Management Accounting: Techniques, Budgeting, and Pricing Strategies

This document provides an overview of management accounting techniques, including cost analysis, cost allocation, cost-volume profit analysis, and flexible budgeting. It also discusses different types of budgets, such as operating budget, capital budget, and cash flow budget. Additionally, it explores pricing strategies and the role of costing in decision-making and inventory management.

Unit 5 - Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................3
LO2..................................................................................................................................................3
Techniques of Management Accounting.....................................................................................3
LO3................................................................................................................................................10
Budget and its types...................................................................................................................10
Pricing strategies........................................................................................................................11
LO 4...............................................................................................................................................14
Compare different management accounting tools.....................................................................14
CONCLUSION..............................................................................................................................16
REFERENCES................................................................................................................................1

INTRODUCTION
Management Accounting is that branch of accounting that deals with the evaluation of
the financial data that is associated with the company and the financial statements are interpreted
so as to evaluate and forecast the business performance. In the current report, different aspects
related to management accounting will be evaluated and distinction between management and
financial accounting will be discussed. The report will also identify the different product costing
techniques and the inventory costing techniques along with development of proper budgets that
are associated with the company. Further, financial data of Prime Furniture will be evaluated and
appropriate interpretation will be made in the report.
LO2
Techniques of Management Accounting
Microeconomics techniques
Cost is the value that is spent by the organization in producing and delivery of product.
There are different types of cost such as fixed and variable cost, direct and indirect cost etc. Cost
analysis is a measure of determining the cost incurred and how well it can be organized which
can help in increasing the productivity (Weetman, 2019). Different types of cost analysis
techniques that can be used by Prime Furniture's are stated below.
Cost Allocation: It refers to process of identifying and assigning cost to different cost objects,
products or departments. The cost is allocated because it is not possible to directly trace te cost
for the specific object.
Cost effectiveness analysis: It is the technique that is used to analyze and compare the relative
cost to the outcome (Holopainen, Niskanen and Rissanen, 2019). It considers both monetary and
non-monetary aspects for comparison.
Cost benefit analysis: It is a process that is used by the organization in analyzing decisions
regarding systems, processes. This method provides evidence based view which is not influenced
by any politics or partiality.
Cost-volume profit
This method helps in determining how variation in cost and volume can affect the
operating profit of the organization. This analysis requires company's all cost to be divided into
fixed and variable which includes manufacturing, selling and administration (Burney and

Malina, 2019). This method is based on several assumptions such as sales price per unit and
variable price per unit is constant, total fixed cost are constant, everything produced is sold.
Flexible budgeting
Flexible budget is a budget that adjusts with the change in volume and activity. As
flexible budget includes variable rate per unit of activity instead of total fixed amount. It uses
revenue and expenses based on current production and estimates how it will change with the
change in output (Bogt and Scapens, 2019). This helps management in comparing the figures to
know the area of improvement and areas improved.
Cost variances
It is a way of showing financial performance of a project. It is the difference between the
actual performance and the standard performance. These variances are bifurcated into different
types of cost such as direct material price variance, labor rate variance, variable overhead
spending variance, fixed overhead spending variance and purchase price variance.
Absorption and Marginal Costing
Absorption Costing helps in ascertaining the costs that are incurred by the organization by
incorporating both direct and indirect expenses in an economy.

Marginal costing technique is that technique where the variable cost is charged to every unit and
the entire fixed cost is written off in the period when it is incurred.

The calculation above shows that for Prime Furniture, the profit is more when it is calculated
under the absorption costing technique because the fixed and variable cost both is charged on an
yearly basis. The net profit for first quarter under absorption cost is 4700 and 5900 for second
quarter. But, under marginal cost, it is only 1900 for first and 4700 for second quarter. This is
because of charging fixed costs collectively and thus it can be interpreted that the absorption
costing is a better method.
Product costing

Different types of costs
There are different types of cost which are classified based on the relationship with level
of output (Hopper and Bui, 2016). Following are cost in relation to how they change with respect
to the change in the level of output.
Fixed cost: It refers to the cost that do not vary with the change in the level of output.
This change is fixed with respect to short term changes and but in long term it may change. For
example, Office rent, insurance expenses, depreciation etc.
Variable cost: This cost changes with the change in the level of production. Variable cost
increases with the increase in production volume and decreases with the decrease in production
volume ((Otley, 2016)). For example, direct material, labor cost, packaging cost etc. It has direct
relation with the level of output.
Semi-variable cost: It is the mixture of both variable and fixed cost. These cost vary with
output but not in direct proportion. In such cases, cost is fixed for certain level of activity and
becomes variable after that activity. It is also known as mixed cost. It includes administrative
cost, maintenance cost etc.
Normal costing
It is the method used in determining the cost of a product. The components included in
this method are actual cost of material, labor and overhead rates that are mostly used for
allocation purpose. This method is used in determining the cost of the product where there is no
sudden change in the costs, mainly increase in cost.
Standard costing
It is the system used by manufacturers to identify the variances between the actual
performance and the standard performance in terms of cost, that is, actual coat incurred and cost
that should have incurred to produce the actual products. The standard cost includes direct
material, direct labor and other manufacturing overhead costs. It involves creation of estimated
cost for the activities.
Activity-based costing
It is a costing method that is used in assigning the indirect and overhead cost to the
products and services. This method is mostly used in manufacturing concerns and it is
considered to be the most logical manner for allocating costs. The cost is first assigned to the

