Management Accounting: Planning Tools for Budgetary Control

This report explores the concept of management accounting and its role in decision-making. It focuses on the case of Crest Dairy and discusses different types of management accounting systems, cost calculations, income statements, and planning tools for budgetary control. The advantages and disadvantages of these tools are also analyzed. The report aims to provide a greater understanding of management accounting principles.

Management Accounting

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INTRODUCTION
Management Accounting is the practise of planning business operations documents that
allow managers to make short-term as well as long-term decisions. It allows a company to
achieve its objectives by defining, evaluating, assessing, interpreting and transmitting guidance
to stakeholders (Armitage, Webb and Glynn, 2016). Management accounting reflects from all
accounting policies targeted at reminding management of operating business outcomes. It utilizes
data concerning to the cost of goods or services obtained by company. Budgets are also used to
measure decisions taken in the form of organisational planning. Management Accountants use
the performance reviews to observe variances between real outcomes from
budgets. .Management accounting allows managers to make choices within an organisation. The
information recorded covers all areas of reporting that notify the business activities in relation to
price of goods or services purchased by organisation. Management accountants are using budgets
to calculate the marketing strategy of activities.
This report based on Crest Dairy where prime responsibility of management accountant of
the company is to analyse the data provided by managerial accounting to support managers in
making effective actions to meet results. Elizabeth has newly joined the Department as a trainee
junior management accountant, and management accountants must prepare a report that offers
greater understatement of management accounting principles. This report covers several topics
such as different types of management accounting systems, report and methods to calculate cost
of product and overall profit. In addition, it includes the different planning tools which are
required for budgetary control. Along with it, organization needs to identify the ways which
helps in resolving financial problems.
MAIN BODY
TASK 1
Covered in PPT
TASK 2
P3. Cost calculations and preparation of income statement
Cost per unit by using marginal or absorption method:
Cost of unit under marginal costing
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Direct materials 54
Direct labor 60
Variable manufacturing overhead 30
Cost per unit under marginal costing 144
Cost of unit under absorption costing
Variable production cost per unit ( marginal
costing) 144
Selling and administration cost =(190,000 / 4800)
= 39.58 or 40
Cost per unit under absorption costing 184
Income Statement as Per Marginal Costing for Waffles (£)
Sales revenue 960,000
Less Cost of sale (4800 * 144) 691,200
Other variable cost
Variable selling and admin expenses 90,000
Total (781,200)
Contribution Margin 178,800
Less Fixed costs
Fixed overhead cost 60,000
Fixed selling cost 30,000
Fixed admin expenses 70,000
Total (160,000)
Net Income 18,800
Income Statement as Per Absorption Costing for Crest Dairy Amount(£)
Sales revenue 960,000
Less Cost Of Sales (184 * 4800) (883,200)
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Gross profit 76,800
Less Non production costs
Variable selling and admin expenses (90,000)
Fixed selling and admin expenses (100,000)
Net Loss 113,200
M2. Accurately apply a range of management accounting techniques and produce appropriate
financial reporting documents
Material Price Variance:
Formula:
Material Price Variance = (Standard price – Actual price) * Actual quantity
= (9 - 8) * 4800
= 4800
Material Usage Variance:
Formula:
Material Usage Variance = (Standard quantity – Actual quantity) * Selling price
= (4800 - 6000) * 200
= 1200 * 200
= 240,000
Labour Rate Variance:
Formula:
Labour Rate Variance = (Actual Rate – Standard Rate) * Actual Hours
= (222750 – 60) * 7.5
= 1,670,175
Labour Efficiency Variance:
Formula:
Labour Efficiency Variance = (Actual hour – Standard hour) * Standard rate per hour
= (24750 – 7.5) * 60
= 1,484,550
Break-Even-Units (In Units):
BEP = Fixed cost / Contribution
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= 160,000 / 4614
= 34.67 units or 35 units
Contribution Units = Sales units – variable units
= 4800 – 184
= 4616
Break-Even-Units (In Value):
BEP = Fixed cost / Contribution to sales ratio
= 160,000 / {(4800 - 184) / 4800}
= 160,000 / 0.96
= 166,666.66
D2. Produce financial report that apply & interpreted within organizational process
While using the marginal or absorption costing approach to measure the price of the product,
it would provide reliable costs that enable the manager build more cost tracking & management
plan for the business production cycle. Such data helps accountants prepare financial reports for
both different stakeholders. All the pertinent information that helps managers in their decision -
making processes is included in the financial statement. The internal operating mechanism can
be changed to further boost performance or performance.
