Management Accounting: Techniques and Tools for Financial Problem Solving

This report discusses the importance of management accounting in decision making and explores various techniques and tools used for financial problem solving. Topics covered include cost analysis, budgeting, benchmarking, and financial governance. The report also provides a case study of a London-based furniture company, Prime Furnitures.

Management Accounting
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Table of Contents
Introduction......................................................................................................................................3
TASK 1............................................................................................................................................3
(covered in ppt).......................................................................................................................3
TASK 2............................................................................................................................................3
P3 Calculation of cost using appropriate cost analysis techniques........................................3
TASK 3............................................................................................................................................5
P4 Management accounting tools...........................................................................................5
TASK 4............................................................................................................................................7
P5 Different MAS to solve financial problems......................................................................7
Conclusion.......................................................................................................................................9
References......................................................................................................................................10
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Introduction
Management Accounting is a form of accounting whose users are only internal
management of the company. Information extracted by these accounts are used for strategic
decision making (Ahmad, 2017). It includes both financial as well as non financial factors into
its consideration. It considers that as much as financial information is important, non financial
information also has a huge affect on business operations which is not recognised anywhere else.
Several techniques are applied on a range of information and the best alternative is observed.
These information are then developed in reports which help management in identifying course of
financial problems and their possible solutions. Corrective action plans are then developed and
executed.
This report is prepared in context of London based furniture company, Prime Furnitures.
Initially, management accounting and its importance is discussed in the decision making process.
Several techniques and planning tools used used by management such as budgets, pricing
strategies, cost accounting, etc. are explained for a brief understanding. Financial governance and
usage of accounting techniques in maintaining financial health of the organisation are also
highlighted.
TASK 1
(covered in ppt)
TASK 2
P3 Calculation of cost using appropriate cost analysis techniques
Cost is defined as monetary value that an organization spends to create or produce some
product or service. It is calculated sans profit mark up. Cost can be classified into various types
such direct and indirect cost, variable and fixed cost, controllable and uncontrollable costs,
operating and opportunity cost, sunk cost, etc.
Cost analysis refers to determination of relationship between cost and output. In other
words, it is determining money value of input factors such material, labor, etc in deciding
optimum level of production (Rozhkova, Blinova and Rozhkova, 2017). Method of determining
impact of varying level of costs and volume on operational profit of the company is called cost-
volume-profit analysis. Companies prepare cost budget which is used to find variance in actual
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cost incurred and budgeted target. Cost budgets shall be flexible enough to incorporate changes
in targets as and when they arise.
Income Statement using absorption costing
Particular Quarter 1 (GBP) Quarter 2 (GBP)
Sales Revenue 62040 82140
Less: cost of good sold 56000 76000
Variable Manufacturing cost 52000 52000
Fixed manufacturing overhead 16000 16000
Opening Stock 0 12000
Closing Stock 12000 4000
Contribution 6040 6140
Less: Fixed cost
Fixed non-manufacturing cost 5200 5200
Net Profit 840 940
Working 2: Absorption cost per unit
Particular Quarter 1 (GBP) Quarter 2 (GBP)
Variable manufacturing cost 52000 52000
Fixed manufacturing cost 16000 16000
Fixed non-manufacturing cost 5200 5200
Total cost of goods sold 73200 73200
Number of units produced 78000 66000
Per unit cost 0.94 1.11
Income Statement using marginal costing
Particular Quarter 1 (GBP) Quarter 2 (GBP)
Sales Revenue 44220 58460
Less: marginal cost of sales 40000 60000
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Variable Manufacturing cost 52000 52000
Opening Stock 0 12000
Closing Stock 12000 4000
Contribution 4220 -1540
Less: Fixed cost
Fixed non-manufacturing cost 5200 5200
Fixed manufacturing overhead 16000 16000
Net Profit -980 -6740
Working 2: Marginal cost per unit
Particular Quarter 1 (GBP) Quarter 2 (GBP)
Variable manufacturing cost 52000 52000
Number of units produced 78000 66000
Per unit cost 0.67 0.79
Reconciliation Statement
Particulars Quarter 1 Quarter 2
Profit/Loss under marginal costing -980 -6740
Add/Less: Adjustments 1820 7680
Profit/Loss under absorption costing 840 940
Interpretation of data.
