Management Accounting Techniques and Planning Tools

This document provides an overview of management accounting techniques and the use of planning tools in management accounting. It discusses the application of microeconomic techniques, cost volume profit analysis, absorption costing, and more. It also compares the ways in which organizations use management accounting to respond to financial problems. The document is based on Prime Furniture and includes relevant examples and explanations. Get study material and solved assignments on management accounting at Desklib.

Management accounting

Table of Contents
INTRODUCTION...........................................................................................................................3
L O 2................................................................................................................................................3
Application of techniques of management accounting................................................................3
L O 3................................................................................................................................................6
Use of planning tools that are applied in management accounting.............................................6
L O 4................................................................................................................................................9
Compare ways in which organizations use management accounting..........................................9
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................10

INTRODUCTION
Management accounting is defined as the process of determining the cost of business and
operations to prepare financial records and reports that supports decision-making of management
in achieving the goals of company (Childress and et.al, 2015). The Report is based on Prime
Furniture. The Report will outline various management accounting techniques, use of various
planning tools in management accounting. Further, it will also describe ways in which different
organizations are using management accounting to respond to financial problems etc.
L O 2
Application of techniques of management accounting.
Overview of management accounting-
The term management accounting refers to the presentation of information with the aim
of developing policies that are to be adopted by the management and supports in day-to-day
activities. It uses the details related with operations of business to prepare reports that offer
consistent insight into profit margin, labour utilization of the business that acts as an input to take
routine decisions (Christian, 2018).
Microeconomic techniques :
Cost- It means the amount that has to be paid in order to get something . In business, cost refers
to monetary valuation of material, labour, time, resources etc.
Types of cost-
On the basis of nature of costs-
Fixed cost : It refers to the cost of fixed inputs that are used in the process of production. These
cost does not change with change in production volume.
Variable cost: It means the cost variable inputs that are used by business in production of goods.
It changes with the change in volume of production.
Semi variable cost: It means the cost which is partly variable and partly fixed. It does not
directly influence the production but may change with production facilities.
On the basis of expense-
Material cost:
It means the cost of purchasing raw material used in production of goods.
Labour cost:
It refers to the payment made to temporary and permanent workers for their services.

Overhead:
It is the cost which changes with the level of production like cost of indirect labour etc.
Cost volume profit analysis-
It refers to the method of cost accounting that focuses at the impact that different levels of
volume and cost have on operating profit. It is also known as break even analysis that helps to
determine break even point for various levels of cost structure and sales volume that are useful
for managers to make short term economic decisions.
Flexible budgeting-
Flexible budget is a type of budget that helps to recognize the variation in difference
between variable and fixed cost to fluctuations in turnover, output etc. It is developed to change
in the relation to the level of activity attained by firm actually (Duan and et.al, 2016). This type
of budget is also called multi-volume budget. Major advantage is that it helps Prime Furniture to
forecast its performance. Major limitation is that fixed cost is generally fixed only over a
significant output range.
Absorption costing-
It refers to the approach of accumulating cost related with the process of production and
dividing them to individual products. The indirect and direct cost like direct labour, direct
material and insurance etc. are accounted for using this method.
cost per unit (absorption costing)
Figures (in
£)
Production cost(variable) 0.65
Production cost (fixed) 0.2
Cost of production per unit 0.85
Profitability statement as per absorption costing
Quarter 1
Particulars Units
per
unit
price
(in £)
Figures
(in £)
Net
figure
(in £)

Sales 66000 1 66000
Less: COGS
Opening stock 0 0 0
add: purchases 78000 0.85 66300
Less: closing stock 12000 0.85 10200 56100
GP 9900
Less: Selling & adm cost
(fixed) 5200
Net profit 4700
Quarter 2
Particulars Units
per
unit
price
(in £)
Figures
(in £)
Net
figure
(in £)
Sales 74000 1 74000
Less: COGS
Opening stock 12000 0.85 10200
add: purchases 66000 0.85 56100
Less: closing stock 4000 0.85 3400 62900
GP 11100
Less: Selling & adm cost
(fixed) 5200
Net profit 5900
Marginal costing-
It means the technique in which variable cost is charged to the units of cost.
Whereas, fixed cost for the period is written off completely against contribution.
cost per unit (Marginal costing)
Figures (in
£)
Production cost (fixed) 0.65
Cost of production per unit 0.65

