Management Accounting: Systems, Reports, Cost Analysis, Budgetary Control

This document provides an overview of management accounting systems, reports, techniques of cost analysis, and planning tools used for budgetary control. It also discusses how organizations adapt management accounting systems to respond to financial problems. The case study focuses on Prime Furniture, a growing East London based company.

Management Accounting
1

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
P1 Management accounting systems .........................................................................................3
P2 management accounting reports ...........................................................................................5
TASK 2............................................................................................................................................6
P3 Techniques of cost analysis ..................................................................................................6
P4 Planning tools used for budgetary control.............................................................................9
P5: Compare how organisations are adapting management accounting systems to respond to
financial problems.....................................................................................................................11
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14
2

INTRODUCTION
Management accounting is an important branch of an organisation, which uses financial
data to aid planning decisions and the monitoring and control of finance within organisation.
Theories and techniques of management accounting assist administration of company to plan for
future course of action and the ultimate objective of this branch of accounting is to provide
support in the decision making processes associated with all aspects of operations of an
organisation (Alexander, 2018). In this report, focus is on Prime furniture, which deals in all
types of furniture for homes and offices. It is a growing East London based company. This report
is presented by junior management accountant of Prime furniture keeping focal point on topics
like, management accounting systems, management accounting reporting methods, link between
MAS and organisational operations.
TASK 1
P1 Management accounting systems
Management accounting can be defined as that useful information for managers that are
used by them to improve monitoring and controlling of business operations. It is selective in
nature and does not uses whole of accounting information, data which can assist managers to
perform their function more effectively and efficiently is used. There are various systems and
techniques under big umbrella of management accounting. This leads to the concept of
management accounting system. It means study of various branches of organisation in an
systematic manner and this systematic manner is known as management accounting system.
Difference between management accounting and financial accounting
Basis for comparison Management Accounting Financial Accounting
Purpose and user It is an assistance tool for
internal users like managers
(Baker and Ricciardi, 2015)
It can be used by external as
well as external users.
Basically it is used by all
stakeholders.
Regulation This is not a obligation under
any law.
This is made an obligation by
governing laws and policies.
3

Audit There is no compulsory audit
for this branch of accounting.
Audit of financial statements
prepared under financial
accounting is subject to
compulsory audit. This audit is
performed by professionals.
Management accounting is very important for an organisation and hence, it is widely used by
managers all over the world. . Few benefits are enumerated below:
 Planning and decision-making – Basic requirement for planning and decision making is
data which can become base for creating plans and strategies. Management accounting
plays this significant role for managers, by providing useful information like cost
incurred, profitability ratios, etc. (Bobryshev and et.al., 2015).
 Identifying early signs of problems – This task is done by various techniques like
budgeting, as it involves calculating deviation of actual performance from what was
budgeted. It is useful in identifying that which activity caused that difference and
administration is able to plan accordingly.
 Strategic planning: Management accounting helps managers in identifying any fault in
already formulated strategies and policies. This will result in formulation of appropriate
strategies which ultimately results in success of organisation.
Prime furniture can use managerial accounting techniques to find any lag in their operations such
as, costing, procurement of raw material, marketing, sales strategy, number of outlets, etc. This
can prove to be a useful adoption for the firm to formulate effective strategies.
Branch of management accounting is integrated with every function of organisation and
than this integration produces a separate management accounting system, some of them are
explained below:
 Cost accounting system – This is a very suitable system for manufacturing companies. As
this system evaluates and monitors every cost incurred in company. These cost may relate
to procurement of raw material, production cost, day to day expenses, cost incurred in
supply chain management. This continuous check and monitoring helps managers in
identifying those tasks which involved cost higher than what was actually needed and
4

also in identifying the areas in which more investment can lead to increased generation of
revenue (Botha and et.al., 2018).
In Prime furniture, this accounting system can prove to be useful adoption as it is a
manufacturing firm, and there are number of costs which needs continuous monitoring and
controlling. This will help managers in determining which department needs cost cutting and
which needs more investment. This system can enhance productivity as well as profitability of
firm. There is break up of total cost incurred in different heads like fixed cost, variable cost,
marginal cost, etc. This break up enhances the analysis and further improves strategy formulation
of cost in the given firm.
 Inventory management system – This system governs flow of inventory in company. This
system includes various functions such as identifying every inventory item and its
associated data such as, barcode, labels, etc. This system also involves management of
hardware which are used in maintaining records related to inventory.
This system assist managers of Prime furniture to ensure uninterrupted supply of
inventory, and also that there is no overstocking or under-stocking. This system maintains
availability of raw material as and when required. This system also ensures that there is no
duplication at the time of ordering of stock.
 Price-optimising system- This system relates to setting of price of products of the
company. This technique helps managers in determining appropriate price for products,
that is not over or under priced
(Brownell, 2015). Prime furniture will use this technique in determining price for their
products which are in accordance of willingness and ability to pay of customers. In this
way, it will be helpful to increase loyal customer base.
P2 management accounting reports
Reporting refers to the process of communicating results of management accounting
systems to the managers so that they can use this information in formulation of strategies and
policies. Some reports are explained below: Budget report – This is basically the results of budgets that were prepared at the time of
application of MAS. These report can help managers of Prime furniture in determining
over/ under budgeted departments and if any change is required in policies. This will help
in determining whether any cost centre needs more investment or require cost cutting.
5