related activities and then assigns cost related to those activities to the respective products.
Sometimes it become difficult to assign indirect costs such as management cost, staff salaries etc.
Role of costing in deciding price of the product
Costs do not determine price but plays a crucial role in formulating pricing strategy. It is
related to the sales level which involves cost of production, selling and administration. The price
is decided based on what buyer is willing to pay, after which quantity required is determined.
Cost affects the prices that is charged (Kaplan, and Atkinson, 2015). A low cost producer can
price low and sell more because it will attract more price sensitive customers but it is not the
same in high cost producer's, as they cannot afford to lower its cost, so it must target premium
customers. Change in cost will force producers to change its price, for example, increase in price
of fuel, material, labor etc. Thus decisions are taken to quantities to sell and the target market to
serve plays an important part in forming pricing strategy. So, Prime Furniture's should consider
these points in setting price.
Cost of inventory
Inventory cost and its types
Inventory cost is the cost related to the procurement, storage and management of
inventory. There are three types of inventory cost which are stated below.
Ordering cost: It refers to the cost incurred for procuring inventory. It includes both cost of
procurement and inbound logistics.
Carrying cost: It involves storage and management of inventory. This cost varies and depends
upon management decision to manage inventory in -house, or outsourcing it to third party.
Shortage and stock out costs and cost of replenishment: These are the cost associated with
unusual circumstances. This situation arises when business becomes out of stock and business
have to incur cost such as paying salary to idle workers and other factory overheads even if
production is stopped.
Benefits of reducing inventory cost
The benefits that an organization can enjoy by reducing its inventory cost are stated
below.
 It will result in less money stuck in inventory management
 Saved cost can be utilized in other activity.
 Reduces the loss due to spoilage or expired products.

 Lowers the risk of loss and lower insurance cost.
Inventory Valuation methods
There are mainly three inventory valuation methods that are used in an organization
which are discussed below.
FIFO Method: In this method, inventory is sold in the order of its purchase or production that is,
first in , first out. This method is typically used as companies sells products in the order of
purchase.
LIFO Method: It is the opposite of FIFO method. In this, the most recent purchased item is sold
first. When prices increases, the cost of goods sold under this method is relatively high.
Weighted average cost: In this method, inventory and cost of goods sold are based on the
average cost of all items purchased. This method is used when cost of units are same.
Overhead costs
It refers to the all the indirect cost or expenses which includes advertising fees, legal fees,
rent, repairs etc. it is important for budgeting and as well as helps business in determining the
price of the product or service to make profit.
LO3
Budget and its types
Budget is an estimation of revenue and expenses for a specific period. It helps in tracking
and managing resources. The different types of budgets that can be used by Prime Furniture's are
stated below. Operating budget: It is a forecast of projected income and expenses for a specific period.
It is prepared weekly, monthly or yearly (Otley, 2016). It includes factors such as
material and labor cost, administrative expenses etc. Capital budget: This budget helps in determining which long term investment should be
accepted or declined. It includes purchasing or replacing new machinery, R&D projects
etc.
 Cash flow budget: It helps in projecting cash flows of the business and how well
company is managing its cash. It is representing cash flow from different activities.
Alternative methods of budgeting
There are four other methods of budgeting which are discussed below.

Incremental budgeting: It uses previous year’s budget and add and subtract a percentage
to create current year's budget. It is used when cost drivers do not change year to year. It is easy
to use.
Activity based budgeting: This approach determines the amount of input required to
achieve the target output. Company determines the activities and then cost associated with it.
Value proposition budgeting: This budget aims to avoid any unnecessary expenditure. It
refers to the value that company promises to deliver to the customers so that customers buy their
products.
Zero based budgeting: It is based on the assumption that all department budgets are zero
and managers need to justify each expenses. It aims to avoid all unnecessary expenditure for
company's success.
Behavioral implication of budgeting
Following are the behavioral implication of budgeting. Dysfunctional behavior: Budget can bring both positive and negative behavior among
employees. The improper implementation of budget results in the negative behavior of
the employees which impacts the organizational goals (Lavia López, and Hiebl, 2015).
This negativity is known as dysfunctional behavior. It is in conflict with organizational
goals. Participative budgeting: It is a bottom up approach which involves the people who are
being affected by the budget, which includes lower level employees also. This helps in
increasing motivation among employees and also reduces organizational conflicts.
 Budgetary slack: It takes place when management intentionally underestimated revenue
and overestimates costs so that organization can request more funds. It is the difference
between the resources required and actual allocated resources.
Pricing
Pricing strategies
Pricing strategy is the model used in establishing the price of the product. There are
different strategies that can be used which are discussed below.
Competition based pricing: This strategy focuses on the prevailing market rate for the product
and services. It usually takes competitor's price as the benchmark. Mostly company's prices their
product below the competitor's prices.

