Management Accounting Report: Prime Furniture - Financial Strategies

This report provides a comprehensive overview of management accounting principles and their application to Prime Furniture, a furniture sales company. It explores key concepts such as the difference between management and financial accounting, marginal and absorption costing, and various management accounting tools, including budgeting (cash, sales, and capital). The report also examines financial problems faced by the company, such as increased costs and decreased revenue, and proposes solutions using techniques like benchmarking, KPIs, and financial governance. The analysis includes advantages and disadvantages of the different management accounting tools and methods. The report aims to assist managers in making informed decisions, improving performance, and achieving strategic goals within the organization.

Management Accounting
1

Table of Contents
Introduction......................................................................................................................................3
Task 1...............................................................................................................................................3
Task 2...............................................................................................................................................4
P3 Calculation of cost using appropriate cost analysis techniques..............................................4
Task 3...............................................................................................................................................5
P4 Management accounting tools................................................................................................5
Task 4...............................................................................................................................................8
P5 Different MAS to solve financial problems...........................................................................8
Conclusion.....................................................................................................................................11
References......................................................................................................................................12
2

Introduction
Management accounting is the process that actually help the managers of the company
to take the decisions. Management accounting further involve the concept of cost accounting and
financial accounting. Its main motive is to analysis the identifying, interpreting and communicate
that information within the managers so that it would be helpful for the company to achieve the
desired goals. It is one of the important management accounting process which involve the
internal decision making process. There is a big difference in management accounting and
financial accounting process. Financial accounting deal with the collecting of accounting
information to create the worth of company whereas .in management accounting, financial
information is collected and gather to perform the business activities. This report prepared on
Prime furniture, a growing company in London (Christ and Burritt, 2017). It was established in
October 2019. And their main business is to sale the furniture through mail-orders and the
internet. This company is a private limited organisation. This report include various important
things like, meaning of management accounting, history of management accounting,
differentiation in between financial and management accounting. In addition with that different
essential requirement for different system of management accounting, planning of different
management tools which are used in management accounting. Furthermore the roles of
management accounting, different methods of management accounting to solve the financial
problems.
Task 1
(Completed in PPT)
3

Task 2
P3 Calculation of cost using appropriate cost analysis techniques
Marginal costing is that form of cost accounting which factors cost accounting of one
extra unit produced. Therefore, it factors only variable cost under manufacturing activities while
absorption costing on the other hand is that form of accounting which factors cost accounting of
both fixed and variable cost.
4

Interpretation:
Difference between the profit/loss between the marginal accounting and absorption
accounting can be attributed to the difference in calculation of amount of closing stock under
both the techniques.
Task 3
P4 Management accounting tools
Management accounting is the procedure which require different techniques and tools
that facilitate the management decision-making. Management accounting tool has main aim to
improve the performance of company and support the strategic goals and objective which
5

provide and add up the extra value and worth of the organisational process. Management of the
company has it perform various activities such as planning, controlling pricing, controlling and
many more. Different tools of management accounting are used for different purposes and
solutions. The very first things which is needed to be understand the management planning and
different management activities. All these plans are act as the basis for considering monitoring
and controlling of management functions. Plan and organisation occur in all the type of
management functions within an organisation. The basic tool for analysing the planning and
controlling is Budgeting.
Budget: It is a statement which is used by the companies to get an estimation of income and
expense which are prepared on the basis of different historical data and .future expectations in
the organisation. The estimated data is compared at the end of the year which gives a result
related to different type of variance from the selected and chosen targets (Van Helden and Uddin,
2016). After an analysing the situation on the basis of estimation, corrective actions are decided
on the basis of different variance. Budgets can be divided in two main categories which are:
Operational budget and Expenses Budget. Operational Budget is prepared for the use of
operating activities and ensuring more about operational revenue and expenses will be having in
an upcoming year. Whereas the capital budgeting is prepared for some long term capital
investment decision of company. IJN the prime furniture limited company, they use different
type of budgets that the manager below explain:
Cash budget:
It is the budget which is used to calculate the inflow and outflow of cash and cash
equivalent in a specified business transactions. It will help the management system of the
company to determine the different sources and nature of cash inflow and outflow within an
organisation. It will help the managers of prime furniture to find the availability of cash and
smooth cash allocation of budget period (Christ and Burritt, 2017). It will help the person to
determine whether they will be needing additional financing in the recent budgeted year.
Advantages: It help the company to avoid the situations which comes under liquidation
and over liquidation. It help the company in planning and smoothing the operations of business
activities. It also provide the resources which are helpful for the company and make the growth
within the organisation. Cash budget is one of the important budget in the organisation as it will
6