With this system, company will able to improve their profits and than, will result into
success of organisation. Inventory management report- This report includes particulars like quantity of raw
material used, wastage, EOQ, when to order, etc. Administration of Prime furniture can
use this system to determine every detail and to carry out required analysis on their stock.
As this is a manufacturing firm, so maintenance of records of inventory is essential. Performance report- This is a report that measures performance of company as a whole
and of each employee as well. This report is also beneficial in measuring financial
performance of a company. Prime furniture's administration can use this report for
furnishing management with detailed statements of profitability, returns, losses or cash
availability, etc. In this way, managers will able to plan for future course of action in an
efficient and effective manner (Chenhall and Moers, 2015).
 Accounts receivable ageing report- This report focuses on management of flow of cash
related to the credits allowed by the company. This report contains particulars like name
of debtors, transaction date, amount blocked with debtor, etc. There are different rimes
allowed as credit time, therefore, transactions for different periods are recorded
separately. Taking this system into use, managers of Prime furniture can manage their
debtors with better credit policies and can help company to recover money sooner.
TASK 2
P3 Techniques of cost analysis
Marginal costing: This is a technique of analysing additional cost incurred in producing
one additional unit. This is a study of marginal cost, and helps in investigating about the
appropriate scale of production.
Absorption costing: This is a method of accounting in which, total cost incurred is being
allocated (absorbed) to every cost centre in accordance with their contribution in production.
6

7

8

Interpretation: Cost of inventory has been computed by multiplying units produced with
cost per unit. Adjustments are made relating to closing stock so that actual profits for the year
can be obtained. Thus, it can be concluded that right technique has been used to calculate profits
of the company. Constant profits is there in both the quarters (calculated by using absorption
costing).
P4 Planning tools used for budgetary control
Budgetary control is control process used to compare budgeted and actual performance
for a specific period (Ghasemi and et.al., 2016.). This process is used for monitoring by
management. Variances are then calculated and corrective actions are devised and implemented.
Following planning tools can be used for Prime Furniture:
Cash budget
9

This budget is prepared by estimating future cash inflows and outflows over a specified
period, on the basis of past records. It helps management in ascertaining whether company will
be facing cash surplus or deficit in that specified period. It will help management of Prime
Furnitures in optimum planning and utilisation of cash and cash equivalents.
 Advantages – Cash planning helps management in planning smooth disbursement of cash
according to availability and inflow of cash. They could avoid both cash crunch as well
as over liquidation in cash. Disadvantages – It is prepared on the basis of past records and future estimation.
Uncertainties in external business environment can upset cash planning and can cause
rigidity in business operations.
Capital Budgeting
All companies aspire to grow. Growth requires undertaking new projects and
investments. Investments require huge capital investments. Planning and evaluating multiple
options available for investment is called capital budgeting (Gurski, Rethmann and Yilmaz,
2016). Many techniques such as net present value, pay-back period, etc. are used for evaluation.
Managers of Prime Furnitures can use these techniques to evaluate whether the alternatives they
are planning for investment are feasible and viable or not. They should then choose the best
profitable option.
 Advantages – Capital investments require huge funds and then those funds get
blocked for a long time. Any wrong investment can create problems fro financial
health of whole organisation. Evaluating investment alternative helps
management in averting such risks.
 Disadvantages – Capital budgeting techniques are based on understanding of
financial managers. Any wrong assumption taken by them can give financial
well being of company a fatal blow.
Planning tools used in budgetary controlling
Planning tools are used by management to prepare plans for monitoring and controlling.
Tools such as multiple types of budgets present management with various targets that company
has to fulfil over the specified period of budget (John and Eeckhout, 2018). It also helps
10

