Presentation 10 Task 2: Report 11 Use of different planning tools use and advantages & disadvantages of budgets 12 Use and Advantages & Disadvantages of Variances 12 Use and Advantages & Disadvantages

21 Unit 5: Budget Management Accounting NSAB530B5 Contents Budget Management Accounting NSAB530B5 Contents Task 1 3 Part A: Portfolio of Calculation and Comments 3 Comment and interpretation of above results 9 Part B: Presentation 10 Task 2: Report to Budget 11 Part A and B: 11 Use of different planning tools for the management to undertake the past budgeting methods 12 Use and Advantages & Disadvantages of Budgets 12 Use and Advantages & Disadvantages of Variances 13 Analysis of Adoption of Management Accounting

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Unit 5: Management Accounting NSAB530B5

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Contents
Task 1...............................................................................................................................................3
Part A: Portfolio of Calculation and Comments..............................................................................3
Comment and interpretation of above results..................................................................................9
Part B: Presentation.......................................................................................................................10
Task 2: Report................................................................................................................................11
Part A and B:.................................................................................................................................11
Use of different planning tools use budgetary tools with advantages and disadvantages of each
planning tools.................................................................................................................................12
Use and Advantages & Disadvantages of Budgets........................................................................12
Use and Advantages & Disadvantages of Variances.....................................................................13
Analysis of Adoption of Management Accounting Systems by Organizations in Responding to
Financial Problems........................................................................................................................13
Use of Management accounting for leading Organizations to Sustainable Success.....................15
Use of accounting planning tools to respond appropriately to solving financial problems of
organizations for sustainable success............................................................................................16
References......................................................................................................................................18

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Task 1
Part A: Portfolio of Calculation and Comments
Summary of all the given information:
Year 3 3200
Sale Price per unit 85
Production
Year 1 3500
Year 2 3800
Year 3 3650
per unit
per unit
per unit

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Distribution Expenses
Administrative Expenses
units
units Net loss before interest and taxes
units Less: Interest expenses
per unit Net Loss before tax
Add: Tax @ 19%
Net loss
units
units Income Statement Under Absorption Costing
units Year 2
Particulars
Sales (3500*85)
Less: Cost of Goods Sold
Opening Stock ( 900 units)
Production (3800 units * 30)
Less: Closing Stock (1200 units *30)
Less: Fixed Indirect manufacturing cost
Opening (900/3500) *92000
Production (2600/3800)*92000

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Less: Closing Stock (1200 units *30)
Less: Fixed Indirect manufacturing cost
Opening (900/3500) *92000
Production (2600/3800)*92000
Total cost of good sold
Gross profit
Less: Other Overheads
Distribution Expenses
Administrative Expenses
Net loss before interest and taxes
Less: Interest expenses
Net Loss before tax
Add: Tax @ 19%
Net loss
Income Statement Under Absorption Costing
Year 3
Particulars
Sales (3200*85)
Less: Cost of Goods Sold
Opening Stock ( 1200 units *30)

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Total cost of good sold
Gross profit
Less: Other Overheads
Distribution Expenses
Administrative Expenses
Net loss before interest and taxes
Less: Interest expenses
Net Loss before tax
Add: Tax @ 19%
Net Loss
Income Statement Under Marginal Costing
Year 1
Particulars
Sales (2600*85)
Less: Variable expenses
Opening Stock ( 0 units)
Production (3500 units * 30)
Less: Closing Stock (900 units *30)
Total variable expenses
Contribution

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Less: Variable expenses
Opening Stock ( 0 units)
Production (3500 units * 30)
Less: Closing Stock (900 units *30)
Total variable expenses
Contribution
Less: All Fixed Expenses
Fixed Indirect manufacturing cost
Distribution Expenses
Administrative Expenses
Net loss before interest and taxes
Less: Interest expenses
Net Loss before tax
Add: Tax @ 19%
Net loss
Income Statement Under Marginal Costing
Year 2

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Total variable expenses
Contribution
Less: All Fixed Expenses
Fixed Indirect manufacturing cost
Distribution Expenses
Administrative Expenses
Net loss before interest and taxes
Less: Interest expenses
Net Loss before tax
Add: Tax @ 19%
Net loss
Income Statement Under Marginal Costing
Year 3
Particulars
Sales (3200*85)
Less: Variable expenses
Opening Stock ( 1200 units)

