Management Accounting: Calculation of Costs and Budgetary Control

This document provides an overview of management accounting, focusing on the calculation of costs using different costing methods and the advantages and disadvantages of planning tools used for budgetary control. It also discusses the role of costing in setting prices and the impact of inventory costs. The document explores different types of budgets, pricing strategies, and how competitors determine their prices. It also considers demand and supply factors, conducts a PEST analysis, and discusses the importance of conducting a SWOT analysis.

Management Accounting
(Task-2)

Contents
INTRODUCTION.................................................................................................................................3
TASK 2.................................................................................................................................................3
P3: Calculation of costs by using different costing methods..............................................................3
P4: Advantages and disadvantages of different planning tool used for budgetary control...............9
P5 Comparison of the way in which organisations are adapting management accounting systems
.........................................................................................................................................................13
CONCLUSION...................................................................................................................................14
REFERENCES....................................................................................................................................15

INTRODUCTION
Management accounting is the process of managing and maintaining books of
accounts with the purpose of making an effective decision and plans for the betterment of an
organisation (Bromwich and Scapens, 2016). For this, finance manager need to provide a
sufficient support by preparing final accounts such as profit and loss account, balance sheet,
cash flow statement etc. on timely basis. The present assignment report is based on Prime
furniture which is a growing East London based company now plans to start training course
for their new interns in November 2019. In this regards, different costing methods are studied
along with the planning tools to control budget. Along with this, role of management
accounting system in resolving financial issues are also discussed under this report.
TASK 2
P3: Calculation of costs by using different costing methods
Cost: It is defined as the amount measured in monetary terms consisting of different
factors such as efforts, time, resources utilised etc. to produce or manufacture something that
brings valuate outcome to an organisation in future period of time. It comprises of two types
which includes direct and indirect cost (Bryson, Crosby and Bloomberg, 2014). Direct cost
refers to the amount which is directly allocated to production activity whereas indirect cost
includes amount which is indirectly invested for the completed for particular project activity.
In the context of Prime furniture, huge amount is invested by production team to make their
desired project activities more successful by spending on purchasing raw materials, hiring
labour etc.
Marginal costing: It is a costing technique which focuses about just variable cost and
overlook fixed expense because of which it has other name i.e. variable costing technique.
Adopting such technique expands the figures of net benefit under the financial report
because of considering just variable cost because of which it is generally used by small and
medium sized manufacturing company such as Prime furniture.
Absorption costing: It is a method which considers both fixed and variable cost due to
which the net profit recorded under the financial statement are low in comparison with the net
profit comes under marginal costing method. It is used by large businesses who wants to

show actual financial position towards its shareholders with a motive to retain them with
company for longer duration (Englund and Gerdin, 2014).
Cost analysis: It is the procedure which is done to analyse the outcomes received after
investing amount in business activities. This will help manager of Prime furniture to make
decision regarding making further investment according to the possible outcomes.
Cost volume profit: It is a technique of cost accounting adopted by managers of Prime
furniture with a motive of evaluating the impact of variations in cost and volume on
organisational profit.
Flexible budgeting: It is kind of budget in which pre-determined amount may vary
according to the situations arises during future business activities. It reduces wastage of
resources utilised by Prime furniture by fluctuating the budget according to the possibilities
of receiving better outcomes (Honggowati and et.al., 2017).
Activity based costing: It is termed as technique which is adopted by Prime furniture
in order to allocate costs to different business activities on the basis of actual expenses taken
place during execution.
Role of costing in setting price: Costing plays an important role in manufacturing
furniture products by Prime furniture as it help them in determining the actual cost which is
incurred while conducting several business activities. Through thus, the manager can set a
price for its furniture after adding margin on it.
Inventory cost: It is the cost which is incurred to store and maintain the level of stock
in warehouses in order to meet clients requirements on time. It consists of two types which
includes:
Ordering cost: This is the cost which is incurred while creating and ordering raw
material for manufacturing furniture products from suppliers is called as ordering cost (Linoff
and Berry, 2011).
Carrying cost: It is another cost which also known as holding cost due to maintaining
adequate level of inventory in warehouses just to meet client’ s requirements.
Shortage cost: In this, cost take place when Prime furniture have faced shortage of
inventory with them.

