Management Accounting: Cost Analysis, Budgeting & Prime Furniture

This report provides a comprehensive analysis of management accounting principles, focusing on cost analysis techniques such as marginal and absorption costing, and the application of budgetary control. It examines various management accounting systems, including cost-accounting, inventory management, job-costing, and price-optimizing systems, highlighting their benefits and applications within an organizational context. The report includes a reconciliation statement of profits using both absorption and marginal costing methods, identifying reasons for variances between budgeted and actual profits. Furthermore, it delves into the advantages and disadvantages of different budgetary planning tools, such as cash budgets, and compares how Prime Furniture adapts management accounting to address financial challenges, ultimately assessing how management accounting contributes to sustainable business success.

Management
Accounting

Table of Contents
INTRODUCTION ..........................................................................................................................3
TASK 1............................................................................................................................................3
P1:Explain management accounting and requirements of various types of management
accounting systems......................................................................................................................3
P2: Different methods for management accounting reporting....................................................5
M1: Benefits and application of management accounting system..............................................6
TASK 2............................................................................................................................................7
P3/M2: Calculate costs by using cost analysis techniques..........................................................7
P4: Mention the benefits and disadvantages of various types of planning tools of budgetary
control.......................................................................................................................................10
M3: Analyse the use and applicability of planning tools for preparing and forecasting budgets.
...................................................................................................................................................12
P5: Compare the manner in which Prime furniture is adapting management accounting
system to tackle financial problems..........................................................................................12
M4: Analyse the manner management accounting helps in attaining sustainable success for
business.....................................................................................................................................14
CONCLUSION .............................................................................................................................15
REFERENCES..............................................................................................................................16

INTRODUCTION
Management accounting can be defined as a process of planning and directing financial
as well as non-financial aspects of an organisation in the direction of the goals of a company. It
assists directors in taking various decisions for an organisation. It involves various reporting
methods, preparation and analysis of budgets, taking actions for any kind of discrepancy and
techniques to solve accounting as well as financial problems (Eliseeva, 2018). The company
chosen in this report is Prime Furniture. It is a UK based dormant company with registered office
in Birmingham. It was established in the year 2019. There is only one director of the firm- Mr.
Haider Ali. The report is divided into two tasks. First part discusses about management
accounting and its various systems along with methods of its reporting. Second task describes
various accounting techniques in addition to advantages and disadvantages of different planning
tools of budgetary control. It also compares the ways of adapting management accounting system
to tackle financial problems.
TASK 1
P1:Explain management accounting and requirements of various types of management
accounting systems.
Management accounting refers to the practice of recognising, analysing, explaining and
informing about the financial information to the managers, so that it can be used for attaining
organisational goals. Its main aim is to guide directors of Prime furniture about the internal
scenario of organisation so that decisions could be made with full knowledge (Sedevich-Fons,
2019).
Principals of management accounting
Prime furniture adopts some of the following rules for maintaining its accounts.
 Relevance- The information provided in the accounting-book should be relevant enough
to be used by internal and external users. Prime furniture should take care that right
decision can be taken only and information provided by it is up-to-mark and there is no
irrelevant content in the financial statements.
 Principal of causality- It directs Prime Furniture to record only those events that has
occurred in reality. This rule indicates that there is a relation between the cause and effect

of an event. In simple words, company can write down only that information that has
actually happened and also has proof of it.
Management accounting system along with its role.
Management accounting system is a process of identifying, measuring and analysing the
financial information so that efficient decisions can be taken for achieving the goals of
organisation (Datar and Rajan, 2018). It also focuses on preparing reports for external party
users along with assisting in tracking cost linked with manufacturing of goods and services,
analysing budgets etc. In Prime furniture, it helps the managers in determining the costs of
different processes and controlling it.
There are various types of systems in management accounting that Prime furniture can employ-
 Cost-accounting system- It is a method of recording inflow and outflow of cash in a
particular accounting period. In other words, all income and expenses which are realised
in cash, presently or lately are recorded in this. It helps the producers of Prime furniture
in tracking the flow of money at every single stage. Through this an optimal cost of
product can be ascertained to generate profits.
 Inventory management system- It simply means to organise all elements of stock by
tracking its supply chain from one end of purchasing tot he other end of sales. It controls
the way a company manages its inventory. Prime furniture uses software – Zoho
inventory, to track the level of stock and its movement inside and outside the firm. It
ensures that organisation is capable enough to provide required amount of goods to its
clients and in desired time (Quinn and Strauss, 2017). On the other hand, it makes sure
that, the supply for manufacturing products is also available to the team correctly.
 Job-costing system- It is a process of collecting information about the cost of
product(job) at every single stage, for instance, customised sofa. It ensures that firm is
able to ascertain the value of material which has been used for production and what part
has been scrapped. With the help of this technique, Prime furniture can communicate the
expense incurred on every specific unit manufactured on its demand and can also
determine its profit margin capacity in that project. Through this, company can also
check out its cost forecasting criteria and can compare the actual results with budgeted
ones.