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Particulars
Sales (3200*85)
Less: Variable expenses
Opening Stock ( 1200 units)
Production (3650 units * 30)
Less: Closing Stock (1650 units *30)
Total variable expenses
Contribution
Less: All Fixed Expenses
Fixed Indirect manufacturing cost
Distribution Expenses
Administrative Expenses
Net loss before interest and taxes
Less: Interest expenses
Net Loss before tax
Add: Tax @ 19%
Net loss
Net Profit or loss reported under Absorption and Marginal Costing
Particulars Year 1 Year 2 Year 3
Absorption Costing -31948.71 -6564.65 -27190.16
Marginal Costing -51111.00 -10935.00 -23490.00
Comment and interpretation of above results
Absorption Costing: Absorption costing means that all the manufacturing costs are consumed
only to the product produced. In the cost of finished goods includes cost of direct material, direct
labour, and both variable and fixed manufacturing overhead.

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Marginal Costing: In the marginal costing approach only variable cost are charged to the unit of
cost and all the fixed cost is written off against the contribution.
The main difference between the marginal and absorption costing is that fixed
manufacturing cost is included in the product cost in case in absorption costing while in case of
marginal costing all the fixed costs are charged to the contribution.
Comments: The above results a show that overall loss reported under the absorption costing
approach is less that the overall loss reported under the marginal costing approach. It is because
in absorption costing only those fixed manufacturing cost is charged to the cost of production
that is actually consumed by the unit sold while in case of marginal costing all the fixed
production cost are charged to the contribution and it is not based on number of units sold or
produced. In marginal costing fixed cost are charged on the basis of the period not on the basis of
the actual unit sold (Bromwich and Bhimani, 2005).
Task 2: Report
Part A and B:
Budget is refers to the financial tool that is used for preparing the projected financial
statements and also to make decisions. Budgets uses the past results and variances to prepare the
financial statements for future period. The main motive to prepare the budgets is to help the
management for making the future planning and to measure the future performance of the
company. It helps to evaluate the performance of the individual as it is compare the actual
performance with the budgeted performance of the individual. So in short it can be said that it is
used to make decision regarding the expenditures that has to be occurred for the fixed expenses,

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cash flow management, expansion plans and many other important managerial decisions (Lalli,
2011). Various planning tools are used to create the budgets such as ratio analysis, variance
analysis, and benchmarking. All these planning tools provide the base for preparing the budgets.
Planning tools uses historical data to make the analysis and provides information that is needed
to prepare the budgets. The important budgets that are produced using the past information are
sales budget, purchase budget, cash flow budget, budgeted income statement, budgeted balance
sheet and other flexible budgets (Davies and Crawford, 2011).
Budgets also include various process that need to be undertake in order to help the
managers to take managerial decisions. The preparation of budget involves proper use of proper
planning tools and use of budgetary controls methods. Budget can also be defined as the process
for statements of different management information is prepared for the future period and actual
results are compared with past results in order to find the variances. The variance helps the
management to make corrective actions for the future period and improve the financial and
performance (Malina, 2017).
Use of different planning tools use budgetary tools with advantages and disadvantages of
each planning tools
Use and Advantages & Disadvantages of Budgets
Budget is the most important planning tool that is used for the budgetary control
decisions. It is defined as the financial tool that helps the management in gaining an estimate of
the future financial performance. Budget performance is based on the past results that have been
derived using the trend analysis of the financial statements. Budgeted financial statement are

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made using the financial statements of the company, while other financial budgets such cash
budget, sales budget, purchase and raw material purchase budget are prepared using the sales
growth rate, management expectation of closing inventory and other financial decisions for the
future period. Sales of the company can be estimated using various methods and using the sales
units for the future it is easy to estimate the budget performance of the company in future years
(Lumby and Jones, 2007).
The most important advantage of using the budget as the planning tool for the budgetary
controls is that it helps in controlling the overall cost and also helps the management for profit
maximization. It helps to define the business plans, objectives, policies for the future year based
on past performance of the company. It can be said that budget provides accurate information for
the future period as it based on the past results and use of estimation methods. It helps to prepare
to prepare the future activities and provide the performance standards for the entire managerial
person in the organization (Malina, 2017). Using the budget it is easy to allocate the specific
targets and goals for each business department and it is most important part of the budgetary
control process. So it can be said that process of budget helps in effective management of
different business activities and allow the proper coordination of between the various business
departments. The actual results of the business department have been compared with the
budgeted results and any unfavorable items are being sorted in order to know the possible cause
for the same. So it is easy for the managers for to identify the issues in each business department
and to develop the effective strategies to overcome the particular issue. Management can
determine the responsibilities and duties of managerial persons on the basis of budgetary targets
and objectives. In short it can be said that overall reduction in the production cost through using

