Management Accounting: Costing Techniques, Budgetary Control, and Financial Analysis

This document provides an overview of management accounting, focusing on costing techniques, budgetary control, and financial analysis. It discusses the importance of cost analysis and the tools used in management accounting. It also compares the approaches of two companies to financial problems. The document is relevant for students studying management accounting or related subjects.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................3
P3 Costing Techniques................................................................................................................3
Planning tools used by company to combat financial problems..................................................7
P4 Budgetary Control and merits and Demerits..........................................................................8
P5 Comparison of companies to financial problems...................................................................9
CONCLUSION..............................................................................................................................11
REFERENCES................................................................................................................................1

INTRODUCTION
Management accounting is all about preparing reports and budgets for improving future
performance in terms of profitability and sustainability. It is a matter of internal management
where the accountant is concerned about improving processes that is internal to the organization.
Such accounting system is meant for managerial decision-making which includes, cost analysis,
budgeting, forecasting and obtaining break-even point. The present report is based on the
concept and usefulness of management accounting. The report will highlight the utility of
management accounting for Prime furniture, which is UK based organization making and selling
furnitures. This report will indicate how Prime Furniture has integrated management accounting
in their operations to improve their performance and ensure sustainability for long term. The
systems under management accounting are very useful in addressing various financial issues to
lead on the path of success.
P3 Costing Techniques
Cost: It refers to the amount paid by an organization towards obtaining raw materials for
initiating production activities, payment for machinery and technology, expenses incurred for
selling and administration activities, etc. Cost analysis is an important aspect of management
accounting as a minor variation in cost leads to a greater impact on profitability of a concern. By
obtaining cost data, managers can decide upon the requirement of external borrowings and
arranges the same in advance at the best possible terms. Costs under management accounting are
defined under the following heads:
Absorption costing: Under the method of absorption costing, all cost related to the production of
a particular product are accounted for ascertaining the cost per unit of product manufactured. The
main purpose of adopting this technique of costing is to facilitate inventory valuation. It is also
called as full costing method. It takes into consideration both direct cost of manufacturing and
fixed and variable overhead costs (Oyewo and AJIBOLADE, 2019).
Variable costing: This particular method of costing provide useful insight to management
accountant regarding the changes occurred in the profit figures due to the small changes in the
level of output. This technique bifurcates the total cost associated with the production into fixed
and variable cost. Fixed cost remains constant at different level of output while the variable cost
goes on increasing and decreasing continuously with the corresponding increasing and

decreasing of output level. There exist direct relationship between variable cost and volume of
production.
In the question, Selling price=1
Variable Cost=52000/80000=0.65
Fixed cost=16000/80000=0.2
Total cost per unit=0.65+0.2=0.85
Income statement for Quarter 1 and Quarter 2 using absorption costing
Particulars Q1 Q2
Sales 66000 74000
Less: Variable costs 50700(0.65*78000) 42900
Fixed costs 15600 13200
Cost of Goods available for
sales
66300(50700+15600) 56100(42900+13200)
Add: Opening stock 0 10200
Less: Closing stock 10200(0.85*12000) 3400(0.85*4000)
COGS 66300-10200=56100 56100+10200-3400=62900
Gross profit 9900(66000-56100) 11100(74000-62900)
Less: Selling and
administration costs
5200 5200
Net Profit 4700 5900
Income statement for Quarter 1 and Quarter 2 using variable costing
Particulars Q1 Q2
Sales 66000 74000
Less: Variable costs 50700 42900
Add: Opening stock 0 7800
Less: Closing stock 7800(0.65*12000) 2600(0.65*4000)

COGS 50700-7800=42900 48100(42900+7800-2600)
Contribution 23100(66000-42900) 25900(74000-48100)
Less: Fixed and administration
costs
5200 5200
Fixed costs 16000 16000
Net profit 1900 4700
Reconciliation of Profits
Particulars Q1 Q2
Marginal Cost profit 1900 4700
Add:Difference in units
produced
400(2000*0.2) 2800(14000*0.2)
2300 7500
Less: Opening stock 0 2400(12000*0.2)
2300 5100
Add: 2400 800(4000*0.2)
Absorption cost profit 4700 5900
It can be seen that absorption costing reports higher profits than variable costing as the costs get
distributed over fixed overheads as well. Absorption costing takes in consideration fixed
manufacturing overheads as well other than variable costing. The fixed costs are absorbed on
actual basis in absorption costs. Variable costs are generally used for internal reporting purposes
and managerial decisions are taken on variable costs. Absorption costing is used for reporting to
external stakeholders as well as for the purpose of filing taxes (Jbarah, 2018).
Tools and techniques used in management accounting