Benefits of minimising inventory cost:
 Minimising inventory cost makes positive impact on net profitability of business
as saved amount can be invested in other profitable operations.
 Reducing inventory cost helps in establishing competitive price in the market due
to which company can easily attracts huge number of customers (Melnyk and
et.al., 2014).
Here are the calculation of net profit by using both marginal and absorption costing
method:
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

Absorption costing for Quarter 1:

Particulars
Amount (in
￡)
Sales 66000
Less: Cost of sales
production cost (78000*0.65) 50700 0
Semi-variable (78000*0.20) 15600
Total Variable cost 66300
Less: Closing stock 10200
56100
Gross profit 9900
Less: -400
9500
Selling and distribution as fixed 5200
Net Profit 4300
Absorption costing for Quarter 2:
Particulars
Sales 74000
Less: Cost of sales
Opening stock 10200
COGS (66000*0.20) 13200
production cost (66000*0.65) 42900
Total Variable cost 66300
Less: Closing stock 3400
62900
Gross profit 11100
Less: selling expenses -2800

8300
Fixed expenses 5200
Net profit 3100
Working note
Fixed costs 16000
Budgeted cost of production
80000 per
units
Budgeted fixed cost 0.2
Variable cost per units 0.65
(b): Reason for analysing variations in profit
From the above calculation, it has been seen that both costing method are presenting
valuable differences in net profit. The main aspects which is vital to be taken into accounts is
related with the fixed overhead expense because of that these difference are arises. The same
is been presented underneath:
For the first quarter:
Overhead absorbed= (66000*0.20)= 13,200
Fixed overhead costs= 16,000
Under absorption: (2,800)
For Second quarter:
Total absorbed expenses: (74000*0.20)= 14,800
Fixed costs= 16,000
Under absorption= (1200)
(c): Reconciliation Statements:
It needs to be done by taking crucial difference those are arises in a project that can
help in reducing those gaps.
Particular Q1 Q2
Profit from absorption 4700 5900

-2800 -1200
Profits as from marginal 1900 4700
Working notes:
Fixed charges= 16,000
=66000*0.20= 13,200
Under absorption=(2800)
= 74000*0.20= 14,800
Fixed expenditure: 16000
Under absorption= (1200)
P4: Advantages and disadvantages of different planning tool used for budgetary control
Budget :- It is an estimation of expenses, financial plan for a specific future period of
time. In order to raise performance and to set long term financial objectives, the organisation
use budgetary control procedure. According to the requirements of Prime furniture develop
different budgets for them. For comparing actual figures with forecasted purposes, it is also
used in the organisation (Budget, 2019).
Preparing a budget:- The manager follows different steps for budget formulating.
For future requirement firstly, the current status is determined then resources are identified by
managers. Later on, for upcoming period different plans are developed to form budget. To
approve them these are presented in-front of managers of Prime furniture and mark the
appropriate approval on one of them. Lastly, for better organisation one approved budget is
implemented and this plan can be followed for the Prime furniture.
Different types of budgets:
Capital budget:- This budget used in large capital investment to keep information of
different activities and helps to keep record of financial performance. To formulate financial
plan for specific future time period for Prime furniture develop a master budget for them

