Analysis of Management Accounting Tools and Techniques

This assignment delves into the world of management accounting, examining the role of various tools and techniques in enhancing organizational performance. It discusses the advantages and disadvantages of incremental budgeting, zero-based budgeting, and price optimisation, while also highlighting the importance of business intelligence effectiveness and corporate performance management. The analysis includes a review of relevant literature, including studies on environmental management accounting, ERP systems, and process innovation.

MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
P4 Explaining advantages and disadvantages of different types of planning tools used for
budgetary control........................................................................................................................1
P5 Evaluating how companies are adapting management accounting system for responding
financial problems.......................................................................................................................7
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Management accounting includes provisions which managers undertake for analysing
monetary dataset and making better decisions. Such field of finance provides management with
effectual framework for decision making. Moreover, it furnishes all the information, including
both monetary & non-monetary, associated with internal operations and thereby helps in
developing competent strategic and policy framework. The present report is based on Ikea which
provides customers with innovative furniture, appliances and home accessories. In this, report
will provide deeper insight about planning tools which firm can employ for the purpose of
budgetary control. Further, it will also shed light on the techniques which can be used for dealing
with monetary issues or problems.
P4 Explaining advantages and disadvantages of different types of planning tools used for
budgetary control
Budgeting is replicated as process to prepare budgets as budgetary control is a technique
or device of managerial control via budgets. The budget is a quantitative or financial statement
formed for specific duration as this states policy to be directly pursued with objective to attain
the set objective. It helps in offering standard for comparison with outcome which is actually
attained. In simple words, this is an estimate of future needs and arranged on orderly aspect ,
recouping some or every activity of any business for specific duration (Hiebl, 2018.). The
essence of budget is known as detailed plan of preparation for specific future period and
followed through system of records which serves as check on the plan.
Budgeting control is referred as system which implies budgets as mode of planning and
controlling each aspect of selling and producing services along with commodities as well.
Moreover, budgetary control is planning in advance of different business aspects could be
controlled. The important features of budgetary control are stated as activity planning of every
department, tracing actual performance, coordination in different departments, comparing in
budgeting standards and actual performance, identifying deviations and extracting reasons in this
aspect and undertaking the follow-up action. Budgeting is formulation of plan for specified
future period in numerical aspect. The organizations might establish for units, divisions,
departments or for entire organization. The usual time duration for a budget is one year and is
expresses in financial terms. These are foundations of most control systems.
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The planning tools and techniques for budgetary control are stated below with their
merits and demerits:
Ratio analysis: This is the most vital tool of financial control which is used for purpose
of judging financial performance of business. Ratio is calculated by undertaking proportion of
single financial variable related to other financial variable. By extracting ratio among two related
financial variables, important interpretation could be made which would help to take decisions.
Moreover, these financial variables are gathered through financial statements like balance sheet
and profit and loss account.
Merits
 This helps in facilitating control over various activities through determining weakness
and strengths of business (Saeidi and Othman, 2017). This leads to preparation of budget due to different ratios act as specific guide to identify
budgeted figures for various activities.
Demerits
 The single ratio could not predict any incident in accurate basis as numerous supporting
ratios must be calculated for forecasting an incident. In this aspect, it is time consuming
affair.
 The ratios extracted on historical figures could not forecast future in precise manner.
Budgets: This involves time and cost for purpose of preparation as it has both benefits and
drawbacks as well.
Merits
 This forms association among objectives and resources.
 This helps in establishing guidelines in form of road map for purpose of proceeding in
appropriate direction. It provides the best management of subordinaries and fosters appropriate study prior to
decision making.
Demerits
 Formation of budget is very time consuming and very difficult in poorly organised
environment where is high need of iteration is budget (The disadvantages of budgeting,
2019).
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 These are primarily concerned with cash allocation to particular activities along with
expected outcome of business transactions.
Fixed budget: It is a financial plan which does not alter via budget period, irrespective to any
alteration on actual activity levels experienced.
Merits
 This helps business for purpose of prioritizing the expenses.
 It is clear distinction among requirements of business and to enforce business for
remaining consistent. This ensures that bill payments are on time or not.
Demerits
 It operates to one level activity, planned activity and doesn't account business
unpredictable activity.
 The actual would always capture through activity level which is significantly varied
through planned activity.
Flexible budget: It is a budget where difference has been recognised in behaviours among
variable and fixed cost in context to output fluctuations, turnover along with other variable
factors etc.
