Management Accounting Report: Prime Furnitures Case Study Analysis

This report provides a comprehensive overview of management accounting, focusing on its application within Prime Furnitures. It explores the core concepts of management accounting, differentiating it from financial accounting and highlighting its importance in decision-making. The report delves into various planning tools, including financial ratios, budgeting, and decision-making accounting, analyzing their advantages and disadvantages. It examines the risks and uncertainties businesses face, particularly credit, market, operational, and liquidity risks, and how Prime Furnitures manages these. The analysis includes a comparison with a competitor, Staverton, to illustrate risk management strategies. Furthermore, the report discusses specific financial problems, such as the risk of default, and how management accounting techniques are employed to mitigate these issues, including the use of financial ratios and debt turnover analysis. The report also covers absorption and variable costing techniques. Overall, the report emphasizes the role of management accounting in providing data-driven insights for business growth, strategic planning, and effective financial management within Prime Furnitures.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
Management Accounting:...........................................................................................................1
Importance of Management Accounting:....................................................................................1
Types of Management Accounting:............................................................................................2
Planning tools are:.......................................................................................................................2
Advantages and disadvantage of financial planning:- ...............................................................3
Uncertainties and risks while running businesses:-....................................................................4
Analysis of Management accounting planning tools:-................................................................5
Financial problems management accounting:-............................................................................6
Absorption and Variable Costing techniques:-...........................................................................7
CONCLUSION .............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Management Accounting is the practice of recognising, evaluating, studying, interpreting
and communicating financial info to the managers for the motive to attain organisational goals.
It is different from financial accounting as the purpose of management accounting is to help
users to make better decisions for the company. In simple words, management accounting is the
provision of making financial as well as non-financial decisions and giving information tot he
managers. This report is based on Prime Furnitures and it's use of management accounting.
Management Accounting:
Management Accounting is the process of the providing financial info and resources to
the managers for the purpose making effective decisions. It is used internally by the organisation
which differentiates it from financial accounting. During the process, financial information and
reports like invoice, financial balance statement is shared by finance department with managerial
team of the company. The main motive of management accounting is to use the processed data to
take effective decisions to control the company and it's activities for the purpose of
development(Ntshonga and Kamala, 2019).
Importance of Management Accounting:
Small scale business owners and managers have to take number of decisions everyday.
Management Accounting uses the data from your day-to-day operations to make reports that will
provide an insight about the daily performance of the business like the profit margin and
utilization of labour.
 Relevant Cost Analysis: Information based on management accounting is used by the
management of the company to ascertain what to sell and how to sell it.
 Activity-based costing Techniques: After taking a decision of what to sell, now the
company has to ascertain the target customers whom they should sell the product. By
making use of activity-based costing techniques, small business management should
ascertain the activities necessary to produce and service a product line. This helps to
decide which customers are more profitable and which are not.
 Make or Buy Analysis: The main use of management accounting is to give information
used in the process of production. Let's say for an example, a small scale business owner
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would confused considering that whether he should buy the primary components or
make it for the purpose of manufacturing the company's main product.
 Utilising the Data: Management accounting information helps in providing a data-driven
look as how to grow a small business. On the basis of this data, managers make
decisions which aims on improving continuously and are also based on intelligent
analysis of the company data(Cokins and Căpușneanu, 2020).
Types of Management Accounting:
The plans, predictions and budgets need to be tracked and monitored continuously. There
are some types of analysis which are involved in management accounting to attain company's
objectives:
 Managing Costs: Cost accounting is a part of management accounting. Cost accounting
evaluates the several costs involved in the day-to-day functioning of the company which
includes fixed costs such as purchase of an equipment or machinery. Prime furniture uses
a plan for managing cost and how effectively it can be reduced.
 Managing cash Flow: Cash is a very crucial aspect of a businesses. It is created by the
record inflow and outflow of cash. It helps in evaluating the excess and short position of
cash in a business. Prime furniture use cash flow for paying its creditor when cash is high
and receiving from debtor so it doesn't found itself on fault side in payment.
 Inventory turnover analysis: It helps in analysing that in a specific period of time, how
many time a goods have replaced or sold. It also identify the cost of carrying good. It
identify the position where excessive amount of inventory can effects its operation. Prime
furniture uses inventory turnover for identifying the inventory carrying cost and reduce it
if its not efficient(Etim,2019).
Planning tools are:
Planning is list of steps prepared by a experienced person of a organisation through
assuming some future certain and uncertain event which helps and affect building a company
project. Planning Tool are ways which make easier for planner to make a perfect plan for future.
Some planning tools are like.