Profitability statement as per absorption costing
Quarter 1
Particulars Units
per
unit
price
(in £)
Figures
(in £)
Net
figure
(in £)
Sales 66000 1 66000
Less: COGS
Opening stock 0 0 0
add: purchases 78000 0.65 50700
Less: closing stock 12000 0.65 7800 42900
GP 23100
Less: fixed expenses
fixed production cost of
sales 16000
Fixed selling & adm. 5200 21200
Net profit 1900
Quarter 2
Particulars Units
per
unit
price
(in £)
Figures
(in £)
Net
figure
(in £)
Sales 74000 1 74000
Less: COGS
Opening stock 12000 0.65 7800
add: purchases 66000 0.65 42900
Less: closing stock 4000 0.65 2600 48100
GP 25900
Less: fixed expenses
fixed production cost of
sales 16000
Fixed selling & adm 5200 21200
Net profit 4700
The above depicted table shows that net profitability as per marginal costing method
accounts for £1900 & £4700 respectively. On the other side, in the case of absorption cost net

profit, with respect to quarter 1 & 2 implies for £4700 and £5900 significantly. Hence, business
unit is advised to employ absorption costing method over marginal. The reason behind this at the
time of assessing production cost both fixed and variable expenses are considered. This in turn
presents clear view of cost as well as profitability aspect.
Product costing : It is the method of determining all the expenses related with developing
the products of company. It involves worker wages, raw material purchases etc. Fixed cost does
not vary with decrease or increase in the amount of products or services. Whereas, variable cost
are expenses that change in direct proportion to the units of output (Fisher, Gallino and Li,
2017).
Activity based costing- It refers to the system of costing that focuses on the tasks performed to
develop the products. Under this, firstly Prime Furniture will trace the activities and then to
products. Cost are assigned to output on basis of individual product's use of every task.
Cost of inventory :
Inventory cost- It means the cost related with purchasing, management and storage of raw
material.
Types-
Ordering cost: It is the cost of inbound logistics and procurement that forms a part of ordering
cost.
Carrying cost: It includes the cost of capital and inventory storage cost.
Methods-
Specific identification method:
Under this, cost of inventory attaches the actual expenses to an identifiable unit of output.
FIFO: It assumes that cost of goods purchased first are charged to cost of goods sold at the time
when firm actually sold goods.
LIFO: It assumes that expenses related with recent purchases are charged first to cost of goods
sold when actually firm sell output.
Weighted average: It is a means of costing the closing inventory using weighted avergae unit
cost.

L O 3
Use of planning tools that are applied in management accounting.
Using budgets for planning and control:
The term budget refers to the formal statement of estimated expenses and income that is
based on future objectives and plans. Prime Furniture may use various types of budgets such as-
Capital budget -
The term capital budget means thee procedure of evaluating huge expenses and
investments in order to get the best return on investment. It will help Prime Furniture to select
profitable project across various projects.
Major advantage is that it helps business to understand different risks involved in
investment opportunity. Limitation is that wrong decision may affect long term durability of
business.
Operating budget -
It reflects the expenses, estimated income, estimated cost by considering annual or
quarterly performance. It should consider historical sales etc. Major benefit is that it will help
Prime Furniture to work towards the aim of building financial reserves. Limitation is that if the
budget is not changes each time to reflect new figures that it will provide inaccurate results
(Maas, Schaltegger and Crutzen, 2016).
Alternative methods of budgeting-
Zero based budgeting-
It includes developing budget from scratch with zero base. It includes re-evaluating every
part of cash flow and justifying expenditure that is incurred by business.
It helps Prime Furniture to make efficient allocation of resources. It also assists organization to
identify various ways of doing things.
Major limitation is that it is very time-consuming method. It requires large number of employees.
Behavioural implications of budgets-
Dysfunctional behaviour:
Budgets may bring positive behaviour among individuals when objectives of managers
are found in consistent with goals of business.
Participative budgeting:

The process of budgeting is either bottom up or top down. In top down process, top
management develops budgets for organization. In bottom up approach all the people are
involved in preparing budgets (Moloney, 2016).
Pricing: It is a method used by business to set the best price for goods or services.
Pricing strategies.
Competition based pricing strategy:
Under this, company focuses on current market rate for a specific product or service. It
does not consider consumer demand.
Skimming pricing strategy:
In this, firms charge the highest possible price for new items and reduces the price over
time when product become less popular.
Common costing systems:
Actual costing-
This type of costing system only uses actual expenses that are allocated and incurred and
it does not includes budgeted or standard amount. It requires no pre planning of standard cost.
Normal costing-
It is the method that assigns cost of products on the basis of overheads, labour and
material that are used to produce them.
Standard costing system-
It is a tool for controlling, managing costs, planning budgets and evaluating cost
management performance. It also includes estimating required expenses of a production process.
Job costing-
Under this, business ascertain the cost separately for different jobs as each work order is
different from clients to clients. Cost is compiled for particular quantity of goods or services that
moves through production process (Olatunji, Oladipupo and Joshua, 2017).
Process costing-
It is the method used by firm to assign and collect manufacturing costs to the output
produced. It is used when company produces identical units.
Strategic planning:
PEST- It is a tool that helps Prime Furniture to identify the impact of external factors on
business.