Merits
 It enables business for predicting income level and performance at specified range of
activity and sales level. Simultaneously, this enables appropriate assessment of organizational and managerial
performance.
Demerits
 It assumes about linearity of cost and does not account and relies on continuity
assumption when costs might actually behave is discontinuous or stepped aspect
(Spraakman and et.al., 2018).
 These budgets tend for maintaining fixed cost at similar level as level of sales or output
and very often these fixed cost are actually fixed with relevant range of output.
Incremental budget: This is very important contribution of management accounting on basis of
premise for performing minor change to existing budget to arrive at innovative budget. It
initiates with budget of previous period.
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Merits
 It is very simple for understanding perspective as compared to other budgeting methods
used in business. This budget is flexible as one could easily perform from one month to next and ensures
about continuity of funding with context of department with absence of detailed analysis
of requirement of funding (Pros and Cons of Incremental Budgeting, 2018).
Demerits
 It tends to make managers spend higher as budgets might be easily available and lead to
unnecessary fund spending which are not surely warranted.
 This encourages high spending so budget is maintained in coming year.
Zero based budget: This allows organization to initiate with zero for every item so there is
absence of possibilities of error if appropriate factors are considered. This targets for determining
alternative and efficient methods for company who opt for purpose of optimum utilization of
resources.
Merits
 It prioritize profits over expenses so in this context, departments or units product indirect
or direct margin which are highly preferred. As outcome, business enable to attain
funding for producing more profits and revenues (Zero Based Budgeting, 2018). The business could be saved through details as it decrease errors and helps business to
see deeply into process. So, in this context, inefficiencies are undertaken care and
business becomes highly effective.
Demerits
 The cost centres does not provide help to produce immediate margin so budgeting does
not encourage to fund them.
 This budgeting method has high requirement of detailed attention along with analysis so
it is very complex for managers and at end this method pays off.
Variance analysis: This is used for purpose of explaining situation where actual outcome or
result of event materially and significantly differ through expected, planned or targeted outcomes
or results.
Merits
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 The managers which are less sophisticated along with other users of accounting
information would simply observe adverse variance as bad and favourable variance as
good. It helps in assessing manager's performance but care must be taken with its
application with absence of costly errors or assumptions (Richards and et.al., 2019). It is highly significant and material variance leads the managements attentions where
planned activities differ through actual outcomes.
Demerits
 This is on basis of activity on financial outcomes which are directly released on later
basis after closing of quarter, there might be presence of time gap which might give
impact on remedial action with capability to certain extent (Variance Analysis, 2016).
 In case budgeting has not been considered about detailed analysis of every factor, then
budgeting exercise might loosely perform with bound for deviating through actual
numbers. This might be not known as very useful activity for business perspective.
Pricing strategies could be used for pursuing various types of objectives like raising
market share, expanding margin of profit or driving a competitor through the marketplace. These
might be necessary for a business to change the strategy of pricing over time along with changes
in market. Generally pricing strategies consider five strategies which are stated below:
 Cost plus pricing
 Competitive pricing
 Value based pricing
 Price skimming
 Penetration pricing
Value based pricing: This is replicated as methodology for setting prices on initial basis
with context to consumer's perceived value of service or product. The organizations that offer
highly and unique valuable services or features are better positioned for undertaking benefit of
this model than business could sell commoditized items (Qian, Hörisch and Schaltegger, 2018).
It can be also known as customer based pricing because it is effectively what it is. These
strategies does not provide high reliance on cost but customer perception is highly valued about
its service or products:
Merits
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 This offers real willingness for paying data as it enforces to generate profit within
strategy of pricing.
 It not only identify accurate price of end product but this process would give direct
benefit to business. In simple words, this helps for developing products of high quality.
 The most of customer data in this pricing is gathered via customer surveys and interviews
so in this aspect attention to consumer opinion has been laid.
 Better fit with perspective of customer.
 The Best product has been adapted with better suit the market.
Cost plus pricing: This involves aggregate of markup to cost of services and goods for arriving at
selling price. With context to this approach, there is aggregate of direct material, direct labour
and overhead cost of specific product. Furthermore, this has been aggregated to markup
percentage for deriving the price of the product. It is most common method to establish a
profitable selling price for service or product as this ensures that organization sells a product
more than it had incurred cost to organization for manufacturing the product.