TASK 3
P4. Explanation of the advantages and disadvantages of different types of planning tools used for
budgetary control
Explain the budgetary control:
It is a budgetary terminology for controlling revenue and expenditure. In practice, it
means contrasting the real income or spending on a regular basis with the expected revenue or
expenses to assess whether or not appropriate action is needed (Carlsson-Wall, Kraus and Lind,
2015). It is the method of determining the different real outcomes with the company's actual
spending for future duration and the expectations set, if any, by contrasting the planned results
with the actual output for measuring the variances. The budget is a means, and budgetary control
is the end product. With the help of several type of budget, management accountant of Crest
Dairy prepare operational budget as per requirement and maintain control over it. There are
several types of budgets, but before implementing into their business, it is very essential to
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identify its advantages or disadvantages which help in better decision to adopt. These are
discussed below:
Budget: It refers to the design, execution and annual budgets process. Budgeting as a
management mechanism sets out a plan to ensure that perhaps the real operations of the company
are less deviated from scheduled activities. The budgets can be used to provide a summary of the
company and its activities. The budget encourages the effective distribution of finite resources
though that the budget controls amount of goods and services to be generated. The budget is also
used to manage cost of production generated. Budgets may be called on others to play a number
of roles. Three are key roles, such as planning, encouragement and assessment, and the other two
are minor ones, such as teamwork and education. Budget allows manager to identify decisions
about how to generate, where and how to produce, the amount or quantities of the goods to be
manufactured each day, week, month or annually. The Crest Dairy can also use budgets
as budgetary control tool to measure and benchmark the effectiveness of business division in a
major business or the entire performance of a small business. They may also use budgets to
assess different projects. It has some advantages or disadvantages which are as follow:
 Advantages: Planning orientation is the process of making a budget that removes
administration in its short-term, day-to-day operations and encourages it to consider long
term (Gunarathne and Lee, 2015). This really is the key objective of budget, even if
planning is not effective in achieving its targets as described throughout the budget-at
least thought about strategic and financial situation of the firm and how to strengthen it.
Profitability examination is the simple way to lose focus of where an organisation is
producing almost all of its money throughout the day-to-day market. A well organised
budget shows the areas of business generate money but which aspects use it, which
allows the company to decide whether certain aspects of company can be sacrificed or
expanded to others. It requires management to understand why organisation is in
operation, and its main assumptions about its business climate. Periodic reassessment of
such issues may lead to a shift in assumptions that may, in turn, change the way
management chooses to work.
 Disadvantages: Basically budget is associated with a set of assumptions which are
usually not that far from operational conditions by which it was developed. If the market
environment dramatically changes, the sales or cost structure of an organization will shift
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so drastically that actual outcomes may quickly deviate from targets set out in budget.
This situation is a great concern whenever there is a significant economic downturn, as
the budget provides for a certain amount of expenditure which is no longer eligible
underneath a suddenly reduced amount of profitability. Unless management needs
quickly to circumvent the budget, administrators will keep spending on the basis of their
original budgetary authorisations, breaking down any chance of making a profit. The
budgetary control only focused the team's attention mostly on plan during the budget
planning stage at end of year. There is also no formal obligation to revise the plan for the
remainder of the year.
Variance analysis: It is a variation in actual activity from forecast or anticipated activity in
budget or management accounting. That's also mainly worried with how the disparity between
real and expected behaviours shows how market output is affected. Measuring and analysing
variances will help track costs and control costs and increase operating performance. It's being
used to evaluate the explanations for the financial results variations from the expectations set by
company in its budget (Klychova, Faskhutdinova and Sadrieva, 2014). It allows the management
to retain control over its operational efficiency. This planning tool can be used by the Crest Dairy
as a budgetary control tool, so before adopting this tool management should analyse its
advantages and disadvantages which are as follow:
 Advantages: The first advantage of variance is indication of deviation from norm or
predicted. This dismissal would give management focus to the investigation.
