BTEC Unit 5: Management Accounting Report - Financial Analysis

This report delves into the core concepts of management accounting, examining various costing techniques such as absorption and marginal costing, and their application within a business context. It explores different planning tools used for budgetary control, including operating, zero-based, and capital budgets, highlighting their advantages and disadvantages. The report further analyzes how organizations, specifically Prime Furniture and TPG Processing, adopt management accounting systems to respond to financial problems, such as late payments and high spending. It discusses the use of tools like KPIs and financial governance to identify and address these challenges, providing a comparative analysis of the approaches taken by the two example companies. The report concludes by emphasizing the importance of management accounting in making informed business decisions and maintaining financial stability.

Management accounting
1

Table of Contents
Table of Contents.............................................................................................................................2
INTRODUCTION...........................................................................................................................3
Task 2...............................................................................................................................................3
P3 Calculation of cost by using appropriate techniques of cost..................................................3
Task 3...............................................................................................................................................7
P4 Advantages and disadvantages of different types of planning tools used for budgetary
control..........................................................................................................................................7
Task 4...............................................................................................................................................9
P5 Compare how organisations are adopting management accounting system to respond to
financial problems.......................................................................................................................9
CONCLUSION..............................................................................................................................11
REFERENCE................................................................................................................................12
2

INTRODUCTION
Management accounting is the accounting term which is used by all business concern to
get productivity and profitability. This is the collection and provision of accounting which helps
to make right business decision. With the help of accounting, financial data and information is
collected by management that helps to attain the business goals (Otley and Emmanuel, 2013).
Administrators are related to the activities managers carry out in order to make profitable
decisions. The management accountant plays a role within the organization as tax accountant,
internal auditor, profit assessor and cost accountant. This is important for organisation to prepare
financial accounts and statements which can provide accounting information and right action that
increases organisational productivity and profitability. To understand about this Prime Furniture,
is selected that is growing East London based company that provides furniture to customers and
run business effectively. This report covers range of management accounting techniques,
planning tools which are used in management accounting and comparison of ways that can use
by company to respond to financial problems.
Task 2
P3 Calculation of cost by using appropriate techniques of cost
Cost: This implies the sum of money generated by market interests for the development
of goods and services. It is required in all companies because it helps to determine the cost of
producing activities. Kinds of costs are described as:
Absorption costing: It is a form of costing that has been assigned fixed and variable costs to the
cost center where consumption ratios are used. This means that the losses generated can be
recovered from the sales value of goods and services. It helps to measure the correct cost of
company operations in order to maximize productivity (Nielsen, Mitchell and Nørreklit, 2015).
3

4

Marginal costing: This is the calculation of the disparity between fixed costs and
variable costs. Costs are generally defined as fixed and contingent costs of marginal pricing. This
focuses on various factors, such as office and administration expense, sales and distribution and
5

processing costs, which determine production costs.
6

Task 3
P4 Advantages and disadvantages of different types of planning tools used for budgetary control
Planning tools are the important for organisation which uses to know the budget and
control it which arises while running business activities. For running a business successfully it is
important that management should used different planning used so they can be able to control the
7

excessive budget and improve organisational productivity. In Prime Furniture, different types of
planning tools are used as defined below:
Operating budget – This is a budget which is used by organisation in order to operate their
business activities and maintain revenues effectively. This budget states the revenues and
expenses which are projected and maintain profitability. operating budget goes through
compiling the all budgets before starting of every year. In Prime Furniture, managers focusing on
operating budget by involving day by day sale that helps to keep records effectively and maintain
profits (Wickramasinghe and Alawattage, 2012).
Advantages – This is a financial plans which is prepared by management in order to
meet with obligations. This helps to upgrade the small business and large business by allocating
resources properly. The management of Prime Furniture build operating budget to make flexible
budget and solve the financial problems.
Disadvantages – This is time taken budget that take too much time to prepare operational
budget. This covers all day by day activities that many be difficult for people to keep records and
maintain activities effectively. it does not provide accurate information all time, that means due
to some errors there is chances to get inappropriate information which can reduce the profits of
Prime furniture (Grabner and Moers, 2013).
Zero based budget – As name suggest this budget is prepared by management by fresh
data and fresh period that means it does not involves any past information which are related to
business. This is used by small and start up business who establish their business by new
accounting period and not having any past information. Prime Furniture can use this budget by
involving new financial data and information which can help to run business (Sánchez-
Rodríguez and Spraakman, 2012).
Advantages – This is flexible budget which is prepared by managers of Prime furniture,
as it generate lower cost and focuses on operation which helps to know productivity and
profitability. This involves only relevant and current period information that maintain business
activities properly (Arroyo, 2012).
Disadvantages – The base of zero base budget is not available because it does not
involve past data and information. If large or medium organisation is adopting this budget then it
cannot give good results due to not involving last data and transaction of business.
8

