Management Accounting: Measurement and Interpretation of Financial Statements

This document discusses the measurement and interpretation of income statements, accounting techniques for producing financial statements, benefits and drawbacks of planning tools, and the roles of management accounting systems in responding to financial problems. It focuses on the case of Prime Furniture, a furniture maker firm, and provides insights into various accounting systems, reporting methods, and planning tools effective for resolving financial problems.

MANAGEMENT
ACCOUNTING

Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
TASK 2............................................................................................................................................3
P3. Measurement of income statements......................................................................................3
M2. Accounting techniques to produce financial statements......................................................8
D2. Interpretation of prepared financial statements....................................................................8
TASK 3........................................................................................................................................8
P4. Benefits and drawbacks of planning tool..............................................................................8
M3: Key roles of different planning tools:................................................................................11
TASK 4..........................................................................................................................................11
P5. Roles of MA systems in responding to financial-problems:...............................................11
M4. Adaption of MA systems to respond to different financial problems:...............................14
D3. Analyzing use of planning tools to respond to financial problems:...................................14
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
Managerial Accounting requires the adoption of specialist insights and expertise in
describing and gathering accounting details and records in a particular manner, in order to
promote management of employees in the creation of strategies, protocols and in the arranging
and tracking of organization procedures (Bedford, D.S., 2015). It provides procedures and
principles that are appropriate for efficient preparation for the selection of appropriate business
activities and for management by assessment and efficiency review. Prime Furniture, the
furniture maker firm selected for this report. The study contains detailed discussion on varied
accounting systems/frameworks, reporting methods including planning tools effective for
resolving financial problems.
MAIN BODY
TASK 2
P3. Measurement of income statements.
Micro economic techniques:
Costs – As far as accounting is concerned, the costs pertain to the monetary amount of the
expenditure / costs on raw resources, inventory, consumables, supplies, personnel, utilities, and
so forth. this is sum listed in financial statement as expenditure or costs with different titles.
Cost Volume Analysis- CV Analysis explains the dynamics of benefit dynamics in relation to
shifts in costs and quantities. In simple words, it is a forecast of the impact of prices and volumes
on profits. Formally known as CVP Study, the top management might identify the revenue level
with which company will be in a no-profit-no-loss point for this measurements. This state is
termed as break-even level.
Cost variances – These are referred to as variations if actual incurred costs are varied
from standardized costs. Whether the actual costs is narrower than the standardized costs or
if actual benefit is higher than standardized profits, the positive variability is established. Even,

on the contrary, where the real expenses are greater than the normal expenses or income are
smaller, this is considered an unfavourable variation.
There is a significant variety of integral methods to drawing up financial statements such as
absorptions-method and marginal-cost method. The use of these methods enables the discovery
of various monetary and non - monetary facets. The following techniques are listed as follows:
• Cost-absorption method: Here, under this system, all production costs are clearly considered
individually in order to calculate gross profit figure.
• Marginal costing approach – The marginal costing system is primarily used for internal
reporting, with the goal of allowing managers to track and manage organisational activities. It is
a control strategy for the calculation of marginal costs as well as consequences on income of
differences in quantities or in form of a result by separating the gross costs from fixed
and variables costs (Cokins, 2013).
Product costing:
Fixed costs – These costs/expenses are those costs/expenses that typically do not change over the
longer term, even though business experiences changes to the average revenue rates or other
purchases.
Variable cost- Such costs are expenses that move up and down in certain proportion to quantity
of outputs produced.
Standard costing – This costing is a way of measuring the expense of the output process. It is just
a cost management element which the manufacturer utilizes, for example, to estimate the
spending for the next year on various costs, such as raw products, direct labours, or overheads.
Activity-based costing: This is methodology for more precise assigning of overheads costs by
assigning them to different operations. After the net expenses are assigned to the projects, the
expenses which are assigned to the things of product which are required for the tasks. The
system may be employed to reduce operating costs in a tailored way (Simons, R., 2013).

