Management Accounting Techniques and Budgetary Control

This study material provides an overview of management accounting techniques such as cost analysis, financial reporting, and planning tools. It explains the use of budgets for planning and control and discusses the advantages and disadvantages of different types of planning tools. The document also includes examples and explanations for better understanding.

B07929
MANAGEMENT
ACCOUNTING

Table of Contents
TASK 2...........................................................................................................................3
Introduction........................................................................................................................3
L.O.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
L.O.3: Explain the use of planning tools used in management accounting Using budgets
for planning and control:..................................................................................................11
P4. Explain the advantages and disadvantages of different types of planning tools used
for budgetary control........................................................................................................11
M3. Use of different planning tools and their application for preparing and forecasting
budgets:...........................................................................................................................13
L. O. 4: Compare ways in which organizations could use management accounting to
respond to financial problems..........................................................................................14
P5. Compare how organizations are adapting management accounting systems to
respond to financial problems..........................................................................................14
M4. Analyze how, in responding to financial problems, management accounting can
lead organizations to sustainable success......................................................................17
Conclusion.......................................................................................................................19
REFERENCES________________________________________............................20

TASK 2
Introduction
Management accounting evolved before the Industrial Revolution. It is important for
the organisational people; it introduces specific information even for non-accountants
anytime, and observes present firm’s finances and helps creating actual professional
way out. In my words, Management accounting is accounting for managers to set up
reports using financial information to achieve business objectives, planning, control and
decision making. It mixes accounting, finance and management with the business skills
and techniques (What Is a Management Accounting System?, 2020). The scope of it is:
Cost Accounting, Tools and technique of management control, Tax accounting and
Statistical and quantitative techniques.
Managerial accounting is carrying out by identifying, measuring, analyzing,
interpreting, and communicating financial information to line managers for chase of an
organizational goal (What Is a Management Accounting System?, 2020).
L.O.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
Costs: Costs are the expenses of business which is to be reduced from sales
revenue to get net profit earn by company during year.
Different costs and cost analysis:
There are mainly two types of costs; fixed and variable. Fixed costs are constant
over year and contains fixed amount paid by business for entire year; while on the

other hand, variable costs varies with sales revenue and calculated on per unit
basis (Types of cost/ classification of costs, 2019). Cost can be calculated based
on two methods:
Marginal costing: In this method cost is calculated based on sales revenue during
year. It only considers those expenses which occur at the time of selling and
distribution activities.
Absorption costing: This costing technique absorbs all expenses during production
process; so it also includes fixed production overhead on per unit basis.
Quarter 1 & 2
SALESPRICE PER UNIT=BUDGETED SALES /BUDGETED SALES
VOLUME=£80000/80000=£1
ABSORPTION COSTING UNIT COST=BUDGETED PRODUCTION COST/
BUDGETED SALES FOLUME= £68000/80000=£0.85
MARGINAL COSTING UNIT COST= BUDGETED VARIABLE COST/BUDGETED
SALES FOLUME= £52000/80000=£0.65
Income statement for the quarter 1
Marginal costing
Units
per unit
£ Total £ Total £
Sales (A) 66,000
Marginal cost of sales (B)
Variable cost
78,00
0 0.65 50,700
Less: Closing stock
12,00
0 0.65 7,800 42,900
Contribution Margin (A -B) 23,100
Less: Periodic costs
Fixed cost 16,000
Selling and administration 5,200
Net profit 1,900

Income statement for the quarter 2
Marginal costing
Units
per unit
£ Total £ Total £
Sales (A) 74,000
Marginal cost of sales (B)
Opening stock
12,00
0 0.65 7,800
Variable cost
66,00
0 0.65 42,900
Less: Closing Stock 4,000 0.65 2,600 48,100
Contribution Margin (A -B) 25,900
Less: Periodic costs
Fixed cost 16,000
Selling and administration 5,200
Net Profit 4,700
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.
1. COGS (cost of goods sold) = Beginning Inventory (OPENING STOCK) +
Purchases during the Period (PRODUCTION) – Ending Inventory (CLOSING
STOCK)
2. Gross Income = Gross Revenue – COGS
3. Net Income = Revenue – COGS – Expenses
Income statement through Variable costing technique:
Income statement for the quarter 1
Absorption costing
Units
per unit
£ Total £ Total £
Sales (A) 66,000
Absorption cost of sales (B)
Variable cost
78,00
0 0.85 66,300
Less: Closing Stock
12,00
0 0.85 10,200 56,100
Gross profit (A -B) 9,900