management in identification of variances and serve as basis for corrective actions. With the help
of tools such as capital budgeting, management can avoid major financial problems.
P5: Compare how organisations are adapting management accounting systems to respond to
financial problems.
Financial problem - All the businesses faces several threats and risks while operating in
a business environment. When management fails to predict problems and figure out ways to deal
with it, company faces multiple issues such as sales downfall, increasing overheads, loss of
growth opportunities, etc. Two such problems are discussed below:
Sales downfall: In life cycle of every product, occurs such stages when sales of the
product see decline. It can be due to multiple reasons such as better competitors, difficult
business environment, uncertainties, etc. Downfall in sales revenue has direct effect over revenue
and growth of company.
Increasing costs of raw materials: Increase in cost of raw materials can be due to
multiple factors such as increase in prices of logistics, increase in bargaining power of vendor,
taxes hike, etc. Increase in cost increases operational expenses and decreases profit margin. It
can also lead to increase in price of product which again can have negative impact on sales of
company products.
Financial governance – It refers to the system of practices in which a company control
its financial information. Companies track their financial transactions and perform control
operations in the interest of its stakeholders (Kostyukova and et.al., 2018). If a company is able
to identify its risk earlier, it can devise a strategy accordingly to avoid it. Proper governance with
monitoring and control allows an organisation to identify the risk coming its way faster. Benchmarking - There are multiple companies working in an industry as close
competition of each other. Benchmarking is a performance indicator in which
performance of one particular organisation is taken as standard of average performance of
the other company's of that industry. This technique is used by managers to identify the
areas where they can improve to reach benchmark.
 Key performance indicators (KPI) – This technique is used to assess the multiple aspects
that effect an organisation (Maas, Schaltegger and Crutzen, 2016). They can be financial
and non-financial aspects. Financial aspects includes indicators such as profits, debts, etc.
11

while non-financial aspects refers to the external factors such technological factors,
market factors, etc. Budgetary targets – Companies prepare multiple budgets and budgetary targets.
Managers then evaluate organisation's actual performance against those set targets.
Deviations are determined and corrective measures are taken.
Comparison:
Base for comparison Prime Furnitures London Furniture Outlet
Financial Issue Company's revenue is steady
yet its profit margin is
decreasing.
Even after introducing new
furniture range, sales and
market share are not picking
pace.
Technique used to identify and
resolve issue
With the help of budgetary
analysis, it was found that
operational cost of company
has increased so, profit margin
is decreasing.
With the help of benchmarking
approach, it was found that
marketing and promotional
policies of company were not
effective.
MAS Cost accounting system –
those points were identified
where cost is more than
estimation. Necessary
corrective measures were then
applied.
Differential pricing system –
Company identified target
customers and then set
different prices according to
them. Also, Various offers and
promotional strategies were
put in place to attract new
customers.
Management Accounting system to solve financial problems
Management accountants help senior management in planning and decision making tasks
(Parmenter, 2015). They possess the combination of leadership and managerial expertise. They
use techniques like absorption costing, Break even analysis etc. to identify significant factors
12

affecting financial health of the organisation. Then, using various techniques of MAS, senior
management prepares strategies and policies to improve business of organisation.
CONCLUSION
Management Accounting system helps mangers plan, prepare and implement controlling
tools for business targets (Robinson, 2016). Managers use various techniques such as price
optimisation, cost accounting system, etc. and multiple planning tools such as capital budgeting,
cash budget, etc. to achieve their objectives. Multiples reports such as budget reports and
performance report are prepared to identify financial issues, company is facing and corrective
actions are undertaken.
13

REFERENCES
Books and Journals
Alexander, J., 2018. Financial planning & analysis and performance management. John Wiley
& Sons.
Baker, H.K. and Ricciardi, V., 2015. Understanding behavioral aspects of financial planning and
investing. Journal of financial Planning. 28(3). pp.22-26.
Bobryshev, A.N. and et.al., 2015. The concept of management accounting in crisis conditions.
Journal of Advanced Research in Law and Economics. 6(3 (13)). p.520.
Botha, M. and et.al., 2018. Fundamentals of financial planning 2018. Cape Town: LexisNexis.
Brownell, P., 2015. Budgetary Participation. Wiley Encyclopedia of Management. pp.1-2.
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.
Ghasemi, R. and et.al., 2016. The mediating effect of management accounting system on the
relationship between competition and managerial performance. International Journal of
Accounting and Information Management.
Gurski, F., Rethmann, J. and Yilmaz, E., 2016. Capital budgeting problems: A parameterized
point of view. In Operations Research Proceedings 2014 (pp. 205-211). Springer,
Cham.
John, L.K. and Eeckhout, L. eds., 2018. Performance evaluation and benchmarking. CRC Press.
Kostyukova, E.I. and et.al., 2018. Improvement cost management system for management
accounting. Research Journal of Pharmaceutical, Biological and Chemical Sciences.
9(2). pp.775-779.
Maas, K., Schaltegger, S. and Crutzen, N., 2016. Integrating corporate sustainability assessment,
management accounting, control, and reporting. Journal of Cleaner Production. 136.
pp.237-248.
Parmenter, D., 2015. Key performance indicators: developing, implementing, and using winning
KPIs. John Wiley & Sons.
Robinson, M., 2016. Budget reform before and after the global financial crisis. OECD Journal
on Budgeting. 16(1). pp.29-63.
14