Management shall obtain relevant facts for this departure, in particular for adverse
departures or variances where costs are more than anticipated. A further benefit of
variance has been its role in managing expenditure. Management shall take reasonable
control measures in the event of adverse variance. During the first place, the cause of
unfavourable variance shall be investigated, where adequate explanations are not given,
and appropriate measures shall be taken. Future modification of budget projections where
there is no reasonable explanation for deviation other than an inaccurate budget estimate,
the budgeted estimate for the future shall be adjusted or updated.
 Disadvantages: Variance analysis is focused on financial statements, which are
published far later since quarter closure; there could be a time delay that may have an
effect on the corrective action taken to that degree (Melnyk and et.al., 2014). Not all
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causes of variation can also be included in financial data that makes it difficult to act on
variances. If the budgetary control is not carried out, taking into account the thorough
examination of each aspect, budgetary exercise may well be carried out loosely, which is
required to differ from actual figures. After this examination of variances, that might not
be a useful practise. The downside of variation is it is not easy to understand. Users of
variance also use it specifically to consider the square root of the value, which means the
standard deviation of data collection.
Responsibility Center: It is an administrative unit or agency inside an organisation that is
responsible for operations and tasks organised for that particular unit. These centres have their
very own goals, personnel, goals, practices and processes and financial reports. They are being
used to balance the obligations relating to the expenditures incurred, the profits generated and
money spent to the individual. In a large or multinational company, such as Crest Dairy, the
activities of the organisation are divided into sub-tasks but each task is also allocated to a number
of small divisions or classes. In this sense, all groups within the organisation are
responsible centers. This budgetary tool can be used by the Crest Dairy for the budget control in
their business operations. But, before that manager has to evaluate its advantages or
disadvantages those are discussed below:
 Advantages: Responsibility assigned to each part, each and every person is associated
and guided towards a target of responsibility which is compatible with the roles. The
person or agency will be monitored, and no one can transfer the blame to someone else,
assuming that something goes wrong (Mistry, Sharma and Low, 2014). The concept of
having to delegate tasks and duties to a single individual will have to serve as a
motivating force. Realizing that the success will be monitored and submitted to the upper
executives, the divisions and stakeholders will do their best to make it happen on their
greatest result. Responsibility centres support decision-making management, as the
knowledge distributed and gathered from multiple centres allows them to prepare all of
their potential actions. It lets them recognize the segment-wise breakdown of sales,
expenses, problems, future action plans, etc.
 Disadvantages: There may have been a risk related to conflict of interest among the
individual and organisation. A salesperson may attempt to force selling in such restricted
areas to raise the profits listed under their obligation centre, while the management does
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have its rule prohibited the same. This method needs a significant time and resources
on part of the administration to thoroughly prepare and follow the necessary plan of
action. If something goes wrong throughout the planning process, the whole process is
destined for failure and will be nothing but a disaster waiting to happen. The delay in
such a system is that it might be too process-oriented to concentrate on division and
assignment of duty to different segments. There is also so much time, attention and
emphasis on such acts.
Above discussed planning tool which can be used by the Crest Dairy for budgetary control
and it helps the managers to estimate overall income and expenses on the basis of specific tool. It
also helps in making operational or strategic decisions which further helps in improving
productivity as well as profitability.
M3. Analyse the use of different planning tools and their application for preparing and
forecasting budgets
Above discussed planning tools are used for budgetary control which helps the
management of Crest Dairy for forecasting their budget and ensure that estimation should be
accurate which provide better results (Nielsen, Mitchell and Nørreklit, 2015). By using variance
analysis, managers are able to revaluate the difference and also evaluate that how it affect the
business operations and financial performance. On the other side, budget is useful for planning,
prediction and it is easy to understand and further managers used in decision making process.
TASK 4
P5. Evaluate that how organisations are adapting management accounting systems to respond to
financial problems
Financial issues: It is the financial burden that causes a situation where organisation and
owners are depressed and faced with hard times due to a lack of capital. In relation to the
business and objectives of market, they must carry out an analysis of the business in order to
determine the financial issues that impact productivity as well as profitability. Some of Crest
Dairy's financial problems have been listed below:
Unforeseen Expenditures: There are many costs in company that unexpectedly emerge
and there are general financial difficulties. So the company's administrators have to control their
financial resources to try to reduce them.
