Management Accounting and Cost Analysis for Prime Furniture

This report discusses the concept of management accounting and the essential requirements of various management accounting systems used in Prime Furniture. It also includes a discussion on different methods used in management account reporting and the income statement prepared using marginal and absorption costs. The report also compares Prime Furniture and Dreams Furniture in terms of their use of management accounting system to respond to financial problems.

Business

Table of Contents
INTRODUCTION ..........................................................................................................................3
TASK 1............................................................................................................................................3
Describe management accounting and discuss the essential requirements of various types of
management accounting systems................................................................................................3
TASK 2............................................................................................................................................6
Describe different methods used in management account reporting..........................................6
TASK 3............................................................................................................................................7
Using the techniques of cost analysis, calculate the costs and prepare the income statement
using marginal and absorption costs...........................................................................................7
TASK 4............................................................................................................................................9
Explain the advantages and disadvantages of different types of planning tools used for
budgetary control........................................................................................................................9
TASK 5..........................................................................................................................................12
Comparisons of how organisations are using management accounting system to respond to
financial problems.....................................................................................................................12
CONCLUSION .............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
Management accounting is a part of accounting. It arose out of the need to make greater
use of accounting to make managerial decisions. It gives a analysis of the activities of business.
It helps in the planning and control of trading operations of the firm(Abernethy and Wallis,
2019). This report includes a critical discussion on the management accounting and also showed
the essential requirements of various management accounting systems used in Prime Furniture.
Various methods of management account reporting is also defined to evaluate the performance
of the Prime Furniture. Further, it also includes the income statement on the basis of marginal
and absorption costing. Various planning tools for the budgetary control are also discussed. A
comparison of Prime Furniture and Dreams Furniture has also shown the use of management
accounting system responding to the financial problems.
TASK 1
Describe management accounting and discuss the essential requirements of various types of
management accounting systems.
Managerial Accounting is defined as the practise of creating reports regarding the
corporate operation to assist the managers making short-term and long-term decisions. It helps a
company in achieving its objectives by identifying, measuring, analysing, interpreting and
disseminating(Anshassi, Laux and Townsend, 2019). The information accumulated in all aspects
of accounting that are significant to the management for business operations, when it comes to
the cost of goods and services purchased by the organisation.
It is used for the internal goals and helps the managers in decision-making. This is a process that
involves both monetary and non- monetary information and financial resources to managers in
the decision-making process. Manager use the provisions of accounting information to inform
themselves before making decisions within the organization, enabling them to better manage and
perform monitoring functions. It plays a vital role in decision - making, planning, performance
management and integrated financial reporting. It gives an opportunity to take effective decisions
regarding their day-to-day business activities.
Functions of management accounting:

1. It help the manager to plan about the future and enhance decision-making power which
assists in formulating and implementing the strategies.
2. Budgets are used by management accountants to quantify a company's operation plan.
3. Performance reports are used to track the differences between actual and budgeted
results.
Management Accounting Systems: It applies all the concepts and works across all the
departments of a corporation(Arashpour and et.al., 2018). An effective and impressive system
will look at each of these areas:- finance, sales, operations, human resource, Information
technology and marketing. It also provides non-financial information in addition to the financial
data. Cash in hand, accounts payable and receivables updates, delivery decisions and inventory
status are few examples. All of this accumulation of data makes it easier to determine crucial
performance indicators in many business domains. These are primarily used to track the costs
associated with the manufacturing of goods and services.
Types of management accounting systems:
1. Job Costing System: It refers to allocating manufacturing costs of individual item or
batch of the products and is implemented if the commodities are different from one
another. The process of accumulating information about the expenses associated with a
specific product and services. The substance may be necessary for the companies such as
Prime Furniture in order to send the cost content of the goods to a customer as a part of
the contract that reimburses data. The data will also be enforced to assign the inventory
prices to the processed products. It needs three types of information to accumulate
information: Direct material, Direct Labour, Direct overhead. The essential Requirements
of job costing in Prime Furniture is:
 It helps in estimation of all type of cost used in the production process.
 It collects the cost sheets of similar jobs.
 It helps in the evaluation of work quality.
1. Price Optimization System: It can be used in deciding the prices of multiple products at
a time and to control the costs of resources. It is a mathematical program that calculates
how demand varies at different price levels, and then combine the data with information
on costs and inventory levels to recommend prices that will improve profits(Comi,
Schiraldi and Buttarazzi, 2018). A project manager of Prime Furniture can optimize the