The difference in net profit under both techniques is due to the different way of taking
fixed and variable cost in process of income statement preparation.
TASK 3
P4 Management accounting tools
Management accounting tools are techniques or processes that facilitates management
decision-making (Spraakman and et.al., 2015). Its main aim is to improve performance, support
strategic goals and objectives and add value to organizational process. Management has to
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perform various processes such as planning and control, pricing decisions, etc. Different tools are
used for different purposes:
First thing to be undertaken by management is to plan out business activities. These plans
act as basis for monitoring and controlling function. Plan and controlling occurs at all level of
management. For planning and controlling, basic tool used by management is budgeting.
Budget is statement of estimated income and expenses prepared on the basis of historical
data and future expectations. This estimate is then compared at the year end to find out variances
from targets. Corrective actions are then decided on the basis of variances. Budgets can be
classified into two categories: operational and capital budget. Operational budget is prepared for
projected operational revenues and expenses company will be having in a year while capital
budget is prepared for some long term capital investment decision. Different types of budgets
that managers of Prime Furniture ca prepare are below mentioned:
Cash Budget
It is statement of estimated inflow and outflow of cash and cash equivalents in a specific
business period (Tucker and Schaltegger, 2016). It helps management in determining sources and
nature of inflow and outflow. It will help managers of Prime Furniture ascertain the availability
of cash and smooth cash allocation over budgeted period. It will help them determine whether
they will be needing additional financing in budgeted year. Advantages – It helps company avoid situation of under liquidation and over liquidation.
It helps company in planning smooth operations of business activities. Disadvantages – Cash budget is based on estimation which makes operations in cash
rigid. Rigidity in dealing in uncertain business environment can contribute to losses for
the company. Thus, cash budget shall be flexible enough to incorporate mid-year
changes.
Sales Budget
It is forecasting the sales of product in an year. It helps company organize its production
schedule. Also, managers of Prime Furniture can use it to determine the period when its sales
decline and then can plan necessary promotional strategies. Advantages – An accurate sales budget is preliminary to the preparation of master budget.
It gives an estimation of the revenue business would be earning which will help
management plan other activities effectively.
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 Disadvantages – Market conditions are uncertain (Wouters and Kirchberger, 2015.).
Inaccurate sales forecasts can lead to over production and under production, both of
which can lead to losses for the company.
Management of Prime Furniture can also prepare other budgets such as production
budget, materials purchase and usage budget, labor and overhead budget, etc. to help and aid
them in preparing master budget for the organizational goal and objectives.
Capital Budgeting
It is the method by which an organization analyses the multiple options available to it for
financing new investment and expansion projects. Managers use multiple models such as net
present value, pay-back period, etc. to compare financial alternatives. Managers of Prime
Furniture shall also undertake tools of capital budgeting to select best option available to them. Advantages – Capital investments require huge funds. Capital budgeting tools help
company avoid the risk of choosing wrong investment which can be fatal to financial
health of the organization.
 Disadvantages - Capital budgeting tools involves predictions. Any wrong prediction can
take company away from the growth path.
TASK 4
P5 Different MAS to solve financial problems
Financial problem- Effective financial management is the essence of a successful
organisation and failure of management on this part may lead to serious hazards causing to
organisation (Weygandt, Kimmel and Kieso, 2020). Financial management consists of
preparation of budgets, deciding source of finance, formulation of cost efficient capital structure,
etc. If managers fails in all above operations, then business faces financial problems. There are
several financial crisis that a business can confront. Some of them are explained below: Decline in sales revenue: In this problem, business faces great fall in sales revenue, due
to this decline business is not able to generate profits and hence, finally results in
declining graph of growth of business. This decrease in sales is continued over number of
years (Schaltegger and Zvezdov, 2015). Reason behind this fall may relate to weak
marketing policies, strong competition, inappropriate pricing strategy or weak product. In
context of Prime furniture, reason behind this issue is ineffective marketing strategies.
