Management Accounting: Types, Techniques, and Planning Tools

This document provides an overview of management accounting, including different types of systems, budgeting tools, and costing techniques. It also discusses the advantages and disadvantages of various planning tools and how management accounting can be used to respond to monetary problems. The content covers the subject of Management Accounting and includes information on types of MA systems, MA budgeting tools, absorption and variable costing techniques, and comparing planning tools.

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
P1 Different types of MA system................................................................................................1
P2 Different types of MA budgeting tools..................................................................................1
P3 Absorption and variable costing techniques...........................................................................1
P 4 Comparing three different planning tools..............................................................................3
Presenting advantages and disadvantages of planning tools.......................................................6
P5 Assessing how management accounting tools can be used for responding monetary
problems......................................................................................................................................7
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Management accounting (MA) is used to make decision by considering all the important
aspects such that manager uses this method to analyze the area of cost control and make
improvement actions as well. In the same way, current study is based upon a scenario of Prime
Furniture who is planning to start a training course for new interns. In this, study will shed a
light on need of MA and assess how absorption and marginal costing assist quoted firm in
ascertaining cost. Further, study will provide different tools used for planning and analyze the
way in which it assist to minimize the financial issues.
P1 Different types of MA system
Covered in PPT
P2 Different types of MA budgeting tools
Covered in PPT
P3 Absorption and variable costing techniques
The calculation of the cost and the profit is very essential for the company as this assist
company in managing the profitability of the company. Thus, for the calculation of the cost there
are two major types of costing method that is marginal and absorption costing.
Marginal costing- the marginal costing is referred to as the ascertaining of cost in order
to measure the impact of profits over the change in the volume of production or the output. This
can also be referred to as the change in the aggregate cost because of the change in the
production quantity. Under this the variable cost is being charged to the per unit cost and the
fixed cost is written off in against of the contribution. Under marginal costing only the
manufacturing cost which is variable is included as product cost.
Absorption costing- this is a type of costing which reflects that all cost associated with
manufacturing of product is included at single time. Further all the indirect expenses that is non-
manufacturing expenses are treated after the calculation of gross profit.
Marginal Costing
Particulars Quarter 1 Quarter 2
Sales (66000*1) 66000 (74000*1) 74000
Less: VC
Variable cost (78000*0.65) 50700 (66000*0.65) 42900
Add: OP Stock 0 7800
1

CL Stock (12000*0.65) 7800 (4000*0.65) 2600
42900 48100
Contribution 23100 25900
Less: FC
Fixed cost 16000 16000
Selling And Administration 5200 21200 5200 21200
Net Profit 1900 4700
Absorption Costing
Particulars Quarter 1 Quarter 2
Sales (66000*1) 66000 (74000*1) 74000
Less: Direct Expenses
Variable Cost (78000*0.65) 50700 (66000*0.65) 42900
Add: OP Stock 0 10261.54
Less: CL Stock 10261.54 3569.70
Fixed Cost 16000 16000
56438.46 65591.84
Gross Profit 9561.54 8408.16
Less: Indirect Expenses
Selling And Administration 5200 5200
Net Profit 4361.54 3208.16
Reconciliation statement
Quarter
1 Quarter 2
Profit as per Absorption costing 4361.54 3208.16
+ op stock @ FOH rate at op. date 2461.54
- Cl stock @ FOH rate at cl. date 2461.54 970.00
Profit as per marginal costing 1900.00 4700
Interpretation- from the above table it is clearly evident that profit under the marginal costing
for quarter 1 and 2 are 1900 and 4700 respectively. Furthermore, in case of the absorption
costing the profit were 4361.54 and 3208.16 for quarter 1 & 2 respectively. With help of above
calculation, it is clear that with help of absorption costing the profits are more as compared to
marginal costing. The reason behind this is that under absorption costing all the direct expenses
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are deducted directly from sales and indirect expenses are treated after calculation of gross
profit.
