Advantages and Disadvantages of Planning Tools for Budgetary Control

This article discusses the advantages and disadvantages of planning tools for budgetary control in management accounting. It explores the use of production budget and sales budget in Innocent Drinks to enhance profitability. The article also highlights the importance of proper utilization of assets and estimation of production requirements.

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1: Management accounting systems..........................................................................................1
P2: Management accounting reports............................................................................................3
TASK 2............................................................................................................................................5
P3: Calculation of costs...............................................................................................................5
TASK 3............................................................................................................................................8
P4: Advantages and Disadvantages of planning tools for budgetary control..............................8
TASK 4..........................................................................................................................................10
P5: Comparison of organizations and the way they use management accounting to respond to
financial problems......................................................................................................................10
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Management accounting is an accounting technique in which the different provisions are
used so that the managers are able to take short-term and long-term decisions which can be
highly beneficial for the future time period for the organization (Abdel-Maksoud, Cheffi and
Ghoudi, 2016). For using it the managers are required to use their skills to analyse and interpret
in a much better manner by deriving out conclusions and recommendations from the given
financial data in a highly effective manner. This report will focus on Innocent Drinks. It is a
company which provides smoothies and other drinks to the customers in the market. In this
assignment, there will be specific focus on demonstration of understanding of various systems,
application of different techniques. Additionally, use of planning tools and comparison of ways
in which the firms can make use of the available techniques to solve financial problems will be
discussed as a part of this project.
TASK 1
P1: Management accounting systems
Management accounting refers to techniques used by the accountants to be able to ensure
that they are able to derive the conclusions and recommendations through the available financial
data in an effective manner (Al-Mawali and et.al., 2018).
There are various systems which are used in Management Accounting. An explanation of
these systems is as follows-
Cost accounting system- In it, there is an estimation of different costs which are
incurred in the organization. This allows the firms to be able to identify the techniques through
which the expenses can be reduced and profits can be enhanced. Thus in this way Innocent
Drinks will be able to identify the costs which are incurring in the firm and the appropriate
techniques which can be used to reduce them to allow the enhancement of available profits.
Essential requirements-
 It needs to include the ways through which the costs can be calculated and segregated
properly within the organization. Thus in this way the managers of Innocent Drinks will
be able to ensure that overheads are properly segregated in the departments of the firm.
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 In it, there is a requirement that the costs are reduced by making the use of various types
of techniques. Thus the management of Innocent Drinks will be able to ensure that in this
way they can enhance the level of profits effectively.
Inventory management system- In it, there is an estimation of the various techniques
through which the stock items can be identified in an effective manner (Alam, 2017). By making
the use of this system, the organizations can manage their stock in a better way. In Innocent
Drinks, it can be used to identify the stock level for the purpose of facilitation of right
management.
Essential requirements-
 In it, there should be a system through which the items are tracked and managed in a
better manner. This will ensure that there is no loss of stock items. This will help
Innocent Drinks to manage its inventory.
 In this system, there should be use of different ways through which the costs of managing
inventory can be reduced. In the context of Innocent Drinks, this can help a lot in
maximizing profits.
Job costing system- This system allows the organizations to be able to identify their job
costs in a much appropriate manner (Gomez-Conde and Lopez-Valeiras, 2018). This helps in
identifying the job costs which are incurred so that methods can be used to reduce them. For
companies like Innocent Drinks this is very helpful as it helps in bringing out efficiency and
effectiveness.
Essential requirements-
 This system should have different methods through which proper management of job
orders can be ensured. For Innocent Drinks, this can be quite helpful.
 This method must provide the required help to the managers so that they are able to
maximize the profits which they earn through these orders. In Innocent Drinks, help can
be provided to the managers through this.
Price optimization system- In this method, the firms are required to properly optimize
the prices which they are charging by forecasting what may happen in the future time period
(Johnstone, 2018). In this way the management of Innocent Drinks will be able to decide the
prices which they can charge and thus this can help them to be able to achieve the goals and
objectives.
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Essential requirements-
 This system should help the managers to be able to forecast the change in prices in the
market by making use of statistical methods and techniques. This will help them to target
the maximization of profits.
 With this method, the management must ensure that prices are changed according to the
prevailing market situations and circumstances. This allows them to adjust according to
the dynamic business environment.
P2: Management accounting reports
There are different types of reports which can be used by the managers so that they are
able to analyse and interpret the financial data in an effective manner (Labrador and Olmo,
2019). They can use them to be able to find out the appropriate actions which can be taken. If
there are problems and issues which the company is facing then they can be resolved by making
their use. These can be explained as follows-
Departmental reports- These reports are quite useful for the firms to be able to apply in
various types of departments (Lay and Jusoh, 2017). Through their usage the managers will be
able to identify the way functions perform in the organization. These departments are
Production, Finance, HR, Sales and Marketing. In the context of Innocent Drinks, they can help
the management by helping them to be able to identify the deviations and variances in the
performance of the various departments and using the appropriate techniques and methods to
reduce them in an effective manner without problems and issues. Responsibility and
Accountability of the departmental managers can be fixed when they are used so that the
necessary improvements can be made and different rectifying actions can be taken.