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 Unwanted higher cost: This problem relates with increase in cost incurred, which results
in decrease in profits margins of company. Possible reason for increase in cost can be
faulted budgeting, employee performance not as per requirements, continuous use of
obsolete technology in business operations, etc. This situation can turn out to be very
hazardous for the survival of business in market. In relation of Prime furniture, this is a
serious threat as there is cut throat competition in industry and to survive that
competition, they have to spend excessively on marketing strategies.
Accounting techniques to solve financial problems: Benchmarking: Benchmarking refers to the comparison tool that is used to compare
performance of a business with the other companies existing in industry. With help of
this technique, managers are able to identify points that will lead to lag in performance of
business. This monitoring will help in identifying areas that need attention of managers. Key performance indicators: It is a monitoring tool that keeps check on financial and
non financial aspects that puts effect on a business. Financial aspects include profits,
losses, debts, assets, etc., on the other hand non financial aspects includes external
environmental factors like political, technological, economical, etc. (Kokubu and Kitada,
2015) This measuring technique helps managers to consider cause of financial issues
confronted by company.
 Financial governance: This is a process of regulating, controlling, monitoring and
managing monetary transactions of business. If there is continuous check on transactions,
it will lead to resolution of financial problems at the source itself. This tool also helps in
maintaining record of financial transaction in a systematic order.
Comparison:
Base for
comparison
Prime furniture London furniture outlet
Financial issue Major issue faced by this company
is that their revenues are constant
over the years and still their profit
margin is decreasing.
London furniture outlet are
continuously coming up with new
range of products but still their
market share is constant and not
coming up on growth pace.
Technique to With the help of technique of Benchmarking technique is useful for
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recognize issue budgetary control, it was detected
that there is increase in operational
cost of company, hence, profit
margins are in decline mode.
this organisation. As with its
assistance, cause of lag in coverage
of market share can be identified, i.e.
ineffective marketing policies
MAS Useful policy in solving problem
related to increased cost is cost
accounting system. This system will
help in identifying reason for
incurring cost than what was
estimated (Shil, Hoque and Akter,
2019). To resolve this issue,
corrective actions are taken by
managers.
To increase market share, one
important tool is to create
competitive advantage by using
differential pricing strategy. In this
system, prices are set according to the
willingness and ability to pay by
customers. Also various promotional
strategies like offers, coupons, etc.
can be utilised in order to enhance
market share.
Management Accountant to solve financial problems
Management accountants possess best combinational streak of managerial expertise and
leadership qualities. They help preparation of financial accounts and multiple MAS techniques
reports such as pricing decisions, budgetary control, etc. These reports are then presented before
senior management. With the help of MAS reports, they also help senior management in
planning and formulating strategies that can improve financial health of the organisation
(Mahmoudian and et.al., 2020).
Conclusion
Above report show that management accounting system is key to sound financial health
of an organization. Integrating MAS techniques in business process helps management in
integrating efforts of various departments of an organization in direction to achieve
organizational objectives. Business Environment is complex and competitive. It helps
management in devising strategies that can give an edge to company over its competitors and
lead it to path of sustainable growth.
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References
Books and Journals
Rozhkova, N., Blinova, U. and Rozhkova, D., 2017, December. The concept of management
accounting based on the information technologies application. In International
Conference on Information Technology Science (pp. 89-95). Springer, Cham.
Schaltegger, S. and Zvezdov, D., 2015. Expanding material flow cost accounting. Framework,
review and potentials. Journal of Cleaner Production. 108. pp.1333-1341.
Shil, N.C., Hoque, M. and Akter, M., 2019. Revisiting Management Accounting Practice Gap: A
Proposed PERAPPGAP Model.Journal of Accounting and Finance. 19(1). pp.135-155.
Spraakman, G. and et.al., 2015. Employers’ perceptions of information technology competency
requirements for management accounting graduates. Accounting Education. 24(5).
pp.403-422.
Tucker, B.P. and Schaltegger, S., 2016. Comparing the research-practice gap in management
accounting. Accounting, Auditing & Accountability Journal.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2020. Managerial accounting: tools for business
decision making. John Wiley & Sons.
Wouters, M. and Kirchberger, M.A., 2015. Customer value propositions as interorganizational
management accounting to support customer collaboration. Industrial Marketing
Management. 46. pp.54-67.
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