UNIT 5: MANAGEMENT ACCOUNTING - Planning Tools and Financial Sustainability

This report explores the role of management accounting systems and planning tools in achieving financial stability and sustainability within organizations. It delves into various techniques like marginal costing, absorption costing, and budgetary control, highlighting their advantages and disadvantages. The report also examines how management accounting can respond to financial problems by implementing benchmarks, financial governance, and incorporating sustainability considerations into decision-making processes. Through a comprehensive analysis of these tools and techniques, the report emphasizes the importance of integrating management accounting practices for achieving organizational growth and long-term success.

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UNIT 5: MANAGEMENT ACCOUNTING

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Contents
INTRODUCTION.......................................................................................................................................3
TASK 1.......................................................................................................................................................4
PART A (P3, M2, D2).............................................................................................................................4
PART B (P1, P2, M1, D1).....................................................................................................................10
TASK 2.....................................................................................................................................................22
INTRODUCTION.................................................................................................................................22
CONTENT............................................................................................................................................22
Conclusion.............................................................................................................................................30
CONCLUSION.........................................................................................................................................31
References.................................................................................................................................................32

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INTRODUCTION
This report deals with the different management accounting systems which are used to analyze
the performance of the company. Various techniques which are used to analyze the cost are also
been identified and the application of these techniques to produce the financial reporting is also
depicted. Benefits of the management accounting systems are explained with context of the
organization. With these factors the use of planning tools are also explained and how these
planning tools respond to financial problems to gain the sustainability in the organization is
highlighted. The benefits and limitations of the planning tools used in organization are also
identified.

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TASK 1
PART A (P3, M2, D2)
Marginal Costing Statement of 3 years:
Income statement of Marginal Costing for 1st
Year
Particulars Amount Amount
Sales 221000
Cost of Sales:
Opening inventory 0
Add: Cost of Production 105000
Less: Closing Stock 27000 78000
Less: Variable distribution and administration
cost
Distribution Expenses 24000
Administration Expenses 89000
Contribution 30000
Less: Fixed Cost 92000
Profit/ Loss of the year -62000
Income statement of Marginal Costing for 2nd Year
Particulars Amoun
t
Amoun
t
Sales 297500
Cost of Sales:
Opening inventory 27000
Add: Cost of Production 114000
Less: Closing Stock 36000
Less: Variable distribution and administration
cost
Distribution Expenses 24000
Administration Expenses 89000
Contribution 79500
Less: Fixed Cost 92000
Profit/ Loss of the year -12500

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Income statement of Marginal Costing for 3rd Year
Particulars Amoun
t
Amoun
t
Sales 272000
Cost of Sales:
Opening inventory 36000
Add: Cost of Production 109500
Less: Closing Stock 49500
Less: Variable distribution and administration
cost
Distribution Expenses 24000
Administration Expenses 89000
Contribution 63000
Less: Fixed Cost 92000
Profit/ Loss of the year -29000
Marginal costing is also known as variable costing as it includes only the variable cost while
analyzing the statement and excludes the fixed cost (Financial accountancy.org, 2015). It is tool
which is used in the decision making process as it determines the company’s actual position that
the company is incurring losses or earning profits (Nawaz, M., 2013). It includes direct labor,
direct material as well as direct expenses while preparing the income statement. Contribution is
termed as the difference between the revenue and the variable and administration cost (Financial
accountancy.org, 2015). It also affects the profit, change in volume and the type of output as the
difference exists between the fixed and the variable cost. It holds only a single disadvantage that
the company cannot take all the decisions in the organization based on the contribution
calculated (Financial accountancy.org, 2015).
There are various assumptions which are used while evaluating the income statements one of
which is that it is assumed that the organization is using the (FIFO) first-in-first-out method
while evaluating the inventories. This statement is prepared by the top level managers of the
company for taking the appropriate and the strategic decision. While evaluating this statement it
considers the inventory of the finished goods as well as of the work in progress. According to the
above analysis it can be stated that the administrative and the distribution expenses are excluded
while evaluating the statements. The losses incurred by the company amounted to be £62000,
£12500 and £29000. The company incurred the loss continuously for the 3 years which states

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that the company have to increase the quality of decision making while keeping the risk factor
into concern.