P 4 Comparing three different planning tools
Management accounting is the process of preparing report about the business operation
which can be used by the manager in the organization to make variety of the different type of
decision to overcome short term and long term issue for the organization. Management
accounting help the organization in pursuing the goal by identifying, measuring and analysing
different data which can be communicated to different manager in the market (Taipaleenmäki,
2017). Management accounting generally includes the financial information which can be used
by the manager to make different decision to achieve the overall objective of the organization.
Looking at the origin of Management accounting it can be said that it has been
originated from the financial accounting. Management accounting was originated in 1900's but
in the initial stage management accounting was not that famous accounting type. In the recent
past there is good sort of demand of management accounting as well. Management Accounting
system are internal framework which can be used by the organization to measure and evaluate
the process of managing the organization in the better way. In simple words it can be said that
management accounting system used to provide the critical information to the manager, which
can be used by the manager to take variety of the different type of decision to improve the
efficiency and effectiveness of variety of different task carried out in the organization.
Pricing strategy: Competitive pricing: The method is used by evaluating competitor's price because it is
based upon market rate of a company's product and depend upon customer demand. So,
Prime Furniture also uses this strategy in order to stay ahead within a competition. Skimming: This is used to gain higher competitive advantage and revenue. Therefore, it
is used when company charge highest possible price for a new product (Different pricing
strategies, 2018). Thus, it is mostly used in technological industry.
 Cost plus strategy: It is used when the company take cost of raw material and cost of
production and then add overhead cost of a product, then set price. Further markup
percentage is also used and then sale a product accordingly.
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Competitor determine their price through market research and then set the price
accordingly. This help business to gain high competitive advantage and attract range of
customers towards it.
SWOT analysis
Strength Weakness
 Strong brand image
 Uses competitive pricing
strategy that attract customers.
 Implement range of
Management accounting
system that helps in forecasting.
 Sudden change in
customer preference affect
the sales (Hnedina and
Vertiiko, 2020).
 If company do not focus
upon quality then it affect
the business performance.
Opportunity Threats
 Company should focus upon
online sales
 Also expand its business in
other countries to improve the
financial performance.
 Competition is consider
the biggest threat.
PEST Analysis
Political factor Fluctuation in country's political stability affects performance of Prime
Furniture. As company is deal with other country and that is why, there is
a need to maintain good relationship with government which helps in
importing and exporting.
Economic Factor Changes in currency rates directly affect Prime Furniture's revenue and if
the currency of a country is weak, then company should sell the product
at lower price so that its financial performance do not affected in
opposite manner.
Social Factor Changes in preference of customers also lead to affect the overall
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performance of a company, as they require furniture based upon latest
trend and that is why, frequently change in customer's preference affect
strategic planning (Beusch, 2020).
Technological
factor
Company should invest in AR and VR to increase sales and decrease
expenses. Moreover, it should design the application for online offering
so that company's financial performance increases.
In order to run a company in better manner, it is essential for the firm to make effective
planning. On this basis, if company do not have suitable financial plan, then Prime Furniture
faces difficulties. Therefore, there are some planning tools which ensure financial stability and
performance.
Cash budget
This is a major type of planning tool which will assist Prime Furniture in budgetary
control (DeFranco and Schmidgall, 2017). The cash budget is a type of budget which assist the
company in planning and making the expected cash inflow and outflow during a period of time.
The cash inflow and outflow includes all the transaction related with the cash either coming in
the business or going out of the business.
Zero Based budgeting (ZBB):
With the help of this, Prime Furniture make realistic planning and in this method,
manager starts with zero base. With the help of this method, company re-evaluate every item of
cash flow statement and justifies the expenditure as well (Zero based budgeting, 2020). This is
more preferable because it justifies each activity and explain the revenue which every cost will
generate for a firm. Therefore, by comparing with traditional budgeting, it is analyzed that ZBB
provides clarity and responsiveness which other method do not.
