Management Accounting: Types, Techniques, and Budgetary Control

This document provides an introduction to management accounting and its importance in decision making. It explains the essential requirements of different types of management accounting systems and the methods used for management accounting reporting. It also includes the preparation of income statement using managerial accounting techniques and the evolution of benefits and drawbacks of different planning tools used for budgetary control. The document focuses on the case study of UKC FURNITURE.

Management Accounting

Contents
Contents...........................................................................................................................................2
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1 Explanation of management accounting and essential requirements of different types of
management accounting systems.................................................................................................1
TASK 2............................................................................................................................................2
P2 Explanations of different methods used for management accounting reporting..................2
TASK 3............................................................................................................................................2
P3 Preparation of income statement by suing managerial accounting technique........................2
TASK 4..........................................................................................................................................10
P4Evolution of benefits and drawbacks of different types of planning tools used for budgetary
control........................................................................................................................................10
P5Evaluation of how organisations are adapting management accounting systems to respond
to financial problems.................................................................................................................15
CONCLUSION..............................................................................................................................17
REFRENCES.................................................................................................................................17

INTRODUCTION
Management accounting is a process of identifying, collecting, summarizing and presenting
accounting data in an effective way through which business organization implement effect
policies. It will help in decision making process. In order to understand the concept of
managerial accounting, UKC FURNITUR has been taken. In this report importance of
various managerial accounting system has been defined and used of various managerial
accounting techniques for calculation of cost had been analysis. This report also considers
how manger use managerial accounting tools for solving financial problem has been define
briefly.
TASK 1
P1 Explanation of management accounting and essential requirements of different types of
management accounting systems
Management Accounting: Management accounting consists of internal systems that an
organization uses to generate measure and evaluate quantitative and financial information for the
management of the organization. Managers of the UCK furniture use this data to analyze the
operational processes of the entity and make necessary decisions to assist its day to day
activities. In other words, management accounting helps the UCK furniture’s management to
perform all its functions including planning, staffing, implementing and monitoring.
There are various types of management accounting system which are as follows:
 Cost accounting system: This method is used by the companies engaged in
manufacturing processes. UCK furniture can use this method to estimate the price of the
products for profitability analysis and cost control. Cost accounting system also assist an
organization in calculating the value of closing material, work in progress for proper
financial accounting (Nielsen, Mitchell, and Nørreklit,2015, March).
 Inventory management systems: This method is used to keep the track of inventories
of an organization on various levels i.e. raw material level, sales, deliveries. This method
helps to prevent the overstocking and under stocking of inventories.
 Job costing system: This method involves the process of accumulation of information of
cost related to specific jobs which are to be undertaken in organization. This method will
1

help the managers to identify the jobs which are of less value or which are not important
and incurring major part of cost.
 Price optimizing system: This system depicts the relationship between supply-demand
and how it varies at different level of prices. This method helps in maximizing profits
and customer retention.
TASK 2
P2 Explanations of different methods used for management accounting reporting.
Business organizations use following types of accounting reports:
Cost reporting: This type of report is prepared for identifying cost summery incurred during in
particular time period. It will help in formulating cost management strategies to reduce cost of
business activites
Stock report: This report is prepared for verifying stock level of the company. It will help in
managing stock level of the company
Accounts receivable report: This report is formulated for the purpose of identifying activites of
debtors, with the use of this report manger built policies so that they can easily collect money
from customers and formulate attractive offer policies to increase cash sales.
Budget report: This report is prepared for summery of income and expense of future time
period it will help in implementation of effective polices (Dekker, 2016).
TASK 3
P3 Preparation of income statement by suing managerial accounting technique
Management accounting technique: These are the tools and methods used for calculating
value of cost incurred during the business operational activities process. Followings are the
techniques used by the mangers for identify cost through which they can implement
policies:
Cost amylases technique: This technique is used for identified special cost incurred
during manufacturing process. Job costing and process costing and standard costing are
part of this technique.
Product costing: This tool is implement by managers to identified cost of each product of
the company. It is also use for controlling additional cost incurred during production
procedure
2

Cost of inventory: This technique is used for calculating the cost incurred during maintain
developing and stocking the inventory within the organization. For this purpose manger
use various method EOQ, LIFO. FIFO, average stock etc. It also use for identifying
maximum, minimum and average stock need for organization for this purpose they use
VED, ABC analyses technique it will help in managing and controlling over all stock of
business organization.
Marginal analysis: This is essential technique of management accounting. It is most
useful tool, it will help in identifying the effect of additional units on profit and cost
incurred on manufacturing product. In this technique mangers analysis the relationship of
profit with other factors.
Absorption costing: It is also an essential part of managerial accounting tools. This will
help in calculating cost and profit for a particular time period. It will use all the factors of
production (Jamil, Zuriana, Mohamed, Muhammad, and Ali, 2015).
3

