A Study on Financial Information Sharing by Prime Furniture

Management Accounting

INTRODUCTION
Management accounting (MA) refers to the system in which all the relevant data is
collected by the management which helps in decision-making process. It is mainly used by the
internal management teams for the purpose of decision making. In this, all the financial
information is shared by the finance team to the internal management team of the organization.
The present report is about Prime Furniture which is London based company. This report covers
meaning and benefits of management accounting and its integration into the organizational
process. It also covers different techniques of management accounting and comparing the ways
in which company can use management accounting to face challenges.
LO1
Covered in PPT.
LO2
Management accounting techniques
Cost: In accounting, cost implies for the figure that a company spend to produce something
valuable. It does no include any profit. From the customer's point of view, the cost is known as
price. It includes both production cost and mark up value.
Cost analysis: It is process of measuring the cost and output relationship. It determines the cost
incurred in procuring input and how it can be arranged so that it will help in increasing the
productivity of the firm.
Types of cost
Cost are of different types, a detailed description is given below.
Fixed cost: It includes rent, insurance, salaries etc which remains same at each level of output or
level of production.
Variable cost: It changes with the change in the output level (Collis and Hussey, 2017). If there
is no production then variable cost will be zero.
Direct cost: It is the cost that is directly or completely assigned to the specific product or service.
It includes direct labour, direct material etc.
Cost volume profit
It helps in analysing the effect of change in cost and volume on the company's operating
income. It is based on several assumptions such as sales price per unit, variable cost per and
fixed cost is constant, everything is sold etc.

Flexible Budgeting
It is the more sophisticated budget that adjusts itself with the changes in level of activity.
It is an estimated financial plan of revenue and expenditure.
Cost variances
It refers to the deviation between the set budgeted outcome and the actual outcome of the
organization. These variances can be of two type’s positive and negative variances.
Cost allocation
It refers to the process of identifying and assigning cost to cost objects. It is used in
financial reporting and also useful in knowing the profitability.
Normal and standard costing
The method of cost allocation in which cost is assigned to the product based on material
labor and overheads is known as Normal costing. Standard costing involves creation of
estimation for each activity. It helps in comparing the actual cost and revenue with the standard
cost and revenue.
Different types of costing methods
Marginal costing
This method refers to the ascertainment of marginal cost by charging variable cost per
unit and written off the fixed cost against the contribution (Collis and Hussey, 2017).
Absorption costing
In this method, all the manufacturing cost is assigned per unit in the cost of production
irrespective of fixed and variable. It is used in external financing and for tax reporting (FIMYAR
and TURCHENYAK, 2017).
Activity-based costing
In this method, overhead and indirect cost is assigned to the products in a more logical
manner to the related product or services. It is mostly used in the environment where there are
many machines and products.
Role of costing in setting price
Costs never determine price but plays a crucial role in pricing strategy. Other than price
there are two other factors that is required to be taken into consideration which are demand and
supply. Price decides what and for whom to produce. Moreover, usually with the motive to
enhance both sales and customer base producer emphasizes on charging lower prices. A high

cost producer will target customers who are willing to pay premium prices. So, change in cost
affect the producer to change its price.
Cost of inventory
Inventory cost: It refers to the expenses that associated with the management of
inventory namely procurement and storage (Birt, J., and et.al, 2020). The different types of cost
associated with it are stated below.
Ordering cost: It is the cost that firm incurs while ordering inventory. It covers purchase cost
and inbound logistics cost.
Carrying cost: It implies for the expenses incurred for handling and maintaining the inventory. It
includes rent of warehouse for storing the inventory.
Shortage cost or cost of replenishment: These cost are incurred in an unusual circumstance. For
example, damaged inventory, stock depletion etc.
Benefits of reduced inventory cost
 It will lead to reduced material maintenance cost.
 Ordering in small lots will help in reducing the ordering cost and also reduces inventory
wastage.
 Reduced cost will help in increasing profitability of the organization.
Different inventory valuation methods
Some widely used inventory management methods are stated below.
FIFO: In this, cost of the good purchased is charged when that good is sold out. It assumes that
first good purchased will be sold first.
LIFO: In this, the cost of last purchased good are the first cost charged at the time of selling the
goods.
Weighted average: In this, ending inventory is measured using the weighted average unit cost.
Overhead costs
It refers to the business expenses that cannot be directly attributed to the specific product
or services. It includes three types of cost which are indirect material, labor and other
expenditure.
Calculate cost using appropriate technique of cost analysis
Income statement as per marginal costing:
Quarter 1 Quarter 2

(Amount in £) (Amount in £)
Sales (1*66000) 66000 (74000*1) 74000
Marginal cost
of sales
Variable Costs (0.65*78000) 50700 (0.65*66000) 42900
50700 42900
Add: Inventory
at the starting
of period 0 7800
Less: Closing
stock
(12000/78000)
*50700 7800 -7800 2600 5200
42900 37700
Contribution 23100 36300
Fixed prod.
overhead 16000 16000
Fixed Sell. &
Adm. cost 5200 21200 5200 21200
Net Income 1900 15100
Profitability statement according to absorption costing method is enumerated below:
January
(Amount in £)
February
(Amount in £)
Revenue (1*66000) 66000 (74000*1) 74000
Marginal cost
of sales

