Management Accounting: Techniques and Applications

This project report explores the calculation of income statements using different costing techniques, the advantages and disadvantages of budgetary control tools, and how organizations use management accounting to respond to financial problems. The report includes examples from Prime Furniture Ltd. and TESCO plc ltd.

Management Accounting
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Contents
INTRODUCTION...........................................................................................................................3
TASK 2............................................................................................................................................3
P3 Calculation of costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costs of Prime Furniture Ltd......................................3
TASK 3............................................................................................................................................5
P4 Explanation of advantages and disadvantages of various planning tools used for budgetary
control..........................................................................................................................................5
TASK 4............................................................................................................................................7
P5 Comparison of how different organisations are using management accounting techniques to
respond to different financial problems.......................................................................................7
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10
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INTRODUCTION
This project report aims at calculation of income statement using different techniques of
costing such as marginal and absorptional to understand the difference between the two. An
attempt is being made to understand the advantages and disadvantages of various planning tools
used for budgetary control by an organisational context of TESCO plc ltd. TESCO plc ltd. is a
British multinational retail grocery supermarket chain (Otley, 2016). This project report also
aims to evaluate the different methods in which different organisations are using management
accounting system to respond to financial problems as well.
TASK 2
P3 Calculation of costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costs of Prime Furniture Ltd.
Marginal Costing Method: Income Statement
Quarter 1 Quarter 2
Sales 66,000.00 74,000.00
Less:Marginal Cost of Sales (0.65 per unit) 50,700.00 42,900.00
Less: Opening Stock NIL 7800 (12,000*0.65)
Add: Closing Stock 7,800 2,600
Contribution 23,100.00 25,900.00
Less: Fixed Costs
Fixed Costs 16,000.00 16,000.00
Fixed Selling and Administrative Costs 5,200.00 5,200.00
Net Profits 1,900.00 4,700.00
Calculation of Closing Stock
Marginal Cost
Variable Cost of Production 52,000.00
Units 80,000.00
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Cost per unit 0.65 0.65
Closing Stock units 12,000 4,000
Value of Closing Stock 7,800 2,600
Absorption Costing Method: Income Statement
Quarter 1 Quarter 2
Sales 66,000.00 74,000.00
Less: Cost of Sales
Marginal cost of sales (0.65 p/u) 50,700.00 42,900.00
Fixed cost of production 16,000.00 16,000.00
Less: Opening Stock NIL 10,200 (12,000*0.85)
Add: Closing Stock 10,200.00 3,560.00
Gross profit: 9,500.00 8,460.00
Less: Selling & Administration cost
Fixed Selling and Administrative Costs 5,200.00 5,200.00
Net Profits 4,300.00 3,260.00
Calculation of Closing Stock
Absorption Cost Q1 Q2
Variable Cost of Production 50,700 42,900
Fixed Cost of Production 16,000 16,000
66,700 58,900
Units 78,000.00 66,000.00
Cost per unit 0.85 0.89
Closing Stock units 12,000 4,000
Value of Closing Stock 10,200 3560
Reconcilation of Profits:
Quarter 1:
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Difference in profit: 4,300 – 1,900 = 2400
Overabsorption of fixed costs in valuation of closing stock in absorptional costing = 10,200-
7,800 = 2,400.
Therefore, difference in profits = overabsorption of fixed costs in valuation of fixed costs.
Quarter 2:
Difference in profit: 3,260 – 4,700 = 1,440
Overabsorption of fixed costs in valuation of closing stock in absorptional costing =
(10,200-7,800) – (3,560-2600) = 2,400 - 960 = 1,440
Therefore, difference in profits = overabsorption of fixed costs in valuation of fixed costs.
The difference in amount of profit of Prime Furniture calculated under both the methods of
absorptional and marginal costing is due to the difference in amount of closing stock. Closing
stock is valued at only variable cost of production under marginal costing method which leads to
an increase in the amount of profit whereas under absorptional costing, closing stock is valued at
total cost of production which included both variable and fixed manufacturing costs which leads
to a decrease in the amount of profit (Malmi, 2016). Absorptional costing is considered as the
more appropriate method out of the two since it values the closing stock at the total cost of
production and not only variable cost which is arguably the right approach.
