Management Accounting Techniques and Planning Tools

This document provides an overview of different types of management accounting techniques and the importance of planning tools for management accounting. It also discusses how organizations can use management accounting to respond to financial problems. The case study focuses on Prime Furniture Limited.

Management Accounting

Contents
Contents...........................................................................................................................................2
INTRODUCTION...........................................................................................................................1
TASK 2............................................................................................................................................1
Explanation of different types of management accounting techniques.......................................1
TASK3.............................................................................................................................................1
Explanation of importance of planning tools for management accounting.................................1
TASK4.............................................................................................................................................1
Comparison of ways in which organisations could use management accounting to respond to
financial problems.......................................................................................................................1
CONCLUSION................................................................................................................................1
REFRENCES...................................................................................................................................1

INTRODUCTION
Management accounting is a tool of strategic management in which managers uses
professional knowledge and skills for communicating accosting data in order to formulate
policies and plans to achieve goals of business organization. It is also known as managerial
accounting. Management accounting is that branch of accounting in which accounting
information are record, collect, measure for decision making process. In order to understand
the concept of management accounting in a better way Prime Furniture has been chosen. In
this report various accounting techniques use for decision making process has been
identified and importance of various planning tools in controlling cost has been analysis.
This report also focus on how well organization uses management accounting tools in order
to overcome their financial problem briefly describe.
TASK 2
Explanation of different types of management accounting techniques
Management accounting technique: Theses includes all methods, frameworks, and tools used by
business entities for achieving predetermine goals of business organizations. For this
purpose they need to apply following techniques:
 Cost analysis: By using this technique mangers easily determine their cost incurred on
allocation of resources, manufacturing products and for selling and distribution activities.
Cost is sum up value of transforming raw material into final product. Many methods are
developed which considered, marginal costing, standard costing, absorption costing,
process costing and job costing etc.
 Product costing: In this method cost of production has been determine, this technique is
used to identify cost and then prepared policies through which minimize cost and
maximize profits of firm (Maas, Schaltegger and Crutzen, 2016).
 Cost of inventory: Success of an enterprises depends on how effectively their mangers
manage and control stock of their organization. To calculate cost of inventory EOQ,
maximum level, minimum level, VWD analysis ABC analysis techniques are use through
which manger can identify their dangers level o stock and maintain management of their
inventory .
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 Marginal analysis: It is fundamental tool of managerial accounting process, this is used to
determine relationship between sales units and profit, in this technique, breakeven point
and marginal safety has been identify these help in identify effect of sale by reducing and
increasing units of productions. It will help in decision making process (Hiebl, 2014).
Income Statement of Prime Furniture (Absorption costing)
Particular Quarter 1 Quarter 2
Sales 66000 74000
Cost of sales:
Opening Stock 10200
Variable overheads 50700 42900
Fixed production overheads 15600 13200
Less closing stock** 10200 3400
Cost of sales 56100 52700
Gross profit 9900 21300
Less: Selling &
Administration Costs(fixed)
5200 5200
Net Profit 4700 16100
Interpretation: It has been identified that if the firm use absorption costing then they will
earn 9900 gross profit in first quarter and 21300 in second quarter and net profit will be 4700
in first quarter and in second they generate 16100 net profit.
Income Statement of Prime Furniture (Marginal costing)
Particular Quarter 1 Quarter 2
Sales 66000 74000
Marginal cost
Opening Stock 7800
+ Variable overheads 50700 42900
Less closing stock 7800 2600
Marginal cost of sales 42900 48100
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Fixed manufacturing costs 9000 9000
Selling & Administration
Cost
5200
Gross profit 8900 16900
Interpretation: It has been analysis that if manger use marginal costing method then they
will gearing 8900 gross profit in first quarter and in second they generate 16900 after
deduction of all expenses.
TASK3
Explanation of importance of planning tools for management accounting.
Planning tools: These are methods used by mangers for their decision making process all
these tools are helped in formulating plans and organize and control business activites in
order to achieve predetermine goal, following planning tools are used by Prime Furniture
Limited:
1. Budget: It is a framework used for the purpose of estimating future performance of
an organization. This is a numerical framework which describe future earning and
income of an enterprises. It provide main base for planning operations. Following
type of budget prepared by Prime Furniture:
 Cash flow budget: This budget is prepared for estimating future inflow or out
flow of cash and cash equivalent items. It will help in identifying activites
through which company generate their inflow activites.