Variable Costs (0.65*78000) 50700 (0.65*66000) 42900
Fixed Cost 16000 16000
66700 58900
Add: Opening
inventory 0 10261.54
Less: Closing
stock
(12000/78000)
*66700 10261.54 56438.46 3569.70 65591.84
GP 9561.54 8408.16
Sell. & Admin
cost Fixed 5200 5200
5200 5200
NP 4361.54 3208.16
Reconciliation Statement
Quarter 1 Quarter 2
Profit as per
Absorption
costing 4361.54 3208.16
+ opening stock @
FOH rate at op.
date 2461.54
- Closing stock @
FOH rate at cl.
2461.54 970.00

date
Profit as per
marginal costing 1900.00 4700
LO3
Types of budgets and its methods
Budget:
A budget is a forecast of organization's revenue and expense for a specific time frame. Capital budget: It is a budget in which business evaluate their major investments. It
consists of capital receipts and payments.
 Operating budgeting: It refers to the estimation of the sales and expenditure for the
future period. It is prepared prior to the beginning of the year (Rosanas, 2016). It is
mostly for short term period.
Other methods of budgeting Zero based budgeting: In this method, everything starts from the scratch and every
department is analyzed based on it needs and cost. This modern budgeting technique is
highly effectual in which each and every line of item is clearly justified.
 Activity based budgeting: In this budget is prepared using activity based costing and cost
are associated with different tasks. It will help in reducing cost.
Behavioral implication of budget Dysfunctional behavior: Budget helps in bringing positive behavior among the employee
and when employees participates in the budgeting process they feel happy and excited.
But if the budget is not properly implemented the reaction of the employees will be found
negative which adversely affect the organization's operation.
 Participative budgeting: In this, the plan is prepared using bottom up approach and
includes all the people affected by the budget. This method motivates employees.
Pricing strategies
It is used by the organization in setting price of the product with the objective of
maximizing profits. There are different types of pricing strategies such as price skimming,
competitive pricing, cost plus pricing etc.
Competitors determine prices

The prices are mainly determined by the demand and supply but at the same time
different pricing strategies are used to set the price. Competitive pricing method is mostly used
by the competitors to set their product prices. It is used when other competitors sells similar
products and services. In this organization sets the price of its product lower than its competitors
to take competitive advantage.
Different types of job costing system
Job costing: It implies recording the cost of the job rather than the process. With this system
managers can monitor the cost of the relevant job.
Process costing: It determines the cost of the product at different stages of production. It is
adopted in manufacturing concern.
Batch costing: In this cost of the product is calculated by batch not individual wise and each
batch consists of specific number of products.
Competitive analysis of the organization
Strength
 Large customer base
 diversified products
Weaknesses
 Inadequate market research
 Lack of technological advancement
Opportunities
 To expand in other markets
 Implement technology
Threats
 Tough competition
Political
 Political instability
 Impact of Brexit
Economic
 Change in interest rate
 Increase of cost of material
Social
 Change in trend and culture
 Increasing education level of
consumers
Technological
 Implementation of analytical
technology
 Automated technology
Threat of new
entrants
Bargaining
power of
Bargaining
power of
Threat of
substitutes
Competitive
rivalry

customers suppliers
 Prime
Furniture
is facing
high threat
of new
entrants as
there are
less
barriers to
entry.
 The
customers
are
driving
more
power as
the
number of
customer
base is
small.
 This threat
is low as
large
number of
suppliers
are
available
in the
market.
 Prime
Furniture
is facing
less threat
of
substitute
products
as
products
are highly
differentia
ted.
 The
company
is facing
tough
competitio
n as large
number of
competitor
s are
available.
Balanced scorecard: It is a tool that managers employ to keep track of the activities of the staff.
LO4
Identifying financial problems
Benchmarking: In this, the performance of the organization is compared to its competitors
which helps in recognizing the area of improvement.
Key performance indicators: It is a measuring tool used by the managers to analyze the success
of the organization in which it engages (Vaes, 2018).
Budgetary targets: It is the amount that is assigned for a particular period within which the
organization has to carry out its activities and achieve goals.
Financial governance
It exhibits the way in which company gathers, evaluates and control the data. It implies
how company monitor financial transactions and activities (Gruin, Knaack and Xu, 2018).
Financial governance prevent financial problems
It assists in assessing the expense that can be reduced, it also increases the awareness for
spending and also creating a monthly plan will help in solving and preventing financial
problems.

Characteristics of effective management accountant
 To be competent enough to manage the things.
 Should keep information confidential.
 Should show integrity in the work and avoid conflicts.
Skills required to deal with the problem
 Planning and reporting skills
 Decision making skills
 Leadership skills
 Technological skills
Strategies and systems
To ensure effective and timely reporting its is essential that proper procedure is followed.
For example, setting strategic objectives, picking the right KPIs, timely measurement and
evaluation of performance is essential. Also, ensuring that all the statutory requirements are
complied with.
CONCLUSION
It can be summarized from above that MA is very essential for the organization. Besides
this, it can inferred that Prime Furniture can employ job costing, cost accounting system etc for
making appropriate decisions. Further, it can be seen in the report Prime Furniture can undertake
absorption or marginal costing systems to prepare relevant reports and budgets. Also, analysis
the ways through which Prime Furniture can solve or prevent its financial problems. The skills
which are essential by the MA to work effectively to achieving organizational objectives.

REFERENCES
Books and journals
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