TASK 3
P4 Explanation of advantages and disadvantages of various planning tools used for budgetary
control.
Budgetary control is one of the most important tool of management accounting which
helps the managers to effectively manage and control the operations of the organisation
(Management accounting- meaning, advantages and functions, 2019). Some of the main budgets
prepared by the management of the TESCO plc ltd include:
Capital budget: Capital budget is prepared to evaluate the various alternative of capital
expenditure than the TESCO has and then taking a decision based on the evaluation as to invest
in which of the project according to profitability and maturity period.
Cash budget: This budget is prepared to determine the cash requirements of the company
and ascertaining sources of liquidity and cash inflows within a specific time period.
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Operational budget: This budget is prepared to determine performance standards and
targets for operational department such as production department, sales department etcetera.
Budgetary control has both advantages and disadvantages in an organisation context.
Some of the merits and demerits of budgetary control are as follows:
Advantages of Budgetary control:
Reduction in costs: Budgetary control helps the management of TESCO plc ltd to reduce
the cost of production and various costs which are involved in the operations of the organisations
(Advantages of budgetary control, 2017). It aims at optimum utilisation of resources and ensures
that no wastage of resource is being done in the production and manufacturing process of the
organisation because preparation of budget doesn’t include a provision of wastage and these
wastage and increase in costs can be easily identified upon comparison between actual
performance and standard performance.
Tools for measurement of performance: Budgetary control act as important tool which
helps the management to measure the performance of its employees and teams against a standard
which helps in achieving organisational objectives and targets.
Specific aims: Budget preparation helps in determination of standard of performance for
each and every employee of the organisation which makes the employees aware of the efficiency
expected out of them and helps in fixing specific aims.
Improving employee motivation: Budgetary control is an important management tool
used by TESCO plc ltd for monitoring and controlling and employees know that their
performance is being evaluated at every point in time which increases their motivation to
perform to their best potential and efficiency in desire of achieving rewards linked to
performance targets.
Disadvantages of Budgetary control:
Timely and costly: Preparation of budget and budgetary control is a very timely process
and requires a lot of human efforts and costs (Evans and Mason, 2018). The management of
TESCO plc ltd makes sure that the cost involved in preparation of budget is not more than the
benefits derived out of its implementation.
Uncertainty: Budgetary control is based on budgets which are prepared with the help of
forecasts made by the management for future business conditions and environments which is
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highly dynamic and uncertain. So the budgetary control has a feature of uncertainty and can’t be
held true in every business condition.
Inter-departmental disputes: Budgetary control paves way for inter-departmental
conflicts and disputes in every organisation to some extent or other due to a difference in
personal interest and the desire for every department to come out as the best performer.
Tool of restriction: Budgets are often perceived as tools of restriction used by the
management to set a limit on expenditure and activities within the organisation for the
employees. This leads to demotivation of members and hinders the application of creative skills
and talents by the employees which might help the organisation to get a competitive edge in the
industry. It hinders the process of creativity.
TASK 4
P5 Comparison of how different organisations are using management accounting techniques to
respond to different financial problems.
Management accounting systems are very helpful for any organisation to respond and
solve financial problems as well (What is managerial accounting, 2020). Here is an example of
how different management accounting systems are being used by different organisation to solve
different problems related to the financial performance of the company:
Cost accounting:
The management of Prime Furnitures Ltd. recently encountered a problem of a sudden
increase in costs of production which badly affected the profitability of the company. The
managers analysed the periodic cost sheet prepared by the management accountants of the
company and identified that the rise in cost of production was due to a lot of wastage being done
in the production process due to outdates machinery and thus the management was able to solve
this problem by replacing the machinery (Drury, 2013). The same management accounting
concept was used by the managers of TESCO plc ltd in a very different way to calculate the
profit margin and offer additional discount on its products to attract a larger customer base and
increase the sales of the company to achieve organisational goals and targets.