Activity based budgeting:
With the help of this method, Prime Furniture make sure about transparency in its budget
process because it consider overhead cost. The main aim of using this method is such that it
determine business cost drivers and also suggest ways through which business become more
profitable (Massicotte and Henri, 2020). Also, the method consider cost driver which further
assist to examine the relationship between cost and activity.
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Presenting advantages and disadvantages of planning tools.
Cash budget
Advantages:
 The major advantage of using the cash budget for Prime Furniture is that this budget
allows the company in managing the cash and its availability in very effective and proper
manner (Adeniran and Obembe, 2020). Another major advantage is that with help of cash budget every mistake or problem can
be analyses in very effective manner and company can take decision for meeting every
deficit.
Disadvantages:
 The major drawback of cash budget is that this limits the spending power of the
company. The major reason underlying this is that under cash budget an estimation of
expenses is made and company does not allow to go beyond that limit (Pavlatos and
Kostakis, 2018). Along with this another major drawback is that the estimation cannot be made
appropriately. The reason underlying this fact is that future cannot be predicted and
future expenses and income of the company can also not be predicted in appropriate
manner (Li and Gu, 2020).
Zero Based budgeting (ZBB):
Advantages:
 This method is flexible to use and also remove all the redundant activities during cost
effectual activities.
 It also assist in efficient allocation of resources because it do not consider historical data. With ZBB, Prime Furniture improves coordination and communication within each
department which leads to make better decision.
Disadvantages:
 ZBB is time consuming method and require personnel to handle such budgeting. If Prime Furniture uses this method, then manager provide effective training session
which is time consuming process.
Activity based budgeting:
Advantages:
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 This planning tool assist to analyze link of cost for each operational activity.
 It further assist to break down cost which further help to examine the item which cause
negative impact upon profit (Indrani, Naidoo and Wickremasinghe, 2020). This method also help to gain competitive advantages and also eliminate all sorts of
unnecessary activities.
Disadvantages:
 This method is more expensive to implement rather than other methods.
 The method also requires technical details in order to capture the cost at a particular level
which is not possible.
 This tool is not suitable for companies that offers one or more products.
P5 Assessing how management accounting tools can be used for responding monetary problems
Financial issues
Every organization is established with the motive of earning adequate profits and
achieving growth. However there are different financial issues which are faced by the company
that affects its growth and operating effectiveness. Different financial issues that company may
face are insufficient cash flow, ineffective inventory management, long outstanding customer
dues, increasing costs and expenditures and many more.
Key performance indicators: It refers to tool used by the business that involves framing
measurable values to be achieved by the business. It helps the business to analyse the level of
success achieved by the departments of organisation in reaching the set targets (Sohrabi, 2017).
The tool is used by the company for identifying the areas where company is lacking by
comparing the actual and KPIs set so that measures could be taken by the management.
Benchmarking: It refer to the tool used by management for comparing the business
performance and process metrics to the industry bests. It also helps the business to measure
performance of different products or processes. It is used by the organisations to identify the gap
between the standards set and the actual level achieved by the department.
Financial governance: It refers to the manner in which company gathers, monitors, manages
and controls the financial information. It helps the company in tracking financial transactions,
managing performance and controlling data, operations, compliance and disclosures. The
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financial governance is essential for ensuring that the management is complying with business
requirements and to establish strong internal controls necessary for the business process.
Comparison of companies using different tools for responding to financial issues
Prime Furniture Star Woods
Prime furniture is medium scale furniture
manufacturing firm. The company faced issues
of inventory management for long time that
made the company to buy goods at increased
cost affecting the budget. Later on company
used KPI to analyze the issue faced of
increasing inventory cost. Company
established inventory management tool for
keeping record of all the movement of
inventory, to track changes and to make
forecasts. It helped the company to place
timely orders for purchases that helped them to
negotiate prices with suppliers. Inventory
management is string tool using which
organization analyses the trend and makes
forecasts for the future period.