Price skimming strategy: In this, company's set the price of the product higher initially and then
lowers it as product becomes less popular. This method is good for new businesses, looking to
enter the market.
Premium pricing strategy: This strategy is used when company's put the prices of the product
high to make it a luxury or premium product. It is helpful in creating brand awareness.
Effect of supply and demand on price
Supply and demand is used in determining the price and it based on some laws. If
demand increases, price of the product will also increase and vise-versa. If supply of the product
increases, then price decreases. So, the price is decided at the point where quantity demanded
and supplied are equal. It is known as the point of equilibrium.
Common costing system
Actual costing
It is the method that uses actual cost for recording the cost of the product. It includes the
actual cost of material, labor, overheads incurred in the production. It is used to determine the
cost to specific products.
Different costing system
 Job costing: It refers to the method of recording and tracking costs by job. It maintains
the data which can be used in future for similar job. These costs are examined carefully
so that costs can be reduced next time.
 Process costing: This method is used in mass production of similar products. In this, the
cost of one unit is assumed to be same as that of others.
 Batch costing: In this method, products are manufactured in batches. The number of
units in a batch may vary from batch to batch. In this, batch cost is used to determine the
cost per unit.
 Contract costing: It is a specific order costing method. It tracks cost with specific
contract of the customers. It is mainly used in construction and engineering projects.
Strategic planning:
Strategic planning is most effective and important for company to increase their sales by
attracting customer towards company (Messner, 2016). This is process of defining strategy or
direction for making decision for allocating resources to pursue strategy. This may extend to
control mechanisms for guiding implementation of strategy. This creates my effectiveness for

working in better and effective manner to complete task. For that here is use SWOT analysis
model. This model is effective for analyse strength, weaknesses, opportunities and threats of
company to know the position of company at market place and in competitive edge. In respect of
that here is applied SWOT analysis assessing financial planning and position of company are as
follows:
Strengths:
 Strength of Prime furniture is their clear vision, which is added the values to its
customers irrespective of market conditions which is translated into well-defined manner
to the business strategy (Otley, 2016). Another strategy of company is the clear concept translate in array of products which is
assembled with the customer themselves leading to humongous cost reduction passed to
customers.
Weaknesses:
 The weakness of company is to operate with multiple countries around the world, which
is highlighted scale and large size business. This is very difficult to control standard
across the locations. Another is to environment concerns about operation and company faces challenges for
communicating their environmental policies to its customers, shareholders (Cooper,
Ezzamel and Qu, 2017).
Opportunities:
 Company have opportunity to expand into the emerging market and developing country.
With the help of this, company able to attract more customers towards business because
different market customer wanted to know about products. Opportunity to adopted new and advanced technology for building growth and
production capacity of company in order to gain effective success of company.
Threats:
 Threat of company is their competitors which have higher brand image and brand value
within the market. This affect to sales and production process of company.
 Another threat of company, is online shopping and internet. Present days various online
shopping apps comes, through that customer increase their interest to purchase products
from online apps.

Balanced scored card:
A balanced scored card is the strategic management performance metric used for identify
and improve various internal business functions and their result is with external outcomes. This
is a tool in which company uses performance metric within the company identifying and
improving various functions impact to resulting outcomes (van der Poll and Mthiyane, 2018).
This is effectively used for measures and provide feedback to organizations. This method is help
to company for measuring effective performance over four major aspects like financial, internal
process, innovation and consumers (Cooper, Ezzamel and Qu, 2017). This reflects and represent
the effectiveness for working in better manner by concerning financial, customer, internal
process and organizational capacity. In respect of measuring financial position of company here
is used Balanced Scored Card in Prime Furniture company in effective and valuable manner.
Financial position of company is good because company offers lower pricing products for
increase revenue, when revenue is increase the productivity of company is highly increased for
company. Through this customer relation with company is increased in effective manner. This
creates more effectiveness for company to measures (Ax, and Greve, 2017). With this internal
process of company is increase positive efficiency of company to working in better and in
effective manner. With the all over production and process organizational capabilities and
capacity is increase and improve knowledge skills as well as increased tools and technology for
working in better manner (Cooper, Ezzamel, and Qu, 2017). This method is applied in company
Prime Furniture to know that the fact which in respect of terms of finance and innovation where
company is lacking and what they are measures for improving those aspects in effective manner.
Those are the strategic planning tools which are important and effective for proper
management working within the company (Rikhardsson, 2017). Those tools and techniques are
help to analysis the financial position of the Prime Furniture. With the help of this company is
able to increase effectiveness and successful growth at market place. By analysing those
performances of company as per SWOT and performance company is able to make strategic
planning for success of company in effective manner.
LO 4
Compare different management accounting tools.
There are different types and kinds of problems and issues which are faced by company
Prime furniture. The main financial problem is monetary terms which company faces doing the