Merits:
 This does not require additional market research as with perspective of business, cost of
production which comprises labor costs, different invoices, etc. The business could
undertake summed costs and place margin on top with belief that market would bear. In
short, this strategy takes limited or few resources.
 It offers entire coverage of cost along with consistent rate of return .
 This is helpful with absence of information about willingness of customer for repaying
and they are not direct competitors within market place. This could be stated as it hedges
against knowledge which is incomplete (Quinn and et.al., 2018).
 This is quite easy for purpose of deriving price of product with application of this method
and appropriate allocation of overhead method must be elaborated to be highly consistent
for extracting price of different products.
 The supplier should persuade its customers of need for increment in price, so in this
context supplier could not point for increment in cost as reason for increment.
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During evaluation, it has been extracted that this method is not acceptable for purpose of
deriving price of product which is going to be sold within competitive market, initially not factor
in prices directly charged through competitors. Conversely, this is valuable tool as supplier has
absence of downside risk and ensure to review cost which is allowable fir purpose of
reimbursement under contract.
P5 Evaluating how companies are adapting management accounting system for responding
financial problems
Stages of management accounting evolution
According to IFAC framework, evolution of management accounting mainly includes
four stages which are enumerated below:
Stage 1: Determination of cost (1950)
According to management accounting evolution, stage one is characterized as technical
activity which places high level of emphasis on determining the cost level. Moreover, from the
perspective of setting prices, cost determination is highly required.
Stage 2: Information generation (1965)
It is considered as management activity where line manager’s takes decision by
considering reports provided by different departments.
Stage 3: Reduction in cost level (1985)
With the motive to facilitate goal attainment related to profit maximization such stage of
management accounting was introduced. On the basis of this, management accounting helps in
assessing the level of wastage and ensures reduction in cost level (IFAC’s conception of the
evolution of management accounting, N.d.).
Stage 4: Value creation (1995)
This stage was introduced referring aspects mentioned in the second namely information
generation. As per this, clear focus is placed on reducing cost level and leveraging or capitalizing
opportunities for the purpose of value creation.
The organizations detect financial problems in organization with context of various tools
which are stated below with their application:
Balance scorecard: Such tool of management accounting is highly significant which
assists in translating organizational mission & vision into strategic actions. Further, by taking
into account such management accounting tool business unit can resolve both financial and non-
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financial issues. Four aspects of balance scorecard tool includes learning & growth, business
process, perspective of customers and monetary data. In other words, with the help of balance
scorecard tool company can assess whether employees are capable enough or not in relation to
gaining competitive edge. Further, firm can identify the level of bottlenecks, shortage or wastage
using such tool. It also provides organization with suitable information regarding satisfaction
level of customers and current products (What is a balance scorecard?, 2017). Along with this,
financial metric helps company in making evaluation of trends and income targets. Referring
overall evaluation, it can be depicted that balance scorecard tools help in identifying deviation
and thereby facilitates strategy modification within the suitable time frame.
Ratio Analysis: This is a form of analysis of financial statement which is used for getting
quick indication of financial performance of company in different key areas. These are highly
significant profit tools in financial analysis which directly implements plans for improving
liquidity, financial structure, leverage and interest coverage. Investors could attain data through
ratios rather than trying for understanding entire statements. The analysis over long duration
could point defect in business function along with future performance of organization in specific
aspect of business. In the same series, this facilitates comparison and analyse company's
performance of two or more organizations within sector or industry. Thus, with context of
efficiency ratio must be assessed as it is important due to earned gross profit each time with
occurrence of turnover. It enables for improving inventory management and buying practices.
On basis of average collection period, it observes average number of days customer takes
for repaying products or services. For purpose of improving about quickly collective payments,
one must establish clear policies of credit and to set procedure of collection. In the same series,
financial viability of business is evaluated but essential to compare business to others in industry
as net profit margin measures how much company earns related to sales.
Key performance indicators: It is also known as performance indicator as type of
measurement as this evaluates organization's success or of a specific activity in which it
involves. As success is repeated, periodic attainment of some level of operational objective and
even success is elaborated as to make progress for strategic objectives. Simultaneously, selecting
the appropriate KPI highly rely on best understanding about what is importance to business. This
is often highly dependent on department to measure performance as KPI is important for finance
which would differ through KPIs assigned to sales. Usually, this is used for reflecting
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organizational progress and success in relation to specified objective. The main objective is for
monitoring progress on basis of attaining strategic objective which is typically communicated in
strategy map. Typically, this is included in reporting dashboard or scorecard which enables top
management, other stakeholders or board to lay emphasis on metrics deemed the critical success
of organization.