be helpful for the company to manage the source and provide a relevant liquidity of cash in the
chosen organisation.
Disadvantages: Cash budget is based on the estimation which operate the company’s
cash rigidness process. Rigidity in dealing with the uncertain business environment that can
further contribute to loss for company and this will become the untidy situation. This will further
make some limits within an organisation, like it will make limits in spending and its rigidity
nature create an uneasiness in the organisation.
Sales Budget:
It is forecasting the sale of product in a financial year. It help the company to organise its
production line which fixed the schedule. Also, managers of prime furniture can also use it in
order to determine the period when the sale decline and then they can further provide some
relevant information which are necessary for the growth of promotional activities. The main
purpose of using sales budget in prime furniture is plan the tools, making an instrument which
are helpful for the coordination within an organisation (Murthy and Rooney, 2018). Whereas the
third reason for conducting sales budget is a defining tool of control. Furthermore they are opting
different type of methods which are using to calculate sales budget such as affordable method,
percentage methods, competitive parity methods, objective and task methods and zero base
budgeting methods. Prime furniture managers can also prepare other budgets such as production,
material and labour budgets which are actually help them to prepare the master budget and
achieve the goals and objective of the company. This budget also have some advantage and
disadvantages which are described further:
Advantages: An accurate sales budget is preliminary to the preparation of master budget.
It will gives the accurate estimation within the organisation about the estimation which would be
earning of management plan in order to perform other activities effectively. This budget
somehow make the strategic plan into actions. This will provide an excellent record of all the
transactions which are taking place in organisational activities.
Disadvantages: the market condition is so uncertain that it will provide an inaccuracy while
forecasting the sales that can lead the problem in the company which is related to over
production and under production (Uyar, 2019). And both the cases will lead to loss with in the
organisation. Their rigid nature will create issues in the organisation and further this will reduce
the initiative for innovation in the company.
7

Capital Budgeting:
It is the methods which is adopted by an organisation in order to analysis the multiple
options which are available for the development of financing the new investment and expansion
of the expansion projects. Managers of the chosen organisation can multiple models which are
net present values, pay-back periods, and many more. All these activities are compare to
financial alternatives. Managers of prime furniture must be useful also undertake the tools of
capital budgeting process which are related to options available to them:
Advantages: capital investments which are require to needed to make huge funds. Which
are actually related to different capital budgeting tools that help the company to avoid the risk for
choosing wrong investment which are required and helpful to financial health within the
organisation. It will also provide the adequate control over the expenditure for the projects and
also allow the management to abstain the expenditure of projects (Quinn and Hiebl, 2018). This
will understand the risk of management and analysis those factors which affect the growth of
company.
Disadvantages: capital budgeting is one of the important tool in the organisation but it
also involve some major predictions. And if any wrong in prediction of the company can take
away from the growth path and reduce the profitability ration of the company. These are for the
long term aspects, and mostly major irreversible in nature of the company. It is used to work as
the introspective nature of risk factors and most of the time it will discounting those factors
which are subjective in nature.
Task 4
P5 Different MAS to solve financial problems
Financial problems are those problems encountered by the businesses that are able to
disrupt financial management of a firm. These problems can vary from minor disruptions to
major issues that are also capable of leading an organisation to failure (Shi, 2019). Therefore,
management of the firms always keep vigilance on the preparation, implementation and
monitoring of budgets, sources of finance, capital structure, etc. Below mentioned are some
financial problems that are faced by managers of Prime Furniture:
8