Less: Periodic cost
Selling and administration 5,200
Less: Overhead overstated 400
Net profit 4,300
Income statement for the quarter 1
Absorption costing
Units
per unit
£ Total £ Total £
Sales (A) 74,000
Absorption cost of sales (B)
Opening stock
12,00
0 0.85 10,200
Variable cost
66,00
0 0.85 56,100
Less: Closing stock 4,000 0.85 3,400 62,900
Gross profit (A -B) 11,100
Less: Periodic cost
Selling and administration 5,200
Less: Overhead overstated 2,800
Net profit 3,100
Overhead overstated
quarter 1
Fixed cost per unit = Fixed cost/total production
= 16000/80000 = £0.2/ unit
Actual production cost = 78,000 * 0.2 = £15,600
Overhead overstated = Estimated cost – Actual cost
= 16,000 – 15,600 = 400
Overhead overstated
quarter 2
Actual production cost = 66,000 * 0.2 = £13,200
Overhead overstated = Estimated cost – Actual cost
= 16,000 – 13,200 = £2,800
Explanation:
Cost of goods manufacturing 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.

Reason for difference in Profit & Loss or Income statement calculating by Absorption
and Variable techniques:
 The difference in Net profit of income statement through absorption and variable
costing is due to different gross profit.
 Gross profit difference occurs due to different units while calculating variable cost
through variable and absorption costing method.
 Absorption costing absorbs all cost of production, without considering how much
sales have done; while on the other hand; variable cost method only considers
cost which occurs at the time of selling product.
M2. Accurately apply a range of management accounting techniques
and produce appropriate financial reporting documents
There are various techniques of management accounting useful for organizations, but
all tools cannot help organization to achieve its targets. These techniques are discussed
below:
1. Financial Planning: The main aim of any organization is maximization of profits
by minimizing expenses. This aim can only be achieved through proper financial
planning. It is the best techniques for achieving business targets. There are 5
golden rules for better financial planning through Prime furniture can build sound
plan:

Prime furniture can build unbreakable financial plan through identifying the
answers of above 5 strategic questions. The goal of Prime furniture is to deliver
genuine product to its consumers, it requires proper plan to cut its
manufacturing cost to bring feasible price in front of its customers. Company
was established in 2000, it’s not new comer it has enormous experience and
goodwill, hence company need not to take any risk which can harm its image.
But if talking about entering into new product Line Company should take
initiative to take risk invest in product modification and adding new product line
to grab new market.
2. Financial Statement Analysis: This statement consist Profit & loss a/c and
Balance Sheet. Financial statement analysis is done through comparative
financial statements, common size statements and ratio analysis of previous
years.

In case of Prime furniture, after doing analysis of its previous income statement
and Balance sheet with current year’s statement it was found that company’s
sales revenue has increased by 20% but its expenses also increased by 50%,
the reason behind this is company has invested handsome amount on
advertisement and brand promotion. So this increase in expenses is not an
issue as it will generate good revenue in near future. While on the other hand
Prime furniture’s ratio analysis report shows that company’s debt-equity ratio is
raised from 2/3 to 1/4 which means company debt is increased from previous
year. This can be an issue if company is not generating regular income to pay
its interests.
3. Cost Accounting: It shows cost information in product wise, department wise,
process wise and branch wise. These costs are compared with previous years
overall costs. These difference in costs of two or financial years’ helps
management in identifying the reason behind this increment.
As discussed above, Prime furniture’s cost is increased this financial year
due to more expenditure on promotions and advertisement of its products. So
it’s clear that this cost is incurring from sales and advertisement department.
This cost should not be considering as pure expenditure by company as it’s an
investment for future growth of the business.
4. Fund flow analysis: This analysis shows the report on the movement of fund
from one period to another. These analysis useful to get information whether the
fund is properly utilized or not. Fund flow consists of two side’s application of
funds (expenses) and sources of funds (loan and equity). It’s a mixture of both
balance sheet and income statement.
Prime furniture fund flow analysis reveal that company’s working capital has
increased in comparison with previous year due to hiring of more sales persons
but this recruitment is for business expansion and will be source of income for
Prime furniture.
5. Cash flow analysis: Through cash flow statement company knows about
movement of cash from one period to another. Besides these changes in cash