Capital budget – This is the process of undertaking the business and evaluating major
projects which helps to get higher profits and productivity. For instance, Prime Furniture
organisation is construct a new plant or bing investment that helps to know the profits from this
investment and make higher profits (Hilton and Platt, 2013).
Advantages – Capital budget give more favourable short run effects on earnings by
setting shorter payback period. This emphasis on early recovery and simplest to understand that
helps to run business activities effectively.
Disadvantages – In this, management can face problems because it involves difficulties
and ignores payback period. This ignores risk of future cash flows and value of money.
Task 4
P5 Compare how organisations are adopting management accounting system to respond to
financial problems
Management accounting is only used by several other organizations that help to
organised all business transactions and sustain a situation of revenue growth. All business
concerns are confronted with financial problem during the running of business operations. To
solve the financial problem organization uses a financial reporting management system that can
be used to formulate a response to problems and suggests a proper system for dealing with
problems. In Prime furniture, managers are facing different types of financial problems are
faced by management that are as explained:
Late payment by customers – A business owners have many credit transactions that has
impacted on business negatively as it reduce the liquidity of cash and reduce productivity. In
Prime furniture, managers sell its material to its regular customers on credit that covers period of
30 days, 60 days and 90 days which create financial problems and less productivity. moreover,
some times, they do not pays amount on fixed period of time due to which organisation faces
financial problems (Nixon and Burns, 2012).
High spending and low income – Organisation sometime spends money on unnecessary
items and structure which increases expenses and reduces organisational productivity. such as
manager of Prime furniture spends their money on structure, designs and others unnecessary
activities due to which financial problem is faced by organisation that has impacted negatively
9

on business. There are different management approaches which can be used to identify the
problems:
KPI – This is a tool which is used management to know and identify the key performance
of employees and organisation that states where need to improve the business activities. In this,
financial and non-financial performance is identified by management that states problems. In
Prime furniture, managers uses this approach to identify the financial and non-financial
performance which states that they are facing high spending and low income financial problems
(Nixon and Burns, 2012).
Financial governance – This is governmental body that has formulated rules and
regulation for a business that states how financial problems can be solved out. Herein, different
rules and laws are formulated by government authority for the welfare of business. For example,
Government male legislation in relation to credit policy, matching cash flow, and payment on
time which has to follow by organisation and customers. This helps to make payment on time
and solve the financial problems effectively.
Comparison between Prime furniture and TPG Processing
Basis Prime Furniture TPG Processing
Financial problems This organisation is facing high
spending and low income financial
problems that reduced its profits and
productivity (Kaplan and Atkinson,
2015).
This is manufacturing
organisation which is facing late
payment by customer problems
as it give goods to customers on
credits and they delayed in
payment process.
Identified problems This problems is identified by using
KPI tool which helps to states what
are financial and non financial
activity.
Managers has identified this
problems by using
Benchmarking tool which helps
to compare with others and why
it facing problems.
Uses of system To solve the financial problems
management should use cost
accounting system that helps to
maintain the cost and financial
To solve the financial problem
inventory management system
and price optimisation system
should be used by organisation
10

activities so problem can be get
solve (Nixon and Burns, 2012).
that helps to solve the problem
which they are facing.
CONCLUSION
Management accounting is the process of making right business decision by planning,
organisation and maintaining financial information. This is managed by management who have
accounting knowledge and experience to control excessive budgets. Marginal and Absorption
costing are two method which is used to calculate the profits. Moreover, planning tools helps to
control budgets and increase profitability.
11

REFERENCE
Books and Journal
Arroyo, P., 2012. Management accounting change and sustainability: an institutional
approach. Journal of Accounting & Organizational Change. 8(3). pp.286-309.
Grabner, I. and Moers, F., 2013. Management control as a system or a package? Conceptual and
empirical issues. Accounting, Organizations and Society. 38(6-7). pp.407-419.
Kaplan, R. S. and Atkinson, A. A., 2015. Advanced management accounting. PHI Learning.
Nixon, B. and Burns, J., 2012. The paradox of strategic management accounting. Management
Accounting Research. 23(4). pp.229-244.
Hilton, R. W. and Platt, D. E., 2013. Managerial accounting: creating value in a dynamic
business environment. McGraw-Hill Education.
Sánchez-Rodríguez, C. and Spraakman, G., 2012. ERP systems and management accounting: A
multiple case study. Qualitative Research in Accounting & Management. 9(4). pp.398-
414.
Wickramasinghe, D. and Alawattage, C., 2012. Management accounting change: approaches
and perspectives. Routledge.
Nielsen, L. B., Mitchell, F. and Nørreklit, H., 2015, March. Management accounting and
decision making: Two case studies of outsourcing. In Accounting Forum (Vol. 39, No.
1, pp. 66-82). Taylor & Francis.
Otley, D. and Emmanuel, K. M. C., 2013. Readings in accounting for management control.
Springer.
12