Analysis of Management Accounting Techniques and Financial Stability

This report delves into the realm of financial management, emphasizing the crucial role of management accounting in business decision-making. It explores various management accounting techniques such as cost accounting, budgeting, and investment appraisal, highlighting their significance in optimizing financial outcomes. The report compares and contrasts three key planning tools: budgetary control, common costing tools, and strategic planning, demonstrating their applications in ensuring financial stability and performance. It evaluates the advantages and disadvantages of different planning tools like cash budgets and standard costing. Furthermore, the report analyzes how management accounting systems are used to address financial issues, and how the application of planning tools can lead to sustainable success for organizations. The report also includes a comparison of how companies like Prime Furniture and ASDA utilize these tools to respond to financial challenges and improve their operations. Finally, the report concludes with a comparison of income statements under absorption and marginal costing methods.

5 REPORTS

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
Importance of management accounting in decision making.......................................................3
Management accounting techniques............................................................................................3
Comparison and contrast of three different planning tools which application ensure financial
stability and performance............................................................................................................4
Advantage and disadvantage of different types of planning tool................................................5
Use of management accounting system to respond to financial issues.......................................6
Application of management accounting planning tool to maintain sustainable success.............7
Different ways by which management accounting responding to financial problem can lead
organization to sustainable success.............................................................................................8
Preparation of Income statement under absorption and marginal costing...................................8
CONCLUSION..............................................................................................................................11
REFERENCES................................................................................................................................1

INTRODUCTION
Financial management is all about managing the financial resources associated with the
business entity. This report will project about the various financial management practices of the
business unit. Henceforth, report will emphasis over the importance of accounting and its
importance over the financial management practices. Various techniques adopted under
management accounting will also discuss under this project. Tools and techniques or various
systems adopted under the management accounting system will be highlighted under the project.
All different elements associated with the management accounting practices will be discussed as
a part of this project.
MAIN BODY
Importance of management accounting in decision making
Management accoutring system plays a huge role in enhancing the overall decision
making of the business unit. This whole system guide the company about the various business
related information such as related to profitability of company and many other information that
can support and guide the business entity to take on the best suitable decuision related to
operations of company. The role of management accounting is very crucial as it empower the
business unit to understand about all different financial terms and its significance to deliver the
business objectives (Kostyukova and et.al., 2018). The importance of management accounting is
significant as it empower the organisation to deliver the best suitable business operations.
Decision making of the business unit is very important as it deliver and allow the organisation to
control over the financial resources established by the organisation. Management accounting
empowers the organisation to take a strong control over different financial resources adopted by
the business unit. This makes it more significant for the organisation to effectively adopt all
different fictional areas part of the organisation. When it comes to taking up the decision related
to operations and functions this is important for the organisation to cover up all areas that can
support the company to take on the best suitable financial decision.
Management accounting techniques
Management accounting is a concept comprises with different techniques and practices
that can favour the company to project the accounting records in the best way possible. This
involve the technique like cost accounting, budgeting, investment appraisal and many such

techniques that can favour the company to take strong business decisions. This is essential for the
organisation to make strong decisions that can favour the business entity to maximise the overall
potential return and outcomes against the business operations channelizes (Alborov and et.al.,
2017). These techniques of management accounting allow and support the business entity to
achieve all the business objectives in the best way possible. This is required for the business unit
to allow the professionals for taking up some strong decisions that can favour the best possible
business growth in business. Management accounting techniques are always a best possible
business growth and such like aspects that can empower the organisation to take on the business
growth at a all different level.
Comparison and contrast of three different planning tools which application ensure financial
stability and performance
The three different planning tools that the Prime Furniture company can use in order to
manage and stable its financial resources are budgetary control, common costing tool and
strategic planning tool. With the help of this planning tools the company is able to understand
and analyse their finance management.
Budgetary control tool: This is a process of planning and controlling all the functions of
the business by preparing budgets such as Cash budget, Profit budget, Sales budget, Fixed and
Variable cost budget etc. After that it also compare and analyse the budgeted figures with the
actual one in order identify the actual performance of the company. It is one of the effective tools
which help the Prime furniture company in measuring the performance of each department,
individuals and also cost centres (Baldvinsdottir, Mitchell and Nørreklit, 2020). In order to
ensure financial stability, this tool help in improving the coordination between the departments
managers which further lead to cost reduction which every company’s primary target.
Common costing tool: In order to manage its financial performance, the Prime furniture
company need to adopt the common costing tools such as standard costing, job costing, batch
costing, process and marginal costing etc. By using this tool, the company is able to identify the
variance between the actual data and budgeted data and also able to identify the point where
company neither earn profit nor incur loss. This also help the Prime furniture company in
distributing the total cost between the different process of the products so that the company can
identify the process which cause loss to the company.