price level by knowing the customers needs, and value the goods accordingly. t helps to
analyse other sectors related with it, execute it with control and manage the expenses of
factors like operations, advertisements and distributing channels. The essential
requirements of this system in Prime Furniture are :
 It defines the price segmentation based on the customer class, product type, quantity and
amount of the product.
 It defines the attitude of the customer based on different prices.
 It collects the competitive insights from the external sources and changes the price list to
improve the future prices in sales.
2. Inventory Management System: It involves the process of storage and re-stocking the
organization's inventory as to increase the sales volume. It is concerned with the effective
utilization of stock and maximizing the productivity. Prime Furniture can use this system
to optimized the business practices and take over the daily process of managing the stock.
It adopts the function of data visibility and gathers the useful data and then display it on
the dashboard of the employees and for the manager(Duan, and et.al., 2019). Essential
requirements of Prime Furniture for this system are:
 It helps in forecasting of the estimated costs requirements of the organisation.
 It helps in improving the accuracy of inventory.
 It improves the company's inventory accuracy which in turn increase the workflow and
manages to achieve it objectives.
3. Cost accounting System: It is a framework which is used by any undertaking to improve
the estimated costs of the product for which profitability, inventory valuation and cost
control analysis can be made. It is a system which is used for the purpose of keeping a
track of flow of inventory at various stages of production(Dunn, And et.al., 2021). Prime
Furniture can use this system as it assists in the cost optimization and understanding the
value of raw material, work-in-progress and finished goods. It also helps in taking
imperative decisions in the absence of the cost report. Essential requirements of Prime
Furniture are:
 Sometimes it takes time to collect and acknowledge the exact demand for the firm. So the
information mentioned in the task profile should be concise, simple and flexible.

 Corrective and co-operative participation of executives for taking effective and efficient
decisions for ascertaining the costs.
TASK 2
Describe different methods used in management account reporting.
Management account reporting: It is a form of financial report used for day-to day
strategic decision making. These are made on a monthly or quarterly basis and gives an insight to
the financial well-being of the business(Frank, Grenier and Pyzoha, 2019). It gives a deeper
understanding of the finances as it focuses on the segments and not on overall business. Prime
Furniture can maintain the management reports as it is beneficial for the company, but on the
other hand it is not mandatory to hold it. It provide the top level managers an accurate and
reliable statistical and financial data. The various reports helps in forecasting the critical
decisions of the business. Some of the methods are:
1. Budgetary Reports: It is utilised for measuring the performance of business and control
costs. It is used by managers to ascertain the projected budgets of a certain period. The
estimated budget is commonly based on the actual costs of the previous years. Prime
Furniture can make this as it reflects financial goal of the company and also motivates the
employees to work towards achieving the desired objectives for the incentives. It is
recommended for for the internal sources of the company and help them manage the
funds more responsibly to handle the budgets within their departments. It helps in
handling the unanticipated circumstances which may arise. It is a list of all sources of
income and expenditures. A company must try to fulfil its objectives within the projected
amount.
2. Accounts receivable ageing Report: This report is mainly concerned for extending the
credits to their customers. It is a record that shows the outstanding bill balances that are
due by the customers along with their duration(Guix and Font, 2020). It also points the
problems out for with the collection process. It will help the Prime Furniture to sort the
receivables by the due date and estimate the bad debts of the business which are to be
written- off. To reduce the bad debts and to maintain liquidity Prime Furniture need to