4
Particular Descriptions Amount
(Pound) Particular Amount
(Pound)
a) Units produced 11000 9500
b) Cost of Direct Material
(4kilo-
gramx3Pound
/kilo-
gramx11000)
132000
(4kilo-
gramx3Pound/kilo-
gramx9500)
114000
c) Cost of Direct Labor
(4 hoursx
2pound/hours
x11000)
88000
(4 hoursx
2pound/hours
x9500)
76000
d) Cost of Variable Overhead (5pound/desk
x11000) 55000 (5pound/deskx950
0) 47500
e) Prime Cost 275000 237500
f) Production overhead 20000 20000
g) Cost of goods
produced 295000 257500
h) Variable revenues cost (1Pound/des
kx11000) 11000 (1Pound/deskx95
00) 9500
i) fixed selling cost 2000 2000
j) Cost of Goods sold 308000 269000
k) Profit= l-j 77000 63500
l) Sales
(35
POUND/des
kx11000)
385000
(35
POUND/deskx95
00)
332500
Cost Card by using absorption costing method
January February

5
Particular Amount Amount
(POUND) Particular
Amount
(POUND
)
a) units produced 11000 9500
b) Revenues price per
desk 35 35
c) Variable cost per
desk:
Direct material
(4kilo-
gramx3Pound
/desk)
12
(4kilo-
gramx3Pound/des
k)
12
Direct Labour
(4 hoursx
2Pound/hour
s
8 (4 hoursx
2Pound/hours 8
Variable overhead 5 5
Variable revenues
overhead 1 1
d) Contribution 9 9
Total contribution 99000 85500
e) Fixed costs
Production overhead NOTE1 22000 19000
Revenues overhead 2000 2000
Profit (d-e) 75000 64500
January February
NOTE1
Production overhead are regarded as average production for every month that is 10000 units.
Thus, for January, the overhead amount= (20000/10000)x11000
Thus, for February, the overhead amount= (20000/10000)x9500
Cost Card by Applying Marginal costing

For the period ending
February
Sales
Net sale for January 385000
Net sale for February 332500
Total sale (A) 717500
Cost of goods sold
Cost for the month of January 308000
Cost for the month of February 269000
Total Cost of goods sold (B) 577000
Net income(C= A-B) 140500
Workings- Cost of
Finished goods
January February
Particular Descriptions Amount
(GBP)
Descriptions Amount
(GBP)
Units produced 11000 9500
6

a) Direct Material (4kilo-gramx3pound/
kilo-gramx11000)
132000 (4kilo-gramx3pound/
kilo-gramx9500)
114000
b) Value of Direct
Labour
(4 hours x 2pound/hours
x11000)
88000 (4 hours x
2pound/hours x9500)
76000
c) Value of
Variable
Overhead
(5GBP/deskx11000) 55000 (5GBP/deskx9500) 47500
d) Prime Cost 275000 237500
e) Value of
Production
overhead
20000 20000
f) Cost of goods
produced
295000 257500
g) Value of
Variable
revenues cost
(1pound/deskx11000) 11000 (1pound/deskx9500) 9500
h) fixed selling cost 2000 2000
i) Cost of Goods
sold
308000 269000
Month Hours
Spent Expenses
January 630 7960
February 505 7410
Mar 705 8285
April 555 7535
May 780 9110
June 795 9820
Highest number of hours = June =
795
7

Lowest number of hours = February
= 505
Variable cost= (9820-7410)/(795-
505)
Variable cost= 8.310345 GBP per
unit
fixed cost= 9820 - (795x8.31)
fixed cost= 3213.55 GBP
expenses for july= 3213.55 +
(650x8.31)
expenses for july= 8615.05 GBP
expenses for august= 3213.55 +
(750x8.31)
expenses for august= 9446.05 GBP
Opening Inventories 0
Purchase 100
Units 10 1000
200
Units 11 2200
130
Units 13.84615 1800
LIFO
130 13.84615 143.85
200 11 2200
70 10 700
Cost of 3043.85
8

Goods
Sold
Value of
closing
stock (30
x 10)
300
FIFO
100 10 110
200 11 2200
100 13.84615 1384.615
Cost of
Goods
Sold
3694.615
Value of
closing
stock (30
x
13.84615)
415.3845
AVCO 100 10 1000
200 11 2200
130 13.84615 1800
Average
Cost
(13.84615
+ 11
+10)/3
11.61538
Cost of goods sold 4646.154
(400x11.61538)
Closing Stock 348.4615
9