The major role of costing process in establishing prices-it is worth taking part in establishing
prices if a firm regulates the rate in accordance with that as well. This is because, on other hand,
prices are greater than the expected expectations established by the companies.
Cost of inventory:
Inventory cost- Inventory costs are not just the amount paid for the production of the goods, as
well as the expense of keeping and storing the item for the selling of just as much as possible.
This can be divided into various categories, including purchasing expenditures, bearing
expenditures, and cost shortages.
Valuation methods:
FIFO- This approach supposes that inventory levels acquired or manufactured for the first time
are sold, while new stocks are not sold. The value of the older inventory is then assigned to the
cost of the goods delivered and the expense of the latest inventory is related to the completion of
the inventory.
LIFO- Usually, this technique is used to place accounting charges on inventory. It is based on the
assumption that the first commodity to be released / sold is the last piece of inventory purchased.
Weighted average costing method- Periodic weighted average is probably the easiest method to
stock. As the calculation is carried out at the end of the time, the net expense of the items bought
for sale is estimated and the number of total units is split. Differentiating purchases from sales is
helpful.
Calculations:

M2. Accounting techniques to produce financial statements.
In the context of financial management, income statements are also organized into
absorbing-method and marginal-method schemes. As for Prime furniture, absorbing as well as
marginal-costing approaches disclose profits. The planning of financial statements, such as the
traditional expense structure, expense events, etc., encompasses a broad spectrum of methods,
besides these. In comparison to the normal costing, the calculation of the potential costs regarded
for contrast can be seen as related. By increasing activity for different types of activities,
operating costs are allocated and calculated (Cullen, Tsamenyi, Bernon and Gorst, 2013).
D2. Interpretation of prepared financial statements.
As far as the above generated income statement is mentioned, it can be claimed that the
number of net profits by absorbed cost method is 1900 GBP. Net earnings are equivalent to
4,700 pounds, creating a marginal cost framework. For these strategies, the benefit percentage
difference is mostly due to under or above fixed-cost absorption.
TASK 3.
P4. Benefits and drawbacks of planning tool.
Budgetary control- Budgetary control is the fiscal term for managing revenue and spending. In
practice, this means comparing actual income or cost on a regular basis with the projected
revenue or loss to determine whether or not corrective steps are required. Here are some facets of
budgetary regulation, as mentioned below:
Operational budget- The operating budget is estimated for one or more future revenue and
spending periods. The executive board typically draws up an annual budget before the beginning
of the year and sets the planned expenditure levels for the whole year. Here are some of the main
benefits and drawbacks of this budget, as continues to follow:

Benefits- This is helpful for the organization to plan its projects successfully by determining the
real efficiency of the various projects as well as predicting them.
Drawbacks- The classification of procedures and the distribution of costs are time consuming
processes in this plan.
Cash budget- The cash estimate shall be the revenues and cash payment documentation for a
defined period of time. This is a study of monetary inflows and cash outflows for a given period
of time. The financial plan indicates the probable sales and expenses of the accounts. In other
situations, effective cash restrictions are enforced where rewards are greater than revenues.
Spending are less than income where there is excess, so the option of how to utilize excess is
made. There are some benefits and drawbacks of this proposal as follows:
Benefits- If cash is low and the gap is covered, it's useful in emergency situations. An current
bank balance makes it easier to pay on due dates, progressively dependent to reap cash-flow
bonuses.
Drawbacks- This budget mainly reflects on cash considerations and lacks other factors that limit
the importance of this budget to strategic decision-making.
Capital budget- This is a kind of plan for the purchase or repair of fixed properties, such as plant
and machinery. This is the corporate capital investment policy. Capital investment is the period
of much more than 1 year of investment accrued. It is used to buy properties or to prolong the
economic life of the assets; the funding of the project is an example of the operating expenses.
The financial planning of the plans involved would take care of the expected viability (Delafrooz
and Paim, 2011). Two calculations for calculating capital spending are used to measure the NPV
or the return on investment. The benefits and drawbacks of this proposal are set out below as
follows:
Advantage- A detailed budget analysis assesses the financial position of the respective
organization.
Drawback- Modifications are a challenge to maintain this type of budget the greatest hurdle.
Pricing:

Pricing strategies:
Penetration pricing strategy: This pricing plan instantly reduces the price of a commodity so that
a large portion of the business can be conveniently reached. The approach is successful for
customers at a lower price for the new business.
Skimming technique- Skimming pricing strategy is a pricing process in which a distribution
company initially agrees on the cost of products or services and reduces prices over time. The
corporation lowers pricing in order to recruit another value-responsive community if the rivalry
of the first consumers is exceeded.
Companies evaluate prices on the basis of industry dynamics and business activities:
organizations design prices on the basis of competitiveness. Prices are subject to the main
operations calculated and taken out.
Considerations of supply and demand- Pricing is an economic principle in the supply and
demand world. Unit or even other commercial commodities, such as labor or monetary fluid
commodities, are priced at a period where rates charged (at current rate) are all the same and
result in equal financial production and use. The prices of such goods may have been fixed.
Strategic planning
SWOT Analysis: SWOT analysis assesses internal abilities and vulnerabilities and outer chances
and risks in the company’s environmental-setting. Internal review is intended to determine the
tools, strengths, key skill sets and strategic advantages intrinsic in the enterprise. The strategic
review defines business prospects and risks by gazing at the capabilities of competition, the
business climate and the general economy (Hansen, 2011). The purpose of SWOT review in
respective company is to use the information that the organization has regarding its internally
and externally conditions and to develop its approach accordingly. This essay presents a
framework of models for performing a SWOT study and offers useful perspectives into how to
develop strategic choices.
Advantages: SWOT analysis allows the company to consider its capabilities and limitations.
Encourages strategic analysis. It allows one to concentrate on capabilities, to build or recognise
opportunities, as well as using them to its advantages. It facilitates one to anticipate potential

threats and also to take steps to deter or mitigate their effects. It's a basic model with no rigid
framework.
Drawbacks: Often, SWOT review may clearly lead in compiling of listings of favorable and
detrimental aspects and might not lead in the improvement and implementation of methods that
are necessary to the achieving goal. The SWOT study can be rather subjective. This can
therefore provide imbalanced or rather biased view of the scenario under review if the individual
doesn't take sufficient consideration to be impartial, analytical and have specific objectives with
respect to the intent of such review (Hopper and Bui, 2016).
M3: Key roles of different planning tools:
The planning tools are based on a straightforward but relevant logic. This helps
managers to split their plans into shorter deliverables which are simpler to accomplish. The
planning tools synthesizes raw data and then transforms it to useful information and schedule.
Planning tools depict the whole strategy and its particular components in an easy-to-receive and
evaluate performance. Different budgets help managers to analyses each level of planning
procedure and render the appropriate decisions as well as in forecasting (Kokubu and Kitada,
2015).
TASK 4
P5. Roles of MA systems in responding to financial-problems:
Financial issues/problems imply to those factors or circumstances which leads to
difficulties for business to attain their prespecified goals. Managers always concern about
handling and responding to different financial problems as to sustain business performance. In
longer period financial issues may affect business’s survival in industry thus management require
proper approach to respond to multiple financial problems. In this regard here are certain specific
financial issues which respective company is facing:
Increasing Operational Costs: Company is continually facing issue of increment in operational
costs which affects business’s overall net profitability. This is also an indication of decreasing
operational efficiency. In long run this may affect business growth and performance adversely.