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Absorption Costing Statement of 3 years:
Income Statement of Absorption Costing for 1st Year
Particulars Amoun
t
Amoun
t
Sales 221000
Cost of Sales:
Opening Inventory 0
Add: Production Cost 197000
Less: Closing Inventory 50657.1
Gross Profit at normal 74657.1
Less: Distribution and administrative Cost
Direct Expenses 24000
Indirect Expenses 89000
Net Profit/Loss -38343
Income Statement of Absorption Costing for 2nd Year
Particulars Amoun
t
Amoun
t
Sales 297500
Cost of Sales:
Opening Inventory 50657.1
Add: Production Cost 206000
Less: Closing Inventory 65052.6
Gross Profit at normal 105895
Less: Distribution and administrative
Cost
Direct Expenses 24000
Indirect Expenses 89000
Net Profit/Loss -7104.5
Income Statement of Absorption Costing for 3rd Year
Particulars Amount Amount
Sales 272000
Cost of Sales:
Opening Inventory 65052.6
3

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Add: Production Cost 201500
Less: Closing Inventory 91089.0
4
Gross Profit at normal 96536.4
1
Less: Distribution and administrative
Cost
Direct Expenses 24000
Indirect Expenses 89000
Net Profit/Loss -16464
Absorption cost is the cost which involves both fixed as well as the variable cost while preparing
the income statement using the absorption costing method (Nawaz, M., 2013). This method is
widely used in the organization as it ensures that all the cost which is incurred during the
production in the marginal cost is recovered from the selling price of the goods. Another name
for absorption costing is full absorption costing (Financial accountancy.org, 2015). As the
marginal costing is widely used by the mangers in the decision making but the absorption cost is
rarely used by the organizations in decision making as it is used for the external reporting not for
the internal one (Nawaz, M., 2013).
This cost is evaluated by keeping both factors parallel that is fixed cost as well as the variable
cost. The absorption cost includes the direct expenses and the indirect expenses as well as the
inventory of the finished goods and the work in progress while preparing these accounts. Above
analysis of the statement shows that the company is incurring losses in the absorption cost also
same like that with the marginal cost. The losses born by the organization for the last 3 years
amounted to be £38343, £7104.5 and £16464.
Reconciliation Statement of 3 years:
Reconciliation Statement of 1st
year
Particulars Amount
Absorption Cost Profit/Loss -
38342.85
7
Less: Closing Inventory of fixed assets 23661
Marginal cost Profit/Loss -
62003.85

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Reconciliation Statement of 2nd
year
Particulars Amount
Absorption Cost Profit/Loss -
7104.511
Less: Closing Inventory of fixed assets 23661
Marginal cost Profit/Loss -
30765.51
Reconciliation Statement of 3rd year
Particulars Amoun
t
Absorption Cost Profit/Loss -16463.6
Less: Closing Inventory of fixed
assets
23661
Marginal cost Profit/Loss -40124.6
When the net worth of both the statements is to be calculated than the reconciliation statement id
prepared (Financial accountancy.org, 2015). This result of this statement reveals that the results
of the marginal costing are matching with that of the absorption costing.
Hence, the reconciliation statement prepared above shows that the there was the loss during all
the three years even after deducting the closing amount of fixed assets from inventory. To
calculate the values of the under absorption and the over absorption this statement is necessary.
Working Notes:
1)
Particulars Amount
Direct labor 10
Direct material 13
variable expenses 7
Total cost 30