modify their credit policy. It will improve the customer payment behaviours ensures the
effectiveness of the collection function.
3. Job cost Reports: It is an analysis of the expenses incurred in the completion of the
project and the payment received from the customer for the successful conveyance of the
project. The purpose is to identify the discrepancies from the results in terms of financial
values. These reports are not standard but are customized on the basis of the set targets. It
will give Prime Furniture a detailed insight of the utilization of their materials, labour etc.
and gives the reason to identify the certain amount for the project. It evaluates the idle
cost and helps in making the changes which can make the project more profitable.
4. Performance Reports: It addresses the outcome of the work done by the employees
which determines the performance of the company. Prime Furniture can collect the
information of the work performance, then analysing it and creating reports. The
variation in the actual and budgeted performance are analysed and conferred in the
performance reports. It should be clear and concise and should include cost, schedule,
quality performance and scope.
5. Inventory and Manufacturing Reports: Companies involved in the production and
manufacturing of goods prepare these reports, so that their stock and production become
smooth and effective(Kostyukova And et.al., 2018). Prime Furniture make these reports
on the per unit cost of labour and overheads. Wastage of resources are concerned with the
inventory management and by help of these reports it enforces to foresee the
opportunities of improvement and make them within the stipulated time. Better
management of inventory levels, helps in placing the purchase orders on time.
TASK 3
Using the techniques of cost analysis, calculate the costs and prepare the income statement using
marginal and absorption costs.
Cost Accounting: To produce or sell a product, the expenditure required is known as
cost(Mahmoudian and et.al., 2021). Is is the classification of information and identifying the
value of different resources such as material, labour, overheads etc. to help the executor for
better decision-making.

Techniques of costs:
1. Marginal costing: It is a costing technique which is used for taking short-term decisions.
It is also helpful is control control, budgeting and profit planning purposes. It comprises
of the per unit variable cost only under the cost of production. The finished goods and
work in progress on the basis of variable costs only. Fixed cost is considered as a period
cost and charged in full.
Income Statement using Marginal Costing:
Particulars Quarter 1 Quarter 2
Sales 66000 74000
Less: Cost of Sales
Opening Stock - 7800
Add: Variable cost of production 50700 42900
Less: Closing Stock -7800 -2600
42900 48100
Contribution 23100 25900
Less: Fixed cost of production -16000 -16000
Less: Fixed Cost (Selling and
Administrative costs)
-5200 -5200
Profit 1900 4700
2. Absorption Costing: It is the methodology which accumulated al cost-pricing along
with the production valuation of given stock and other resources(Martinopoulos, 2020). It
can absorb both the fixed and variable costs. Prime Furniture also use value inventories
with consideration of direct material, labour and overheads.
Income Statement using Absorption Costing:
Particulars Quarter 1 Quarter 2
Sales 66000 74000

Less: Cost of Sales
Opening Stock - 10200
Add: Cost of Production 66300 56100
Less: Closing Stock -10200 -3400
56100 62900
Gross Profit at normal 9900 11100
Less: Under -absorption cost -400 -2800
Gross Profit at actual 9500 8300
Less: Fixed Cost(Selling and
Administrative costs)
-5200 -5200
Net Profit 4300 3100
Reconciliation:
Particulars Quarter 1 Quarter 2
Profit from absorption costing 4300 3100
Less: Fixed Cost of closing stock -2400 -800
Add: Fixed Cost of opening stock 0 2400
Profit from marginal costing 1900 4700
Working Notes:
1. Selling Cost per Unit: 80000/80000 = 1 per unit
2. Variable cost per unit: 52000/80000 = 0.65 per unit
3. Fixed cost per unit: 16000/80000 = 0.2 per unit
4. Absorption Rate per unit: Variable cost per unit + Fixed cost per unit = 0.65+ 0.2 = 0.85
5. Under- absorption stock of Quarter 1 = Estimated sales – Production of quarter 1
= 80000 – 78000 = 2000
6. Under- absorption Cost of Quarter 1 = 2000*0.2 = 400