Inventory management:
Inventory management concepts are being used the Prime Furniture to decrease the
storage costs related to the inventory and stock to increase operational efficiency and financial
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performance of the company, the company was facing a problem of increase storage cost of the
inventory and hence an optimum level of stock helped the company to overcome that problem
with inventory management. TESCO plc ltd. has a number of suppliers from distant areas which
results in a high ordering and carrying costs. The management of the company used the tools of
inventory management to determine an economical order quantity based on its inventory
requirements throughout a certain period which resulted in decreased costs and better operational
profit for the company.
Use of Balanced Score Card by TESCO Ltd:
Balanced Score Card can be defined as a framework which is being used by business
managers as a tool of management accounting to translate the goals and objectives of the
organisation into different set of standards used for measurement of performance and
effectiveness. Four different perspectives can be used by the management of any organisation
under this approach to evaluate the operations of the company which are financial perspective,
customer service perspective, business internal perspective and innovation perspective
(Nørreklit, Kure and Trenca, 2018). The management of TESCO Ltd. uses this approach to
evaluate the performance of the company beyond the traditional notion of economic benefits and
profits. Customer service along with innovation and learning perspective is the primary objective
of management of TESCO Ltd. which is being used for measurement of the company’s
performance. A high score on both these areas determines the effectiveness of the company in
meeting the objectives and vision of the organisation.
Use of Key Performance Indicators by Prime Furnitures Ltd:
Key Performance Indicators refers to a measurable value which is used to demonstrate
the effectiveness of a business organisation in achieving the objectives and goals of the
company. It is one of the most important tool of management accounting used to determine
business success (Parmenter, 2015). For example, the management of Prime Furnitures
determines the Key Performance Indicators for the organisation on the basis of business strategy
and objectives. Further, by evaluation of those KPIs, the management of the company is able to
picture the effectiveness of the company in meeting and accomplishing business objectives and
goals. Customer retention rate is one of the key performance indicator for the management of
Prime Furnitures Ltd. and by assessment of the increase or decrease in the customer retention
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rate over a period of time, management of the company is able to determine whether
organisational goals and objectives are being achieved or not.
Thus, it can be said that management accounting concepts are contrast being used by
different organisation to respond to the financial problems of the organisation as well (Ward,
2012). This adds to the importance and popularity of management accounting as an
unconventional concept of business organisations.
CONCLUSION
It can be concluded from the above report that absorption and marginal costing methods of
preparing income statement value closing stock using different methods which leads to a
difference in the amount of net profits. It can also be concluded that the various planning tools
used for budgetary control have advantages such as tool for measurement but at the same time
they are costly and require a lot of time and efforts (Cadez and Guilding, 2012). At last, it can be
concluded that management accounting system and concept are being used different by
organisations such as TESCO and Prime Furnitures to respond to different financial problems. It
can be inferred that management accounting is no more an optional practice but is crucial for
every business organisation to monitor its operations and exercise effective control.
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REFERENCES
Books and Journals
Cadez, S. and Guilding, C., 2012. Strategy, strategic management accounting and performance: a
configurational analysis. Industrial Management & Data Systems.
Drury, C.M., 2013. Management and cost accounting. Springer.
Evans, B. and Mason, R., 2018. The lean supply chain: managing the challenge at Tesco. Kogan
Page Publishers.
Hiebl, M.R., 2014. Upper echelons theory in management accounting and control
research. Journal of Management Control. 24(3). pp.223-240.
Malmi, T., 2016. Managerialist studies in management accounting: 1990–2014. Management
Accounting Research. 31. pp.31-44.
Nørreklit, H., Kure, N. and Trenca, M., 2018. Balanced Scorecard. The International
Encyclopedia of Strategic Communication, pp.1-6.
Otley, D., 2016. The contingency theory of management accounting and control: 1980–
2014. Management accounting research. 31. pp.45-62.
Parmenter, D., 2015. Key performance indicators: developing, implementing, and using winning
KPIs. John Wiley & Sons.
Ward, K., 2012. Strategic management accounting. Routledge.
Online
Advantages of budgetary control. 2017. [Online]. Available through<
https://hmhub.me/budgetary-control-advantages-disadvantages/>.
Management accounting- meaning, advantages and functions. 2019. [Online]. Available
through< https://cleartax.in/s/management-accounting>.
What is managerial accounting. 2020. [Online]. Available through<
https://www.investopedia.com/terms/m/managerialaccounting.asp>.
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