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2)
Stock Valuation according to Marginal costing approach
Particulars Year 1 Year 2 Year 3
Cost of Production in
particular years
10500
0
11400
0
10950
0
Units produced 3500 3800 3650
Cost per Unit 30 30 30
3)
Calculation of Opening and Closing Stock
Particulars Year 1 Year 2 Year 3
Opening Stock 0 900 1200
Add: Units produced 3500 3800 3650
Less: Units Sold 2600 3500 3200
Amount of closing stock 900 1200 1650
4)
Total cost of production and per unit cost
Particulars Year 1 Year 2 Year 3
Total variable cost 10500
0
11400
0
10950
0
Total fixed cost 92,000 92,000 92,000
Cost of Production
Units
19700
0
20600
0
20150
0
Units produced 3500 3800 3650
Cost Per Unit 56.29 54.21 55.21

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PART B (P1, P2, M1, D1)
Slides:
Slide 1: Title

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Slide 2: Table of content

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Slide 3: This depicts about the various management accounting systems used in the management
accounting and also the meaning of the management accounting is been explained. With the
different types of management accounting the benefits of the management accounting systems is
also been highlighted (Business Dictionary, 2018). Evaluation of how the management
accounting systems and the reporting is integrated with the organizational process is also
identified.

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Slide 4: Management accounting systems is the process of preparing and managing the financial
reports and accounts. The report generated by the management accounting is not on the annual
basis as of the financial accounting but it generates the reports on the weekly or the monthly
basis. It often includes the company’s available cash and the generated sales revenues of the
organization (Business Dictionary, 2018).

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Slide 5: There is various management accounting systems which are been used by the
organizations to analyze the performance and the competiveness of the business in the external
market. Some of which includes financial statement analysis, budgets, variance and management
accounting systems.

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Slide 6: There are various principles but for the ease of understanding some of them are
explained (Accounting Web, 2014). Profit of the company can only be calculated if the capital
earned is in the real terms so the rate of inflation is into account so as to achieve the success.
Utility here means that the accounting systems should be used for the long term unless it serves
some purpose (Accounting Web, 2014). The return on business shows that how efficiency the
company is working. As the overheads is the mixture of three components so appropriate
methods should be used to achieve the desired results. Proper utilization of resources must be
done in order to achieve highest growth (Accounting Web, 2014).

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Slide 7: Fund flow statement analysis is done to predict the inflow and outflow of funds in the
organization. This also shows whether the funds are used appropriately or not (Business
Dictionary, 2018). Standard costing is like benchmark which is predetermined and it acts as a
yard stick to compare the actual performance. Marginal costing techniques are used to fix the
selling cost so that the decision can be made appropriately in the organization. Budgetary control
is the technique to predict the future and take decisions accordingly for business concerns.

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Slide 8: Through management accounting systems the organizations can reduce their operational
expenses by lowering the economic cost (Business Dictionary, 2018). With the proper allocation
of the expenses the company can easily improves the decision making process by analyzing the
quantitative factors also with qualitative (Vitez, 2018). Company can increase their financial
returns by analyzing the customers demand and potential sales that can affect the prices. Budget
is the way through which the flow of cash in the organization can be measured as it compares the
actual results with the budgeted one (Vitez, 2018).

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Slide 9: There are various uses of the tools and methods which are used in the management
accounting. Some of which are shown by the income statement which is calculated on the
variable cost basis and represents the different cost while evaluation. The similarity that can be
predicted is that the company is not incurring profits from the last 3 years. Marginal costing is
one of the tools which predict that how variable cost affects the performance of the company as
it varies from time to time (Accounting Web, 2014).

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Slide 10: Management accounting is integrated within the organization as the different types of
management accounting is used in the organization for evaluating the performance of the
employees as well as the organization (Accounting Web, 2014). It also helps in improving the
organization by evaluating the reports on the monthly and the weekly basis so as to increase the
efficiency and attain the economic growth. With the continuous improvements the cost is also
effectively managed within the organization through the development and integration of cost
management systems.

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Slide 11: This can be concluded that management accounting is the process of preparing and
managing the reports while various accounting systems are responsible to evaluate the
performance of the organization with external market (Accounting Web, 2014). The principles of
management accounting describe the efficiency of the organization in the real terms whereas the
benefits determine the overall growth of the organization in the competitive market.