7. Under- absorption stock of Quarter 2 = Estimated sales – Production of quarter 2
= 80000 – 66000 = 14000
8. Under- absorption Cost of Quarter 2 = 14000*0.2 = 2800
9. Fixed Cost of Closing Stock of Quarter 1 = 12000* 0.2 = 2400
10. Fixed Cost of Closing Stock of Quarter 2 = 4000* 0.2 = 800
11. Fixed Cost of Opening Stock of Quarter 2 = 12000* 0.2 = 2400
TASK 4
Explain the advantages and disadvantages of different types of planning tools used for budgetary
control.
Budget: It is a financial statement, prepared before the start of the fiscal year. It shows
the projected revenues and proposed expenditures of a certain organisation for the following
year, that is usually prepared and updated on a regular basis. Budgets can be created for an
individual, a group of people, a business, government or almost anything else that makes and
spend money(Meng and et.al., 2017). Certain steps are to required to be maintained by the Prime
Furniture to prepare the budget. It identifies the cost related to different activities and changing
costs of the business to create a budget. A budgeting allows Prime Furniture to spend various
expenditures associated with its operations and schedule its activities accordingly. It specifies the
techniques and manner in which revenue collection and administration are to be carried out.
Types of Budget:
1. Sales Budget: It is also referred to as revenue budget. It assists the management to
determine the number of units to be produced and its value per unit. It is the sales
manager responsibility of the Prime Furniture to prepare the sales budget for a specific
period of time. It consists of the units and amount of revenue including all the expenses
related to sales, advertising and distribution of goods.
2. Cash Budget: It is prepared for the figuring inflow and outflow of cash for the budgeted
period of time. It is generally used to check whether there is appropriate cash to execute
the daily operations of Prime Furniture. It shows the liquidity position of Prime Furniture
and to check whether it has the capability to meet the objectives of the company.

Budgetary Control: It is the procedure in which budgets are prepared for the future and are
compared with the actual performance for determining the variances. It is prepared for
discovering our the weak points and take corrective actions to improve and to control the costs of
the organisation without any delay(Mustafakulov 2020). Prime Furniture uses budgetary control
to eliminate the waste and increase the profit the company. It is the centralized control system
which fixes the over-cost economically and efficiently.
Techniques of Budgetary Control:
1. Variance Analysis: When the period for which the budget was prepared has finished, it
is compared with the actual costs, the difference which come out is known as variance.
The variances are identified to find out the reason of such difference an analysis is made.
Advantages Disadvantages
It helps the undertaking to achieve the
business targets of Prime Furniture and
manages the risk arising out of such
variances by giving an insight to the
reasons of controllable and
uncontrollable variances(Noto and
Noto, 2019).
It consume a lot of time to gather the
variances and giving the results to the
management of the Prime Furniture,
which decreases the frequency of
decision-making.
2. Zero-based Budgeting: It is and approach to plan and prepare the budget from the
scratch. To create it, the engagement of employees is required. It aims to control the
expenses which are not essential to the company's profitable operation. Its base is the
current year income unlike the other methods of budget control.
Advantages Disadvantages
It provides better coordination and
communication with the involvement of
employees in decision - making.
Budget under this is planned and
prepared from zero which consumes
more time and delays the further
process of Prime Furniture.

