Management Accounting and Budgetary Control

This study material provides an in-depth understanding of management accounting, including different types of MA systems and their requirements. It also covers cost analysis for income statement preparation using marginal and absorption costs. Additionally, it explains various planning tools used for budgetary control and their advantages and disadvantages. Suitable for management students.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1: Evaluate management accounting and requirements of different types of MA systems.......1
P2: Different methods used for the management accounting reports..........................................3
M1 Evaluation of pros of management accounting systems and its application: .......................3
D1 Critical evaluation of management accounting system and report in integration to
organization:................................................................................................................................4
TASK 2............................................................................................................................................4
P3: Calculation of cost analysis for the preparation of the income statement by using marginal
and absorption costs.....................................................................................................................4
M2 Accurate application of management accounting techniques and production of appropriate
financial reporting document:......................................................................................................6
D2: Interpretation of the data for range of business activities ....................................................7
TASK 3............................................................................................................................................7
P4: Explaining different types of planning tools that is used for budgetary control along with
its advantages and disadvantages:................................................................................................7
M3 Analysing the utilisation of different planning tools and their application for preparing as
well as forecasting of budget:......................................................................................................9
TASK 5............................................................................................................................................9
P5 Comparing organizations on the basis of their adoption of management accounting systems
as a response to financial problems:............................................................................................9
M4 Analysing how management accounting helps in responding financial problems of an
organization for the purpose of sustainable success: ................................................................11
D3 Evaluation of planning tools for responding and solving financial problems of business:. 11
CONCLUSION .............................................................................................................................11
References......................................................................................................................................12

INTRODUCTION
Management accounting refers to the process of financial and non financial for making
the decision by the managers by the given information. It is the special branch of the accounting,
it is the modern innovation of the accounting. Through this help management accountant is able
to identify the financial data and prepare the accounts for assess the financial statements in the
entity. Through this help they are able to develop communication skills which is very important
for the interpretation of the income statements. There is use of the different techniques for decide
the future course of the actions (Bennett and James , 2017) with the help of financial
information. In this the procedure is designed through GAAPS. This report is based on the
company which is Prime Furniture, it is the growing East London based firm which start their
training course for the new interns in November 2019. In this report, there is the understanding
of the management accounting system, different ranges for the management accounting
techniques and different planning tools for management accounting. There are different ways for
solving financial problems.
TASK 1
P1: Evaluate management accounting and requirements of different types of MA systems
Management accounting is the technique used used for analysing the accounting
information which is very useful for the management team in the organization. There are various
types of system are made which is followed by the Prime Furniture are as follows-
 Inventory management system- It is the system used for the management of the raw
material, inventory by using various methods LIFO, FIFO, weightage average method.
From these techniques there is increasing the efficiency and effectiveness in the inventory
management. In the context to Prime furniture, it is the most important tool which is
useful for the achievement of goals and objective.
Essential requirements-
 In this system there is the use of the different methods like Last in last out, first in first
out, simple average method for assess the outflow and inflow of the finished goods.
Through this they can track the movement of the goods in the better ways. In Prime
furniture, they can track the manufactured goods which is sell to the the customers.
Through this the requirements of the raw material is met (Francioli and Quagli, 2016).
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 Job costing system- This system refers to the distribution of the job orders, it is done by
first identified the job costs by using the various tools and techniques. This is used to
determine the cost of the different process that is used by the manager for reducing the
cost effectively. In Prime furniture, through the use of this system they are able to gain
profit through different job orders so the cost of all is maximized.
Essential requirements
 In this technique, by the use of different methods and techniques cost of all the
department should be assessed, so that the cost can be reduced and result is profit maxi
maximization. For Prime furniture, this will be helpful for the company in the decreasing
of the job costs (Greger, Wolf and Krcmar, 2015).
 Through this system, it helps in increase in the effective work of the job orders of
different department for the achievement of the various goals and objectives.
 Cost accounting system- It is the system used by the organization in deciding the cost of
the output which provide high profit. There are various methods used for cost control and
for the input measurement system. In Context to Prime furniture, it is very useful
technique to identify the cost of the specific product which result is increase in efficiency.
Essential requirements
 In this system there is the use of various tools and techniques for the ascertainment of the
cost in the different department. In Prime furniture, cost of all goods and services can be
identifies by using various cost management techniques.