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Slide 12: References

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TASK 2
INTRODUCTION
This report deals with the different planning tools which are been used in management
accounting so as to ensure financial stability. The advantages and the disadvantages of these
planning tools are also been highlighted so that the performance of the organization can be
analyzed. With different planning tools how management accounting is helpful in to deal with
the financial problems has also been identified. Different ways has also been explained in which
these planning tools and management accounting are supportive to solve the financial problem so
as to achieve sustainable success.
CONTENT
P4) Budget helps the organization and its members to achieve their goals (Hartman, 2017). The
advantages and disadvantages of different planning tools which are been used for budgetary
control are:
Advantages:
Enhanced Efficiency: As the planning tools are used for ensuring the better performance in the
organization so the budgeting is the best way for eliminating the waste and controlling the cost.
This will promote efficiency and economy (Hartman, 2017).
Definite Planning: Budgets are pre determined so they are based on the well defined plans. With
definite planning the organization can predict the amount of their expenses and can also identify
the income to be earned.
Proper Communication: As the budget are prepared differently by all the departments of the
organization taking the consideration of the lower management so it makes the two way
communication between the departments as well as the top level managers in the organization
(Hartman, 2017).

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Uniform Policy: With the uniform policy adopted by all the departments in the organization
brings uniformity without the disadvantage of an authoritarian business.
Maximization of Profit: Profit is maximized as the planning and coordination of the different
activities are done according to the pre determined budget. The cost, revenue and the capital
structure of the organization is optimally used and controlled.
Forecasting Credit Needs: The statements of cash expenditure and cash receipt makes possible
for the managers of the organization to forecast and arrange their credit needs in advance.
Disadvantages:
Future is uncertain: Budget id prepared by forecasting the future but the future is uncertain and
cannot be predicted accurately (Money Matters, 2018). Therefore, the budget ignores the
reliability in the organization.
Prepared on basis of estimates: If the estimates which are been done for the future are not
accurate than it will adversely impact the organization in analyzing the other factors (Money
Matters, 2018). Therefore, the success of the budget is totally dependent on the accuracy of the
estimates.
Develops conflicts among the line managers: All departments are individually responsible for
preparing their budget so this factor is responsible for the conflict as every department will need
more resources for the particular department (Money Matters, 2018).
Small Business organization cannot afford: The budget control technique cannot be adopted
by the small enterprises as it involves huge amount cost.
Budgetary Programme is a rigid one: The deviations are calculated by comparing the actual
performance with the budgeted one. So, the management cannot make any one employee
responsible as conditions may vary (Money Matters, 2018).
Participation and coordination are not easily available: The preparation and implementation
of the budget requires active participation of all the employees in the organization but this is not
always possible.

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M3) There are various planning tools which are been used for preparing and forecasting budget.
But to choose the best tools and techniques is a great challenge so that the business problems can
be easily solved (Richard, 2016). Strategy analysis is one of which can help in forecasting of
budget. Strategy analysis is an approach which helps in facilitating, analyzing and researching
organizations ability so that the organizational goals can be achieved and the performance can be
measured. To achieve the desired objectives various requirements are to be looked upon which
includes present state, future state, risk and financial factors of the organization. Some of the
common tools which are used for analysis are:
PEST: It is the framework that analysis the macro factors such as political, economic, social and
technological. It is the tool which is randomly used with SWOT (Imarticus, 2017).
Image: PEST Model
Source: By Author, 2018
PEST explains the opportunity and the threats in better way by keeping in view the factors which
will impact the business in future (Richard, 2016).
SWOT: It is a strategic tool which will analyze the strength, weakness, opportunities and threats
of the business (Imarticus, 2017). Here the strength and weakness are analyzed as the internal
POLITICALFACTORSECONOMICFACTORSSOCIALFACTORSTECHNOLOGICALFACTORSPEST