The financial key performance indicator are on basis of components of income statement
or balance sheet and might report alterations in growth of sales or in category of expense. The
non financial key performance indicators are replicated as other measure for assessing activities
that organization observes as significant for attainment of its strategic objectives. Typical non
financial KPIs considers measures related to customer relationships, operations, employees,
cycle-time, quality and supply chain of organization or its pipeline. In addition to this, non
financial and financial, other mutual categorisation of performance indicators are quantitative vs
qualitative, lagging or leading, long term or near term, output, input along with process
indicators etc.
On basis of responding financial problems, KPIs could improve execution of strategy
through aligning activities of business along with actions of individuals with its strategic
objectives. The well designed KPI offers mode for management and board to trace business's
core activities instead of simply outcome measures of financial success. The integration of non
financial and financial KPI could give huge contribution to greater focus on success of long term
perspective instead of short term financial performance. The application of KPI report of daily,
weekly, monthly, quarterly or yearly or each of them to set up good KPI report platform is key
to attain success. The few KPIs are monitored but tracked deeply where each activities and
measures which could impact KPI. For instance, tracking recurring revenue on monthly basis,
there is information of quality leads of started trials of the best onboard where various other
measures would impact success of monthly recurring revenue .
Usually, organizations translates its corporate vision into measurable operational
objectives which are directly communicated to employees. These goals are directly associated to
individual performance objectives which are directly assessed on established periodic basis. In
order to this, internal processes are established for attaining or exceeding the strategic objectives
along with customer experience. Thus, key performance indicators are directly analysed with
context to evaluate and make recommendations for improving further performance of company.
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Benchmarking: It is replicated as process to measure company's performance of
products, services or process of company against those where consideration of another business
as best in the industry. It determines internal opportunities of environment and with study of
companies with the best performance, breaking down what brings high possibilities of superior
performance and then these business operates one could implement alterations which yield
significant improvements. This may be referred as tweaking features of product in closely aspect
for matching offering of competitor of altering scope of services one offer along with installing
innovative customer relationship management system for enabling high personalised
communications with customers. On basis of responding to financial problems, it involves
comparison of level of performance for particular process as this information could be used to
determine opportunities for setting and improving performance targets. The performance level of
other business is known as benchmarks and ideal one originates through business recognised as a
leader in related area. Performance benchmarking might involve comparison of financial
measures like cost of labour, expenditure, cost of buildings, cost of energy, cash flow and
collected revenue or non financial measures such as absenteeism, staff turnover, budget
processing time or call centre performance.
It helps organization for purpose of employee understanding of cost structures along with
internal processes. This also encourages cooperation and team building with context to interests
to become highly competitive. Lastly, this would enhance familiarity with numerous key
performance metrics along with opportunities of improvement company wide.
Evaluation of management accounting system with actual example
Inventory management system
This is as discipline primarily about specifying placement or shape of stocked goods.
This is highly required for various locations within particular facility or locations of supply
network for proceeding planned and regular course of stock and production materials. This tracks
goods via whole supply chain or portion of business which it operates. It covers each aspect
through production to retail, warehousing to shipping along with movement of stocks and parts
among this. In practical terms, a business could sell each small moving parts of operations,
allowing for purpose of better decisions along with investments (Lasyoud, Haslam and
Roslender, 2018). The different inventory managers lays emphasis on various parts of supply
chain as small businesses are highly interested in ordering to sales end of the chain.
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The IKEA supply chain is world's largest home furnishing retailers which has approx 355
stores in 29 countries as its clear vision to give well designed at process so low so mostly people
could afford them. It has adopted unique supply chain and inventory management techniques as
implies maximum or minimum settings as proprietary system where in store logistics manager
uses process of inventory replenishment management to respond store-level inventory reorder
products (IKEA supply chain, 2018).
It includes ensuring business does not spend money on unnecessary order of product
along with tracking products or selling which are not. However, it could be time consuming
along with small businesses with limited products which might not require any inventory
management system.
