Management Accounting Techniques and Financial Statements

This document provides detailed information about various management accounting techniques, including absorption and marginal costing methods, and their application in preparing financial statements. It also discusses the limitations and benefits of budgetary control planning tools and how management accounting methods can help organizations respond to financial problems. The case study focuses on Prime Furniture Limited.

MANAGEMENT
ACCOUNTING

Contents
INTRODUCTION.......................................................................................................................................3
MAIN BODY..............................................................................................................................................3
TASK 2...................................................................................................................................................3
P3. Calculation of costs and preparation of financial statements under marginal and absorption costing
method.....................................................................................................................................................3
M2. Accounting techniques to produce financial statements...................................................................6
D2. Interpretation of prepared financial statements.................................................................................6
TASK 3...................................................................................................................................................6
P4. Limitations and benefits of planning tools of budgetary control........................................................6
M3. Use of different planning tools and their application for preparing and forecasting budgets............7
TASK 4...................................................................................................................................................8
P5. Analysis of ways in which management accounting methods help organisation to respond to
financial problems that will have sustainable success..............................................................................8
M4. MAS to solve financial issue............................................................................................................9
D3. Importance of financial plans for planning and managing monetary sources which can contribute in
overcoming problems regards to finance...............................................................................................10
CONCLUSION.........................................................................................................................................10
REFERENCES..........................................................................................................................................11

INTRODUCTION
The term MA is defined as a way of making internal reports by help of financial and non
financial information. There are a wide range of techniques such as absorption, marginal in order
to make financial statements (Arroyo, 2012). The report covers detailed information related to
various accounting techniques, planning tools and use of management accounting systems in
order to solve monetary issues. The company selected for this report is Prime furniture limited.
MAIN BODY
TASK 2
P3. Calculation of costs and preparation of financial statements under marginal and absorption
costing method.
Micro economic techniques:
Cost- This can be defined as total amount of expenses that occur in order to complete different
types of operations and activities. There are different types of costs such as fixed cost, variable
cost, direct cost, indirect cost and many more.
Cost volume analysis- The cost-benefit analysis is a strategic approach to the model of
weaknesses and strengths of choices used for determining the best method to gain advantages
while maintaining costs, also termed the cost / benefit study or benefit cost analysis.
Cost variance- This can be defined as a process of calculating difference between actual cost and
estimated cost. It is presented in adverse and favorable aspects.
There are a vital number of approaches such as absorption and marginal methods in the field
of planning financial reports. They are used to preparation of financial statements for companies.
Herein, below description of these costing techniques is mentioned in such manner:
 Absorption costing method- This is a form of technique of costing that defines and
widely allocates the expense of various activities and operations. The expense of the item
is considered as fixed and non-fixed costs (Chenhall and Moers, 2015).

 Marginal costing method- It can be understood as a way of identifying the expenses
involved with different activities. The fixed costs are considered time cost and unit costs
are considered variable costs.
Product costing:
Fixed cost- It is a type of cost that cannot be changed or not affected due to change in production
volume.
Variable cost- It is a type of cost that can be changed or affected due to change in production
volume.
Standard costing- Standard costing combines the expected expense in the accounting records
with the actual cost. Thereafter, the variations between the planned and the actual costs are
reported as indicated
Activity based costing- Activity costing is a costing method, which defines operational tasks and
calculates costs for each operation according to the real use of each product and service. The
approach allocates more direct costs than traditional costs to indirect costs.
Role of costing in setting prices- Costing plays a key role for setting prices because on the basis
of it companies set prices. This is so because if cost is higher than expectation than companies
set price higher, vice versa.
Cost of inventory:
Inventory cost- Inventory costs are the expenses of acquisition, transportation and better
management of cost. There are different types of inventory cost which are as follows:
 Ordering cost
 Carrying cost
 Purchasing cost
 Hiring cost
Valuation methods:

 First in first out method- This is a type of method which is linked to taking stock for
production which comes first in the warehouses.
 Last in first out method- This is a type of method which is linked to taking stock for
production which comes last in the warehouses.
 Weighted average costing method- The weighted average cost approach in accounting is
one of three methods for valuing the inventory of the firms which calculates the total
expense of a product component depending on the quality of each component which its
volume. Companies use the weighted average to measure the volume and the quality of
the products produced.
Calculations:
Quarter 1
Particulars Amount (in ￡)
Sales 66000
Less: Cost of sales
Opening inventory 0
… ….production cost (78000*0.65) 50700
Less: Closing stock (12000*0.65) 7800
42900 42900
Contribution 23100
Less:

… ….Fixed overhead 16000
…. ….Fixed & selling expenses 5200
21200
Net profit 1900
Quarter- 2
Particulars Amount (in ￡)
…. ….Sales 74000
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