 Price-optimising system- It is an analytical method of calculating the impact of different
prices on the demand of customers. It also helps in determining the level of cost a firm
can charge from its clients to maximize its profits. This technique makes use of various
surveys, inventories, history of good and its price effect, sales etc. Prime furniture uses
this tool to frame the structure of amount it can charge in beginning, for promotions and
the level of discount that can be offered (Nobakht and Baradaran Hassanzadeh, 2017).
The most important thing which is required to be kept in mind is the change in pattern of
demand along with the conversion of rate.
P2: Different methods for management accounting reporting
These are the reports which presents the complete picture of business. It is used by
companies for analysing and interpreting the various records so that decisions can be made in the
direction of attainment of organisational goals. It is very important for Prime furniture as it
assists them in determining the performance of organisation. The most important thing is that the
information present in these reports must be understandable. This makes the statement easy for
its users to read and interpret according to their need.
There are various types of management accounting reports:
 Budget Report- It is used by managerial department to understand and control all the
costs incurred in specific project. This system helps Prime furniture in critically
evaluating the performance of company by comparing the planned budget with the actual
results. It also helps in taking corrective actions so that business can achieve its
objectives (Dierkes and Siepelmeyer, 2019). A budget is usually framed on the basis of
historical data holded by firm related to same project but Prime furniture must consider
the impact of future while framing it.
 Accounts Receivable Aging Report- This report is generally made by companies who
deals in providing credits to its customers. The main aim of this statement is to provide
information about the balances of receivables and number of days in which the amount is
to be collected. It helps Prime furniture in identifying defaulters and finding problems in
collection process. So that, firm can take corrective actions to improve its debt collection
strategy.
 Job Cost Report- It provides information about the cost incurred in every single step of
production which is then compared with the expected income earning of the project. It

helps Prime furniture in generating knowledge about the profits earned by different
products by identifying there costs. It further assists the firm in taking decision related to
projects which are more profitable. Company also uses this technique to figure out the
cost incurred on raw material, labour, overhead and other costs through which an
expected budget for similar product can be made in future (Loscher and Kaiser, 2020).
 Inventory and Manufacturing Report- This statement is prepared by companies
involved in manufacturing process so that the procedure of preparation and stocking can
be carried out efficiently. It helps in assembling data related to inventory cost, labour and
other costs related to manufacturing and inventory. Prime furniture prepares this report
for ensuring that it holds optimum level of inventory with it.
M1: Benefits and application of management accounting system
There are various benefits of this system for Prime furniture along with its applications.
 Cost-accounting System- It helps the managers of Prime furniture in lowering down the
cost of products by determining and controlling the unnecessary costs incurred during
project. It can be applied by businesses to improve its efficiency by making plans for
decreasing costs and bringing efficiency in production process for reducing costs.
 Inventory management System- It helps Prime furniture in holding an appropriate lot
of stock which is neither in excess, nor short. This will help in saving money as higher
amount of stock can cause wastage of goods. It is applied by firm to reduce its lead time
by improving its relations with suppliers (Kaya and Yazan, 2019).
 Job-costing System-It is used by Prime furniture for detecting the more profitable
projects so that it can put more focus on such tasks rather than carrying out unfruitful
business. This system is applied to check out the cost accrued on each job separately with
details and analysing its profits or losses.
 Price-optimising System- This technique helps Prime furniture in eliminating all the
wasteful activities so that it can control its cost and increase its profits. It is applied by
firm to recognise a price which can generate profits and is also acceptable by the
customers.

TASK 2
P3/M2: Calculate costs by using cost analysis techniques
Cost can be defined as a value of a product which has been used by firm to produce a
particular subject by applying various factors. These factors can be time, efforts, resources etc.
There are generally two types of costs- direct and indirect cost
Marginal costing is a technique of calculating the amount of cost uncured on the
production of every extra unit. It is prepared with a view to guide managers about the variations
in cost, so that required actions can be taken (Swiatek, 2019).
Absorption costing is a method in which the impact of fixed and variable costs are
analysed separately. It makes use of only that cast which is actually incurred in the production of
product.
Calculation of cost according to marginal costing and absorption costing

