Management Accounting: Cost Analysis, Planning Tools, and Techniques

MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
Task 2...............................................................................................................................................3
P3 Cost analysis using appropriate techniques of marginal and absorption costing and income
statement......................................................................................................................................3
M2 Management accounting techniques for financial reporting documents...............................3
P4 Advantages and disadvantages of different types of planning tools used for budgetary
control..........................................................................................................................................5
M3 Use of different planning tools and their application in preparing and forecasting of
budgets.........................................................................................................................................9
P5 Comparison of organisations using management accounting for responding to financial
problems......................................................................................................................................9
M4 Management accounting leading to success in response to financial problems in
organisation................................................................................................................................11
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
This report is on concepts of management accounting. Management accounting is the accounting
of use for managers of an organisation for identifying, measuring, interpreting and analysing of
information based on accounting for achieving short and long-term objectives. The organisation
taken for the study is Prime Furniture, which is a furniture-based company in UK. Prime
Furniture has expertise in making various furniture products. Different types of management
accounting techniques applied to organisation has been talked about. Different types of planning
tools have been talked about for Prime Furniture with their advantages and disadvantages. Cost
analysis using marginal and absorption techniques have been illustrated. Comparison of
organisations’ financial performance adapting management accounting has been done.
Task 2
P3 Cost analysis using appropriate techniques of marginal and absorption costing and income
statement
Marginal costing and absorption costing have the difference that fixed overheads are taken as a
one-line expense in marginal costing however, in absorption costing, fixed overheads are
computed separately.
Here, Selling price=1
Fixed cost=16000/80000=0.2
Variable Cost=52000/80000=0.65
Cost in total per unit=0.65+0.2=0.85
M2 Management accounting techniques for financial reporting documents
Income statement for Q1 and Q2 using absorption costing
Particulars Q1 Q2
Sales 66000 74000
Less: Variable costs 50700(0.65*78000) 42900
Fixed costs 15600 13200

Cost of Goods for sales 66300(50700+15600) 56100(42900+13200)
Add: Opening stock 0 10200
Less: Closing stock 10200(0.85*12000) 3400(0.85*4000)
COGS 66300-10200=56100 56100+10200-3400=62900
Gross profit 9900(66000-56100) 11100(74000-62900)
Less: Selling and
administration costs
5200 5200
Net Profit 4700 5900
Income statement for Q1 and Q2 using marginal costing
Particulars Q1 Q2
Sales 66000 74000
Less: Variable costs 50700 42900
Add: Opening stock 0 7800
Less: Closing stock 7800(0.65*12000) 2600(0.65*4000)
COGS 50700-7800=42900 48100(42900+7800-2600)
Contribution 23100(66000-42900) 25900(74000-48100)
Less: Fixed and administration
costs
5200 5200
Fixed costs 16000 16000
Net profit 1900 4700
Reconciliation of Profits
Particulars Q1 Q2

Marginal Cost profit 1900 4700
Add: Difference of units
produced
400(2000*0.2) 2800(14000*0.2)
2300 7500
Less: Opening stock 0 2400(12000*0.2)
2300 5100
Add: 2400 800(4000*0.2)
Absorption cost profit 4700 5900
It can be seen profits reported in absorption costing are higher.
P4 Advantages and disadvantages of different types of planning tools used for budgetary control
1. Financial Planning
The income statement, as well as the statement of financial position, are the two most important
statements of finance for shareholders to consider. For assessing the organisation's strengths and
shortcomings, the financial accounts are analysed over several periods. It may be utilised for
evaluation if an organisation’s operational costs are low or high, also the amount of receivables
and debt, fixed assets and variable costs, and, most crucially, the organisation's net gain, which is
utilised by investors and shareholders (Pradhan, Swain and Dash, 2018).
Benefits: a) Financial planning aids in cost projections, which will be useful in future initiatives.
b) Through financial analysis, it gives a look into how organisation can approach a project.
c) Planning financially assists in calculation the right rate of return on projects, and also the
management of cash flow and working capital.
Disadvantages:
a) Planning financially may go awry because of estimates that maybe or may not be sufficiently
right (Cuzdriorean, 2017).

2. Analysis of costs
Raw materials, labour, and other variable charges are only a few of the direct and indirect costs
of production. Costing methods can be used to compute the overall cost of production, which is
then divide by produced total units. This aids in calculating per unit cost of output and also unit
pricing. This has benefited Prime Furniture's in identifying cost-cutting opportunities, for
example switching to a supplier giving low cost tender that meets the exact quality standards.
Different types of costing used in Prime Furniture are:
Standard costing: The costing measure which helps find out whether the system is facing
deviations in performance. It sets costs which are predetermined and thus serve as a standard for
Prime Furniture to check on performance (Pradhan, Swain and Dash, 2018).
Normal costing
Direct costs are assigned to the jobs as they occur. Manufacturing overheads are applied to jobs
by predetermined rates of overheads.
Actual costing
Actual costs assign overheads manufacturing when the actual costs are known. These actual
costs are assigned to jobs.
Job costing: A project being segregated in small parts is known as job and the costs related to
each part of the job whether direct or indirect are covered in job costing. It helps to find out
whether the costs being spent on a project are in controlled manner or not and gives estimate of
the costs which will go in the project (Cuzdriorean, 2017).