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factors whereas the opportunities and threats are the external factors. This analysis is done to
check the competitive ability of the company in the market (Richard, 2016).
Image: SWOT Analysis
Source: By Author, 2018
PORTER’S FIVE FORCES: This shows the position where the organization lies currently in
terms of present competitiveness and positioning strength. According to the porter this model is
used as a line for the business (Richard, 2016). It analyzes the bargaining power of the supplier,
competitive rivalry in the market and the threats to entry of new substitute. Using this model the
organization can identify their area of profitability (Imarticus, 2017).
STRENGTHWEAKNESSOPPORTUNITIESTHREATS

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P5) Organizations are adapting various management accounting systems to respond to financial
problem as it is the only way through which the growth of the organization can be achieved and
the performance can be measured. One of them is setting up of the benchmark. Benchmark
means setting of the specified target by the organization and then comparing the current results
with the pre determined benchmark (Matambele, 2014). It considers two things while setting the
benchmark one of which includes the best level of performance with the other competitive
companies in the market. Second one is the best level of performance in producing the products
and services. When the standards are attained according to the benchmark then it is easy for the
top level managers of the organization to compete with the dynamic environment. The setting of
the benchmark unlike the use of variances helps in accessing the internal performance of the
organization (Matambele, 2014). Various problems are also faced by the managers while
implementing the benchmark which includes ensuring that the numbers of the benchmark are
comparable and finding the best appropriate benchmark for the particular issue. While making
the comparison of the organization with that of the other competitor’s key performance
indicators are used as a basis as it specifies how company is performing according to the plan.
KPI’s may be either financial or non financial (Matambele, 2014). Financial KPI’s include
revenue, cost, profit and cash flows while the non financial KPI’s include reliability, capability,
flexibility and innovation. These factors are analyzed against factors such as budgeted sales,
result of other business and trend over time.
The use of non financial factors has contributed to various factors which includes change in cost
structure, manufacturing environment and lack of information from financial KPI’s. Financial
governance is another factor which can be used to respond to the financial problems. Here the
word governance means the structure and the control system which has been controlled by the
managers in the organization but it is obligation for all the other members of the organization to
follow it (Matambele, 2014). It also describes that how the purpose and the priorities are decided
by the decision makers so as to maintain the accountability in the organization. Financial
governance is the part of the corporate governance. Corporate governance describes all the
factors which are related to the accountability, decision making and purpose of the organization.
There are many ways which can be used to solve the financial problems using the financial
governance. Some of which includes internal auditing, external auditing, system of internal

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control and audit committee. Through various reports to the boards of directors the financial
governance can be used as a strategy those are strategic planning report, budget report, variance
analysis and reports and forecasting and appraisal report. These are the three management
accounting systems which are very useful to respond to the financial growth (Matambele, 2014).
If these three will be adopted by the organization the organization will achieve the great growth
in the external market and also the accountability will increase.

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M4) Management accounting can help to attain the sustainable success in respond to the
financial problems as the management in the organization is responsible to deal with all the
challenges and the decision making process (Fast Company, 2018). Organizations nowadays are
facing various problems that how to use business models and strategies to respond to the
challenges which has been occurred due to the social and the economic factors arising in the
market. According to the CGMA report it was found that only 13% of the companies are
confident to deal with the challenges and compete with sustainable economy (White, 2015). This
proves that many of the companies are still lacking of the management accounting skill set to
compete with the challenges. This challenge can be faced if the analyses of the report is done
while considering the impact of the social and the economical factors in the organization so as to
increase the business performance (Fast Company, 2018). As this is the basic factor for
evaluating the performance of any organization in the competitive market so the management
accountants are currently very much involved in the sustainability issues. 67% of the respondents
argued that including the factors related to the social and the economical in the organizations
decision making will bring financial and the commercial benefit (White, 2015). The companies
who use sustainability information believe that more of the people use sustainability in the
strategic decision making as compared with that of risk management decisions. The risk
management decisions will help the organizations to identify the risk factors such as depletion of
natural resource and social inequality on the initial basis so as to avoid the issues related to the
future strategies and the pricing or productivity. However, this can be seen that if the
organizations adapt the sustainability factors in their decision making so this will lead to
achievement of the organizational goals as well as the economic growth (Fast Company, 2018).