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Late Payment by Suppliers: All companies must negotiate with or sustain a long-term
partnership with Suppliers (Quinn and Jackson, 2014). They therefore have to negotiate with
vendors on a credit basis to increase profits. Almost all of the time, it has occurred that creditors
are unable to pay the sum on time and also that the company is faced with a shortage of
monetary capital.
Management accounting techniques:
Key Performance Indicator (KPI): It is a measuring instrument that helps the company
assesses its progress on the basis of a variety of metrics. There are generally two types of key
metrics, such as monetary or non - monetary. With the aid of financial KPI, Crest Dairy
managers establish unpredictable and non-financial costs used to recognize flaws in business
processes. Using this strategy, the managers of AstraZeneca Plc address the financial dilemma of
unexpected expenditures.
Benchmarking: This is the competitive methods that company has used to equate its
results to the leaders in the market (Strauss, Kristandl and Quinn, 2015). With the aid of this
strategy, managers are able to recognise areas for change. In Crest Dairy, managers define the
issue of late payment of suppliers by contrasting it with their credit policy. It allows managers to
create an effective plan to solve these problems.
Financial governance: It refers to the different laws and regulations to be enforced by the
company. This includes how companies can monitor their financial status, the productivity of
management, control data, compliance, etc. Throughout the Crest Dairy, the corporation faces
financial challenges in order to guarantee that the enterprise meets fundamental principles or not.
At the time of documenting financial reports, different principles or criteria must be followed.
Comparison of two organizations:
Basis Crest Dairy Creams Ltd
Management
accounting system
In order to overcome unforeseen
costs, Crest Dairy’s manager
implemented the cost
management system (Van der
Stede, 2015). They can define the
cost per unit with the help of it.
Business shall track operating
The business used the price
optimization system to define
customer behaviour in relation to
cost of the commodity. With the aid
of this, managers can overcome the
problem of late payments from
distributors. But they've decided to
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activities on a daily basis to detect
additional issues.
make their pricing structure more
competitive so they don't ask for
credit.
Management
accounting
technique
In order to resolve above financial
issues, Crest Dairy adopts KPI
technique which helps the
managers to evaluate valuable or
non-valuable activities and try to
eliminate non-profitable activities
to minimise cost or maximise profit
margin.
In the Creams Ltd, manager
implement benchmarking technique
to compare their current
performance with previous one and
identify the reason and make sure
that overall performance should be
increases.
M4. Analyse how, in responding to financial problems, management accounting can lead
organisations to sustainable success
There are different forms of financial problems facing Crest Dairy organisations, such as
delayed in payment from suppliers and unexpected expenditures. By using different methods,
such as the Key Performance Indicator (KPI) and benchmarking, the organisation is helping to
address its financial issues. In addition, administrators often ensure that businesses obey risk
management or not because they'll have to report their details to stakeholders. They will ensure
that certain accounting concepts are practised or not.
D3. Evaluate how planning tools for accounting respond appropriately to solving financial
problems to lead organisations to sustainable success
It is analysed critically that various forms of budget support managers to address their
financial issues (Wagenhofer, 2016). With the aid of the budget, managers are able to determine
each product that solves the unexpected cost issue or late payment from suppliers. By evaluating
each product cost, manager of the organisation able to determine which behaviour is essential to
the operations. These preparation tools help Crest Dairy address its financial challenges that
ensure sustainable progress in the company.
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CONCLUSION
It has been inferred from the above analysis that management accounting is the method that
any corporation has to know in order to coordinate their business processes and other internal
stakeholders. In order to optimize organizational performance and also productivity, there are
different accounting systems and reports used by the company's managers. It also helps
executives to make strategic decisions to meet corporate priorities and goals. It supports and
works appropriately with both the help of preparation instruments including the budget and
variance analysis. Companies have to face several financial challenges and strive to reduce them
through using different strategies, such as KPI, benchmarking and financial governance.
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REFERENCES
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