Management Accounting Techniques and Planning Tools

This document discusses management accounting techniques such as cost analysis using marginal and absorption costs. It also explains the use of planning tools like budgets for planning and control. The advantages and disadvantages of different types of planning tools used for budgetary control are also discussed.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................3
L.O.2: Apply a range of management accounting techniques.........................................................3
P3. Calculate costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costs...........................................................................3
M2. Accurately apply a range of management accounting techniques and produce appropriate
financial reporting documents.........................................................................................................8
L.O.3: Explain the use of planning tools used in management accounting using budgets for
planning and control........................................................................................................................9
P4. Explain the advantages and disadvantages of different types of planning tools used for
budgetary control.........................................................................................................................9
M3. Use of different planning tools and their application for preparing and forecasting budgets10
L.O.4: Compare ways in which organizations could use management accounting to respond to
financial problems.........................................................................................................................11
P5. Compare how organizations are adapting management accounting systems to respond to
financial problems.....................................................................................................................11
M4. Analyze how in responding to financial problems, management accounting can lead
organizations to sustainable success..........................................................................................12
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
For the internal purpose of the company - hence the name. Facts and figures are confidential o
management team and other decision-making individuals. There is not a set pattern or format or
reporting. Statistics are communicated according to the target audience, and therefore may or
may not include information as per their requirement. Reports can include both financial and
non-financial data as required. No formal audit structure is required for such reporting. Reporting
is done more than a year since information is used to improve decisions made for forecasting
schemes. In this project report management accounting techniques with advantages and
disadvantages of each has discussed. How management accounting methods can solve financial
problems of the company with effective tools and attain sustainable success for the company.
L.O.2: Apply a range of management accounting techniques
P3. Calculate costs using appropriate techniques of cost analysis to prepare an
income statement using marginal and absorption costs
Cost: During the production of any item, the total amount spent on it is called cost. There are
many prices like expenditure on raw materials, expenses on running the machine, salary of
employees, etc. The sum that is combined with all these expenses is called the cost of production
(Quinn and Oliveira, 2018).
Different costs and cost analysis:
Based on production; costs are of two types; direct and indirect. Where direct costs directly
associated with production process; while indirect costs are not directly associated with
production process. On the basis of occurrence two further types of costs; variable and fixed
costs calculated to identify standard cost of the product. Cost can be identified through two
methods discussed below:
Marginal costing: Marginal cost includes costs that vary with the level of production, while
other costs that do not vary with production are considered fixed. For example, the direct cost of
producing an automobile usually includes the cost of labor and parts required for the additional
automobile.

Absorption costing: In this cost technique all costs, whether fixed or variable produced, are
absorbed by total units. It is used for reporting purposes, that is, for financial and tax reporting.
Quarter 1 & 2
Calculation of product cost per unit:
Quarter
1
Quarter
2
Variable Cost (78000 ×
0.65) £50,700 £42,900
+ Fixed Cost £16,000 £16,000
Total Product cost £66,700 £58,900
÷ Total Units Produced £78,000 £66,000
product cost per unit £0.86 £0.89
Income Statement (Absorption)
Quarter 1 Quarter 2
Sales (66000 × £1/
unit) £66,000
Sales (74000 ×
£1/ unit) £74,000
COGS (66000 ×
0.85) -£56,100
COGS (74000 ×
0.89)
-
£65,860
Gross
Profit £9,900 Gross Profit £8,140
Less: Operating
Expenses:
Less: Operating
Expenses:
Selling & administ.
Expenses £5,200
Selling &
administ.
Expenses £5,200