Performance reports- In the organizations, these are quite useful reports which ensures
that the overall level of performance can be judged appropriately (Machado, 2016). This can be
done by setting standards for measurement or by comparing with data of previous years or with
the competitors in the market. They provide techniques through which the required improvement
in the performance can be brought. In Innocent Drinks, the managers can make sure that they are
used to assess the performance and find out the ways through which it can be improved so that
the overall processes can be effectively improved. In this way the management will be able to
achieve the goals and objectives which they have set for the long-term period.
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Cost managerial accounting reports- For the firms, it becomes important that they
make the appropriate use of these reports to be able to facilitate improvement (Machado, 2016).
Costs like Fixed Costs, Semi-Variable Costs and Variable Costs can be identified by making its
use. Also the apportionment of overheads according to the share of the departments can be made
when these reports are used. Thus for the cost accountants of the company using them becomes
quite crucial. Thus for the management of Innocent Drinks it is quite essential that they use it for
the purpose of identifying the costs and segregating them according to a pre-decided ratio among
the departments. Thus in this way the managers will be able to optimize the costs and maximize
the available profits.
Operating budget report- The managers can use these reports by summarizing the
entire operating budget effectively and efficiently (Mazarak and Fomina, 2016). These are
prepared for a specific time period i.e. mostly a year in the firm. In the context of Innocent
Drinks, it becomes very essential that these are used so that operating profit or loss can be
ascertained. Thereafter, the right methods can be used for maximizing them. Thus the
management can target more efficiency and effectiveness in the various functions through using
them.
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TASK 2
P3: Calculation of costs
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In Management Accounting, Different techniques can be used so as to facilitate the
calculation of costs. These are explained as follows-
Marginal Costing-
In this method, there is a use of different types of techniques so that the organizations are
able to determine the profitability level and target its maximization (Nartey, 2018). Through it,
Break-Even point can be calculated which is the level where an organization neither earns profit
and does not incurs a loss. Innocent Drinks can make sure that its use so that it assesses the level
of profits.
Advantages-
 Classification of costs- By making the use of this technique, the managers can ensure
that they can classify the costs in a much better manner. Thus in this way Innocent Drinks
can ensure that they can classify and segregate the costs effectively.
 Assessment of profits- The use of this method allows the managers to be able to assess
the overall profits effectively. In Innocent Drinks, this will be helpful in ensuring that
profits are appropriately assessed.
Disadvantages-
 Use of assumptions- In this technique, the different assumptions can be made for
ascertainment of profits. The management of Innocent Drinks is therefore in disadvantage
here because if the assumptions prove out to be wrong it can lead to inaccurate results for
the organization.
 Not useful for cost control- This method is not useful from the point of view of
controlling costs in the organization. For the managers of Innocent Drinks, this can create
a disadvantage.
Absorption costing-
This method is very useful as it considers all costs for the determination of profits. Also it
considers the overheads in the organization and ensures that their proper apportionment can be
done (Oyewo, Ajibolade and Obazee, 2019). In Innocent Drinks, it can be a very useful method
so that the managers are able to attain goals and objectives related to profits.
Advantages-
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 Treatment of fixed costs- In this method, there is a much better treatment of fixed costs
as compared to marginal costing method. Thus for Innocent Drinks this creates an
advantage.
 Acceptable method- This method is acceptable for the organizations as it conforms with
the various accounting concepts. Thus an advantage can be created for Innocent Drinks.
Disadvantages-
 Does not helps in decision-making- This technique does not helps the management to
be able to take decisions effectively. In Innocent Drinks, this can lead towards a
disadvantage.
 Inaccuracy in product costs- If the overhead costs are apportioned in a wrong manner in
the firms this can result in a high-level of inaccuracy. Thus in the context of Innocent
Drinks, a disadvantage can be created.
Justification- Both of these techniques are very useful for the managers of any
organization so that they are able to effectively determine the profits. Thus for the management
of Innocent Drinks it is recommended that they make use of both of these techniques to assess
the profitability level. This is so because they can consider the suitable techniques through which
the profits can be increased.
TASK 3
P4: Advantages and Disadvantages of planning tools for budgetary control
In an organization, the use of various types of planning tools can be facilitated. The tools
which can be used by Innocent Drinks are as follows-
Production budget-
It is a budget which is generally used by the manufacturing organizations to ensure that
proper production of goods can be ensured (Qian, Burritt and Monroe, 2018). Its use can be
made by the managers of Innocent Drinks so that they properly ascertain their production
requirements.
Advantages-
 When this budget is prepared the proper utilization of various assets can be made within
the organizations. Thus this is an advantage for Innocent Drinks.
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 With this budget, the firms can make sure that they are able to properly estimate the
production requirements using the forecasting technique. Thus this can create a benefit
for the management of Innocent Drinks.
Disadvantages-
 The preparation of this budget requires a lot of time on the part of the managers. Thus for
the management of Innocent Drinks this creates a disadvantage.
 It is prepared on the basis of certain assumptions and estimations. Thus in Innocent
Drinks, a disadvantage can be created due to it and thus this can create difficulties.