Strategic Planning tool: Here, the Prime furniture company can use the SWOT, PESTLE
and Porter’s five forces tool to identify and ensure the operational and financial opportunities and
challenge available to the company. The strategic planning is important because it provides the
direction to the organization and also help them in making decision by analysing the internal and
external factors. It basically forces the managers of the company to think and rethink external
risk which might causes financial loss to the company (Scapens, 2017). Analysing the political
and economic factors help the company’s managers to identify resistance of changes and also to
take remedial action wherever necessary and appropriate.
Budget
In simple term, budget is a document which is prepared by the management of the
organization in order to estimate the revenue and expenses for the next upcoming year on the
basis of their goals. And then compare it with the actual in order to identify differences (Drury,
2018).
Budgetary control
The budgetary control is a technique with the help of which the management of the
organization plans in advance the effective use of resources of the organization. It enhances the
utility of the cost account which provides the knowledge of future costs (Otley and Berry, 2019).
Advantage and disadvantage of different types of planning tool
CASH BUDGET
The cash budget is a financial plan which reflect the cash receipts and cash payments of
the company and which help the Prime furniture company in identifying is minimum closing
balance.
Advantage:
 This helps the management of the company to track its spending habits and also help in
managing atleast target minimum cash balance.
 By using this the company are able to avoid its debt by keeping aside cash for the future
uncertain and emergency situation (Alawattage and Wickramasinghe, 2021).
Disadvantage:

 Keeping large amount of cash at business premises increases the chances of theft by the
closed one or staffs.
 It also limits the spending power of the company and the impact of which they are unable
to enjoy the high return on investment.
CAPITAL BUDGET
This is also one of the tools of financial budgets which focus on the assets such as new plant,
land and machinery etc.
Advantage:
 It helps the business in identifying, analysing and evaluating the risk attach with the
various investment plans.
 With the help of NPV method, the company can invest the money in the assets which
provide them higher return.
Disadvantage:
 Basically, the capital budgeting is an irreversible decision because one it has taken is not
be change and any wrong decision may lead to the loss of huge amount.
 This relay on assumption is one of the disadvantages.
STANDARD COSTING
Variance analysis is a type of standard costing tool which help the Prime furniture
company in identifying the variance between the actual and budgeted figure.
Advantage:
 This helps the company in measuring the operational and financial performance of the
company as favourable and adverse criteria.
 With the proper use of variance analysis, the company are able to make proper and
appropriate decision in critical situation.
Disadvantage:
 It creates challenge and lose to the company if variance is analysis by them without
knowing the main causes of variance (Cobb, Helliar and Innes, 2021).

ACTIVITY-BASED COSTING
The pricing strategy help the Prime furniture company in deciding the best and suitable
price of the product as per the demand and supply analysis.
Advantage:
 The activity-based strategy helps the company in communicating the value of their
products and services to the target customers (Drury, 2018).
 By charging a fair price, the company are able to incorporate value into their high-quality
product and services.
Disadvantage:
 The company face difficulty in the factor on which the value of the product gets
identified and sometime knowing the customer perception is quite hard.
SWOT ANALYSIS
This is a tool in which the Prime furniture company need to analyse the internal and
external factor of the environment changing.
Advantage:
 The SWOT analysis helps the company in analysing the opportunity and issues which
affects their business in order to take corrective actions.
 It also possible that the company able to generate new ideas without costing the business
much in process.
Disadvantage:
 The wrong analysis of the strength and opportunity including weakness and threats may
cause company lots of financial issues (Tappura and et.al., 2020).
SALES BUDGET
This tool help the business in identifying the expected sales revenue the company is able
to generate in the upcoming year.
Advantage:
 It helps the business in reaching a certain selling goals with the help of which the
business further increases their profitability.

 The company are able to monitor and track the current sales and make strategy to go
beyond sales of current period.
 It is also help in identifying the reason of variance between the actual and expected sales.
Disadvantage:
 Basically, sales budgets are depending on the assumption and expectation and do not
reflect any actual figure.
Comparison of how Prime furniture and ASDA uses the management accounting tools to
respond to financial issues and problems
Standard costing: Every company have their own strategic goals and objective and in order
to achieve that the company also face various financial issues such as high cost, low cash balance
etc. The use of management accounting tools helps the Prime furniture company in identifying
their financial and other capabilities. For example, Prime furniture company can use this tool to
identify the variance between the actual and budgeted figures. And the ASDA company can use
this tool to track the record of work-in-progress, finished goods and cost of goods sold in order to
solve their operational gaps.
Cash Budgets: With the help of cash budgets, the Prime furniture able to identify whether
they have high cash flow or low and in case of high cash flow it helps them in generating more
return. While on the other hand, the Asda company able to identify the various sources of finance
in order to expand their business. This helps both the company to solve their financial risk such
as over budgets, lack of resources etc.
Investment Appraisal tool: For expansion the ASDA and Prime furniture company’s
manager can use investment appraisal tool of the management accounting. The investment
appraisal helps the company in making the decision regarding the profitable project plan. The
inventory management system helps the company in attaining the optimum economic order
quantity and also make availability of the raw material all the time in warehouse (Otley and
Berry, 2019).
Marginal costing tool: The Asda company in order to provide and make available the
goods all time in stores, warehouse and supermarkets uses the Just-in-time inventory technique
and with the help of which they are able to manage all their orders delivery on time. And the
same way the Prime furniture company can use the price optimising system in order to set the

