LFBM203 - Management Accounting Techniques for Performance Analysis

This report critically examines the role of management accounting in enhancing organizational performance, focusing on key components such as ratio analysis, sources of finance, costing methods (activity-based costing vs. traditional costing), cost volume profit (CVP) analysis, cost of capital, and investment appraisal methods. It details the benefits of ratio analysis for planning and forecasting, explores various sources of finance and their impact, and discusses how activity-based costing can improve decision-making. The report further explains how CVP analysis aids in identifying profitable goods and services and determining sales volumes for profit targets. Finally, it covers the importance of cost of capital in project evaluation and various investment appraisal techniques like payback period, accounting rate of return, and net present value, highlighting their contribution to customer satisfaction and employee morale.

LFBM203 Assessment Part 2
project

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
SCENARIO – 1...............................................................................................................................3
Ratio Analysis..............................................................................................................................3
Sources of Finance.......................................................................................................................3
SCENARIO – 2...............................................................................................................................4
Costing.........................................................................................................................................4
Cost Volume Profit Analysis.......................................................................................................5
SCENARIO – 3...............................................................................................................................5
Cost of Capital.............................................................................................................................5
Investment Appraisal Methods....................................................................................................6
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
The improvement of the organisational performance depends upon various components
of the management accounting like ratio analysis, sources of finance, costing method, cost
volume profit analysis, cost of capital and investment appraisal methods. Thus, the below
prepared report explains what is the role of these components of the management accounting in
improvement of the performance of the organisation like benefits of ratio analysis and
appropriately suited sources of finance for the organisation.
MAIN BODY
SCENARIO – 1
Ratio Analysis
A quantitative study of the financial data prepared, presented and disclosed by the
management to arrive at a meaning relation between these elements of the financial data like
liquidity, solvency, turnover and profitability (Husna and Satria, 2019). Now, such ratio analysis
in the management accounting has various merits which can be discussed as below:
 It involves analysis of the trends thus allowing planning and forecasting of the performance
of the business which is very essential for the future prospects of the business.
 It also involves analysis of the previous trends thus allowing estimation of the budget of the
business on the basis of which the operations of the business will be carried out.
 It ensures that the operations or the business are being carried out efficiently and effectively
to get an idea about success of the operations of the business.
 Through such an analysis the users of the financial statements and information are equipped
with significant information to base their decisions on so that they can make properly
informed decisions and avoid facing losses and unnecessary failures.
 Through such an analysis, two or more than two firms can be compared with each other as
such measure of comparison is standard for all the businesses.
 The analysis also facilitates determination of liquidity as well as the long – term solvency of
the business to determine the performance of the business.
Sources of Finance
Finance means funds or money which every business organisation requires for starting or
to purchase new capital assets, launching of new goods or services, upgradation of the machinery
or running its operations. Therefore, the sources through which such funds or money can be

acquired are called sources of finance (Shrotriya, 2019). A business organisation generally
sources its finances on its own, borrow from friends or colleagues, borrow from banks or lending
institutions, receive as a grant from government, from its revenues, through venture capital, from
other private companies, etc. Such sources can be explained as follows:
 Owner’s capital – It includes savings or other personal funds of the owner.
 Reserves – It includes reserves of the business accumulated from the profits.
 Loans – It includes borrowings from the bank or any financial institution.
 Government Grant – It is normally allowed for a specified purpose by the government or
contains a condition for its use.
 Leasing – It includes taking costly assets on hire or lease and pay instalments rather than a
single large payment.
 Shares – It includes issue of shares in the market by the public companies.
 Assets – It includes selling of spare and unnecessary assets.
 Venture Capital – It includes financing from a specialized investing company in exchange
of the ownership generally.
Thus, selection of an appropriate source of finance will majorly impact the performance
of the organisation and its improvement.
SCENARIO – 2
Costing
Costing simply means determination of the costs of the various elements of the business
which may include purchases of the business, production and manufacturing by the business,
selling of goods or services, channels of distribution, remuneration to the employees, etc. Now
this costing can be of two types i.e., activity – based costing and traditional costing. ABC
involves measure of cost and performance of the various activities of the organisation
(Rikhardsson and Yigitbasioglu, 2018). The traditional costing method involves allocation of
overhead manufacturing costs or indirect manufacturing costs. It requires calculation of overhead
rates which is predetermined and the application of these rates on a specific metric. It can be
agreed that the using ABC reduced the distortion risk and renders accurate costing information
for the further decision making by the management. Thus, it is a better type for improvement of
the performance of the organisation.
Thus, the steps of implementation of ABC system shall be known which is as follows:

STEP 1 – Identification of the activities.
STEP 2 – Determination of the costs of activities.
STEP 3 – Determination of the drivers of cost.
STEP 4 – Collection of activity data.
STEP 5 – Calculation of product cost.
Therefore, it can be said that costing is a tool of fixing and controlling the price and
allows taking of managerial decisions. It helps the organisation achieve efficiency in its
operations and provides the guidelines to facilitate various decision of the management.
Cost Volume Profit Analysis
CVP analysis is the analysis of the changes in the variable and fixed costs on the
operating profit of an organisation. Under this, the organisation can determine the number of
units they should sell to achieve break – even or earn a specified minimum margin of profit. In
this analysis it is assumed that sales price, fixed costs and variable costs per unit remains
constant (Hiromoto, 2019). It shall be noted that the changes in activity will lead to changes in
the variable costs whereas, fixed costs remains constant. Thus, when variable costs are recovered
from the sales revenue, the remaining profit is called as contribution which is then applied to
cover the fixed costs and in case of any remaining profits it is called net profit. Therefore, to
arrive at break-even point, total contribution shall be equal to the total fixed cost.
Therefore, CVP analysis have the following benefits to the organisations applying it:
 It helps in identification of those goods and services which are most profitable for the
organisation thus can utilize these in generation of maximum revenue and profits.
 It will also ascertain the volume of sales that will be required to earn a specific level of
profits.
 It will ascertain the volume of sales to achieve so as not to incur any losses.
 It renders the expected budget of the organisation.
 It will ascertain the fixed costs of the organisation.
SCENARIO – 3
Cost of Capital
Cost of Capital can be defined as the minimum return that an organisation will require to
earn from a project so as to be justified in undertaking such a project. It is the return an
investment is generating in relation to the costs that are associated with it including the risks

involved. In the cases where an organisation has used both debt as well as equity for financing its
business activities, weighted average cost of capital is being utilized (Kling and et.al., 2021).
Now it shall be noted that cost of capital and discount rate are generally used interchangeably.
The cost of capital has its own advantages to the performance of the organisation which are
discussed as below:
 It is one of the most vital concepts of decision – making in the financial management of the
organisation.
 It denotes that how much time will a proposed project take to recover what it costs. Such a
project for growth and expansion may include various options like expanding the factory,
acquiring the rival organisation, construction of a larger factory, etc.
 It will also denote that how much will a proposed project earn as returns in the future.
 It relates to the wealth maximisation objective of the organisation.
Investment Appraisal Methods
Also referred to as Capital Budgeting Techniques, it can be defined as appraisal of the
various options of investment to come to a conclusion whether or not to invest in it. In involves
decision making on the basis of the expected returns of the proposed project in the long term
(Investment Appraisal Techniques, 2022). It is also helpful whether there are more than one
products or projects to choose from. Various techniques involved in this investment appraisal can
be explained as follows:
 Payback Period – It is one of the easiest techniques which ascertains the time a project will
take to generate enough cash flows to cover the initial cost (Siziba and Hall, 2021).
 Accounting Rate of Return – It measures the profit which is expected from an investment
(Warren and Seal, 2018). It is expressed in the terms of percentage of the capital investment
and is also referred to as Return on Investment or Return on Capital.
 Net Present Value – It is the sum of the net cash flows from a proposed project discounted
at an appropriate discounting rate, etc.
Such appraisal of the investments will allow enhanced satisfaction of the customer along
with enhanced morale of the employees by working with assets of high quality and better
systems.

CONCLUSION
Conclusively, the above report critically explains the role of management accounting in
the improvement of the performance of the organisations. Thus, the above prepared report
explains what is the role of methods of costing and cost volume profit analysis and also the role
of cost of capital and investment appraisal methods in improvement of the organisational
performance.

REFERENCES
Books and Journals
Hiromoto, T., 2019. Restoring the relevance of management accounting. In Management Control
Theory (pp. 273-288). Routledge.
Husna, A. and Satria, I., 2019. Effects of return on asset, debt to asset ratio, current ratio, firm
size, and dividend payout ratio on firm value. International Journal of Economics and
Financial Issues. 9(5). p.50.
Kling, G. and et.al., 2021. The impact of climate vulnerability on firms’ cost of capital and
access to finance. World Development. 137. p.105131.
Rikhardsson, P. and Yigitbasioglu, O., 2018. Business intelligence & analytics in management
accounting research: Status and future focus. International Journal of Accounting
Information Systems. 29. pp.37-58.
Shrotriya, V., 2019. Internal sources of finance for business organizations. International Journal
of Research and Analytical Reviews (IJRAR). 6(2). pp.933-940.
Siziba, S. and Hall, J. H., 2021. The evolution of the application of capital budgeting techniques
in enterprises. Global Finance Journal. 47. p.100504.
Warren, L. and Seal, W., 2018. Using investment appraisal models in strategic negotiation: The
cultural political economy of electricity generation. Accounting, organizations and
society. 70. pp.16-32.
Online
Investment Appraisal Techniques. 2022. [Online]. Available through:
<https://efinancemanagement.com/investment-decisions/investment-appraisal-
techniques>