 Operating Budget: This budget is used for forecasting income and expenses
from operating activites it includes, cost production factors. Manager of Prime
Furniture will be prepared it to analysis their profitability rate (Chenhall and
Moers, 2015).
 Production Budget: This statement is prepared for analysing cost incurred on
manufacturing product units . Manager of Prime Furniture use this tool in order
to determine their price as sales price is determine on the basis of production
budget it also useful to identify cost incurred on manufacturing process.
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 Sales Budget: This budget is formulate for the purpose of estimating future sales
of organization within given time period. This will use to identify expenses and
income earned in fixed period of time. Manger of Prime Furniture use this
statement for estimating their future sales as it is the base of planning and
procedures.
 Financial Budget: This framework isnuse for determining srttgies uses by firm
to run mange their assests and liabilities and investing their securtities. Manager
of Prime Furniture will be use this framework to identify financial heath of their
organization.
 Master Budget: This is summery of all budgets master budget is combination of
all budget in one framework. Busin3ess organizations use this tool in order to
analysis overall performance of all business department of Prime Furniture.
2. Budgetary control technique: These tools are part of management accounting
technique, budget is numerical statement of estimating future profits and process of
preparation of budget is known as budgeting, budgeting is a systematic process of
preparation of budget. Following are the tools of budgeting
 Zero Base Budget: In this method budget are prepared from scratch level, for
this purpose mangers needs to start researching from initial level. This type of
budget is useful for those organization who start their new venture.
 Rolling Budget: In this budgets are formulates for short time period when the
duration was completed mangers prepare new budget after rectifying errors of
pervious budget, in this method budgets are formed on continuously basis.
 Activity Base Budget: In this type of budget, statements are formulated on the
basis of allocation of resources. Main purpose of using this method of budgeting
is it will help in proper utilization of resources.
Manager of Prime Furniture will be using any one the above mention method for
formulating their budget, they choose budgeting method on the basis of their
organizations objectives (Bromwich, and Scapens, 2016).
3. Price strategy: This is also an important planning tool, manger of business
organizations formulated their polices to earn profit and their profit margin is depend
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on the value of their selling price thus each business organization determine
particular pricing strategy which will help in gaining revenue income.
 Cost plus: In this mechanism business organizations determine price of their
product on the basis of cost incurred on production of these products.
 Competitive strategy: Under this strategy mangers determine their price of
product on the basis of analaysing their rivalry industries selling price.
 Value based: In this strategy business enterprises decided selling price of their
product according to their customers expectation. Worth of price of a unit
according to customer point of view, which satisfy them and they are ready to
pay the price for product.
 Price skimming: In this strategy mangers decided to took high price at starting
and then reduce prices when they involved in marketing.
 Penetration pricing: It is most useful and adoptable strategy by business
organizations, in this strategy mangers set decide low selling price to enter in
market and then increase their price when they built strong position in market.
 In order to make effective planning strategies regarding price, manger of Prime
Furniture will adopt penetration pricing strategy as it will more beneficial for
them as compare to another strategies and by apply penetration strategy they will
earn sufficient profit by their business operations.
4. Cost system: This planning tool is implemented in order to analysis cost of
manufacturing product, business organization will be, use following methods:
 Actual costing: IN this method calculation of cost incurred on actual basis had
been calculated.
 Normal costing: It is use for driving actual as well as standard cost of a product.
It is calculated by using 3 components which consider, actual cost of material
and labour and standards rate of these components (Quattrone, 2016).
 Standard costing: This method is used to determine difference between actual
cost incurred and standard cost set up by business entities.
Manager of Prime Furniture uses standard costing method as this will help in
planning and controlling of additional cost of manufacturing products.
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5. Strategic planning tools: Managers will use strategic planning tools to analysis the
environment.
 PEST: With the use of this tool mangers able to understand situations of there
political, economical, social, and technological environment.
 SWOT: This tool is used to identify opportunities , strength, weakness and threat
of organization, on the basis of this analyasis manger formulate plans .
 Balance Scorecard: This is used to evaluate performance of business
organization.
TASK4
Comparison of ways in which organisations could use management accounting to respond to
financial problems
Financial Problem: It is a pressure arise on company due to lack of financial resource.