Sales budget-
A Sales budget is prepared to ascertain the expenses which are required to be made to ensure that
the sales are achieved (Sales Budget| Process, Importance & Examples, 2020). In Innocent
Drinks, its preparation can help the management a lot to make sure that targeted revenues are
achieved.
Advantages-
 This budget is helpful for the organizations to ensure that they are able to ascertain the
sales in the future time period. Thus in this way it can help the management of Innocent
Drinks.
 For the firms, it is useful to prepare this budget so that they are able to make sure that the
required comparisons can be done with the data of previous year. Thus the required help
can be provided to the managers of Innocent Drinks in this manner.
Disadvantages-
 In the companies, the preparation of this budget is dependent on various forecasts. Thus
for the management of Innocent Drinks a disadvantage can be created due to it.
 It is not useful for those firms in which fluctuations are very frequent in the sales figures.
Thus for the managers of Innocent Drinks this can lead towards creation of a
disadvantage.
Personnel budget-
In it, there are details regarding the expenses which are to be incurred for the personnel in
the organization (Tucker and Lawson, 2016). With its preparation, the managers can make sure
that they are able to effectively achieve the goals and objectives related to the personnel
department which they have set for the future time period.
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Advantages-
 By preparing this budget the organizations will be able to identify the expenses which
they will incur for the development of their various employees. In Innocent Drinks this
can create an advantage.
 This budget is very crucial from the point of view of the management to properly manage
its funds for personnel development. In the context of Innocent Drinks, it is quite
beneficial.
Disadvantages-
 It is a costly process to prepare this budget. Thus for Innocent Drinks this can create a
disadvantage.
 The preparation of this budget demands the use of various sort of skills. In the context of
Innocent Drinks, this can lead towards a disadvantage.
Justification- In Innocent Drinks, the use of all of these budgets should be made so that
the managers are able to create short-term and long-term plans to be applied in the future time
period.
TASK 4
P5: Comparison of organizations and the way they use management accounting to respond to
financial problems
Financial problem- A financial problem is a situation which the organizations face in
which there is an impact on the position of funds (van der Kolk, 2019). This type of situation is
not good for the purpose of financial health of the organization. Like other companies, Innocent
Drinks also faces certain financial problems. These have been explained as follows-
 Improper absorption of overheads- In Innocent Drinks, the overheads are not being
absorbed in a proper manner. This is leading towards an increase in the overall level of
expenses and is thus causing difficulties for the management as it is creating a direct
impact on profits by increasing the overall expenses.
 Wrong valuation of inventory- Inventory is being valued in a wrong manner in
Innocent Drinks. This is creating difficulties for the management as it is decreasing the
level of profits.
Techniques for solving financial problems-
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 KPIs- KPIs refer to Key Performance Indicators. These are used as metrics by the
management so that they are able to ensure that the performance is properly evaluated in
an effective manner. Its use can be made by Innocent Drinks to solve the problem related
to overheads as by setting standards for absorption of overheads the organization can
make sure that they are able to properly manage the overall expenses.
 Benchmarking- It is a process through which standards are set for the purpose of
measurement and comparison of performance. Its use can be made by the managers of
Innocent Drinks to be able to ensure that the problem related to inventory can be resolved
as by setting appropriate standards for valuation the company will be able to make sure
that it can value the inventory in a proper manner.
Financial Governance- It is way through which the companies are able to manage their
financial data and facts in an appropriate manner (Zarzycka and et.al., 2017). Its use can be made
by Innocent Drinks so that it is able to present the financial data in a desired way to achieve the
various goals and objectives without problems and issues.
Comparison of organizations-
Basis Arcadia Group Debenhams
Financial problem It is facing the financial
problem of excessive costs in
job orders.
It is facing the financial
problem of low profits due to
selection of wrong price for its
products and services.
Management accounting
system used
It can make use of Job costing
system for solving the
problem.
It can make use of Price
optimization system to solve
this problem.
Application of the system It can apply this system by
ensuring that it can fulfil the
various types of job orders
appropriately and also reduce
the costs being incurred in it.
It can apply this system by
making sure that the
appropriate prices are set in the
organization for earning the
targeted profits.
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Thus, by learning from the examples of Arcadia Group and Debenhams and the way they
solve their financial problems the management of Innocent Drinks can make use of the
appropriate systems. They can make use of Cost accounting system to solve the problem related
to overheads and can use Inventory management system to solve the problem related to
inventory.
CONCLUSION
From the above report it can be concluded that management accounting is a system
through which appropriate decisions can be taken effectively and efficiently. Its usage helps the
managers to be able to achieve the goals and objectives which they set and it allows them to
manage the financial transactions appropriately. It has different types of systems which are quite
helpful for the firms. Its reports are useful for performing relevant analysis and interpretation. Its
techniques help in finding out the costs. Planning tools help the managers in creating plans both
for the short-term and long-term basis. The use of various types of systems can be made in the
organizations to help them to be able to solve their financial problems in an effective manner.
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REFERENCES
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Online
Sales Budget| Process, Importance & Examples. 2020. [Online]. Available through:
<https://www.marketing91.com/sales-budget/>
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