Net Operating
Income £4,700 £2,940
Note: 1. Selling cost / unit is assumed to be £1/unit.
2. Variable cost/ Unit = Total variable cost/ No. of units produced
= 52000/80000 = £0.65/ unit
3. COGS = Cost of goods sold
Interpretation: On the basis of preparation of income statement through absorption
costing; it was found that quarter 2 gross profit and net profit is reduced due
absorption of unsold manufacturing costs (Types of cost/ classification of costs,
2019).
Income statement through Variable costing technique:
Quarter 1 Quarter 2
Sales (66000 ×
£1/unit)
£66,00
0
Sales (74000 ×
£1/unit)
£74,00
0
Less: Variable Cost Less: Variable Cost
Cost of Goods
Manufacturing
(78000 × 0.65)
£50,70
0
Cost of Goods
Manufacturing
(66000 × 0.65)
£42,90
0
Less: Closing Stock
(12000 × 0.65)
£7,800
Add: Opening stock
(12000 × 0.65) £7,800
Less; Closing Stock
(4000 × 0.65) £2,600
Contribution
Margin
£23,10
0
Contribution
Margin
£25,90
0
Less Period
Expenses
Less Period
Expenses

Fixed Manufacturing
cost
£16,00
0
Fixed Manufacturing
cost
£16,00
0
Fixed Selling and
Admin. Expenses £5,200
Fixed Selling and
Admin. Expenses £5,200
Net Operating
income £1,900
Net Operating
income £4,700
Interpretation: Cost of goods manufacturing is determined by duplicating all out
creation with variable expense per unit (£0.65/Unit). Cost of Goods producing is
cost so it is exposed to be subtracting from Sales income. Then again Closing stock
is subtracted from absolute variable expense since this stock has not been sold and
ought not to be subtracted from Revenue (What Is a Management Accounting
System?, 2020).
Difference in Profit & Loss or Income statement calculating by Absorption and
Variable techniques:
Absorption costing Variable Costing
Quarter 1 Quarter 1
Sales (66000 × £1/
unit) £66,000
Sales (66000 ×
£1/unit) £66,000
- COGS (66000 ×
0.85) £56,100 Less: Variable Cost
Cost of Goods
Manufacturing
(78000 × 0.65) £50,700
Less: Closing Stock
(12000 × 0.65)
£7,800
Gross Profit £9,900
Contribution
Margin £23,100
Less Period
Expenses

Less: Operating
Expenses:
Fixed
Manufacturing cost £16,000
Selling & administ.
Expenses £5,200
Fixed Selling and
Admin. Expenses £5,200
Net Operating
Income £4,700
Net Operating
income £1,900
Interpretation: Income through absorption costing shows less gross profit than
variable costing method; the main reason behind this difference is calculation of per
unit variable and fixed cost. Another reason for variance is variable cost of
manufacturing product; which is not considered by Variable costing method.
Absorption costing Quarter 2 Variable Costing Quarter 2
Sales (74000 × £1/
unit) £74,000
Sales (74000 ×
£1/unit) £74,000
- COGS (74000 ×
0.89) £65,860 Less: Variable Cost
Cost of Goods
Manufacturing
(66000 × 0.65) £42,900
Add: Opening stock
(12000 × 0.65) £7,800
Less; Closing Stock
(4000 × 0.65) £2,600
Gross Loss £8,140
Contribution
Margin £25,900
Less Period
Expenses
Less: Operating
Expenses:
Fixed
Manufacturing cost £16,000
Selling & administ.
Expenses £5,200
Fixed Selling and
Admin. Expenses £5,200

Net Operating
income £2,940
Net Operating
income £4,700
Interpretation: The translation for this figure is like above figure. Assimilation
costing incorporates all expenses, including fixed costs which are just identified
with creation, while variable costing just incorporates the variable expenses
legitimately acquired underway (Schaltegger and Burritt, 2017).
M2. Accurately apply a range of management accounting techniques and
produce appropriate financial reporting documents
Management accounting techniques are useful for managers to generate valuable reports for
making business decisions. On the basis of application of such techniques financial reporting
documents have been produced below:
Financial statements: Financial statement refers to the statement that states the financial position
of the business at the end of the accounting period and the results of business operations. The
main purpose of financial statements is to provide the information needed by their users to make
the right decision (Management Accounting – Meaning, Advantages & Functions, 2020).
Balance sheet: A balance sheet reports a company's assets, liabilities, and shareholders' equity at
a specific point in time, and provides the basis for calculating rates of return and evaluating its
capital structure. It is a financial statement that provides a snapshot of the amount invested by the
owners of a company as well as shareholders.
Income statement: An income statement or profit and loss account (also known as profit and loss
statement (P&L), profit or loss statement, revenue statement, statement of financial performance,
income statement, operating statement, or statement of operations) Is) one of the financial
statements of a company and shows the revenue and expenditure of the company during a
particular period.
Cash flow statement: Cash flow statement (CFS) measures how well a company manages its
cash position, which means that the company creates cash to fund its debt obligations and fund
its operating expenses. Cash flow statement complies with balance sheet and income statement.