Standard costing: It being a predetermined cost helps Prime furniture in determining a yard
stick for measuring actual performance. Reasons for deviations are found out which managers
assess how to reduce them.
Marginal costing: Prime furniture uses the technique to fix the selling price, selection of sales
mix, best use of raw materials, to take a make or buy decision, acceptance of a bulk order by
suppliers. This is based on fixed cost, variable cost and contribution received. It has helped the
company to fix pricing over a batch of production after reaching break even on a category of
products. Overall it has helped company in realising the profits (Abdusalomova, 2019).
Statistical techniques: Prime furniture has used techniques like least square, regression and
quality control in removing the management problems. This technique has helped the company
in removal of errors and provide base for the company to look at how much progress has been
made in which section and which section requires improvement.
Ratio Analysis: It has helped management in helping out in functions like forecasting, planning,
coordination, communication and control. The physical and monetary targets which paves the
way for control of business operations have been undertaken (Usenko and et.al., 2018).
Financial Statement Analysis: The Profit and loss and Balance Sheet are the two important
financial statements which are assessed by the investors. The statements are analysed for
different period and analysis is done to know the strong and weak points of the company. It helps
to know whether the company's operational expenses are high or low,it helps to know the
company's amount of debt and receivables, lays light on variable expenses and fixed assets and
the most important the net profit for the company which is used by shareholders and investors.
Prime furniture being a new company in business lays emphasis on the financials to have clarity
for assessment purposes (Ameen, Ahmed and Abd Hafez, 2018).
Cost analysis: There are a number of costs going in production with respect to direct and
indirect costs which involve raw material, labour, and other expenses which are variable.
Through costing techniques company is able to find out the total cost of production and divide it

by the total number of units produced. It helps in ascertaining the cost per unit of production and
also the pricing is then decided per unit. This has helped Prime Furniture to also assess on the
costs which can be reduced like switching to a low cost tender supplier which is providing same
quality of raw material.
Budgetary Control
The management uses budgetary tool for controlling and planning of allotment of resources
which control the activities of business. It is an important technique of directing business
operations in which the business is able to receive a return on investment. This is also an exercise
which helps improve communication between different sections of the organisation and help
achieve a common goal (Rikhardsson and Yigitbasioglu, 2018).
Decision making: Prime Furniture gets help in evaluating business decisions which may involve
big investment costs. Techniques like NPV and IRR have helped the company in choosing
between projects as to which project will be giving better returns considering the time value of
money aspect in mind. The company has also benefited through the management accounting
techniques while making purchase for the company in terms of raw material from suppliers and
purchase of fixed assets as to what type of financing company should take; whether it should be
done through company's own capital or using leverage methods like debt. The balance of equity
and debt is also reflected in management accounting as to recommending a fixed proportion of
debt and equity to be maintained.
Planning tools used by company to combat financial problems
In today's technical era, companies are taking help of software to help record payments, bills,
salaries. Prime furniture uses technology to record its payments and receivables. The planning
which company does is:
a) Production Planning: Company is taking help in this area with advanced software which
aids in production planning and control. Managers and Planners use pertinent data from
any of the stages in manufacturing process, machine capacity and availability, worker
skill sets and orders received.

b) Economic Order: Company gets help in inventory management through management
accounting methods and is able to order the exact quantity required without any wastage
of ordering more or getting less in stock (Jbarah, 2018).
c) Scheduling: With help of scheduling system company is able to build a lean process.
Managers are able to input data as and when required and assess improvement with input
of new data. This way they are also able to balance demand with supply.
P4 Budgetary Control and merits and Demerits
The budgetary control is an exercise of allotting capital for operations and it is done on
estimates of previous years capital allotment in various sections of the organization. The budget
allocation done based on previous financial may suit the system and sometimes, it may go wrong
considering changes in organization structure and market factors.
Budgetary control begin from preparation of budgets for the future, and after doing so the
management accountant on completing their objective as planned accordingly carry out the
report in order to identify what are the major deviations in performance. Such control through
preparing budget leads to minimization of major deviations in performance and helps in
matching actual performance with that of planned performance. The budgets help in achieving
objectives with a greater ease. A possible control system can be established within organization
to control variations and eliminating wasteful activities. Each individual within organization
know what is expected from them and what are the standards against which their performance
are going to be compared (Vakhrushina and et.al., 2018).
The advantages of budgetary control are:
Provide plan: It provides the plans for achieving organizational objectives. It helps in deciding
early on what is to be done and checking on the expenses and estimating the sources of funds.

Coordination: It focuses on having coordination with departments or divisions of a business
organization. The committee decides roles and responsibilities for departments and
communicates with them.
Variance analysis: It helps in knowing which departments have been able to follow the budget
constraints and which departments have exceeded them. This helps in knowing which
departments have performed optimally and for whom measures need to be taken (O’Grady,
Akroyd and Scott, 2017).
Measures performance: It helps in measuring the performance of various departments by
providing comparison tools. It finds out the factors which are deviating the budget standards set.
Cost control: A planning done with budgeting helps in controlling the costs which can go
unnecessary if not made with a planned budget. All divisions are accordingly instructed to make
expenditure go within the planned budget.
Maximization of profit: It aims at enhancing the efficiency of the organisation resources with
elimination of additional costs. By monitoring the performance of all divisions necessary steps
are taken to increase the productivity.
Disadvantages of Budgetary Control
The disadvantages are as follows:
Inaccuracies in Estimates: The budgets are framed for future events which require calculations.
It may also happen that due to changing market factors, the estimates may go wrong. The
requirements may go high than set for various divisions (Vakhrushina and et.al., 2018).
Expensive process: It is expensive to make the budget as each division is to be kept in
consideration with various categories to be evaluated. In doing research and forecasting it
requires heavy expenditure.