balance for two periods also reveals by this analysis. Cash flow statement is
different from Fund flow statement as in cash flow statement it calculates cash
in and out from 3 different activities like operating, investing and financial
activities.
Prime furniture’s cash flow analysis shows that company’s cash from
operations is negative that means cash out from operational activities due to
changes in working capital. Company has not invested in any business so there
is no change in investment activities, while financial activities shows increase in
equity shares as company has issued some shares to increase its funds.
6. Standard Costing: It is predetermined cost, it is useful in measuring actual
performance of the company.
7. Decision-making Accounting: This technique is useful in solving business
problem by choosing best alternatives. To find such alternatives relevant costs
are compared,
Prime furniture can solve the business problem arising due to increasing in
complexity of nature of business processes.
8. Management Information System: This technique is useful in integrating
different line departments and stores into one system. Prime Furniture use this
tool to get exact number on how much stock is left, how much money is blocked
into market and how much time it will take to deliver product to the customer.
Other then this company will also get to know what current status of unused
inventory.
9. Statistical Techniques: There are various statistical techniques used for
removing management problems like least square, regression and quality
control tool. Prime furniture has raised the quality of its product through quality
control tool and estimates its future sales through regression method.
10. Management Reporting: This report consists of information’s of financial
statement of previous years. Prime furniture use this report to find its business
growth, wealth and its financial health.

Ratio Analysis: This is the more powerful technique to get estimate performance
of the company. But this analysis has a drawback that it only expresses data in
proportional and percentage basis.
L.O.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.
Budget: The budget is a quantitative as well as fiscal articulation of approach for a
characterized future period (Budgeting and Forecasting Software, 2020).
Importance of Budget:
 Budgets facilitate effective control.
 Budgets facilitate coordination and communication.
 Budgets facilitate record keeping.
 Budgets are a natural complement to planning (Budgeting software, 2020).
Types of Budgets:
1. Cash flow budget: It is forecasting of future cash inflow and outflow into the
business. It is prepared for specific time period which is one year. The elements
taken by cash flow budget are accounts payables and receivables.
2. Operating budget: This budget forecasts future operational activities of the
business like selling and distribution, paying salaries, advertisement and
marketing expenses. This budget support in knowing estimated net earnings gain
by business in next year.
3. Financial budget: This budget covers the strategies and estimation made by
managerial accountant for managing assets, income statement and other

financial related documentations. It is prepared to identify the elements which
can affect wealth of company.
Planning tools:
Planning tools are the backbone for the company because of its beautiful design and
easy to use interface (Management Accounting – Meaning, Advantages & Functions,
2020). Without proper planning tool no business can survive and launch any new
product line.
Advantages and disadvantages of different types of planning tools:
Tools ˃ Financial Planning Cost Accounting Budgeting
Advantages It helps Prime furniture
in identifying money
required for starting new
product line and running
it for a long run. It also
highlights period like
boom and recession
where company requires
extra financial funds.
It eliminates
wastes, losses and
Inefficiencies of
Prime furniture,
additional to this it
also reduces cost
and advices make
or buy decisions.
Budgeting helps
Prime furniture in
coordinating
across
departments,
translate
strategic plans
into action.
Disadvantages It is costly process for
Prime furniture because
it is a lengthy process
and requires lots of
analyses and accurate
data. Additional to this it
is unable to do
forecasting, coordination
and certain modifications
for the company.
The major
disadvantage of
this tool is it takes
decisions on the
basis of previous
records. And in this
rapid changing
world decisions on
basis of past
records can be
hazardous.
Problem with this
tool is it applied
mechanically
and rigidly. Once
budget plan is
made Prime
furniture cannot
do any
modification in it.
M3. Use of different planning tools and their application for preparing
and forecasting budgets:
Basis Financial Planning Cost Accounting Budgetary Control