This is comprehensive inventory system which keeps business operation streamlined as
computerized system makes inventory easier through shortening amount of time that inventory is
taken. It could track particular serial numbers for products on digital or accurate tallies stock
through time increment related to preference of business owner and manager. On the contrary,
there is requirement of constant attention where products are continuously required to be
updated, reordered and restocked. In case business is operating computerized program, it carries
risk of hacking into software or dishonest employee manipulating the outgoing payments for
purpose of personal gains. Simultaneously, inventory management is directly subjected to human
mistakes when staff enters incorrect information through mistake.
Price optimisation system
The price optimisation system is refereed as process to extract price sweet spot or for
increasing price against the willingness of customers to repay. Generally, companies up and
down the supply chain, both in settings of B2B and B2C, rightly dedicate massive amount of
time with context of price optimisation for ensuring that products would sell on quick basis at
right place and still making decent profit margin.
The Wills Towers Watson Company is global multinational risk management insurance
brokerage and advisory organization as headquartered in London, UK. This has adopted price
optimisation system as process needed for purpose of conducting this analysis. With application
of price optimisation system for analysing information related to price levels of customer and
customer behaviour on basis of price levels so that company could extract appropriate balance
among these factors. The optimized price system has helped this company to identify optimal
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price within range of possible prices for each insured. In the same series, adaption of premium
based on competitiveness of market for attracting certain profitable segments on basis of
business. This had attracted innovative customers with strong loyalty along with increment in
potential for purpose of cross selling. With adopting price optimization at early phase, pioneering
companies would capture more of innovative business which desire at profitable rates (Price
optimisation, 2018).
While adopting price optimisation system, it benefits business as it extracts premium
bases solely on loss costs which is not enough for purpose of optimising growth of company and
profits through innovative business. The combination of analysis of various indicators which
impact profitability and allows insurers to reach financial objectives to maintain competitive
market position. On the contrary, it is possibility of unemployment at large scale in various
markets sectors because of automation. The multiple companies are automating in order to raise
efficiency in production and workers get disenfranchised.
The above stated management accounting system leads to decrease expenses, improves
cash flow, helps in undertaking business decisions and raise financial returns. It often improves
for decision making process instead of business decisions on basis of solely on qualitative
analysis and as important decision making tool.
CONCLUSION
By summing up this report, it has been concluded that management accounting tools and
techniques are highly significant which in turn helps in meeting organizational goals to the large
extent. It can be seen in the report that ratio analysis, zero base and fixed budgets facilitates
monetary control. In other words, budget gives input for evaluation and thereby helps in
identifying variances. Further, it can be summarized that by using ratio analysis tool Ikea can
evaluate trend and thereby become able to develop sound framework. Along with this, it has
been articulated that using cost-plus strategy firm can determine appropriate price of the products
or services. It can be stated from the evaluation that benchmarking, KPI and balance scorecard
are the most effectual tools which assist in mitigating or avoiding the impact of financial
problems on firm’s performance.
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REFERENCES
Books and Journals
Hiebl, M. R., 2018. Management accounting as a political resource for enabling embedded
agency. Management Accounting Research. 38. pp.22-38.
Lasyoud, A. A., Haslam, J. and Roslender, R., 2018. Management accounting change in
developing countries: evidence from Libya. Asian Review of Accounting. 26(3). pp.278-
313.
Qian, W., Hörisch, J. and Schaltegger, S., 2018. Environmental management accounting and its
effects on carbon management and disclosure quality. Journal of Cleaner Production. 174.
pp.1608-1619.
Quinn, M. and et.al., 2018. Future research on management accounting and control in family
firms: suggestions linked to architecture, governance, entrepreneurship and
stewardship. Journal of Management Control. 28(4). pp.529-546.
Richards, G. and et.al., 2019. Business intelligence effectiveness and corporate performance
management: an empirical analysis. Journal of Computer Information Systems. 59(2).
pp.188-196.
Saeidi, S .P. and Othman, M. S. H., 2017. The mediating role of process and product innovation
in the relationship between environmental management accounting and firm's financial
performance. International Journal of Business Innovation and Research. 14(4). pp.421-
438.
Spraakman, G. and et.al., 2018. ERP systems and management accounting: New understandings
through “nudging” in qualitative research. Journal of Accounting & Organizational
Change. 14(2). pp.120-137.
Online
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Price optimisation. 2018. [Online]. Available through
<https://www.towerswatson.com/-/media/Pdf/Insights/Newsletters/Global/Emphasis/
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