Management Accounting for Financial Control

This assignment delves into the crucial role of management accounting in businesses. It defines management accounting, highlighting its purpose of analyzing internal activities to enhance productivity and efficiency. The report examines various planning tools employed by companies to measure profitability and productivity, including budgetary control, ratio analysis, and standard costing. The effectiveness of these tools in addressing financial challenges is also discussed.

MANAGEMENT
ACCOUNTING
PART-2

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
1.1 Using techniques of cost analysis prepare income statements using absorption and
marginal cost .........................................................................................................................3
1.2 Apply different range of techniques of management accounting and produce financial
report.......................................................................................................................................4
1.3 Produce financial report that help in interpreting complex business activities...............5
2.1 Advantages and Disadvantages of different planning tool used in budgetary control ....6
2.2 Estimate cost using high low method...............................................................................7
2.3 The purpose of budget and prepare a cash budget...........................................................8
TASK 3............................................................................................................................................8
3.1 Compare how organisations are adapting management accounting system to respond
financial problem....................................................................................................................8
3.2 How management accounting aid in improving company's performance........................9
3.3 Evaluate different types of planning tool in order to reduce financial problem ..............9
CONCLUSION .............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Management accounting refers to the process of analysing business operation and cost so
as to prepare internal financial records, statements and account that help manager in decision-
making process and accomplishing organizational goal in an effective manner (Chiwamit,
Modell, and Yang, 2014). The given report is based on UCK Furniture and it covers various
techniques of management accounting, positive and negative of different types of planning tools
and preparation of income statement using absorption and marginal cost.
TASK 1
1.1 Using techniques of cost analysis prepare income statements using absorption and marginal
cost
Evaluating cost and profit of the company is considered as one of the most challenging task for
accountants and manager. They thoroughly measures day to day activities of business that
involves monetary values. There are different types of cost accounting techniques that help in
measuring the profitability of the firm. Profit and cost evaluation process becomes easy and
convenient with the help of these techniques.
Fixed and Variable Cost: Fixed Cost is the one that doesn't vary with the change in volume of
production i.e. it does not change with the amount of product & services produced by company
over a period of time. Even it remains same if there is no production in the company. It often
includes machinery, building, rent etc.
On the other hand, Variable Cost refers to that cost of company that is associated with
produced goods and services over a period of time. It either increases or decreases due to any
change that occurs in production volume. It include: wages, material used in production, utilities
etc.
Absorption Costing: It refers to the cost that is concerned with manufacturing overall products
and services. Basically this costing method covers everything that is directly related with
producing a goods or services such as overheads, labour, material etc.
Marginal Costing: Cost related with any change in total production cost either increase or
decrease for producing one additional unit of an item is known as marginal costing (Albu, and
Albu, 2012). It is normally calculated in cases where company has attain its break-even point
and its fixed cost has already been absorbed by produced item. It includes variable cost such as

material or labour cost plus some proportion of fixed cost such as selling expenses,
administration overheads etc.
Calculation of profit as per marginal costing
PARTICULARS January February
Sales (35 per unit) 315000 402500
less:
Cost of Production (12+8+5) 275000 237500
variable selling overheads (1 per unit) 11000 9500
variable cost 286000 247000
Contribution 29000 155500
less:
fixed manufacturing overheads 20000 20000
Fixed Admin & selling cost 2000 2000
total fixed costs 22000 22000
NET INCOME AS PER MARGINAL COST 7000 133500
Calculation of profit as per absorption costing
Particular January February
Sales (35per units) 315000 402500
less:
Cost of Production (12+8+5+1.82) 295020 254790
Gross Profit 19980 147710
LESS:
Fixed and variable cost:
variable sales overheads (1 per unit) 9000 11500
Fixed selling cost 2000 2000
Total costs 11000 13500
NET INCOME AS PER ABSORPTION COSTING: 8980 134210
1.2 Apply different range of techniques of management accounting and produce financial report
As per the above mentioned situation, there are different range of management
accounting techniques that can be used by company's manager in order to identify the final cost