Net profit 4700
… ...Reconciliation
… ...Working note Q1 Q2
… ...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
M2. Accounting techniques to produce financial statements.
Most income statements are structured according to the absorption and marginal costing
system in the financial accounting field. As in the Prime furniture limited, the profits statements
are made using absorption and incremental costing strategies (DRURY, 2013). Most methods,
except for these techniques, involve preparing of financial statements, such as a standard costing
system, activity based costing approaches etc. So far as standard costing is concerned, this can be
seen to be related to the estimate of future costs used for comparisons. Costing based on the
operation is distributed and evaluated by increasing behavior for various forms of activities.
D2. Interpretation of prepared financial statements.
In regards with above produced income statements, this can be found out that value of net
profit is of 1900 pounds under absorption costing. As well as under marginal costing, net profit is

of 4700 pounds. The cause of variation in profit is consideration of cost in different manner
under both of methods.
TASK 3.
P4. Limitations and benefits of planning tools of budgetary control.
Budgetary control- This may be comprehended as a types of approach and try to regulating of
monetary and anti-financial results by help of lots of different types of budget. In this facet of
position of budgets is important because by aid of these financial strategies management of
organizations take corrective actions for setting more outcomes. A number of budgets are
required and these are as follows:
 Operational budget- It is a form of budget which makes it possible for management to
estimate the quantity of material necessary for the completion of various operations for a
certain period of time (Tucker and Lowe, 2014). The accountants plan this estimate for
their managers in the sense Prime furniture limited. With this program, the administrators
take corrective measures with respect to the administration of various operations.
Benefits- This budget is helpful for companies in order to track usage of different types
of resources available in a business entity.
Drawbacks- The key issues under this budget are that it consumes too much time as well
as cost for allocation of expenses.
 Cash budget- It is a statement that defined regarding the all cash sales and expenses and
is focused on expectations for particular accounting period of time. The actual budget has
been generated after planning of all budgets such as revenue budget, master budget,
capital budget and purchasing budget (Hiebl, 2014). Financial products and expenditures
and transfers are recoded. It is a document that is mainly prepared for external actors and
cannot be changed easily after publication. In the aspect of above company this budget is
prepared which has some benefits and drawbacks such as:
Benefits- This is beneficial for companies in order to manage daily basis of cash expenses
and income.

Drawbacks- This budget is based on assumptions so companies cannot rely on it
completely for further financial plans.
 Capital budget- Any divisions or lower budgets provide a complete budget of a company.
It finds that the recording of potential sales, production levels, expenditure in resources
and even tons to be gained and repayable is a costly corporate strategy. In accordance
with Prime furniture limited, the balance sheet as well as the income statement is
determined according to the schedule.
Benefits- With a detailed budgeted review summary of Prime furniture limited’s financial
situation is analyzed (Kokubu and Kitada, 2015).
Drawback- The main issue of this budget is that it is difficult to make modifications
under it.
Pricing:
Pricing strategies:
 Penetration pricing strategy- The penetration pricing strategy initially reduces the price of
a product to reach a large portion of the market rapidly. The approach works for
consumers moving to the new company because of the cheaper price
 Skimming pricing strategy- Price skimming is a pricing tactic whereby a marketer
initially sets a relatively high initial price for an item or service and then lowers the price
over time. There was a misunderstanding. The organization lowers the price to draw
another market-sensitive group, when competition from the first customers is satisfied.
How competitors determine prices- Companies set prices in accordance of market trends and
activities of competitors. They assess key activities which are being performed and on the basis
of it they set prices.
Supply-demand consideration: Supply and demand is a price-determination economic concept on
a sector. It states that the price of the unit of a specific product or other exchanged item, such as
labor or liquid financial assets, shall differ until the quantity required (on current prices) is settled
in a situation where it is equal to that provided (on current prices) which leads to a balanced
economic demand and supply.

Strategic planning:
SWOT Analysis- This is a type of technique which is related to assessing companies’ strength,
weakness, opportunities and threats for a particular time period. This technique has below
mentioned benefits and drawbacks such as:
Benefits: SWOT analysis may be extended to an organization, organizational unit, person or
team. In fact, the research will endorse a variety of project goals. The SWOT approach can, for
example, be used for assessing a commodity or brand, a purchase or partnership, or for
externalizing a functioning business. Therefore, SWOT analysis can help to determine a
particular source of supply, business cycle, and product demand or technology implementation.
Drawbacks: SWOT analysis refers to four sets of strong points, vulnerabilities, possibilities and
risks in individual countries. But the method does not provide a system to list the value of one
element over another. It is however difficult to evaluate the true effect of any aspect on the
target.
M3. Use of different planning tools and their application for preparing and forecasting budgets.
There are various types of budgets used by companies for better financial decision-
making. Their reports include a number of budgets such as the Cash budget, the operational
budget and capital budget in the form of above Prime furniture. All of these forecasts can be used
in an effective management of their money assets and to reliable planning of various operations.
In the precise calculation of income and spending, all these expenditures play a major part
(Kotas, 2014). This is likely as management of this organization analyzes details calculated in
previous years in order to predict new operations. It can therefore be said that budgetary
management forecasting devices are too important to reliably project various types of financial
operations.