 Price optimization system- In this system, there is the use of various techniques for the
determination of the price of the following product. It is very useful tools for the
forecasting of the price in right manner. In context to Prime Furniture, they use this
system for the effective optimization of price for the attainment of the organizational
goals.
Essential requirements
 This system is very necessary for the prediction of the price in the future of the goods and
services. There is the use of different statistical methods for settings of the price (Guinea,
2016).
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P2: Different methods used for the management accounting reports
In management accounting reports, all these reports are made for the analysis and
interpretations of the financial data, figures and information. This is recorded in the books of
accounts of the Prime furniture for recording of various reports which is described below-
 Job costing reports- In this reports, there is the description of the job orders which is
made in the organization for various departments. By the use of this reports there is
effectively distribution of the cost among the different activity which help in proper
record of the all financial data which leads to increase in the profitability level in the
better way. In context to Prime furniture, there is the better assessment of the jobs order
can be made.
 Inventory management report- In this reports, there is the management of the inventory
is done in the proper way to know the gap between the inflow and outflow of the
inventory. There is the assessment of the stock is done effectively for reducing the cost.
In context to Prime furniture, they can achieve the goals and objective by reducing the
maintenance cost of the stock management and increase the level of profit.
 Departmental reports- In these reports, there is use of the different departmental such
finance, marketing, human resource and production department to increase the
productivity of all the workers present in all sectors. For the effective work they have to
work in a better way, they have to make coordinating with each departments to achieve
the goals and objectives of the firm in the Prime Furniture (Hoggett, 2015).
 Performance reports- This reports is develop for measure the performance of the
clients at the company to match their expected performance with the actual performance
and if there is any conflict occur then manager have to take corrective measure. In Prime
furniture, this report is made for the evaluation of the employees performance and make
strategy for improvement of the performance according to their specialization and talent.
M1 Evaluation of pros of management accounting systems and its application:
Job costing system tracks costs related to different activities or process of business that
helps Prime furniture in monitoring costs of each activity and avoid unwanted expenses. Further,
cost accounting system ensures proper flow of cash in business. Price optimisation helps in
setting adequate price and Inventory management system monitors situation of inventory in
company.
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D1 Critical evaluation of management accounting system and report in integration to
organization:
Management accounting system tracks and record position of finance in an organization
which helps Prime Furniture in gaining financial sustainability. Price optimisation, job costing,
inventory management and cost accounting are management accounting systems which
effectively tracks and manage cash flow in company. Further, account receivables is
management accounting report that monitors time period in which business receives payment
from debtors (Lowe, 2019).
TASK 2
P3: Calculation of cost analysis for the preparation of the income statement by using marginal
and absorption costs
There are various expenses used by the company on producing the product and service is
known as cost accounting.
There are various types of the cost are incur in the Prime furniture company-
 Direct and indirect cost- it is the cost which is used as direct for the production of the
output are direct labour, direct material and indirect cost which is attach with the cost
indirectly like maintenance expenses, repair expenses. In Prime furniture both costs is
used for the preparation of income statement.
 Fixed and Variable cost- the cost which is not changed with the level of the production
is called fixed cost and cost which is changed with the production level is called variable
cost. In the Prime furniture bot the costs is used for the effective production.
 Product and Period costs- both costs are associated with the product, in the product cost
this cost is associated with the product of the particular entity. Period costs is related to
the particular period of accounting . In Prime furniture, both costs are used by this for the
development of the cost with the product.
 Cost analysis- it is the analysis which refer to the proper analysis of the cost which is
based on the performance of the business. There are various methods are used in this are
cost control, cost ascertainment techniques. In Prime furniture there is the use of the cost
techniques to reduce the cost (Mueller and Trost, 2017).
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 Cost-volume profit analysis- This analysis is depend on the break even point of the
organizations. It is the point at which entity is not earn profit nor incur loss. Prime
furniture is used this analysis to check the profit and loss earned by them.
 Flexible budgeting – Flexible budget means budget which is change with the level of the
activity in the organization. Prime furniture prepare this for the gaining the advantage of
level of activity.
 Cost variances- It refers to the difference made between actual cost and planned cost,
through this they can reduce the cost for finding the effective solution.
 Absorption costing- It is the method used for calculation of the costs which include
indirect and direct costs. Prime furniture use this techniques for the effective working.
 Marginal costing- It is the cost which include variable cost which is charged to units of
contribution and completely written off against fixed costs (Revellino and Mouritsen,
2015).