L.O.3: Explain the use of planning tools used in management accounting
using budgets for planning and control
P4. Explain the advantages and disadvantages of different types of planning
tools used for budgetary control
Budgeting: The budget is a statement of estimated receipts and expenses under a certain period,
a comparative table giving the amounts of income and expenses to be incurred; In addition, it is
an order or authority given by the appropriate authorities to collect and spend income (Budgeting
and Forecasting Software, 2020).
Types of Budgets:
1. Operating budget: This budget helps company in identifying whether personal finances are
enough to handle working capital requirement or not. Its main structure consists of preparing
sales/ revenue, cost of sales, gross profit, interest and depreciation and fixed assets. This
budget shows expected money after deducting operating activities from gross profit.
2. Capital budget: It is the process of allocation of funds for undertaking major projects by
business for the growth of business. For instance, construction of new plant, investment in
new venture. The main process includes, taking fixed amount of money out for investing in
project; later alternatives in the form of different available projects identifies and after sort
listing available projects on the basis of evaluation; company release amount of budget
(Budgeting software, 2020).
Advantages and disadvantages of different types of planning tools:
Budgets: The form in which a statement of income and expenditure of the company is
collected is called the budget. The annual financial statement of the income and expenditure
estimates of the previous year is presented in the budget.
Advantages Disadvantages
It supports business through build coordination
between different functional departments.
It is rigid in nature and cannot be
modified once prepared.
Budget is powerful technique along with
controlling expenses, also keep track of
income and expenses,
Due to less participation of employees;
it raises the situation of discouraging
workers.

Cost volume profit analysis: Cost-benefit analysis is done to decide whether any thought
work will be beneficial going forward. Although, this analysis can be used for anything; but
it is usually used only on financial questions.
Advantages Disadvantages
It is the perfect mathematical equation
method, which gives approximate figure
based on equation.
It categories all costs as fixed element;
besides the fact that cost might be semi
variable in nature.
Minimum sales required by business for
their survival can be obtained through
breakeven point.
Alteration demand by keeping sales
variable constant might not give accurate
results.
Pricing strategy: A business may use several pricing strategies when selling a product or
service. The price can be determined for each unit sold or to get the maximum profit from
the market overall. It can be used to protect the existing market from new entrants, increase
market share within the market, or enter a new market.
Advantages Disadvantages
Through this planning tool; company able to
know the amount willing to pay by
customers.
It’s not possible to estimate what
customers are willing to pay; because
customer doesn’t have enough knowledge
about product.
Through this method optimized price, where
maximum benefit received by firm could be
analyzed.
Only follows standard costing method;
denies variable and fixed nature of
expenses.
M3. Use of different planning tools and their application for preparing
and forecasting budgets
Budgets:
Use: It is used to make implementation of plans made through execute it in proper supervision
and controlling costs to reduce variance.
Application: Prime furniture could apply this method through collecting various financial
documents such as income statement, balance sheet and cash flow statement.
Cost volume profit analysis:
Use: This method used for analyzing cost of each structure on the basis of its volume and size.

