realizing assessed net income gain
by business in one year from now.
3. Financial budget: This spending covers the procedures and estimation made
by administrative bookkeeper for overseeing resources, pay articulation and

other monetary related documentations. It is set up to distinguish the
components which can influence abundance of organization.
Advantages and disadvantages of different types of planning tools:
Budgets: It is a planning tool which helps organization to control manufacturing and
cost of sales, promotes coordination and communication among various departments
of firm. It is detailed analyses of all the aspects of business operations to set desired
target and later do performance appraisal through matching actual result with
estimated and find variations between them. Evaluation of budget plan includes
activities which make efforts to reduce variations through identifying main sources
of variations like variable and fixed overheads.
Advantages and Disadvantages of Budgets:
Advantages Disadvantages
Helps in coordinating functions among
various departments.
It has rigid nature; once prepared cannot
do further modifications.
Executes plans into action through
analyzing available resources, revenues
and other activities necessary for
achieving target.
It usually not takes participation of
employees which lost their trust in a
company and discourage; if not convey
the reason for any modification to them.
Better communication with workers. It generates the environment of
competition for resources among various
functional departments.
Cost Volume profit Analysis:
This planning tool evaluates the impact of sales volume and product cost on net
earnings of the firm. This technique is used to forecast sales, costs and profits
through applying mathematical equation; in which dependent and independent
factors are taken to analyze the affect of independent variable on dependent factor.
Advantages and Disadvantages of Cost Volume Profit Analysis:
Advantages Disadvantages
It offers standard equation which helps in
estimating variables through simply
change the value of independent
variable.
It considers costs as a fixed factor in
mathematical equation; but there are
many expenses having semi variable in
nature.
Breakeven point analysis supports
management in knowing minimum
required sales to get no profit no loss
stage.
It takes sales factor as constant and
modifies demand; which in real not
possible.

Helps in optimizing price according to
outsider factors such as competition,
demand, etc.
Only shows result for specified period of
time.
Pricing Strategy: Every product has certain rate for which it is sold in the market.
This rate is decided on number of factors such as cost of sales, desired profit of
company and market price of similar product.
Advantages and disadvantages of pricing Strategy:
Advantages Disadvantages
It only charges that money which
customer willing to pay and hence
customer oriented.
Sometimes assumption of customer’s
willing prices gone wrong.
It allows to find optimized price where
company receiving maximum profit.
While determining optimized price on the
basis of demand; it totally avoids
numerous expenses.
M3. Use of different planning tools and their application for preparing and
forecasting budgets
Budgets:
Use: Executes plans into action through analyzing available resources, revenues and
other activities necessary for achieving target.
Application: It is applied for preparing long term objectives. It uses past data such as
income statement, balance sheet and fund flow statement to forecast next year’s budget.
Cost Volume Profit analysis:
Use: It is used to get effect of cost and size of sales on profit through changing values.
Application: It simulates the changes in fixed costs, variable expenses, selling price per
unit and semi variable expenses on net earnings of the company. This method classifies
all types of costs into fixed and variable overheads and together calculates cost price per
unit of the finished product (The 5 Step Risk Management Process, 2018).
Pricing Strategy:

Use: It is used to plan about future price of the project; this price is optimized to get
maximum profit.
Application: It applies on pricing strategies such as premium, penetration, economy and
skimming pricing methods.
LO.4: Compare ways in which organizations could use management
accounting to respond to financial problems.
P5. Compare how organizations are adapting management accounting
systems to respond to financial problems
1. Relevant cost analysis: The board cost bookkeeping is significant due pertinent cost
examination include. It can help Prime furniture to decide the current expenses and
can offer guidance on the most proficient method to treat with future exercises. It
can likewise help organization by illuminating the principle issue which is the
means by which to contribute organization spending plan so it can pick up
advantage in future. It responds to financial problems such extra cost bear by firm,
variance in expenses compared to budgeted and uncontrollable costs.
2. Make or Buy Evaluations: Creation of an item is generally intricate and costly for
any organization, as it includes a lot of choices identified with picking fabricating
area. It can solve financial problems related with leverage of project and best
project (Risk management, 2019).
3. Decision tree project: It is another efficient tool for taking decisions; in this method
various risk factors and return from investment concerned to get more details about
the project. It can solve financial issues like risk factor analysis, how much delay in
project, sources of financing, etc.
M4. Analyze how, in responding to financial problems, management
accounting can lead organizations to sustainable success.

1. Demand forecasting: Through forecasting demand Prime furniture gets information
about latest trends of the market and built product accordingly to match the demand.
And can lead to sustainable success.
2. Make or buy decisions: Through estimating cost on whether to make or buy
product, Prime furniture has fulfilled demand on time and also increase its Net
revenue through minimizing overall costs. An appropriate decision will help
company in achieving sustainable success (Sustainable Success, 2020).
3. Activity based costing: Through this tool Prime furniture has divided all the
activities or operations on costing bases. It takes less costing activity on the top and
high costing activity on bottom to focus on each activity separately. It is done for
particular period and hence can achieve sustainable success (Budgeting and
Forecasting Software, 2020).
CONCLUSION
On the basis of report analyses it can be concluded that; Absorption costing absorbs all
variable costs associated with manufacturing or cost of sales; while variable costing only
includes those variable expenses which are associated with selling of product. There are
many cases when management accountant requires to take crucial decisions like make or
buy decisions, acquisition related decisions, selecting project among various alternatives and
selecting sources of finance. These decisions are not that much easy to take; it requires
timely and in-depth study before coming up with conclusion.

REFERENCES
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comparison/>
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software/>
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%20Success>
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