TASK 4
P4Evolution of benefits and drawbacks of different types of planning tools used for budgetary
control.
Budget: It is numerical framework which is prepared for identifying future profit and
expenses value. Business organization use it for taking essential decision regarding their
future purpose. Process of preparation of budget is known as budgeting and methods used
for systematic process of budget is known as budgetary control. It is uses as planning tool
for organization. Following are the different types of planning tool use for budgetary
control:
Zero base budgeting: Under this method budgets are prepared from scratch level.
Benefits:
 It provides accurate information for future
 Chances of errors are less as compare to other methods
Drawbacks
 It is highly expensive method
 Success of this method depends on skilled expertise
Rolling budgeting: It is famous method of controlling budget as budgets are
prepared for short term and continuous process. Manager evaluates each budget
and then make another budget by rectifying all the errors
Benefits
 This method help in overcoming difference of achieved and standard target
 It will also useful for newly establish organization (Modell, 2014).
Drawbacks
 It takes lot of tie for formulating budgets after each duration
 Employers feel dissatisfy and de motivating due to changes of policies
Activity based budgeting: In this process budgets are prepared on the basis of cost
incurred during the allocation of business activities and resources.
Benefits
 Help in optimum utilization of resources
 Use in saving cost and time for the business organization
Drawbacks
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 It is very complex process
 It can not applicable for service industry.
Manager of UKC furniture used activity based budgeting method for preparation of budget
and use as planning tool
1) schedule of
expected cash
collections for
September
Descriptions September
(GBP)
Cash Sale 39000
Collection for
revenues on
account
(Quattrone,
2016).
July 392
August 4416
September 840
Total
collections
44648
11

2) Schedule of expended cash disbursements for merchandise inventory purchases in
September
Descriptions September
(GBP)
Payment for
inventory
purchased in
September
4800
(24000x.2)
Payment for
inventory
purchased in
August
15000
12

Total
disbursement
for inventory
purchase
19800
3) Cash
Budget
Descriptions September
(GBP)
opening
balance
(A) 20000
Collections
Cash Sale 39000
Collection for
revenues on
account:
July 392
August 4416
September 840
Total
collections
(B) 44648 64648
Disbursements
13

Payment for
inventory
purchased in
September
4800
(24000x.2)
Payment for
inventory
purchased in
August
15000
Selling and
administration
expenses
(Suomala,
Lyly-
Yrjänäinen,
and Lukka,
2014).
9000
(excluding
depreciation of
4000)
Purchase of
equipment
18000
14

Dividend to be
paid
3000
Total
disbursements
(C) 49800
Balance (A+B
-C)
14848
Financing
Activity:
Loan Taken 1152
Closing
Balance
16000
P5Evaluation of how organisations are adapting management accounting systems to respond to
financial problems.
Financial problem: These problems are related with money. Conflicts arise due to money
problems known as financial problem. Currently UCK furniture suffering from this problem with
the use of management accounting technique they overcome their lack of sales outcome and lack
of managerial police by following way
Ratio: These ratio used to identify outcomes of the both part of the company with this analysis it
is clear that Furniture Design Division provides more profit and have in good position to
overcome money problems (Bobryshev, and en.at. 2015).
key performance indicators: This tool is used to measure performance, with the use of this
method manger can implement their managerial skills
Benchmarks: It will help in comparison with setting benchmark standard. With the use of this
tool manger can overcome and increase their sales.
15

Calculation of ratios
Return on capital employed
 Formula: Operating Profit/ Capital employed x 100
 For UCK Furniture Design Division
 Operating Profit: 5,890
 Capital employee: 23,100
 = 5890/23100*100 : 25.49
 UCK Furniture Gear Box Division
 Operating Profit: 3,600
 Capital employee: 31,930
 3600/31930*100= 11.274
 Total ratio of capital employed of UCK Woodworks : 8.562108
Assets Turnover
 Formula: Net Sales/Total assets
 For UCK Furniture Design Division
 Net Sales: 13000
NOTE: Due to lack of knowledge regarding net assets, capital employed has been assumed as
net assets
 Total assets: 23,100
 13000/23100 = 0.562771
 UCK Furniture Gear Box Division
 Net Sales: 24900
 Total assets: 31,930
 24900/31930 = 0.779831
 UCK Woodworks assets turnover ratio: 0.191801
Operating profit margin
 Formula : Operating profit margin = Operating Profit/ Total revenues x 100 (Christ,
2014).
 For UCK Furniture Design Division
 Operating Profit 5,890
16

 Total revenues 13,000
 5890 /13000*100 = 45.30769
 UCK Furniture operating ratio: Box Division
 Operating Profit: 3,600
 Total revenues: 24900 = 3600/24900*100 = 14.45783
 UCK Woodworks operating ratio : 44.64056
CONCLUSION
From the above analysis it has been concluded that management accounting is needed by
business organizations for achieving their vision and maintain a strong position in market
area. Business manger use managerial accounting technique for formulating policies and
controlling budget. They also use these tools to analysis the financial problem and resolve it
through adopting tools of management accounting
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REFRENCES
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