3. Responsibility Accounting: It is designed to control the cost and revenues by the
specific manager to achieve the accounting objectives. This type of accounting mainly
involves preparing both monthly and annual budgets for every responsibility centre. The
responsibility centres are: cost, revenue and profit centre.
Advantages Disadvantages
It encourages the manager of Prime
Furniture to work responsibly, since he
is responsible for the performance of
the department.(Oh and et.al., 2018)
Prime Furniture uses this technique
but it only works for the cost that can
be controlled, and not for the
uncontrollable costs.
4. Adjustment of Funds: In this technique of budgetary control, the executives has the
right to adjust the funds from one project to another, in case of deficiency of the funds in
a project.
Advantages Disadvantages
The adjustment of funds from the
internal sources of Prime Furniture
shows the teamwork and it increases
the effective and efficient working of
the organisation.
In case of the excess demand of
funds, the conflicts can arise between
the departments of Prime Furniture.
TASK 5
Comparisons of how organisations are using management accounting system to respond to
financial problems.
Financial Problems: It is defined as where the organization have the deficiency of funds
due to which Prime Furniture faces the difficulty in operating the business (Pınarbaşı, Galparsoro
and Borja, 2019). Some of the financial problems are:

1. Sudden changes in government policies: It can impact the organization as it have to
modify its norms due to which sudden costs will be charged and will impact the profit of
the company.
2. Unreasonable costs: The costs which are occurring due to the irresponsible behaviour or
miss-happenings in the company can be managed by the the management accounting
system.
Prime Furniture use different types of techniques to solve the monetary problems. For solving
these difficulties Prime Furniture used the following techniques-
 Benchmarking: It is a process of comparing a company's product, services or procedures
to those of a competitor that is deemed to be the best in the industry. The objective is to
find internal areas where opportunities for improvement are there. Prime furniture can
implement the changes that will generate significant benefits by analysing the
outstanding performance, breaking down such superior performance feasible and then
comparing those procedures to how the business operates. This could involve modifying
the scope of products and services, the Prime furniture offers.
 Key Performance Indicators: It is a sort of measurement used to assess performance.
These are used to measure the success of an organisation or a specific activity such as
projects, programmes products and other activities(Samuel, 2018). Often success is
defined as the achievement of some levels of operational goals on a regular basis. As a
result, selecting appropriate KPIs necessitates a understanding of the Prime furniture's
priorities. What is important values depending on the department assessing performance,
for example- Finance KPIs would differ from Sales KPIs.
 Financial Governance: It is defined as the method of collection which maintains,
monitors, and controls the financial data. It encompasses how businesses track the
monetary transactions, manage performance, regulate the information and disclose it.
Financial data is insured by the good financial governance(Vaalma and et.al., 2018).
Prime Furniture can use this technique to ensure that the firm is utilising the correct data
to produce reports, budgets, and other monetary documents but have control on the
financial data.
Comparison of Organisation on the basis of their financial problem with respect to the
management Accounting System:

Prime Furniture Dreams Furniture
Financial Problem The over-expenditure on the
products due to the
irresponsible behaviour.
It faced a problem of high
inventory costs and increasing
of the stock turnover ratio.
Management
Accounting System
used
The cost accounting system
should be used to eliminate the
unreasonable costs. It helps in
cost optimization and assesses in
taking the imperative decisions
in absence of cost report.
Inventory Management
system can be used here to
solve the monetary obstacles
of the company. It has a basic
tendency to lower the
inventory costs, including the
costs associated with the
handling of equipment and
warehousing.
Applicability of
Management
Accounting System
It improves the estimated costs
of the products and helps in
understanding the value of raw
material, work-in-progress and
finished goods.
It helps in the storage of daily
inventory and managing it
which reduces the costs of
spare stock and increases the
revenue.
CONCLUSION
Choosing the right administrator for ant firm is a crucial as having the right management
accounting system. Administration must confirm that the correct structure of this model of
business is chosen for the execution, as it is supposed to provide reliable and accurate
information. The fundamental reason is that accounting is considered the cornerstone of every
organisation. Prime Furniture needs to apply and implement these management accounting
system to solve its financial problems and will help in sustaining for then long-term and ensuring
profitability and success. The use of marginal and absorption costing also assists n preparing the
financial report. It is recommended for the Prime Furniture to use budgetary control tools and

techniques for operating the business successfully. The management tools and techniques
provides a data-driven input to the managers for taking the correct decisions.

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