of the product and deciding the price of the product taken into account all essential cost related to
it such as labour, material, overhead etc. It is important for a company to categorise their cost on
the basis of fixed and variable aspect. For example: If company wants to compute its absorption
cost, then first they need taken into consideration both fixed and variable cost.
Different types of cost measuring techniques are used by the firms as per its nature and
flexibility (Callahan, Stetz, and Brooks, 2011). Job costing, process costing, standard costing
are some of the cost measuring methods. These evaluating techniques are used so measure the
profitability of the firm in an effective and efficient manner.
1.3 Produce financial report that help in interpreting complex business activities
Financial Reports are prepared so as to measure the performance of the company through
the year. This report mainly shows or depicts the sources from where the firm's money came
from, where it goes and where it is now. Basically this report detailed about all funding sources
of the business enterprise and how they further used it in order to attain its organisational
objectives and goals (DRURY, 2013). There are four financial statement through which entire
funding or investment of the firm can be calculated are income statements, cash flow statements,
balance sheet and equity shareholder statement.
Costing Method Advantages Disadvantages
Marginal Costing  This costing method
aid in covering all
essential variable
aspects such as labour
cost, material cost. This
is also refers as prime
production cost
 It helps in production
planning as well.
 Under this method,
non-production and
fixed cost are not taken
into consideration.
 It is quite difficult to
separate costs into
variable and fixed.
Absorption Costing  This costing method
covers both fixed and
variable cost subject to
measuring product cost
 It is not very helpful in
taking managerial
decision such as
whether to produce or

as per fixed and
marginal aspects.
 It help in identifying
actual cost of the
product
buy, selecting of
appropriate product
mix, choice of
alternatives etc.
 Inclusion of fixed cost
is not justified.
TASK 2
2.1 Advantages and Disadvantages of different planning tool used in budgetary control
Budgetary Control: It is a kind of management control system in which actual spending and
income of the company is compared with its planned income and spending so as to figure out
whether everything is going as per the defined plan or not (Fourie, and et. al., 2015). The
comparison between actual and budgeted figures will assist management in determining
discrepancies and take remedial measures for the same at right time.
Objectives of Budgetary Control:
1. Helps in eliminating waste and maximising profitability
2. Effective and efficient control over different cost departments and centres.
3. Correction of deviation from established or pre-defined standards
There are three types of planning tool that is used by business enterprise for budgetary control
are as follows:
Incremental Budgeting: This budgeting report is based on the assumption of making small or
minimal changes to the present budget so as to arrive at the new budget. This budgeting report is
prepared by taking into consideration budget of last or previous year and on the basis of that
company's add incremental amount so as to prepare new budgetary report. Moreover the
allocation of resources is depend upon the budget of last financial period. It also promotes
“spending up to the budget” that assure reasonable allocation of resources for next accounting
period.
Advantages of Incremental Budgeting:
1. With the help of this budgeting, co-ordination among budgets is easier to achieve.
2. Impact of change can be seen or figured out quickly.
3. The system is relatively easy to understand and simple to operate.

Disadvantage of Incremental Budgeting:
1. No extra incentives to reduce cost
2. Based on the assumption that working methods and activities will continue in similar
manner like of previous year.
3. There might be chances of change in context of priority of budgets (Melnyk and et. al.,
2014).
Zero-based Budgeting: Under this method of budgeting, expenses are measured according to the
costs and needs of each function. In simple words, expenses for new period are computed on the
basis of actual expenses that has been incurred in the company. This method assumes that no
balances or expenses of last year is going to be carried forward in next accounting year.
Advantages of Zero-based Budgeting:
1. It assist in allocation of resources in an efficient manner.
2. It help in identifying numerous opportunities in cost-effective manner by removing all
redundant activities. (Messner, 2016).
3. This method also enhances communication and co-ordination within the department and
also motivates workforce by involving them in decision making process
Disadvantages of Zero-based Budgeting:
1. This process is time-consuming and waste lots of energy of company and employees
2. The whole budgeting report requires high manpower which waste lots of their time,
energy and efforts
3. Lack of expertise
Activity-based Budgeting: Under this accounting method, firm determines the activities that they
need to perform and then allocate indirect cost to product accordingly. This approach defines the
relationship between activities, cost, products and through this relationship, company further
assign indirect cost to products. Cost is allocated to each activity as per their actual consumption.
Advantages of Activity-based Budgeting:
1. Simple and easy method for allocating cost
2. Facilitates benchmarking
3. Supports performance scorecards and management
Disadvantages of Activity-based Budgeting:
1. The method is costly and time-consuming