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M2 Accurate application of management accounting techniques and production of appropriate
financial reporting document:
Actual costing system indicates computation of actual cost on the basis of actual amount
incorporated with overhead expense. Normal costing system is used for the purpose of deriving
cost of products of company. It involves direct as well as overhead cost. Standard costing
systems refers to estimation of standard cost for manufacturing single unit of product.
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D2: Interpretation of the data for range of business activities
In the business activities, cost of the goods of the prime furniture has been calculated by
multiple cost of production with cost per unit. In the above financial statements variable costing
is showing the profit of the quarter 1 is 1900 and 4700. in the absorption costing it show the
profit in quarter 1 is 4300 and 3100. In quarter 2 result are same. It means profit is remained
same in both the quarter. This helps in increasing the profitability level which is very essential
for the manufacturing company Prime Furniture (Roberts and Gnan, 2017).
TASK 3
P4: Explaining different types of planning tools that is used for budgetary control along with its
advantages and disadvantages:
Budgetary control can be describes as a procedure of preparing budget for enhancing
the performance of upcoming period of time. Planning tools of budgetary control refers to
measures which are utilised for the purpose of comparing actual results with estimated one.
Implementation of budgetary control measures enhances management of Prime Furniture.
Mentioned below are some tools or techniques which can be applied for budgetary control in an
organization:
 Capital Budgeting: It is a procedure of determines purchase of fixed assets in an
organization. This budgeting technique is utilised for the purpose of creating quantitative
view of proposed investment regarding fixed assets in Prime Furniture which enables
judgement on rational basis. Advantages and disadvantages of capital budgeting is
described below:
Advantages:
 Identifies risk: Capital budgeting helps in identifying risk that is associated with plans of
business regarding capital investment. It examines various aspects of projects for the
purpose of identifying risk factor associated with it.
 Maximizes wealth of shareholders: Capital budgeting entitles value maximization that
is associated with shareholders. Application of this tool enables Prime Furniture for
deploying fund in effective way, hence, profitability increases.
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 Controls expenditure: This method of budgetary control focuses on reduction of
expenses entitled with investment alternatives. It helps Prime Furniture in minimizing
expenses and ensuring adequate inflow.
Disadvantages:
 Implications are for long term: Decisions made regarding capital investment possesses
long term affect. Hence, is any mistake or negligence in capital budget may lead to huge
negative implications on Prime Furniture (Rosenthal, 2019).
 Not modifiable: As huge amount of capital is involved in capital budgeting, therefore,
such decisions cannot be modified or altered in future.
Operating Budget: It comprises of revenues and expenditure over a time period that
business generates from its day to day operations. Components that are considered while
preparing operating budget are revenue, variable costs, fixed costs, non-cash expenses, non-
operating costs and capital costs. This budgeting technique governs operational activities of
Prime Furniture. Pros ans cons of operating budget are considered below:
Advantages:
 Management of current expenses: Preparation of operating budget enables Prime
Furniture to manage its current expenditures. Reason is that it overviews revenues and
expenses incurred in business which helps in elimination of unnecessary costs.
 Projection of future expenses: Evaluation of past expenditure helps management of
Prime Furniture in effective estimation of future expenses in alignment with objectives of
an enterprise.
Disadvantages:
 Time consuming process: Process of preparing operating budget is a time consuming
procedure as it involves various factors such as analysis of past data, current business
environment, objectives of entity etc.
 Strategic rigidity: Implementation of operating budget results as reduction in flexibility
of strategy formulation in Prime Furniture. As various business operating activities are
already determined in budget and costs are estimated in accordance to it.
Alternative method of budgeting:
 Activity Based Budgeting: This method of budgeting refers to a system that tracks,
records and analyse activities of company that leads to cost. Activities of an organization
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is scrutinized on the basis of cost in activity based budgeting for the purpose of creating
efficiencies in Prime Furniture (Schaltegger, 2018).
M3 Analysing the utilisation of different planning tools and their application for preparing as
well as forecasting of budget:
For the purpose of estimating revenues and expenditure in an organization different
planning tools and techniques are applied. Hence, operating and capital budget are two method
of budgetary control that is implemented in Prime Furniture for effective allocation and
management of funds that business generates as well as expenditures that is incurred in
company. Former enables effective planning of budget for day to day business transactions while
later helps in understanding of risk factor associated with investment in fixed assets.