(Nørreklit, 2017). There are some advantages and disadvantages of the budget and they are
below:
Advantages :-
 A larger number of monetary resources are invested, so this helps to keep the record
of all projects.
 To determine financial performance of organisation, it provides high angle of the
business to the stakeholders.
Disadvantages :-
 Due to its consist of clustered data of all departments, lack of specificity occur.
 It is difficult to observe because of collective information at high level.
Operating budget:- This budget is used to calculate income and expenses which are based
on forecasted sales and revenues. To examine the monetary resources that are appropriately
undertaking or not, Prime furniture create this budget to help their top level of executives
(Quattrone, 2016). Few advantages and disadvantages are there which are as follows:-
Advantages:-
 It provide long term financial obligations which allows to predict the cost and manage
the spending in short term.
 This budget evaluated the past and present expenses.
Disadvantages :-
 The revenues and figures can overstate of organisation.
 Figures can manipulate easily.
Alternative method of budgeting:- The various alternative budgeting methods are there
which are as below.
Zero based budgeting:- This budgeting starts from zero. In this for a new period, all
expenses are justified. In order to reduce the cost of operations for Prime furniture by
justifying all the costs rerecorded in the books.
 Advantage : To establish accuracy, a new budget is formulated at each accounting
year.

 Disadvantage : In this, records can be biased by managers so it is not appropriate for
short term planning.
Cash only or traditional budgeting :- it is the inflows and outflows of cash receipt and
payment over a period of time and expected occur monthly and quarterly. To keep track
record of monetary resources of organisation, it is conducted by Prime furniture (Senftlechner
and Hiebl, 2015).
 Advantage: It is used to identify the loss in company's financial statements.
 Disadvantage: To deal credit transactions it limits the power of organisation.
Behavioural implications of budget :
 It helps to improve communication among employees.
 It consider actual data instead of budgeted figures .
 Requires high monetary investment as the process of formulating budget is very
complex.
 In this highly skilled managers are required to form budget for small companies.
Pricing strategies: organisation use different pricing strategies to set price for products.
 Penetration : in this , the low prices are set at initial level that are going to be sold to
clients.
 Premium : in this, high pricing is set by business that are sold to customers due to
high quality of products (Tucker and Lowe, 2014).
This is used by Ryder architecture to set prices for the constructed buildings.
Ways of competitors determine their prices :- Competitors of Ryder Prime
furniture such as Laz furniture determine their prices by analysing market situations.
Demand and supply considerations :- in order to achieve success, Prime furniture
required various demand and supply considerations and these are economic conditions,
market situations, social factors changes.
PEST analysis:
 political:- the affect of unstable political situations on Prime furniture can result in
changes in government policies and cant alter their strategies according to it.
 Economic :- Fluctuation in inflation and deflation rates can impact upon purchasing
power of clients.

 Social :- Ignoring social factors like customer preferences, buying behaviour which
changes with time can decreased profits of Prime furniture.
 Technological :- the techniques such as aerogel insulation, smart bricks, etc are
taking so in order to achieve growth is to focus on all of them.
SWOT analysis :
 Strengths :- To enhance profit market image should be very good of Prime furniture.
 Opportunities :- the organisation can achieve growth by business expansion.
 Weakness :- the low amount of budget spend on research and development which
results in lack of knowledge regarding customer preferences.
 Threats :- Laz furniture wants to capture market share of Prime furniture.
Balance scorecard : this tool is used by mangers of Prime furniture in purpose of analysing
the activities which is performed by staff members are under control or not and due to such
activities it is also used in monitoring the unfavourable events.

P5 Comparison of the way in which organisations are adapting management accounting
systems
By different types causes there are some financial issues which follows as:
Sudden expenses: Prime furniture is faced by financial issues because of ineffective
preparation which incurs on less income and high cost.
Late Payments by customers: By clients obtain latish payments because of prime
furniture face may financial problems.
KEY PERFORMACE INDICATORS- Company use KPI's, In order to evaluate
and standard activity for the procedure. Some component are key performance factors that is
tracked administration to check business processes. For controlling workers action and
behaviour it helps to control prime furniture. To reset objectives and goals this techniques are
used to measure their aims.
BENCHMARKETING- Recognise that What administration is working, how the
organisation is giving services, how other companies doing, how fairly company is working,
that's why it is the quality improvement tool, is in acknowledged to measure as well as
how ,what can be improve. Examples are- full stock execution is a benchmark against to the
various stocks can be measured winning reward account will be benchmark. In upcoming
future years others will be judged by benchmark (Yeshmin and Hossan, 2011).
Financial Governance- It define the way that how administration manages, collects,
control financial information, monitors information as well as it also involves how
organisation track compliance, operations, financial transactions, disclosures, operations,
manage performance and control data. It is important because it assure that financial data is
correct.
Budgetary Targets- For a particular period it is an approximation amount of money
for a financial time period and for the operating capital expenses budget key will be the
combination. Budget target is used to set up fund plan for financial goal. For example-
monetary fund are used to expenditure and control income, set targets in numeric terms and
launch precedence.
Price optimisation system- It is constant subject to cost reduction, drive spending
and business focused, while business value is increasing. It involves to getting the best terms