Financial
Stability
This tool helps Prime
furniture to get know
how much it should
invest on new
product line, how
much source it has
and how much risk it
can take in long run.
Through this it helps
company in
achieving financial
stability.
This tool helps
achieving financial
stability through
estimating the cost of
different departments
and product line of
the company. Also it
forecast how much
cost should be
incurred on sales and
advertisement
department to get
desired result.
This tool helps
company in plan in
advance how next
year income
statement and
balance will look
like after doing
significant
changes in costs
and revenues. It
also give
estimated data on
how much fund
required by
different head of
Prime furniture to
do its operations
Financial
Performance
This tool is not as
good as financial tool
in achieving financial
performance of the
company as Cost
accounting.
It is the best tool in
achieving financial
performance of the
company. Because it
controls the
unnecessary cost of
underperformed
department and also
reduced employees
have no role.
It can only forecast
how financial
performance will
effect after doing
certain
modifications in
costs and
revenues.
Solving
financial
Problem
Prime furniture face
problems like raising
funds,
underperformed
assets, etc. This tool
is the best for solving
such a problem. As it
helps Prime furniture
in knowing in
advance from where
to generate funds
and what the effect
of raising funds from
different sources is.
This tool is not so
efficient in solving
financial problem of
the Prime furniture.
It can only help in
knowing how
much fund is
required for
different
operations to
achieve desired
revenue but it is
also less efficient
tool.
Target
Achievemen
t
This tool plays a
major role in filling
the gap between
actual performance
and desired
This tool can achieve
the target of cost
minimization of Prime
furniture.
This tool helps in
deciding desired
sales target which
a company can
fulfill with its

performance of
Prime furniture by
arranging funds.
available funds.
L. O. 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
Effectiveness of management accounting in dealing with financial problems
 It forecasts available funds required for the business and identifies the
sources of funds.
 It helps company in identifying whether to buy or make product so its
overall costing reduces and financial problems solved.
 Through budgeting it sets desired sales revenue for coming year which
can be attained by business.
Comparison of Management Accounting in the decision-making process for improving
the performance of the different organizations:
1. Relevant cost analysis: Management cost accounting is important due relevant
cost analysis feature. It can help Prime furniture to determine the existing costs
and can give advice on how to treat with future activities. It can also help
company by solving the main issue which is how to invest company budget so
that it can gain advantage in future. It is the primary step which a company
should take before taking any action. Relevant costs analysis is necessary for
taking strategic decisions to increase company’s profit. Management accountant
can do costs analysis by analyzing various sales channels, services, marketing
activities and products to get best profitable business model.

To take better and full proof decisions, relevant cost analysis has to
be done by Management accounting team.
2. Audience targeting: To get sound profit company needs to increase its sales
turnover and to increase turnover it is necessary to pay special attention towards
its customers. So Prime Furniture should divide their niche market on the basis of
below features:
 Age & gender
 Physical and virtual locations
 Basic pay of consumers
 Education
 Life style
 Values
3. Make or buy evaluations: Production of a product is most complex and expensive
for any company, as it involves plenty of decisions related to choosing
manufacturing location, coordinate with workers and fulfilling their demand if any.
For Prime Furniture there is two way to increase its stock that is either buy or
make the product.
In case of Prime furniture production of every product is not possible, because
company has huge product line (Flat Pack Furniture, Cookware, Bathroom
Accessories, Toys & Games, Kids Furniture, Beauty products). Hence
manufacturing of each product will increase the expenses and reduce the profit.
Therefore company should adopt mix strategy that means Prime furniture should
focus on manufacturing of furniture only as this product doesn’t need instant
modification. And it should buy rest of the products from third parties to reduce
unnecessary production cost.
4. Define Budgets: The most difficult task is to make budget for a company,
because making budget is a part of planning, which done with the help of
forecasting. Future is uncertain; no one knows what will happen in coming year.
There are many factors which generate this uncertainty like change in lifestyle,
government regulations, competitor’s strategy, war situations, etc. Hence to
tackle this situation, Prime furniture should consider “β” (beta) value for this