2. This method do not conform GAAP
3. Data can be easily misinterpreted which creates ambiguity in decision-making process
2.2 Estimate cost using high low method
Calculation of variable cost per unit using identified high and low activity level:
Total cost = (Expenses of high activity- expenses of low activity)/(Highest activity hours spent -
lowest hours spent)
Total expense per units = (9820-7410)/(795-505)=8.31
Total expenses for July = 650*8.31=5401.5
Total expensed for August = 750*8.31= 6232.5
2.3 The purpose of budget and prepare a cash budget
Cash budget Amount
Particulars September
Opening balance 9000
Cash sales 39000
Sale on account 5648
Total Cash collected 53648
Purchase -16800
Selling and administration
expenses -13000
Equipment cost -18000
Dividend paid -4000
1848
Add: minimum cash balance 5000
Expected cash in the end of
September month 6848
TASK 3
3.1 Compare how organisations are adapting management accounting system to respond
financial problem
Ratios Formula UCK furnitures UCK woodwork

ROCE(Return on
capital employed):
Operating profit/Capital
employed*100
5890+3600/23100+
31930*100
=9490/55030*100
=17.24%
6955/81230*100
=8.56%
Assets turnover Revenue / Net assets 13000+24900/2310
0+31930
=0.68 times
8150/81230
=0.100 times
Operating profit
margin
Operating profit / sales *100 9490/13000+24900
*100
=25.03%
6955/81230*100
=8.56%
UCK Woodwork:
Given organisation deals in selling and manufacturing furniture all across the globe.
From the above analysis, it can be observed that company's operating profit margin is 8.56%
which means that it's profitability is low even after all variable production cost such as raw
material, wages etc.
UCK Furniture:
As per the above analysis, it can be concluded that operating profit margin of this firm is
25.03% which is 3 times higher than UCK Woodwork (Mistry, Sharma and Low, 2014). It
denotes that company is yielding sustainable profit and possess good control over their operation
and activities. It's return on capital employed is 17.24% and asset turnover is computed as 0.68
times.
3.2 How management accounting aid in improving company's performance
Huge role is performed by systems of management accounting to achieve sustainability
in their business operation. Contribution of various management accounting system towards the
enhancement of financial performance of the company is discussed below:

 Application of costing techniques like standard costing aid in measuring risk factors
associated with particular project. It also help in determining budgeted cost that can be
compare with the current one. It help in reducing or eliminating unnecessary costs.
 Management accounting covers price optimisation method that assist company in
satisfying the need and demand of customer in an effective manner and leads to improve
the sales figures. Moreover, it also leads to yield higher profitability and revenues for the
company.
3.3 Evaluate different types of planning tool in order to reduce financial problem
1. Budgetary Control: It is type of management control system that is used by business
enterprise so figure out the actual income or spending of the company and compare it
with planned income and spending. This is mainly done so as to check whether
everything is going as per the plan or not (Renz, and Herman, 2016).
2. Ratio Analysis: It refers to the quantitative investigation of firm's operating & financial
performance
3. Standard Costing: It refers to the planned unit of cost of particular product, services or
component. It refers to the practice of substituting expected cost from the actual one
(Robalo, 2014).
CONCLUSION
From the above mentioned report it can be concluded that management accounting means
recording and analysing internal business activities of the company in an effect to maximise
productivity and efficiency. Different types of planning tools used by company to measure its
profitability and productivity in an effectual manner.

REFERENCES
Books and Journals
Chiwamit, P., Modell, S. and Yang, C. L., 2014. The societal relevance of management
accounting innovations: economic value added and institutional work in the fields of
Chinese and Thai state-owned enterprises. Accounting and Business Research. 44(2).
pp.144-180.
Albu, N. and Albu, C. N., 2012. Factors associated with the adoption and use of management
accounting techniques in developing countries: The case of Romania. Journal of
International Financial Management & Accounting. 23(3). pp.245-276.
Callahan, K. R., Stetz, G. S. and Brooks, L. M., 2011. Project Management Accounting, with
Website: Budgeting, Tracking, and Reporting Costs and Profitability (Vol. 565). John
Wiley & Sons.
DRURY, C. M., 2013. Management and cost accounting. Springer.
Fourie, M. L. and et. al., 2015. Municipal finance and accounting. Van Schaik Publishers.
Melnyk, S. A. and et. al., 2014. Is performance measurement and management fit for the future?.
Management Accounting Research. 25(2). pp.173-186.
Messner, M., 2016. Does industry matter? How industry context shapes management accounting
practice. Management Accounting Research. 31. pp.103-111.