Reconciliation statement of profits from absorption costing and marginal costing
Particular Q1 Q2
Profit from absorption 4700 5900
Less: Under absorption -2800 -1200
Profits as from marginal 1900 4700
Working Notes:
Under absorption of fixed charges
Quarter 1
= 16000 – 66000*0.20
= 16000 – 13200

= 2800
Quarter 2
16000 – 74000*0.20
= 16000 – 14800
= 1200
Reason for variation behind budgeted and actual profits.
Prime furniture expected the profits of £ 6800 but actual results came out to be £ 4700
and £5900 according to absorption costing and £1900 and £4700 as per marginal costing for the
two quarters respectively. The main reason behind this is over expectation of production and
sales. The firm is not able to satisfy its target of selling 80,000 units in any of the quarter.
P4: Mention the benefits and disadvantages of various types of planning tools of budgetary
control.
Budget can be defined as a statement presenting the expected revenues and expenses on a
particular project in a specific time period (Simonova, 2019). It provides base according which
an action plan is framed. Directions of pursuing any task is also given on the basis of this report
only. Prime furniture prepares budget for ensuring that it can bifurcate its limited resources
according to the needs of different projects. There are various types of budgets prepared by
Prime furniture which are discussed below.
 Cash Budget- It predicts the movement of cash in a business. At the end of a particular
time period, net cash balance is determined by deducting outflow of money from inflows.
It helps Prime furniture in managing its funds and determining whether the cash flow
system of company is acceptable or not.
 Operating Budget- It forecasts a plan for expected expenses and revenues related to
daily operations of business. It involves various costs related to manufacturing, labour,
rent, electricity etc. along with sales made during the year. It helps Prime furniture in
comparing its actual results with that of the budgeted ones, so that required actions for
recovering any kind of discrepancies can be taken in time.
Budgetary control
It can be defined as process of ascertaining the variations between the actual results with
that of the estimates framed in budget. This process starts from preparation of budgets, followed
by communicating to concerned departments, assigning responsibilities and at last comparing the

actual performance with the planned one (Dunaev and Kirilenko, 2018). On the basis of this
analysis, Prime furniture makes plans to rectify the problems due to which difference has
occurred.
Various types of planning tools used by by Prime furniture for budgetary control
 Variance Analysis- In this technique, a budget is prepared for each project separately
and is communicated to the concerned authorities. After this, the actual performance of
task is compared to the desired result from time to time. Variances can be desirable or
undesirables. Unfavourable projections are then considered for evaluation so that
corrective actions can be taken in time. Prime furniture conduct this analysis at regular
intervals, so that the process can improvised in between the project only (Grossi and et.
al., 2019).
Advantage Disadvantage
It makes Prime furniture proactive by
forecasting the risks in advance and building
trust among staff to create planned outputs.
It does not consider the change in the value of
currency due to time and follows same
standards for projects of all times.
 Zero Base Budgeting- It focuses on preparing fresh budget every single time while
considering nil base. It can only be done if the estimated expenses and incomes are equal
in total. The excess in this type of statement is adjusted among the lower side. Prime
furniture apply this technique to make allocation for customised projects.
Advantage Disadvantage
It ensures that the managers of Prime furniture
predict the cost of project by taking fresh data
as it considers the tendency of prices to grow
with time.
It is very time consuming process as whole
fresh budget is to be prepared rather than
modifying the exiting one.
 Responsibility accounting- It is a technique to evaluate the performance of employees
on the basis of standards made for them. This tool creates three different sections of cost,
profit and investment and the work of all the employees are bifurcated into these parts.
The results derived by staff is then compared to there standardized performance. Prime

furniture uses this technique to take decision related to promotion and demotion of
employees (Lyly-Yrjänäinen and et. al., 2017).
Advantage Disadvantage
It helps Prime furniture in acknowledging the
human capital structure of firm and checking
which person is useful and who should be
replaced.
This system can create an environment of
pressure for the employees of Prime furniture
and it can directly impact there performance
which is harmful for the individual and the
company.
M3: Analyse the use and applicability of planning tools for preparing and forecasting budgets.
The various planning tools are used by Prime furniture for ensuring efficiency in its work
process. All these techniques helps the firm in creating an optimum budget keeping in view that
with time the cost of expenses tends to grow and old budgets cannot be used every single time.
Further, variance analysis helps in ascertaining differences occurring at the time of perusing the
project and acknowledges the points where preparation of budget went wrong so that next
budget can be prepared accordingly (Ryu and Won, 2018). Responsibility accounting also helps
Prime furniture in forecasting the capabilities of its staff members on the basis of their historical
data.
P5: Compare the manner in which Prime furniture is adapting management accounting system to
tackle financial problems.
Financial problems means the inability of a firm in paying off its debts in a short or long
time period. It can occur due to large fixed expenses, shortage of liquid assets, insufficient sales
or economic downfall. These problems needs to be addressed in time to ensure smooth running
of business.
Some of the monetary problems faced by Prime furniture is as follows:
 Unnecessary expenditure- Prime furniture is not tracking its expenses and is spending
extra in promoting its products without even analysing the impact of these
advertisements. There ads are not targeting any specific customers, thus not bringing any