TASK 5
P5 Comparing organizations on the basis of their adoption of management accounting systems as
a response to financial problems:
Financial problems: Financial problems or issues refers to a situation that indicates
insufficient generation or management of fund in an organization. Such issues leads to
incapability of an entity in earning required amount of profit or maintaining smooth flow in
business operations. Mentioned below are some issues that business faces in relevance to its
financial activities:
 Mismanagement of working capital: Mismanagement of working capital indicates
incapability of management of business in maintaining flow of working capital in Prime
Furniture. It leads to hindrance in conducting daily operations of business as cash flow
within an organization is effected (Shulepina, 2015).
 High expenditures: Problem of high expenditure indicates that costs incurred in business
is high which leads to reduction in overall profitability of Prime Furniture. This problem
arises due to incorporation of unnecessary or unwanted costs in an enterprise.
Tools used for identification of financial problems: For the purpose of identifying
issues related to finance that business faces, following tools are utilised:
 Benchmarking: This method indicates comparison of financial results of business with
the estimated one with the motive of analysing overall effectiveness of entity.
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Application of benchmarking tools helped in identification of financial issue of high
expenditure that is pertained with Prime Furniture.
 Key Performance Indicator: KPI is a performance indicator that enables measurement
of success of business in context to achievement of its objectives. KPI involves financial
as well as non financial indicators of performance. Former indicates valuation of revenue
as well as profit generation capacity of Prime Furniture by evaluating its financial
information, while later clarifies non monetary activities of entity such as market share,
satisfaction of customers etc. Financial problem of mismanagement of working capital is
identified with the application of financial key performance indicator (Smith, 2019).
Financial Governance: It can be explained as a activity of managing and controlling
financial information, hence, it involves tracking of transactions in Prime Furniture that relates to
finance. Financial governance indicates management of financial issues of company by
identifying problems and implementing effective solution with the utilisation of management
accounting (Warren, Jonick and Schneider, 2020).
Prime furnitures Katie furnitures
Managers of the organisation are using cost
accounting system for the purpose of solving
the issue of mismanagement of working capital
because it guides the staff members to get
aware of all the costs and reduce the possibility
of mismanagement in working capital.
The organisation is facing the problem of
improper management of stock and in order to
deal with this problem the managers are using
inventory management system which guides
them to determine the way in which goods
could be managed systematically and the issue
could be ignored.
Job costing system is implemented by
management of Prime Furniture with the
intention of solving issues regarding
incorporation of high expenditures in an
organization. It enables enterprise in evaluating
cost related to each project which helps in
identification of unnecessary costs. It
Issue of high price is faced by Katie furniture.
For the purpose of solving this problem price
optimisation system is utilised by managers of
business. Applying this system ensures
alignment of price that company sets with
expectations of customers. Further, it also
ensures that adequate price is set so that
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ultimately leads to reduction in amount of
expenses.
company motive and customer demands can be
matched.
M4 Analysing how management accounting helps in responding financial problems of an
organization for the purpose of sustainable success:
Financial problems can be solved by appliance of financial governance which focuses of
elimination of issues related to finance in Prime Furniture. It suggests that financial problems
that business pertained can be identified with the utilization of monitoring tools, such as, key
performance indicator and benchmarking. Further, use of management accounting system helps
in tracking information related to fund that enables solving financial hindrances that business
faces (Solovida and Latan, 2017).
D3 Evaluation of planning tools for responding and solving financial problems of business:
Capital budgetary tool tracks investment of business in context to fixed assets that impose
long term implication. It enables Prime Furniture in evaluating high risk factor associated with it.
Further, operating budget estimates financial transactions for daily activities of business which
enables company to eliminate high costs that incurs in Prime Furniture. In context to
management accounting systems, job costing tracks expenditure entitled with every process
hence reduces high expenses. In addition to it, cost accounting avoids mismanagement of
working capital in an organization (Trucco, 2015).
CONCLUSION
From the above report it has been concluded that management accounting is very useful
in making strategic planning in the organization. It help in analysing of the financial data easily
by different statements like balance sheet, cash flow statement and ratio analysis. Through this
analyst is able to take decision making after evaluating the position of the company in the
market. There is the use of different system as per the management accounting reports. In this
costs is also calculated through different method. They adopting various system for solving
various financial problems.
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References
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