Cost Assessment and Review of Financial Statements

This document provides an introduction to the method of creating financial records using monetary and non-monetary details. It discusses the cost assessment and review of financial statements using the marginal and absorption methods. It also explores the limitations of budget management techniques in planning and how MAS can be used to resolve financial issues. The document focuses on the case of Prime Furniture Limited.

MANAGEMENT
ACCOUNTING

Contents
INTRODUCTION...........................................................................................................................3
TASK 2............................................................................................................................................3
P3. Cost assessment and review of the financial statements by the method of marginal
and absorption........................................................................................................................3
TASK 3............................................................................................................................................7
P4. Limitations and drawbacks of budget management techniques in planning....................7
TASK 4............................................................................................................................................9
P5.MAS use to resolve and overcome financial issues..........................................................9
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
The term MA is defined as a method of actually creating records, with the support of
monetary and non - monetary details within company to make crucial decision. There is a range
of methods, including absorption, marginal for creating financial reports to describe the net
income (Arroyo, 2012). The report includes detailed information relevant to particular
accounting processes, planning techniques and MAS to address monetary issues. The company
selected for this particular project is Prime Furniture Limited.
TASK 2
P3. Cost assessment and review of the financial statements by the method of marginal
and absorption.
Micro business methods:
Cost: this might be expressed as the total amount of expenses that emerges to complete various
types of operations as well as facilities of businesses. There are specific costs to regard as fixed
costs that continue with increases in supply level while variable costs tend to adjust as per
increases in output volume. Direct rates are directly connected to the conduct of company
operations, and additional costs are conversely.
CV analysis: Cost-benefit assessment is a structured method for the definition of advantages and
disadvantages of options used to determine the right effect approach while maintaining costs,
also referred to as cost-benefit assessment.
Variability in cost: this can be regarded as a process of assessing the variability proportion
between real cost as well as expected cost throughout a particular program within business
during accounting period. This is presented in ways that are unfavourable and beneficial to the
company.
The description of some costing methods which help to prepare statement and extract net
profit is stated as follows:
Absorption costing method: It is a category of costing methodology which calculates and
usually allocates the values of different operation of business. The worth of the item is defined as
continuous and unfixed spending (Chenhall and Moers, 2015).
Calculation of net profit as per absorption costing.
Quarter 1

Particulars Amount
Sales 66000
Less: Cost of sales
Production Cost (78000* 0.65) 50700
Semi variable (78000 * 0.20) 15600
Total variable cost 66300
Less: Closing stock 10200 56100
Gross Profit 9900
Less: Expenses 400
9500
Selling and distribution as fixed 5200
Net Profit 4300
Quarter 2
Particular
Amoun
t
Sales 74000
Less: Cost of sales
Opening stock 10200
COGS (66000*.20) 13200
Production cost (66000*0.20) 42900
Total variable cost 66300
Less: Closing stock 3400 62900
Gross Profit 11100
Less: Selling expenses 2800
8300
Fixed expenses 5200
Net profit 3100
Working notes
Fixed costs 16000
Budgeted cost of production
80000 per
unit
Budgeted fixed cost 0.2
Variable cost per unit 0.65
Marginal pricing method: This methodology could be viewed as a way to assess the
costs associated with specific operations. The fixed values were measured as time charge and
contingent costs are called unit payments in a financial period.
Quarter 1
Particulars
Amoun
t
Sales 66000
Less: Cost of sales

Opening inventory 0
Production cost
(780000*0.65) 50700
Less: Closing stock
(12000*0.65) 7800
42900 42900
Contributon 23100
Less:
Fixed overhead 16000
Fixed selling expenses 5200 21200
Net profit 1900
Quarter 2
Marginal
Sales
Less: Cost of sales
Opening inventory
(12000*0.65) 7800
Production cost (66000*0.65) 42900
Less: Closing stock
(4000*0.65) 2600
48100
Contribution 25900
Less:
Fixed overhead 16000
Fixed selling expenses 5200 21200
4700
Variable costing profit 1900 4700
opening profit 0 7800
Closing stock 7800 2600
Absorption costing profit 4300 3100
Opening inventory 0 10200
Closing stock 10200 3400
Variable costing profit 1900 4700
Opening inventory 0 7800
Closing stock 7800 2600
Absorption costing profit 4300 3100
Opening inventory 0 10200
Closing stock 10200 3400
With respect to the financial report produced accordingly, this can be found that the net
income sum is 1900 pounds through use of absorption method. On the other side n et revenue is