profits to the firm. Additionally, it is continuously purchasing assets which are not useful
for the business (Petratos and Faccia, 2019).
 Non-availability of funds- Debt collection policy of Prime furniture is not efficient. It is
not able to collect payment from its debtors in time, on the other hand, its creditors
demands payment in time. This has decreased its liquidity position and also harming its
daily operational needs. Another reason behind this is that it does not collect and monitor
information related to its debtors, due to which it could not collect cash from them in
time.
Techniques of identifying financial problems
There are various techniques through which Prime furniture can identify its money
related problems, out of which few are discussed below:
 Benchmarking – It is a tool used by companies to measure its performance by using
some specific indicators, it can be cost per unit, time taken by cycle etc. Prime furniture
uses this technique by identifying the results brought up by other industries of same field
to its own results. This helps it in learning about how well they themselves are
performing and which particular projects needs improvement. This will also assist in
acknowledging the areas where it is spending wastefully and requires to control its
expenses (Hiebl and Richter, 2018).
 Key performance indicators- It is a technique of measuring the effectiveness of
company in achieving its business objective. It provides targets to the staff members of
Prime furniture to achieve them optimally. These standards helps each and every
department of firm in moving towards a specific planned target. This also assists in
generating information about how well the firm is performing as compared to previous
results.
 Financial Governance- It refers to the process of collecting, managing, monitoring and
controlling information related to corporate accounts. It helps Prime furniture in tracking
transactions and performance of business. Through this, firm can have a check on the
movement of cash and can retrieve this information at the time of need. It will also help
in recognising the time of collection of money from debtors and enhancing its liquidity
condition (Agrawal, 2018).
Comparison of organisations

Basis Prime furniture Hugh Miller Furniture
Financial problem Prime furniture is facing problem in
controlling its expenses. It is
spending unnecessarily on wasteful
items and do not have any record
related to it. Doe to this profits of
firm is decreasing on one hand on
the other hand, it is not remained
with enough cash to secure its
liquidity.
Hugh Miller Furniture is not able
to control its inventory.
Sometimes, there is a lot of stock
which gets wasted due to change
in fashion and sometimes there is
shortage of goods leading to
dissatisfaction among clients. It is
thus affecting its profitability and
hiking its costs.
Management
Accounting System
used
Prime furniture is using cost
accounting system through which
its can manage its cost effectively.
This technique helps it in
acknowledging the places where
there is no need on investment and
which place demands expenditure
for growth.
Hugh Miller Furniture is using
inventory management system to
have a control over the inventory.
It will help the firm in creating an
optimum stock of all types of
goods and at right time.
Application of
system
Prime furniture is applying this
system by evaluating the value
created by every single expense
incurred by firm. Through this tool
it tries to eliminate all those
expenses which are undesirable and
are also not adding any value. This
tends to improve its profitability
and reduced cost along with
improving liquidity position.
Hugh Miller Furniture is applying
this technique by tracking the
movement of stock out of the firm
and checking the frequency of
change in fashion. This allows the
firm to hold only a particular level
of inventory with it.

M4: Analyse the manner management accounting helps in attaining sustainable success for
business
With the help of the various tools of management accounting, Prime furniture can detect
the areas where there no requirement of spending money and also recognising the assets which
are not adding value to the firm (Adler, 2018). By applying KPI technique, it can ascertain the
performance of each and every department so that the effort of all sections can be directed
towards bringing optimisation and enhancing profitability capacity of firm. Financial governance
will assist in collecting required information of all aspects of finance and in right time. This will
help in reducing the delays related to collection of money happening in the firm.
CONCLUSION
It can be concluded from the above report that management accounting is very important
aspect for the success of firm . It includes number of indicators which provides knowledge about
the performance of business. There are number of techniques which constantly tracks the costing
and inventory management policy of company so that corrective actions can be taken in time.
Number of reports made in this system guides them about the variance in budgets and tools with
the help of financial problems occurring in institution can be solved. Marginal and absorptive
costing helps in analysing the impact of fixed costs on the value of product and profits earned by
business. Benchmarking, financial governance are some techniques with the help of which
organisations can identify the monetary problems occurring in the firm and how these
hindrances can be eliminated for the success of corporation.

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