Political: It involves factors like political stability in the country, rules and regulations of the
Government etc. Political conditions of the country will affect operations of Prime Furniture.
Economical: It includes factors like purchasing power of customers, rate of inflation etc. If
purchasing power of people is high they will spend money on purchasing furniture.
Social: It involves attitude, beliefs of people towards the company and products. Firm should
develop products as per the customer requirements (Said, 2016).
Technological: It includes change in technology of producing and distributing items to clients.
Prime Furniture should use innovative tools to make furniture items.
L O 4
Compare ways in which organizations use management accounting.
Basis Prime Furniture Triumph Furniture
Company
Financial problems Currently, firm is facing the
problem of inconsistency in
sales volume.
At present, company is facing
the issue of high expenses as
compared with operating
income.
Benchmarking It is the process of obtaining
measure. Firm uses
benchmarking to make inquiry
to facilities an processes used
by competitors (Shigaev,
2015).
Company uses benchmarks to
determine the methods adopted
by other firms operating in
furniture industry to improve
their performance. It develops
set of metrics to monitor the
expenses.
Key Performance Indicators It is the measurable value that
demonstrates how effectively
firm is attaining business
objectives. To improve the
consistency in sales Prime
Furniture uses financial
indicators like operating cash
To reduce the cost of
operations the organization
uses financial KPI's like
current ratio etc. Further, it
also uses non financial KPI's
like operations quality etc.

flow etc.
Financial governance -
It is defined as the way an organization manages, collects, controls and monitor financial
nature information. It involves the way firm track financial transactions etc. It is important
because it provides accurate information and records that executives uses to dictate the direction
based on business financial reality.
Management accounting skill-
Characteristics of effective management accountant:
Effective management accountant possess features like a strong sense of ethics, sense of
accountability, ability to work in a team etc.
These skills help management accountant of Prime Furniture to deal with complex
business situations. It also helps to coordinate accounting operations, maintaining budgets etc
(Said, 2016).
Effective strategies and systems-
Inefficient management processes that provides wrong information generally causes more
harm than good. Strong management reporting is required to produce reliable, timely
information. It helps to make better quality business decisions regarding the future of the
business. Insight collected from reporting helps to make deeper analysis to understand problems
and to offer right comparison against competitors.
CONCLUSION
The above Report has outlined that there are various types of cost such as fixed cost,
variable cost, semi-variable cost etc. Cost volume profit analysis is the method of cost
accounting that focuses at the effect that different levels of volume and cost have on operating
profit Further, it has been concluded that fixed cost does not changes with decrease or increase in
the amount of products or services. The two major types of inventory cost are ordering and
carrying cost.
REFERENCES
Books and Journals -
Childress, S., and et.al, 2015. Using an activity-based model to explore the potential impacts of
automated vehicles. Transportation Research Record. 2493(1). pp.99-106.

Christian, D., 2018. Building Cost Management: Case Study Using Costing Methods. IJAME.
Duan, Y., and et.al, 2016, June. Benchmarking deep reinforcement learning for continuous
control. In International Conference on Machine Learning (pp. 1329-1338).
Fisher, M., Gallino, S. and Li, J., 2017. Competition-based dynamic pricing in online retailing: A
methodology validated with field experiments. Management Science. 64(6). pp.2496-2514.
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.
Moloney, N., 2016. International financial governance, the EU, and Brexit: the ‘agencification’of
EU financial governance and the implications. European Business Organization Law Review.
17(4). pp.451-480.
Olatunji, O.C., Oladipupo, O.F. and Joshua, A.A., 2017. Impact of Capital Budget
Implementation on Economic Growth in Nigeria. Global Journal of Management And
Business Research.
Said, H.A., 2016. Using Different Probability Distributions for Managerial Accounting
Technique: The Cost-Volume-Profit Analysis. Journal of Business and Accounting. 9(1). p.3.
Shigaev, A., 2015. Accounting entries for activity-based costing system: The case of a
distribution company. Procedia Economics and Finance. 24. pp.625-633.