 Increase in cost – There are two primary factors that are able to dis-balance financial
stability of the firm, one of them is increase in cost. Cost structure of the company can
see variance from the budgeted one because of increase in cost prices of the raw materials
and other allied cost or other possible reasons for increase in cost of Prime Furniture can
be faulty budgeting, employee performance not as per requirements, continuous use of
obsolete technology in business operations, etc.
 Decrease in revenue – Other factor that is able to disrupt financial stability of the
business is decrease in revenue. Primary source of revenue for a business is from sales
and if a business faces decline in sales-volume due to any reason such as instability in
market or as the recent one caused by pandemic, it is not able to maintain the profit
margin and can lead to decline in financial health of the company. Prime Furnitures
should reason out its ineffective marketing strategies for this downfall.
Tools and techniques used to solve financial problems:
 Benchmarks – Bench-marking is a technique under which firm's performance is
compared with best performance in the industry to determine the factors where firm
needs to improve (Goliguzova, 2017). Also, performance and operational practises of
other companies are evaluated to know best practises that can help company outperform
its own growth and success measures. This will helps managers identify both problem
and solution.
 KPI – Key Performance Indicators or KPI is a tool that is used to monitor both financial
and non-financial factors that have impact over financial management of the company.
Sound financial management of the company is directly proportional to the success,
growth and development of the organisation. Under it, managers focus on those resources
of the firm which are able to prove themselves as assets of the company.
 Budgetary targets – This technique asserts that company prepares various budgets such as
sales budget, cash budget, expenses budget, etc., and finally merge them into master
budget. These budgets are not only used for planning purposed but also serve as
monitoring tool and used as standard for controlling purposes. Variances in actual
performance is assessed from standard or budgeted one. It is also used to identify trends
and make business forecasts (Zou and et.al., 2019).
9

 Financial governance – This is tool cum process wherein monetary transactions of the
firm are analysed from source then regulated, controlled and monitored to ensure the
streamlined process of financial management. It asserts that if all the transactions are
tracked from sources, all the issues will be identified and the path to resolution can be
decided. This tool ensures sound financial health of the company.
Comparative analysis of financial problems of two competing firms
Particulars Prime Furnitures VIG Furnitures
Financial problem Revenue of the firm has
declined in last years thereby
reducing their profit margin
(Paolone and et.al., 2020).
Cost structure of the company
is disturbed as all the expenses
are way above the budgetary
standards.
Tools and techniques used Key Performance indicators –
Using KPI assisted by
benchmarking, it was revealed
that primary cause of this
decline is that due to
uncertainty in the market due
to Brexit, followed by
pandemic, sales of the
products of company has
declined.
Finance governance tool –
Company checked all its
monetary transactions and
tracked them from source.
Analysis revealed that due to
pandemic, cost of raw
materials has increased.
Moreover, other expenses
related to logistics have also
increased. In addition, sales
has also decreased thereby
disrupting whole financial
management of the company.
MAS used to resolve issue Price optimisation system shall
be used by the firm to regain
their customers. Differential
pricing policies will also be
helpful in these circumstances.
Further, company needs to
Cost accounting system should
be used by the company in
association with revising
budgetary control. With its
help firm will be able to
determine the variances and
10

change its marketing policies
and introduce more offers like
discounts, coupons, etc.
(Prowle and Lucas, 2016)
make necessary changes
required. Company should
make changes in the
agreements with suppliers and
seek favourable terms like
discounts or deferred
payments.
Characteristics of an effective management accountant
Management accounting users are internal users of the company. Managerial accountants
are required to assess both financial and non-financial data of a company to help senior
management in designing strategies of the firm (Hutaibat and Alhatabat, 2020). Therefore, they
needs to possess both managerial skills as well as leadership skills. Their job requires them to
prepare financial accounts reports as well as different other accounting reports such as cost
management accounting report, inventories management accounting report, etc. They further are
required to prepare for various planning tools like budgetary control planning tools, price
optimisation tools, etc. These reports are then further used by senior management of the firm to
prepare policies that are required to maintain sound financial health of an organisation. To
perform such functions, they are required to possess planning skills to suggest and help develop
course of actions and further skills like honesty and integrity to work in the favour of company.
Conclusion
From the above report it is concluded that management accounting is the very important tool
which help the company in their decision making. This function is used in the internal process of
company to getting more benefits. The company can use different use different type of
techniques such as budgeting report, investment appraisal, job costing, and execution report.
Further to control the budgetary management tool, organisation can use inventory management
system, prize optimization, variance analysis, standard costing, cost volume analysis and many
more techniques. Furthermore they also try to develop some financial problems in the company.
All these things are very helpful for the company to manage all the .policies and rules to attain
11

the desired goals in the organisation. This is one of the best management style to run the
organisation smoothly and perform effectively.
12