On the other Star Woods is also a medium
scaled company that makes furniture. The
company was growing at considerable speed
due to high quality of furniture. Company was
facing issue of increasing costs and
expenditures that was reducing the profit
margins. Company used bench-marking for
identifying the financial being faced behind
increasing costs (KASHANIPOOR and et.al.,
2018). Company implemented the cost
accounting method and budgeting tool for
effective allocation of resources among
different departments. Also strong financial
governance was established implementing
internal controls ensuring that departments are
operating within the budgets. It also ensured
that effective allocation of the resources is
being made by the company
In the above manner organizations use different tools and MA tools for meeting the
financial issues faced by organization. These tools play an effective role in meeting the
organizational goals and objectives.
With the help of planning tools, Prime Furniture assist to monitor the performance of
company in order to inform budgeting and pricing decision as well as strategic planning. For
example, ZBB help quoted firm to determine the present performance while ABB consider all
the overhead to attain the define aim. Overall, through effective planning tools, company
maintain sustainable success and attain the set objectives as well.
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CONCLUSION
By summing up above, it has been concluded that MA plays an important role in the
success of a company. Also, with the help of effective MA system, Prime Furniture measure and
evaluate the process. Beside this, company with the help of budgeting report like cost and
inventory, quoted firm monitor the performance. Moreover, company should also use absorption
costing for assessing cost and margin. Hence, with the help of variance analysis as well as
budgetary control helps in responding financial problems.
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REFERENCES
Books and Journals
Adeniran, A.O. and Obembe, O.E., 2020. The significance of strategic management accounting
on the performance of transport businesses in Nigeria. Insights into Regional
Development.2(3). pp.677-688.
Beusch, P., 2020. Management accounting and control for sustainability. Accounting for
Sustainability, pp.33-50.
DeFranco, A.L. and Schmidgall, R.S., 2017. Cash Budgets, Controls, and Management in
Clubs. The Journal of Hospitality Financial Management. 25(2). pp.112-122.
Hnedina, K. and Vertiiko, A., 2020. Formation of strategic management accounting system for a
startup enterprise. Problems and prospects of economics and management, (1 (21)),
pp.309-320.
Indrani, M.W., Naidoo, M. and Wickremasinghe, G., 2020. Exploring adoption and
implementation of strategic management tools and techniques by listed companies in the
Sri Lankan context. International Journal of Accounting and Business Finance. 6(1).
KASHANIPOOR, M., and et.al., 2018. The impact of economic and human factors in applying
management accounting tools (companies listed in the Tehran Stock Exchange).
Li, Z. and Gu, J., 2020, February. Research on Artificial Intelligence Cash Budget of Electric
Power Enterprise Based on Evidence Reasoning. In The International Conference on
Cyber Security Intelligence and Analytics (pp. 308-314). Springer, Cham.
Massicotte, S. and Henri, J.F., 2020. The use of management accounting information by boards
of directors to oversee strategy implementation. The British Accounting Review, p.100953.
Pavlatos, O. and Kostakis, H., 2018. Management accounting innovations in a time of economic
crisis. The Journal of Economic Asymmetries. 18. p.e00106.
Sohrabi, M., 2017. The Relationship between Non-Financial Innovative Management
Accounting Tools and Risk and Return of Iranian Stock Market Listed Companies. Dutch
Journal of Finance and Management. 1(2). p.40.
Taipaleenmäki, J., 2017. Towards Agile Management Accounting: A Research Note on
Accounting Agility. Turunkauppak kea.175.
Online
Different pricing strategies. 2018. [Online]. Available through:
<https://blog.hubspot.com/sales/pricing-strategy>.
Zero based budgeting. 2020 [Online]. Available through:
<https://efinancemanagement.com/budgeting/zero-based>.
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