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D3) Planning tools are the techniques through which the performance of the company can be
identified and the decisions can be taken accordingly so as to reduce the waste. To analyze the
performance of the organization the actual results are first analyzed with that of the budgeted
targets. There are many analyses which are been used for analyzing the financial accounts.
Corporate governance is the part of the financial governance which helps in the analyses of
revenue, cost and return on investment. The result which arises from the analyses is compared
with the actual result so that the growth of the company can be measured in the external market
and the sustainability can be identified (Fast Company, 2018). For checking the sustainability
there are various factors that needs to be taken those are political, economic as well the social
factors. The evaluation of these factors will help in taking the correct decisions for the
organization to avoid the risk issues. The return on the capital is calculated by identifying the
time taken by the organization to complete the particular task (Fast Company, 2018). So, to solve
the financial problems in order to achieve the desired outcomes it is necessary to take all the
decisions considering the risk factor (Fast Company, 2018).

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Conclusion
It can be concluded that there are various tools and techniques which are been used by the
organization so as to achieve the sustainable success in order to respond back to the financial
problems. To analyze the sustainability various advantages and disadvantages of the different
planning tools are also been explained in the report. The ways in which the organization is
adapting the management accounting systems is also been shown so that the financial problems
which are been occurring in the organization can be achieved and the performance of the
company can be enhanced.

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CONCLUSION
It can be stated that organizations are adapting various techniques to solve the financial issues
which are prevailing in the market and also taking the steps to attain the sustainability in the
organization. The analysis of cost has been done by preparing the income statement using the
marginal and the absorption cost. Factors that states the integration of the management
accounting within the organization is also been revealed. So, this can be concluded that the
organization should look after the various factors that lead to achievement of the growth such as
the consideration of the social and the economic factors to reduce risk.

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References
1. Richard Lavron, 2016. 8 tools and techniques to apply to strategic analysis and planning.
[Online]. Richard Lavron. Available at: http://braveworld.ca/8-tools-techniques-to-apply-
to-strategic-analysis-planning/. [Accessed on: 15-03-2018]
2. Imarticus, 2017. How do we determine techniques in Strategic analysis. [Online].
Imarticus. Available at: https://imarticus.org/techniques-strategic-analysis/. [Accessed
On: 15-03-2018]
3. White, S., 2015. How management accountants can lead their organizations towards
sustainable success. [Online]. Financial Management. Available at: https://www.fm-
magazine.com/news/2015/jan/201511533.html. [Accessed On: 15-03-2018]
4. Matambele, K., 2014. Management accounting tools providing sustainability information
for decision making and its influence on financial performance. Management accounting.
Available at:
http://uir.unisa.ac.za/bitstream/handle/10500/18990/dissertation_matambele_k.pdf?
sequence=1&isAllowed=y. [Accessed On: 15-03-2018]
5. Fast Company, 2018. 7 fundamentals of sustainable business growth. [Online]. Fast
Company. Available at: https://www.fastcompany.com/3049856/the-7-fundamentals-of-
sustainable-business-growth. [Accessed On: 15-03-2018]
6. Money Matters, 2018. Disadvantages or Limitations of Budgetary Control. [Online].
Money Matters. Available at: https://accountlearning.com/disadvantages-or-limitations-
of-budgetary-control/. [Accessed On: 15-03-2018]
7. Hartman, D., 2017. Advantages and disadvantages of Budgetary control. [Online].
Bizfluent. Available at: https://bizfluent.com/info-8338790-advantages-disadvantages-
budgetary-control.html. [Accessed On: 15-03-2018]
8. Vitez, O., 2018. Advantages of management accounting. [Online]. Available at:
http://smallbusiness.chron.com/advantages-management-accounting-3983.html.
[Accessed On: 16-03-2018]
9. Financial accountancy.org, 2015. Income statements under marginal and absorption
costing. [Online]. Financial accountancy.org. Available at:

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http://www.financialaccountancy.org/marginal-costing/income-statements-under-
marginal-and-absorption-costing/. [Accessed On: 16-03-2018].
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