Financial problems is a phase during which business enterprises are unable to pay debt to
their creditors and fulfil their short term liabilities. Mostly small and medium size business
organization suffers from financial problem and this is the main reason of their slow growth
rate even they have stuffiest workforce and excellent capabilities but due to money problem
they cannot give hard competition to multinational corporations. There will be many reasons
of business entities face financial problems, lack of management skills, wastage of resource,
over consumption, wrong portfolio investment strategies. Etc. At present time Prime
Furniture also suffers from financial problem due to overspending on selling and distribution
activities and not receiving timely payment from their debtors. Manager of Prime Furniture
can overcome all this problems by applying tools of management accounting, these are
mention below:
 key performance indicators: These are quaifiable measurement applying by
business organizations in order to measure how efficiently their workforce achieve
the goal. In other words, it is a tool used for performance evolution of an running
business organization. A skilled manger use Key Performance Indicator to solve
their financial problems. Manager of Prime Furniture use this tool to analysis days
their firm needs to collect money from their customers, after identifying their default
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debtors they formulate polices through which they attract their debtor to pay debt
liable to the company within short term period, manager also give reward to their
sales department if they improve their performance by improving numbers of cash
sale transactions(Vosselman, 2014).
 Benchmarks: This is traditional technique using by mangers to enhance
performance of organization. In this method standards are decided and business
organization compares their performance with set standard which known as
benchmark. This benchmark can be set by analysing rivalry companies data and
using government benchmark or preceding performance of the company. Manager of
Prime Furniture can control their cost on overspending on selling and distribution
activites they set fixed criteria and then compare whenever their department incurred
expenses under set criteria or not. By adopting this strategy they can minimize their
cost and optimum utilize their financial resources.
 financial governance: It is a policy used by business organizations, which describes
the way their management department collects, record, analysis, monitor control and
communicate their financial information. In other word it is a systematic procedure
use to describe how effectively company track their business operational transactions
to effectively run their business. Capabilities of a manger determine on the basis of
how effectively they formulate and run financial governance policy. Poor
performance of their tracking system will be main causes of finical problems, fraud,
corruption and mismanagement arise within the premises. Financial governance play
essential part for business entity as effective and strong finical position describe
strong position of financial structure of an organization, this also implicate that
company is able to fulfil their day to day business transactions . Manager of Prime
Furniture needs to create strong financial governance policies only after that they can
overcome their financial problem for this purpose they need to implement effective
business plan which considered budget and operational plans, they need to supervise
operational activities on daily basis and use software which help in tracking records
and managing all the activites, this will result in effectively utilization of finance and
mange cash flow activites it will also result for Prime Furniture (Suomala, Lyly-
Yrjänäinen, and Lukka, 2014).
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Prime Furniture Sunshine Private Limited
This organization use KPI to enhance their
performance, this it has wider area then
compare to benchmarking.
Benchmarking has narrow scope area as
compare with KPI.
Key performance indicator use by internal
auditors for evalution of performance.
Benchmarking is used by external auditors in
order to evaluate performance of an
organization.
CONCLUSION
From the above analyasis it has been concluded that managerial accounting play vital role in
run successfully for an organization. Managers uses different costing techniques to
identifying their cost it will help them making policies which help in decreases cost value of
their products, they uses various planning tools in order to take effective decision for their
future purpose, inventory cost valuation, absorption costing marginal costing budgetary
methods all these tools of managerial accounting used in decision making process, with the
financial governance, benchmarking method mangers can solve their financial problem and
maintain strong position in market place.
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REFRENCES
Books and journals
Maas, K., Schaltegger, S. and Crutzen, N., 2016. Integrating corporate sustainability assessment,
management accounting, control, and reporting. Journal of Cleaner Production. 136.
pp.237-248.
Hiebl, M. R., 2014. Upper echelons theory in management accounting and control
research. Journal of Management Control. 24(3).pp.223-240.
Chenhall, R. H. and Moers, F., 2015. The role of innovation in the evolution of management
accounting and its integration into management control. Accounting, Organizations and
Society.47.pp.1-13.
Bromwich, M. and Scapens, R. W., 2016. Management accounting research: 25 years
on. Management Accounting Research .31. pp.1-9.
Quattrone, P., 2016. Management accounting goes digital: Will the move make it
wiser?. Management Accounting Research, 31. pp.118-122.
Nitzl, C., 2016. The use of partial least squares structural equation modelling (PLS-SEM) in
management accounting research: Directions for future theory development. Journal of
Accounting Literature, 37. pp.19-35.
Vosselman, E., 2014. The ‘performativity thesis’ and its critics: Towards a relational ontology of
management accounting.Accounting and Business Research, 44(2), pp.181-203.
Suomala, P., Lyly-Yrjänäinen, J. and Lukka, K., 2014. Battlefield around interventions: A
reflective analysis of conducting interventionist research in management
accounting. Management Accounting Research, 25(4), pp.304-314.
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REFRENCES
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