businesses. In any type of business situation company can face the issues relating to monetary
problems and this affect profitability of company. The financial problems include lack of cash
flow, poor accounting principles, debt repayments and other. Thus. For the management of these
financial problem some management accounting principles help Prime furniture for dealing those
problems by using some techniques and tools are as follows:
Benchmarking:
This is referring points which used to compare performance against performance of
others. This comparing processes, products and operations. Under this technique and tool
company is compare products and services with their competitors. This is the tool which is help
to manage and know the position of company within the market place (Ax and Greve, 2017).
This help to company for handle and dealing different financial problems like bad quality of
product, higher cost, low production and other financial problems. In context of Prime furniture
for compare product with the other competitor’s company used this model. This help to company
for outlining the superiority which is based on quality of products and services. On the other
side, company ABC Ltd use this tool for outline the difference of product as per sales to know
profitability and the area in which they need to develop.
Key performance indicator:
This quantifiable measures used for evaluate the success of organization and employee’s
n meeting goals and objectives for performance. This shows the big improvements and delivery
times which have been reduced for working in effective manner with the business. This is help
handle some problems like number of new contract, internal process, decrease in sales due or
changes in job role of employees (Granlund and Lukka, 2017). This method is applied and used
by Prime furniture for know the facts in respect of finance and innovation work where company
is lacking and what are measures improve aspects. On the other side, ABC Ltd is using
techniques for identifying their employees and retain them in higher competitive world.
Variance analysis:
This is tool that is help to company for determining deviation towards planned work. This
is effective and valuable for company to analysis and solve different financial problems within
the company like gap between actual and standard performance. This technique if help to
management accounting of companies for solving different financial problems in respect of gap
analysis. In respect of company Prime furniture use to sets some standard of working for quality

of products and work for achieve high quality standard (Otley, 2016). But, in ABC Ltd uses
variance analysis by setting the target the profits and the company works in direction of attaining
direction standards only in effective manner.
Financial governance:
Financial governance refers with ways a company to collect, monitor and manage or
control financial information (Quattrone, 2016). This includes track of financial transactions,
manage performance, compliance, operation and control the data. After that all the information
are effectively managed and monitor for proper and effective evaluation of all this information
which is done and management accountant take effective decision for the better success of
company. This is mentioned which help to company for dealing financial problems like errors in
material, lack of finance and many of others. The implementation of this tool in Prime furniture
to analysis the past performance and future performance for analysis the current improvement
within the company. On the other side, the company ABC Ltd. Used this technique for forecast
the trends to increase sales of products and services in effective manner.
Management accounting skills sets:
There are various skills and knowledge which are important for accountant. For become
an effective management accountant require some characteristic which includes leadership,
responsibility, ability to react, team working, ability to manage deadlines and self-motivation
(Cooper, Ezzamel and Qu, 2017). There are some characteristics which are as follows:
 Management accountant have a one good characteristic which is ability to react reflects
on one own their work and the wider consequences of the financial decisions for working
in effective manner.
 Organizational skills and ability to manage deadlines for working in better manner.
 To the effective management accountant team working and sharing important
information on employees are more important and effective.
Those characteristic are help to accountant for solve different financial problem which are faced
by company Prime furniture. For example: company faces problem which is decrease in sales
due to lack of motivation employees (Rikhardsson, 2017). In this management accountant have
responsibility to motivate employees by giving proper direction to complete work in effective
manner. Through that employees are motivated for working in better manner and create higher

effort in working to achieve goals and objectives of company. This is highly helped to managed
work by solving problem in effective manner.
CONCLUSION
The research conducted in the report above helps in concluding that there are a variety of
costs that are associated with the management accounting and different concepts were evaluated
and discussed such as pricing strategies, product costing etc. the concept of absorption and
marginal cost was also discussed and evaluated in the report.

REFERENCES
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management accounting: A research note extending the Burns and Scapens
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