Mishandling of inventories: Due to mis handling of different inventories, company is facing
increase in normal and abnormal costs of inventories. This directly affects company’s gross
profit margin by increasing cost of goods sold. Inventory is material item in balance sheet which
thus mismanagement of inventories affects business’s performance (Maiyaki, 2011).
In order to deal with these financial issues management has to adopt management
accounting system as this assist managers to maintain accountability in processes and operations.
Along with systems there are specific techniques which aid in identification of main causes of
different financial problems, as listed below:
Benchmarking: Benchmarking is standard procedure and a logical technique to develop a
standard, determine best practices, find areas for change and construct a competitive atmosphere
within enterprise. Incorporating benchmarking into the company can result in useful evidence
that identify financial issues and promotes innovative concepts and activities. In respective
company, it could be used as method to help businesses identify and assess effect
of financial issues. By setting benchmarks company can easily track the root causes of financial
issues just by analyzing variations (Moser, 2012).
Key Financial Indicators: KPIs are important (key) indices of success towards the desired
outcome. KPIs concentrate on strategical and managerial change, offer an objective framework
towards decision - making, and better focus on resources on what requires most. Suppose, for
example, that sales are down for year. Company want to monitor revenues of KPIs to enable
them to increase annual revenue. Company want to add "revenue growth" to KPI dashboard.
Company's aim is to raise sales by 10% for next 6 weeks, which is a significant target as it would
make the business more financially viable. Company decide that it will calculate success against
this target by monitoring the growth in sales versus the rise in dollars expended. Company will
also understand that recruiting more sales personnel and working on customers loyalty and
engagement will help company to meet these targets. Within 6 weeks, company will know if
company has accomplished this target, but every four days, company will carry out a real-time
representation of how they're going.
Financial Governance: Financial regulation relates to sort of way in which an organization
receives, handles, tracks and regulates financial records. Financial regulation covers how

businesses monitor financial activities, monitor results and monitor information, audit, activities
and transparency. As financial control results in more comprehensive facts and figures, the
reports used by management to formulate plans and determine strategy are focused on more solid
view of financial realities of the company. This allow managers to key areas which are
responsible of different financial issues (Otley, 2016).
Here it is also relevant to discuss skills of management accountants in relation to respond
to different financial issues, as discussed below:
Communication skills: Currently, management accountant personnel not only are required to
function on report, but also are required to communicate key insights they obtain from it
to business leaders/managers. They need to be trained to do narrative and create a central
database. Communication is thus one of most important accounting management capabilities of
these times.
Predictive Skills: Management Accountants have been more focused in info, reporting and
evaluation in past years. Currently, though, the function has changed. They are
presently supposed to grasp the market thoroughly and foresee the effect of the different
variables on the activity. Currently, it creates more merit for management accountants to be
futuristic in dealings than actually evaluating the figures in hindsight (Parker, 2012).
Comparison:
Basis Prime Furniture Hope Construction
Financial Issues Company is primarily facing
issue of increased operational
costs which is detrimental in
company’s profitability.
Company is struggling with
mismanagement of
inventories at their different
construction sites.
MA Systems Company must apply cost
accounting systems as to
optimize and control their
operational costs. As this
This company applies
Inventory management
system as to manager and
track their different

system offer effective control
over different costs and basis
for allocating costs (Renz,
2016).
inventories across their
different construction sites.
This system offer proper
classification, management
and controlling over different
inventories process and also
optimize overall inventory
costs.
M4. Adaption of MA systems to respond to different financial problems:
As above tabular comparison of two firms in terms of adoption of different systems to
respond to their respective financial issues this has been analyzed that main aim of different
system is support managerial actions by helping them to responding to financial issues. Different
systems act as cumulative framework which not only identifies major financial issues but also
provide proper action plan to respond to such financial issues (Schaltegger and Zvezdov, 2015).
D3. Analyzing use of planning tools to respond to financial problems:
Planning tools basically provide fundamental blueprint to making respond to different
financial issues by measuring their effect on business performance. Multiple budgets cover
different elements of business which also essential for business to consider while responding to
different financial issues. These also enable managers to make forecast of performance of
company in coming as well as to early identification of potential issues (Wagenhofer, 2016).
CONCLUSION
From above study this has been concluded that Management accounting relies on all
those accounting strategies targeted at informing managers of ongoing company metrics. It
utilizes information related to different costs incurred towards goods or services bought
by organization. Budgets are also required to measure actions taken in the form of budgetary
planning. Accountants employ performance analyses to observe variances in real outcomes from
projections.

REFERENCES
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