fair price of their products by incorporating the best pricing strategy such as value-based
(Caplan, 2020).
Activity-based costing tool: This also help the company in identifying their products value
as per their target customer needs and preferences. In such way, the use of management
accounting helps the company in managing and overcoming their financial issues. ASDA
company allocate the total cost into the activity involve in producing the goods and same way the
Prime furniture can use this tool to identify the cost of each activity. The impact of which the
company able to analyse and identify the area or activity which cause loss to the company. And
then after the company can make decision whether to continue with such activity and disclose it
based on their materiality (Tappura and et.al., 2020).
Application of management accounting planning tool to maintain sustainable success
The planning tool of the management accounting help the Prime furniture in maintaining
their sustainable success in many ways. This involve that with the help of different aspects of
this planning tool the company are able to align the future operation of its business with the
strategic and operational goals and objective of the company. For example: If the company wants
to expand its business to the new market that they can use the budget tool of the management
accounting and identify the funds required for the research and development of the new market.
It also helps the Prime furniture company in taking the competitive advantage in the local and
international market via using the cash flow modelling and using the financial resources in an
effective and efficient manner. With the help of variance analysis, the company is also able to
increase its profitability by managing the different cost area. If cost of the product and services
get control than the company able to earn high profit which further lead to the sustainable
success of the business as controlling and monitoring the business activity is better for the
company (Bartolomeo and et.al., 2018).
Different ways by which management accounting responding to financial problem can lead
organization to sustainable success
The different ways which help the company in sustainable success are as follow:
 The use of management accounting such as break-even analysis and standard costing
helps the Prime furniture company in developing the plan and taking the most effective

decision. For example: Sainsbury company uses the costing system to analyse their actual
and budgeted figures and also to identify their contribution & margin of safety
percentage.
 It also helps the company in developing the effective financial governance and
formulating the sustainable goals and objectives for the business future operations.
 With the help of management accounting tool, the company are also able to identify the
issues which create lose to the company and affect their sustainability. For example, the
accounting scandal of the Tesco company in 2013 where the company’s burger contains
horse meat and the impact of which their customer base decreases (Kurunmäki, 2017).
 After analysing the sandal, the company uses appropriate strategy such as online
campaigns which reflect their quality of the product in order to correct and overcome the
challenges.
Preparation of Income statement under absorption and marginal costing
Income statement
For the quarter 1 and quarter 2
(Under Absorption costing)
Particulars Quarter 1
Details
Amount (£) Quarter 2
Details
Amount (£)
Sales Revenue 66000*1 66000 74000*1 74000
Less Cost of goods
sold:
Opening stock 0 - 10200
(12000*0.85)
Add cost of
production
66300
(78000*0.85)
56100
(66000*0.85)
Less Closing stock (10200)
(12000*0.85)
(56100) (3400)
(4000*0.85)
(62900)
(Under)/ over
absorbed fixed
production
(400) (2800)

overheads Note3
Gross Profit 9500 8300
Less Fixed selling
and Administration
overheads
(5200) (5200)
Net Profit 4300 3100
Income Statement
For the quarter 1 and quarter 2
(Under Marginal Costing)
Particular Quarter 1
Details
Amount (£) Quarter 2
Details
Amount (£)
Sales Revenue 66000*1 66000 74000*1 74000
Less Variable cost
Opening stock 0 - 7800
(12000*0.65)
Add cost of
production
50700
(78000*0.65)
42900
(66000*0.65)
Less Closing stock (7800)
(12000*0.65)
(2600)
(4000*0.65)
(42900) (48100)
Contribution 23100 25900
Less Fixed
production cost
(16000) (16000)
Less Fixed selling
and administration
cost
(5200) (5200)
Net Profit 1900 4700
Note1 Selling price per unit is £1 (i.e., 80000/80000)
Note2 Calculation of production cost per unit based on budgeted production units

Particular Quarter 1 Quarter 2
Production Variable cost per unit 0.65
(52000/80000)
0.65
(52000/80000)
Production Fixed cost per unit 0.2
(16000/80000)
0.2
(16000/80000)
Total production cost per unit 0.85 0.85
Note3 Calculation of under and over fixed production overheads
Particular Quarter 1 Quarter 2
Actual fixed production O/h 16000 16000
Fixed overheads absorbed 15600
(78000*0.2)
13200
(66000*0.2)
Over/ Under absorbed 400 under absorbed 2800 under absorbed
Reconciliation of profit figure
Particular Quarter 1 Quarter 2
Profit under absorption 4300 3100
Difference in units of
inventory* fixed production
overheads
(2400)
(12000*0.2)
1600
(8000*0.2)
Profit under margin costing 1900 4700
Interpretation: From the above calculation, it is interpretated that the profit under absorption
costing reflect higher profit than the profit under variable costing technique. Whenever the
number of units produce is higher than the number of units sold at that time absorption profit will
be higher than the marginal profit. And on the other hand, when no. of units produced is less than
number of units sold than absorption costing will be less than variable costing.
Reason of difference between both the technique are as follow:
The reason of difference between the absorption profit and variable profit is only one and
that is treatment of fixed production overheads. In the variable costing, the total amount of fixed