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the proper budgetary control techniques helps the management to improve the overall economic
performance and efficiency of the company (Moles and Kidwekk, 2011).
Every budgetary control process has some drawbacks and it limits the use of planning
tools in the management process. Budgets are based on the past performance and future results
are estimated using the past trends but it is certain that future estimation can be fluctuated due to
inflation rate. So it can be said that budgets that are prepared using the past performance can
have some deviations and can provide unrealistic outcome only in few cases. Budgets are also
prepared using the help of top management, so it can be said that if top manager fails to provide
the help to the top management that there will problems in making the budgets (Rasmussen,
2003).
Use and Advantages & Disadvantages of Variances
The method of variance analysis is used for identifying the deviations in performance by
comparing the actual results with the budgeted results. This helps in development of strategies to
overcome the differences and taking corrective actions for future development and growth. It
helps in identification of the material variances, overhead variances and labor variances. Thus,
the accurate determination of the problem areas with the help of technique of variance analysis
enables the managers to plan and take actions to overcome the issues identified. The main aim of
the use of technique by accountants is to minimize the deviation in budgeted results and
achieving the long-term goal and objectives of the company (Warren, 2016).
The main advantage of variance analysis is that it assists the business managers in
performance measurement. The overall performance analyses will help the management in
gaining an understating of the root cause of the problems and then developing solutions so that

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the problematic areas can be completely removed. The analysis also helps in assigning the
responsibility to managers for improving the performance of the company to maximize the
operational efficiency. Also, it assists the manager in taking quantitative investigation of the
deviations in performance rather than only providing a theoretical estimation. Thus, the
quantitative investigation provides a more accurate estimation of the problematic areas which
help the manager in developing effective control measures for their resolution (Weygandt, 2015).
There are many disadvantages along with the numerous advantages that limits the use of
variance analysis in the applying the budgetary control techniques. Variance analysis is done for
two or more period and there is some time gap in each of period. So it can be said that variances
does not provide useful information because it does not consider the time vale of money concept
which is very important for making the managerial decisions. So it is important to pay attention
to various factors that can impact the overall results of the variances. Factors can be change in
material price, government regulations, technology changes and change in market conditions. So
it is important to incorporate all the external factors while applying the variance analysis method
in the budgetary control (Soyka, 2012).
Analysis of Adoption of Management Accounting Systems by Organizations in Responding
to Financial Problems
Management accounting can be regarded as the process of developing management
reports to extract accurate and timely financial and statistical information for decision-making.
The management reports prepared leads to analysis and interpreting of the relevant information
to enable an organization to achieve its goals and objectives. The field of management
accounting has considerably evolved over the past few years and has traditionally being changed

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from cost identification to facilitate decision-making. The considerable evolution of management
accounting over the past can be discussed as follows:
 Prior to 1950: The major focus of management accounting before 1950’s was only
determination of cost and financial control. The management prepares financial reports
only for identification of costs involved in carrying out different business activities. This
facilitates the managers in achieving financial control through taking significant measures
for cost reduction and development of budgets. The business managers do not adopt the
use of management reports in strategy planning and execution. It was only used for
gaining an overview of the internal processes and cost accounting practices.
 1950’s to 1970’s: The role of management accounting has been significantly changed
during this stage and involves extracting information for planning and controlling of
internal processes. The management activities during the period involves the use of
management controls in optimizing the production processes and seek to develop
effective ways for managing the resources to achieve the organizational objectives and
goals. Therefore, the role of management accounting has shifted from only cost allocating
to using the information for improving the operational efficiency during this phase. For
example, Nokia adopted the use of cost accounting for estimating the direct and indirect
cost involved in its operational functions. The company integrates the use of account
analysis method to classify various cost accounts as variable, fixed or mixed as per the
individual level of activity (Weygandt et al., 2015).
 1970’s to 1990’s: The stages involve the use of information for managerial planning and
control by the use of information technologies and devices. This is largely been due to
increase in competition and technological development that has assisted the management