Application: This method can be applied by Prime Furniture through categorizing fixed and
variable cost separately and analyzing the impact of each costs and their importance for
operating core activities (The 5 Step Risk Management Process, 2018).
Pricing strategy:
Use: This strategy is useful to identify cost to be charged from customer.
Application: Prime furniture can apply this method through identify standard costing per unit and
adding some value as a desired profit.
L.O.4: Compare ways in which organizations could use management
accounting to respond to financial problems
P5. Compare how organizations are adapting management accounting systems
to respond to financial problems
Prime furniture can apply various key performance tools for analyzing its financial performance
to compare it with its competitors to know what problems are becoming hurdle in the way of
achieving goal. Some of the performance analyses tools which help company in comparison are
discussed below:
Return on capital employed: This performance analyses tool will support Prime furniture in
knowing how much proportion of net profit is earned by firm compare to capital employed. More
proportion indicates better performance.
Assets turnover: This tool shows how efficiently Prime Furniture has converted its invested fixed
assets into money. It usually compares net sales with proportion to fixed assets; more turnover
better for the company. As fewer turnovers indicates inefficiency of company and indicates non
performance of assets (Risk management, 2019).
Operating profit margin: This tool compares operating profit with net sales; it shows how much
proportion of net sales is successfully converted into operating profit. More proportion better for
the Prime Furniture; shows good performance through controlling minimizing the impact of
variable costs.

M4. Analyze how in responding to financial problems, management
accounting can lead organizations to sustainable success
Management accounting can help Prime Furniture in improving financial performance of the
company in achieving sustainable success in following ways:
Advanced technology and features: Management accounting tools with its efficient advanced
technology like budget control, costing methods and evaluation process could support Prime
furniture in solving financial problem and attaining sustainable success (Sustainable Success,
2020).
Cost transparency: Management accounting will help Prime Furniture in maintaining
transparency and clarity of various costs among different functional departments. This will help
Prime furniture in achieving sustainable success.
Flexibility and independence: Due to flexible nature of management accounting; automated
artificial intelligence make it possible for Prime Furniture to reduce its involvement in making
reports yearly, monthly and weekly (Sustainable Success, 2020).
CONCLUSION
So, on the basis of project report it can be concluded that; the scope of management accounting
is wide and this creates many difficulties in the implementation process. Management requires
information from accounting as well as non-accounting sources. This leads to fairness and
subordination in the conclusions derived from it. The purpose of management accounting is to
provide managers with both qualitative and quantitative information to help them make
decisions, and thus maximize profit. This article is designed to help you learn the important
differences between financial accounting and management accounting. It is also recommended
that Prime furniture should adopt mix strategies by applying best suitable management
accounting tools which fulfills business requirement.

REFERENCES
Books
Quinn, M. and Oliveira, J. eds., 2018. Accounting for alcohol: An accounting history of brewing,
distilling and viniculture. Routledge.
Schaltegger, S. and Burritt, R., 2017. Contemporary environmental accounting: issues, concepts
and practice. Routledge.
Online:
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Budgeting and Forecasting Software, 2020, Online Available through:
<https://www.softwareadvice.com/accounting/budgeting-forecasting-software-
comparison/>
Budgeting software, 2020, Online available through: <https://www.capterra.com/budgeting-
software/>
Management Accounting – Meaning, Advantages & Functions, 2020, Online available through:
<https://cleartax.in/s/management-accounting>
What Is a Management Accounting System?, 2020, Online Available through:
<https://bizfluent.com/facts-5460765-management-accounting-system.html>
What Is a Management Accounting System?, 2020, Online Available through:
<https://www.freshbooks.com/hub/accounting/management-accounting>
Sustainable Success, 2020, Online Available through:
<https://corporatecoachgroup.com/blog/sustainable-success>
Sustainable Success, 2020, Online Available through:
<https://www.huntsman.com/corporate/a/Careers/About%20us/Sustainable%20Success>
Risk management, 2019, Online available through: <https://www.heflo.com/blog/risk-
management/what-is-the-risk-management-process/>
The 5 Step Risk Management Process, 2018, Online Available through:
<https://www.clearrisk.com/risk-management-blog/bid/47395/the-risk-management-
process-in-5-steps>