4700 pounds through using marginal costing method. Under both approaches, cost consideration
is the explanation for the income volatility in different situations. Along with handling of fixed
costs under absorption as the degree of output is measured for entire period.
Product costing:
Fixed cost: This is a type of costing that cannot be changed or adjusted result of a change in
output volume.
Variable cost: This is really a component of cost that can be changed or influenced as a result of
variability throughout the production quantity.
Standard or normal costing: It calculation contrasts the expected expense to the actual cost in
the financial records. The variations between the estimated as well as the actual expense are then
identified and explanations for variance are determined.
ABC technique of pricing: It really is a type of cost accounting that recognises company's
operations and regulations fees between each procedure according to the real use from each other
product / service. The approach applies to indirect expenditures and more real losses than normal
costs.
Costing role in price setting: Costing literally performs an crucial role in determining costs, as
companies change pricing on the basis of the same. This means that, if premiums are greater than
estimates, firms set low costs which really enable them deliver fewer units of products by paying
enough attention to a wide range of consumers and vise - versa.
Cost of inventory:
Inventory costs: These are the charges involved in gathering, transportation and enhancement of
an inventory stock management during a financial year. There were different categories of
inventory expenditures that are as defined in the following:
• Order costs
• Extra features to bear
• Retail Costs
• Recruitment Expenses
Types of Stock Assessment:
• FIFO: This is also a form of device connected with the manufacture of products that
comes first in the factories to be included in every current market at the very first.

• LIFO: It is basically a technique that can be related to collecting products for final output
from the warehouse on the grounds from last through first out.
• Weighted average costing method: The technique aims to determine the stock prices of
the business, and measures the total price of a consumer commodity based on the position
of some other item’s amount.
TASK 3
P4. Limitations and drawbacks of budget management techniques in planning.
Budgetary control: It can also be defined as a sort of policy that aims to govern both
financial that pro-financial results on the basis of several different forms of budget.
Throughout this element of budget component is crucial even though, with the support of
these strategic strategy, business organization takes proper measures to generate further
outcomes. It contains a variety of budgets that are used by the manager of prime furniture
these are defined as follows:
• Operation budget: it really is a form of budget allowing managers to determine the
quantity of products necessary to finish the different operations over a given time
period (Tucker and Lowe, 2014). The auditors use this budget prepares the
calculation of various projects and tasks within Prime Furniture Limited that also
helps management to make appropriate decisions. Under this program, the
management take corrective measures to meet the objectives by carrying out the
actions stated. The primary benefits and drawbacks below were mentioned:
Benefits: Manager Benefit from this framework when calculating the supply of alternative types
of technology used throughout prime furniture to meet the optimal goal in specified timeframe.
Drawbacks: The key concerns with that kind of expenditure plan is that it still requires a lot of
extra time as well as expenses for the allocation of funds which directly increase the total costs
for prime furniture.
• Capital expenditure plan: All departments and units would include total monthly
expenditure plan about capital requirement within company. This finds that
monitoring sales income; production efficiency etc. is a dynamic and costly market
practice. In accordance with Prime Furniture, manager use take advantage through

this budget and make sure that no extra capital must be used in any operation if once
the capital is allocated.
Benefits: The financial condition of Prime Limited Furniture has been assessed with a
description of the detailed budget which manager maintain while allocating and using capital.
Drawback: The greatest drawback about this program is that improvements under it are
difficult to implement, resulting in a pressure on the management of the relevant organization
impacting the amount of efficiency within the given period of time (Kokubu and Kitada,
2015).
Alternative budgeting method
Cash budget: This is a document describing both monetary sales and costs as well as
reflecting on expectations over a particular time span in the financial statements. The final cash
budget is produced after preparing of all expenses such as overall budget, capital expenditure,
profit planning, and transaction spending plan (Hiebl, 2014). Consequently financial products
and investments and expenditure can be reported in this budget. It really is a document that is
designed primarily for external players which is not readily modifiable after publication. This
budget is structured in the sense of the Prime furniture that has some benefits and drawbacks:
Benefits: This allows Prime furniture to manage cash expenses and income on a daily basis and
allow clear provisions that could be used to cover any constraints that occur and impair market
efficiency.
Drawbacks: This strategy relies on estimates, and for long term financial plans, businesses
cannot fully rely upon the same. Therefore, each procedure must be closely checked by the boss
of the particular organization and identify the cash used throughout the project which can be an
exhausting and labour intensive task.
Price:
Strategies for pricing:
• Pricing penetration strategy: The penetration sales model effectively reduces the
expenses of products and services to quickly reach a large market share. The approach
operates for consumers who turn into another new company and consume products at a
reasonable price.
• Skimming pricing strategy: Price skimming is basically a successful pricing technique
whereby a selling firm initially sets a fairly hefty premium per service or product and

then reduces the price over time. The business, when first market demand is satisfied,
then lowers the price to draw more market-sensitive parties.
How competitors determine prices?
By maintaining in agree with the current global business dynamics and activities of
competing companies in the same sector, enterprises have used to determine the most acceptable
costs. They analyse essential components that have now been done by other businesses and
develop strategies that concentrate on lowering operational costs and maintaining a reasonable
quality of goods and services which help in generating real income and raise market share.
Consideration of supply-demand: Supply and demand are an economic theory from
which rates are set within each market. This means that, unless the appropriate amount (at
current prices) for a given commodity, such as labour and liquid capital resources, is set at a rate
equal to the total sold (at current prices), which will be equal to organized economic demand and
supply.
Strategic planning:
SWOT Analysis: It really is a process of measuring the institution's strength, weakness,
opportunities and threats over a specified period of time. This provides a strong base for
company to make crucial decision which can lead to expanding of business in shorter time. Some
of its benefits and disadvantages as:
Benefits: The SWOT analysis can involve an agency, an organizational unit, a person or a team.
The SWOT approach, for example, can be used to evaluate a product or service, merger or
partnership or to relocate an existing sector. This also assists in assessing a particular production
point, economic process and also sales volume or implementation of Prime furniture.
Drawbacks: This method lacks a structure to rank the significance of one component above
others. Additionally it is difficult to assess the true effect of each aspect on the target.
TASK 4
P5.MAS use to resolve and overcome financial issues.
In general, the absence of sources of funding causes financial difficulties that cause
problems for firms to conduct competitive operations (Otley and Emmanuel, 2013). Two of the
biggest economic challenges Prime Furniture faces are:

• Accounting record errors: This may be described as a financial problem related to
deliberate or accidental misuse of geometric structures due to incorrect account
preparation. Therefore, the question that has consequences for their financial reporting is
discussed in prime furniture (Suomala and Lyly-Yrjänäinen, 2012).
• Lack of money management: This is consider to be the major financial issue faced by
prime furniture, as lack of proper money circulation leads to delay in business process or
even closure of productive business operation.
MA methods for reacting to financial problems:
• Benchmarking: This method measures its financial aspects of the company to competing
firms with a view to predicting negative variances (Sánchez-Rodríguez and Spraakman,
2012). Manager use the criteria in the aforementioned sector to determine their particular
monetary issue. Management uses the strategic aspects to compete with other businesses
dealing in same industry.
• KPI: This approach can be described by a rational estimation of financial and non-
financial components. The financial aspect includes operational efficiency, expenses etc.
while being components included in non-financial terms; employee stress levels,
relationships, etc. In respective, to prime furniture manager uses financial components to
record all relevant money transaction in order to detect the issue of money
mismanagement.
• Financial governance: This is a technique in which a corporate entity's complete
economic activity is recorded over a span of time (Schaltegger and Burritt, 2017). This
approach recognizes true financial issues and analytical approaches are used to resolve
the issue. In prime furniture planner makes use of strategies to alleviate the
aforementioned problems and take proactive action to eliminate these circumstances in
the future.
Expertise’s of management Accountant:
• Better management skills: The willingness of effective auditors to convey financial
details inside the working community with separate activities will be expanded.
• Good knowledge of accounting ideals: They must be capable of producing financial
reports and also provide sufficient accounting details. These strategic techniques can be

used to address financial challenges. That is because, largely on the basis of this,
commitments can address any kinds of issue but can guide business leaders to fix issues..
Comparison of companies in order to solve financial issues by help of MAS:
Basis of
difference
Sainsbury AlDI’s
Monetary
issue
The business faces challenges due to
the scarcity of monetary capital.
The biggest problem facing the
organization is spending for different
work.
Techniques to
solve issues
This corporation uses benchmarking
tools to tackle the financial problem
and classify flaws in financial reporting
relative to other companies
KPI financial factors that continue to
set the benchmarks at various jobs so
that higher expenditures can be
managed are used to handle the
financial problem aspect.
MAS To overcome the problem business
implements cost accounting program to
monitor and control the total cost
activity.
Managers use to monitor all
expenditures included in project
expenses and make correct budgets to
eliminate excess spending for the next
cycle.
CONCLUSION
In conclusion, it has been founded that MA is a useful process to make internal decision and
increase the profit figures and remove any sort of financial issues faces by company. Different
costing methods are effective in making financial reports are detecting profit for the specified
period. MA system and budgetary tool are valuable for future planning and eliminating of
financial problems.

REFERENCES
Books and journal:
Arroyo, P., 2012. Management accounting change and sustainability: an institutional approach.
Journal of Accounting & Organizational Change. 8(3). pp.286-309.
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.
DRURY, C. M., 2013. Management and cost accounting. Springer.
Hiebl, M. R., 2014. Upper echelons theory in management accounting and control
research. Journal of Management Control. 24(3). pp.223-240.
Kokubu, K. and Kitada, H., 2015. Material flow cost accounting and existing management
perspectives. Journal of Cleaner Production. 108. pp.1279-1288.
Kotas, R., 2014. Management accounting for hotels and restaurants. Routledge.
Otley, D. and Emmanuel, K. M. C., 2013. Readings in accounting for management control.
Springer.
Sánchez-Rodríguez, C. and Spraakman, G., 2012. ERP systems and management accounting: A
multiple case study. Qualitative Research in Accounting & Management. 9(4). pp.398-
414.
Schaltegger, S. and Burritt, R., 2017. Contemporary environmental accounting: issues, concepts
and practice. Routledge.
Suomala, P. and Lyly-Yrjänäinen, J., 2012. Management accounting research in practice:
Lessons learned from an interventionist approach. Routledge.
Tucker, B. P. and Lowe, A. D., 2014. Practitioners are from Mars; academics are from Venus?:
An investigation of the research-practice gap in management accounting. Accounting,
Auditing & Accountability Journal. 27(3). pp.394-425.