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in developing strategies for reduction of cost and reduction of waste to increase profit.
The management reports adopted the use of accounting techniques such as Activity based
costing for allocation of costs to each department activities and maximizing the
operational efficiency. For example, H&M adopts the use of activity based costing to
allocate cost as per the department activities and therefore accurate pricing of its products
and services (Warren et al., 2016).
 1990’s onwards: This period has resulted in causing major changes in the management
accounting functions within organizations. The stage involves adoption of information
from the management reports to create value by better management of resources. The
information is used for strategic planning and decision-taking by the organizations. The
management reports involve the use of financial information for forecasting the future
growth potential in order to take strategic decisions regarding the investment in
equipment and other strategies adopted for promoting its financial growth. It aids the
management in taking decisions reading the procuring of materials either from outside or
manufacturing in-house (Warren, Reeve and Duchac, 2011). The insights developed by
the management personnel’s assists in taking effective decisions for maximizing the
operational effectiveness. It aids in budget planning and development by estimating the
future cash flows and as such assist the managers in allocating financial resources for
generating more revenue and promoting the growth of the company. Therefore, the role
of management accounting has shifted from only taking decisions regarding allocation of
resources to that becoming a strategic business partner. Thus, the changing role of
management accounting over the past few years has caused larger changes in financial

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reporting and development of effective cost management system to enable an
organization to attain competitive advantage (Moles and Kidwekk, 2011).
Use of Management accounting for leading Organizations to Sustainable Success
Business managers are adopting the use of information gained from the management
reports to promote sustainable growth and development of business entities. This is because the
financial and statistical information gained from the management reports will help in
identification of a financial risk in advance. The identification of a financial problem by the
development of budgets will helps the company to plan appropriate strategies for overcoming the
problem identified. Also, the analysis of the overall internal processes of a company with the
help of management report developed will lead to identification of Key Performance Indicators
(KPIS’s) to support its long-term business goals and objectives. The management on identifying
its KPIs’ can develop sustainable strategies incorporating the use to promote its growth and
development (Malina, 2017).
For example, IKEA have improved the competency of its value chain with the use of
management accounting systems. It adopted the use of two planning control systems that are,
budgets and business plans. The information extracted from the reports developed by the
management accountants is shared equally at all level. The management at higher level provides
guidance to lower level management team about the key focus area to improve the operational
efficiency. This can be price reduction, decrease in the waiting time or improving the production
processes.. The selection of the key problematic area is followed by determining target figure to
be achieved by the use of a management accounting system. This is followed by developing a
business plan for achieving the determine target and developing action plans for achieving them.

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The information provided by the management accounting reports is used to make forecast about
budgeted sales and them comparing it with actual sale figure to identify the deviations and taking
suitable actions for overcoming them. The reports are also used by stores manager to compare
the sale figures with the last year figures and budget figures to determine the percentage increase
or decrease in the financial growth. Therefore, it can be said that IKEA is using management
accounting system to identify its KPI’s that leads to its sustainable growth and success (Adler,
2013).
The identification of the operational and financial risk that a company can face I the
future context will enable in developing a risk management framework for mitigation of the
respective risks. The risk management framework will define the roles and responsibilities of
different management personnel in identifying, measuring and controlling the risks. The action
plan can be developed in advance against each of the identified risk so that it can be mitigated
properly. It also assists in developing an effective financial governance system to meet the
financial goals and objectives of the company. The presence of a financial governance system is
essential to prevent the occurrence of any fraudulent activities impacting the achievement of
financial goals of the company. The management reports will lead to easy identification of the
loopholes and also any unethical practice and procedures in advance by the company (Lumby
and Jones, 2007).
This will help in its early mitigation so that stakeholders are provided with only reliable
and accurate information. The error in the financial reporting process will also be identified
accurately by development of management reports. This assists the financial accountants to
disclose the information to the external stakeholders that is neutral, error-free and complete in all
aspects. The estimation of the costs involved in operational activities assist the management in

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taking accurate decisions reading the pricing of products and better inventory planning. The
identification of the wasteful activities will help in reducing the inventory costs and thus
improving the operational efficiency. This will enable the company to price its products at lower
price and achieve customer satisfaction that will promote its long-term growth and development
(Lalli, 2011). For example, Wal-Mart adopt the use of inventory forecasting for taking future
business decisions by estimating the amount of inventory required and therefore helpful in cost
assessment.
Use of accounting planning tools to respond appropriately to solving financial problems of
organizations for sustainable success
The different tools of accounting are used effectively by the management for resolving
the financial problems and promoting its sustainable success and growth as follows:
 Budgetary Control: This is the most important and significant tool of management
accounting used planning and control of financial resources. The budgets are developed
with the use of past accounting data by keeping into account the future expectations of
growth and development of the company. The budgeted data is compared with actual data
in order to identify the deviation in the performance and planning strategies to overcome
the deviation.
 Decision Accounting: Decision-making is also one of the most important tools of
management accounting. The development of financial reports assist the managers in
taking decision about the activities that need to be undertaken and that need to be
eliminated. The development of alternatives for improving the operational efficiency
helps in selection of the best possible methods to improve the productivity and