TASK 4
P5. Analysis of ways in which management accounting methods help organisation to respond to
financial problems that will have sustainable success.
Monetary issues- The rivalry in today's business scenario is increasing which is leading to
monetary problems. The inadequate preparation and execution of a policy establish such issues.
In general, financial difficulties emerge from the shortage of revenue outlets, through which
businesses struggle to carry out different functions (Otley and Emmanuel, 2013). Here are some
specific financial challenges that most of the businesses face in this way:
 Errors in accounting records- This can be described as a form of financial problem linked
to the deliberate or accidental distortion of figures, which contributes to the incorrect
preparing of accounts. As a consequence, businesses cannot find actual revenues,
acquisitions and so much more owing to this financial problem. In the above Prime
furniture limited, they face this problem that affects the financial statements they have
prepared (Suomala and Lyly-Yrjänäinen, 2012).
 Inadequate protection of financial assets- The risk of losing investments is a kind of
investment issue. This dilemma exists because of a loss of management of fixed and
unfixed assets. As a result, businesses experience other problems, including resources
absence and much more.
MA methods to respond financial problems:
 Benchmarking- This strategy relates financial aspects of an organization to competing
businesses with the goal of identifying adverse variances (Sánchez-Rodríguez and
Spraakman, 2012). As a consequence, the business can figure out the factors which lead
to the financial problem. They use this method in the above business to assess their
particular monetary problem. The financial aspects are compared to the rest of the firms.
 Key performance indicator- It can be described as a methodology linked to the correct
assessment of financial and non-financial aspects. The financial dimension covers the
productivity of the company, the costs etc. whereas the stress level of employees, relation
etc., is included in the non-financial aspect.

 Financial governance- It can be recognized as a strategy in which a corporate entity's
entire financial activity is reported accurately for a specific period of time (Schaltegger,
S. and Burritt, R., 2017). Using this method, real monetary challenges are defined and
theoretical solutions are used to solve the problem.
Management accountant skills:
 Better communication skills- Effective accountant should have better communication
skills so that financial information can be shared inside company.
 Effective knowledge of accounting concepts- As well as accounts must have complete
knowledge of accounting so that financial statements can be produced.
These accounting skills can be used to overcome financial issues. This is so because on the basis
of it, companies can overcome from any type of issue and can guide to manager of companies to
solve issues.
Comparison of companies in order to solve financial issues by help of MAS:
Basis of
difference
London beer factory Orbit beers
Monetary issue Their financial issue is related to
accounting errors in this business. It
prohibits them from learning actual
business details.
The issue confronting the organization
is the absence of asset protection. As a
result, the valuation of properties
cannot be monitored and assessed.
Techniques to
solve issues
This organization used benchmarking
technology to solve the financial
problem. They contrasted their
financial statements with another
organization using this method in order
to discover mistakes and thus solved
their problem.
They also used key indicator
technology for results. They evaluated
the financial implications of this
method and addressed their issue. It
was made possible by measuring the
true worth of properties and by
matching them with the normal value.

M4. MAS to solve financial issue.
The only way to solve monetary problems is in less time that is to enforce MAS. Like the
Prime furniture above, their problem was resolved successfully by means of a price optimisation
system (Tucker and Lowe, 2014). As the income was insufficient with the introduction of the
above-mentioned costing method they checked their pricing policy and the financial dilemma of
this business was solved.
D3. Importance of financial plans for planning and managing monetary sources which can
contribute in overcoming problems regards to finance.
The budgets can be described as financial plans that are related to the correct financial
appraisal process. They use a number of budgets as cash budget, operational budget, etc. in the
above Prime furniture limited (Suomala and Lyly-Yrjänäinen, 2012). All of these resources are
important for them when measuring variances that help solve problems.
CONCLUSION
On the basis of above project report this can be concluded that MA is useful for business
entities in order to manage various aspects. The report concludes about different techniques of
preparing income statements such as absorption and marginal costing. As well as planning tools
are also mentioned in the report along with their role for solving financial issues.

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.