Revision at times: It requires revision of the budget made in between as per the changing
circumstances faced by the organisation. It thus requires attention regularly and takes time out of
the daily routine (O’Grady, Akroyd and Scott, 2017).
Time consuming: Budget requires time to make and minute details have to be given to make it
accurate and precise. The ongoing demand for various departments have to be taken in
consideration and have to take various product categories in consideration. Thus it is time
consuming process.
P5 Comparison of companies to financial problems
Costing analysis
Capital Joinery has used costing techniques to find out its overall cost of production. There are a
lot of direct and indirect costs involved like procurement of raw materials, labor and other. All
these costs are computed per unit and then a profit margin is set up on products. The costing thus
helps company in calculation of costs as well as ways to reduce variable costs and realize profit
margin.
Prime furniture has a wide variety of products and thus has several variable costs
attached. Costing analysis helps in computation of costs and of cost cutting measures to realize a
different alternative for process (Usenko and et.al., 2018).
Financial Planning
Prime furniture has been able to plan financially for its sub departments and got help in allotting
of budget with help of tools like variance analysis etc. It helps in determining the short term and
long term obligations of the company. It has helped the company in developing financial policies
and procedures to achieve those objectives.
Capital Joinery has benefited from financial planning in terms of maximizing return on
capital employed. It has helped in managing the sources of funds, help in determination and
distribution of income to shareholders in the form of dividends.
Financial Analysis
Prime furniture has been able to judge its future earnings, ability to pay interest on securities and
solvency of the firm in period of crisis. The company has been able to judge its account

receivables and accordingly work on its credit policy. The analysis helps company know which
ratios to work on to bring further investment.
Capital Joinery has made use of financial ratios like activity ratios to judge its working
capital efficiency and accordingly plan an increase in current assets. It has made company aware
of future credit risks and do a forecast in earnings to announce dividend policy (Sedevich-Fons,
2018).
Funds flow and cash flow analysis
Prime furniture uses techniques of funds flow in order to analyse the changes in the financial
position between two terms. It has helped identify for the company sources of funds and which
funds can be increased through use of fixed assets.
Capital Joinery deals with many suppliers and creditors. The analysis has helped the
company estimate cash flows in its future projects showing the profitability aspect in the jobs
undertaken. Cash expenditures thus have been able to channelise by the company and save costs.
CONCLUSION
It can be concluded that management accounting is a very important aspect for planning and
decision-making. It helps not only in saving costs for the company but also in realising profits
and doing investment analysis for the company. Management accounting helps managers in
allotment of finance and use surplus wherever necessary in operations.

REFERENCES
Books and journals
Abdusalomova, N., 2019. PROBLEMS OF MANAGEMENT ACCOUNTING AND WAYS TO
SOLVE THEM. International Finance and Accounting. 2019(3).p.2.
Ameen, A.M., Ahmed, M.F. and Abd Hafez, M.A., 2018. The Impact of Management
Accounting and How It Can Be Implemented into the Organizational Culture. Dutch
Journal of Finance and Management. 2(1). p.02.
Rikhardsson, P. and Yigitbasioglu, O., 2018. Business intelligence & analytics in management
accounting research: Status and future focus. International Journal of Accounting
Information Systems. 29. pp.37-58.
Oyewo, B. and AJIBOLADE, S., 2019. Does the use of strategic management accounting
techniques creates and sustains competitive advantage? Some empirical
evidence. Annals of Spiru Haret University. Economic Series. 19(2). pp.61-91.
Jbarah, S.S., 2018. The impact of strategic management accounting techniques in taking
investment decisions in the jordanian industrial companies. International Business
Research. 11(1). pp.145-156.
Rasyid, A., Sugiarto, E. and Kosasih, W., 2017. Management accounting techniques and
corporate performance of manufacturing industries. Risk Governance & Control:
Financial Markets & Institutions. 7 (2). pp.116-122.
Vakhrushina, M.A. and et.al., 2018. Integrated management accounting in the financial
management system. Research Journal of Pharmaceutical, Biological and Chemical
Sciences. 9(3). pp.808-813.
O’Grady, W., Akroyd, C. and Scott, I., 2017. Beyond budgeting: distinguishing modes of
adaptive performance management. In Advances in management accounting. Emerald
Publishing Limited.
Usenko, L.N. and et.al., 2018. Formation of an integrated accounting and analytical management
system for value analysis purposes.
Sedevich-Fons, L., 2018. Linking strategic management accounting and quality management
systems. Business Process Management Journal.
1

Ostaev, G.Y. and et.al., 2019. Lean production management: Accounting and cost control in
processing enterprises of the consumer cooperation system. Amazonia Investiga.8(23).
pp.830-841.
Balstad, M.T. and Berg, T., 2020. A long-term bibliometric analysis of journals influencing
management accounting and control research. Journal of Management Control. 30(4).
pp.357-380.
Online
[Online]. Available through: <>
2