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profitability of the organization. It also assists in accurately determining the product
prices by taking into account the overall operational costs (McWatters and Zimmerman,
2015).
 Management Information system: MIS is an integrated tool used by the management in
order to record and stores the information accurately for use by the management. MIS
tools and device scan be sued by the management in collection, storing and retrieving the
information accurately so that it can be extracted easily at the time of its use (Davies and
Crawford, 2011). For example, Starbucks adopts the use of management information
system for maintaining communication flow across its different department in order to
take effective decisions. The company has developed a web portal that disseminates the
management accounting information to the people working in the organization. The tool
serves the function of providing different type of information to varying departments as
per their needs and requirements. This facilitates the department manager to plan the
consecutive strategies for driving its growth and development. The use of MIS enables
the management to gain timely information for strategic planning to promote the business
growth and development. The improved communication flow across different business
departments has improved its productivity. This has enhanced the supply chain capability
of the company and therefore optimizing the time involved in carrying out different
supply chain activities. It has having large number of stores and therefore the use of MIS
systems enables it to achieve success by effectively disseminating the information across
various departments. Therefore, it can be said that the use of accounting tool has largely
enabled Starbucks to resolve various financial problems (Marco, Te'eni, Albano and Za.,
2012).

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 Capital Structuring: It is management accounting tool used by the business managers to
develop an appropriate capital structure consisting of balanced proportion of debt and
equity. This is possible by the use of management reports that provides a complete
overview regarding the financial resources and constraints possessed by the organization.
Thus, the business managers can accurately take the decision whether to incorporate the
use of equity of leverage financing for promoting the future growth and development of
the company. It also provides an analysis of the working capital management of the
company. Thus, it helps in determining the ability of a firm to effectively use is resource
to convert into cash to meet its financial obligations. Thus, the managers can plan of
strengthening its current asset base for meeting the liabilities in case the current assets are
comparatively less in amount to meet the financial obligations as they become due
(Bromwich and Bhimani, 2005) .
 Variance Analysis: It is also regarded to be the most important tool of management
accounting for identifying and overcoming the deviations in the actual behavior as
compared o the forecasted behavior. This consists of two stages, that is, calculating ad
recording individual variances and gaining an adequate understanding of the cause of
each variance. The reasons for variances can be due to material deviations, labor changes
or overhead fluctuations. The material differences can be due to difference in the quantity
consumed and that allocated for production whereas labor variances can be due to
fluctuations in the actual wage paid to the workers and the standard wage specified.
Lastly, the overhead variances can be due to difference between standard overhead costs
budgeted in comparison to that incurred (Wickramasinghe and Alawattage, 2007).

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References
Bromwich, M. and Bhimani, A., 2005. Management accounting: Pathways to progress. Cima
publishing.
Davies, T. and Crawford, I., 2011. Business accounting and finance. Pearson.
Lalli, W. 2011. Handbook of Budgeting. John Wiley & Sons.
Lumby,S and Jones,C. 2007. Corporate finance theory & practice. Thomson.
Malina, M. 2017. Advances in Management Accounting. Emerald Group Publishing.
Moles, P. and Kidwekk, D. 2011. Corporate finance. John Wiley &sons.
Rasmussen, N. et al. 2003. Process Improvement for Effective Budgeting and Financial
Reporting. John Wiley & Sons.
Soyka, P. et al. 2012. Building Sustainability Into Your Organization (Collection). FT Press.
Warren, C. et al. 2016. Financial & Managerial Accounting. Cengage Learning.
Weygandt, J. et al. 2015. Financial & Managerial Accounting. John Wiley & Sons.
Wickramasinghe, D. and Alawattage, C. 2007. Management accounting change: approaches
and perspectives. London and New York: Routledge. Taylor & Francis Group.
Adler, R. 2013. Management Accounting. Routledge.