uncertainty or risk factors. This beta value helps accountant in estimating budget
for next financial year and can find tolerance level of business risks.
With the help of this tool accountant of Prime furniture will be able to
create financial plans for each product line, various projects, marketing campaign
and new products to be launched.
5. Controlling: Budgeting is not enough to bring bright future for a company. The
main part of budgeting is to execute that budget properly as forecasted by
management accountant which is not an easy task. This process of properly
execution of plan is known as controlling. Controlling can be measured by
matching it with previous year’s performance of the company and furnish it in a
better way by identifying the reasons of loss. It makes easy for line managers to
minimize operational costs.
In case of Prime furniture, controlling can help company by cut salaries of
underperforming departments or by decreasing the unnecessary employees
hired by the company. Company can also invest in high earning portfolios or can
add new product line to increase sale.
6. Planning: The last benefit of accounting management is forecasting of future
developments and progression. It enables Prime furniture to stay updated in this
competitive world, company can take actions on time and can build plan B in
crucial circumstances. Through planning company can establish long-term
business policies. But for proper execution of planning again controlling plays
main role.
M4. Analyze how, in responding to financial problems, management
accounting can lead organizations to sustainable success.
Sustainable success means a success which stays for a longer period of time. In
this changing world the concept sustainable success seems to be difficult. There
are certain tools which help Prime furniture to achieve sustainable success:

1. Demand forecasting: Through forecasting demand Prime furniture get
information about latest trends of the market and built product accordingly to
match the demand (Sustainable Success, 2020).
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.
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
(Sustainable Success, 2020).
Risk management for attaining sustainable success:
Risk is uncertain and sometimes not tolerable. But there are some risks which
can be covered and tolerated by the company (Risk management, 2019). There
are some steps through which Prime furniture can manage risk:
1. Week core product: After assessing risk factors it was found that company’s core
product which is furniture not strong enough to compete with Margolis office
furniture. As this competitor company has deep product categories as compare
to Prime furniture.
2. Identifying factors to minimize the risk: The next step for Prime furniture is to
identify the factors which can minimize the risk. So company can focus on
available products quality and service to compete Margolis office furniture.
3. Low demand: This risk has effected many organizations in recession period.
Prime furniture has diversified its product line to gain revenue even if its core
product is not working properly while Margolis office furniture hasn’t adopted
such strategy.
4. Change in lifestyle: In this rapidly changing world, risk of lifestyle change is
common. To face this challenge Prime furniture arranges marketing campaign
every quarter to know consumers taste. Additional to this it interacts with
customers through social media to keep itself up to date. Margolis office furniture

only interacts through its blog page and official website which gives strategic
advantage to Prime furniture (The 5 Step Risk Management Process, 2018).

Conclusion
After analyses complete case study it can be concluded that Prime furniture face
problems like raising funds, underperformed assets, etc. This tool is the best for solving
such a problem. As it help Prime furniture in knowing in advance from where to
generate funds and what the effect of raising funds from different sources. This tool can
achieve the target of cost minimization of Prime furniture, Management cost accounting
is important due relevant cost analysis feature. It can help Prime furniture to determine
the existing costs and can give advice on how to treat with future activities. It can also
help company by solving the main issue which is how to invest company budget so that
it can gain advantage in future. It is the primary step which a company should take
before taking any action.

REFERENCES________________________________________
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comparison/>
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%20Success>
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management-process-in-5-steps>