and costing for overall business purchases. Simplifying, rationalizing platforms, services,
applications, regulation. It refers mathematical investigation through company to check how
consumers will react to various prices for goods and services by contrasting channels as well
as also check the value that the organisation influence will run into its subjective such as
increasing operative net profit. Optimisation is all about the clear scale between economic
value and profit is important .
Comparison:
Prime Furniture Laz furniture
Many types of companies facing financial
content because instead of actual rate they
spending more income and acquisition
unessential expenditure.
By consumers weak financial firmness of an
administration which can be delay in payment.
Regarding investment this will help manager to
making decision, it is necessary to choose by
using cost accounting system as it checking the
potential cost which is obtain in manufacturing
activeness.
Select to resolution of financial issue in
required by inventory management system as it
help to hold over adequate merchandise in
storehouse.
CONCLUSION
It can be concluded from the above report that there are different costing techniques
which includes marginal and absorption among which an organisation can use to calculate net
profitability according to their objective of business. The accounting manager is held liable to
use different planning tools to control budget which includes capital, operating budget etc.
Aside this, the manager need to analyse cost and pricing strategies so as to maintain their
loyal clients and financial stability in market. An organisation also requires to use various
management accounting system to resolve financial issues arises due to various reason such
as default in payment of customers.

REFERENCES
Books and Journals
Bromwich, M. and Scapens, R. W., 2016. Management accounting research: 25 years on.
Management Accounting Research. 31. pp.1-9.
Bryson, J. M., Crosby, B. C. and Bloomberg, L., 2014. Public value governance: Moving
beyond traditional public administration and the new public management. Public
administration review. 74(4). pp.445-456.
Englund, H. and Gerdin, J., 2014. Structuration theory in accounting research: Applications
and applicability. Critical Perspectives on Accounting. 25(2). pp.162-180.
Honggowati, S. and et.al., 2017. Corporate governance and strategic management accounting
disclosure. Indonesian Journal of Sustainability Accounting and Management. 1(1).
pp.23-30.
Linoff, G. S. and Berry, M.J., 2011. Data mining techniques: for marketing, sales, and
customer relationship management. John Wiley & Sons.
Melnyk, S. A. and et.al., 2014. Is performance measurement and management fit for the
future?. Management Accounting Research. 25(2). pp.173-186.
Nørreklit, H. ed., 2017. A philosophy of management accounting: A pragmatic constructivist
approach. Taylor & Francis.
Quattrone, P., 2016. Management accounting goes digital: Will the move make it
wiser?. Management Accounting Research. 31. pp.118-122.
Senftlechner, D. and Hiebl, M. R., 2015. Management accounting and management control in
family businesses: Past accomplishments and future opportunities. Journal of
Accounting & Organizational Change. 11(4). pp.573-606.
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.
Yeshmin, F. and Hossan, M. A., 2011. Significance of management accounting techniques in
decision-making: an empirical study on manufacturing organizations in Bangladesh.
World Journal of Social Sciences. 1(1). pp.148-164.
Online
Budget. 2019. [Online]. Available through:
<https://www.mymoneycoach.ca/budgeting/what-is-a-budget-planning-forecasting>