Financial ratio:- Financial ratio are quantitative figure which helps in determining the
operating a financial stability of organisation for building a plan. Some financial ratio are debt
equity ratio, leverage ratio, profitability ratio,market value ratio and debt turnover ratio. Prime
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furniture uses debt equity ratio for identifying the risk of insolvency, profitability ratio is use to
measure the identify the gross profit and net profit percentage in sales and debt turnover ratio is
used by company for paying its current debt by doing cash flow analysis(Boyd, and Pitre, 2020).
Budget and monitoring:- It is a plan for allocating fund to different sector for a period
of time, it is more likely to build for one year. There are many type of budget like activity-based
budgeting, incremental budgeting,base budgeting. Prime furniture use incremental based
budgeting which process like company takes figure from last year accounting transaction and
analyse the activity with a prospect of growth and shrinking then accordingly budget is decided.
This budget have flexibly and dynamic in nature.
Decision making accounting:- Accounting is a process of recording financial transaction
of business. These reporting helps in analyse the financial ratio. Prime furnitures uses the
decision making process by accounts reporting when facing an issue with investments because it
helps in comparing return on investment and company also uses it when it want to remove out
some bad performing product from production. It also show how frequently the product is
ordered(Nartey, Aboagye-Otchere, and Simpson, 2020).
Advantages and disadvantage of financial planning:-
Financial Ratio
Advantages Disadvantages
Financial ratio make different figures into its
base and solve solve complex number easy
way which helps in analysis of different
financial report.
Ration analysis helps in getting the picture of
past information but user are more likely to see
the future projection of the organisation.
Financial ratio helps in planning the optimized
budget for the organisation by analysing the
previous year data
Financial ratio calculation method are not
standard. They can be manipulated according
to the method is being used.
It helps in analysing a companying records for
large period of time frame.
It ignore the time value of money assumption
which means the money is received in early
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stage have more worth then the later one.
Budget and Monitoring
Advantages Disadvantages
It helps in defining the goals, plans and
policies for the organisation and give view on
future upcoming events.
It is hard to build up accurately under the
condition of uncertain inflation rate.
It helps in looking for various department
activities and force the to work efficiently.
Budget are for future period which is uncertain
and any uncertainty can make a budget upset.
Monitoring helps in determining the unwanted
expense and reduce the cost of production
Preparing of budget require some cost and
problem of co-ordination is required in as
future uncertainties occurs(Martin, 2020).
Decision making accounting
Advantages Disadvantages
Decision making helps in identifying the past
patterns which helps in making decision. For
example sales may change for a time but
planner are able to identify the pattern for it.
Decision are made on analysing data for the
market but that market preference changes very
frequently which can not be predicted every
time.
Decision making in accounting helps in
identifying rooms from for launching new
product or how much or more less it can
spend .
Every one have its own interpretation of data
may some have lack of information which led
to wrong decision making for the organisation.
Uncertainties and risks while running businesses:-
Prime furnitures is one of the best organisation in its sector. It hold good percentage of
margin in its sales and like other it also have some risk associated with its operations. There are
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various risk like credit risk,market risk, operational risk and Liquidity risk. In this we are going
to compare Prime furniture and Staverton.
Particular Prime Furnitures Staver Furniture
Credit risk Prime furnitures is one of the large
companies with large operation.
sometimes company have to borrow
fund to expand operation. Company
follow a credit worthiness and follow
credit sales terms transparent. It helps
them to make timely payment to others
Staver is also well establish
company and have large
operations. This company follow a
credit limit process helps them to
reduce credit risk but let its
operation for halt after the
limit(Nishimura, 2019).
Liquidity risk Company hold large operation along
with its large work force but some times
uncertainties occur like shortage of cash
or unable to pay its staff. So to robust its
cash flow company uses inventory
turnover ratio so it can beware of
blocking money in inventory and
minimize its operation in the lean period.
Company operate on a large scale
and operate on standards either
there is lean period or healthy
demand. That makes their work
effective and efficient but
sometime block its money in
inventory at low demand period.
Market Risk Volatility bring uncertainty in market
and to reduce it company slow all
operation and demand in vendor. Then
try to understand the market trend. Try
to reduce financial transaction in its
accounting. So it helps them to build
strong financial system in the
organisation.
Company watch and analyse the
market trend till the operation are
held in slow pace but in
considering the view of market
volatility sometimes uncertain
expense arrived in business which
affects the growth.
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Analysis of Management accounting planning tools:-
Management accounting planning tool helps Prime furniture in building a success and make
healthy operation. Financial ratio are one of the major factor of the company which provide a
overall view of past and present status of organisation. Prime furniture try to make a healthy
turnover ratio by look after the past sales trend and maintain a economical inventory stock which
helps in reducing the inventory management cost. Company also change its debt structure by
identifying its equity value in comparison to borrowing and try try build a low level of debt
which reduce the risk of default and in exception circumstance bankruptcy(Imai, 2019).
Prime furnitures uses budget for getting ahead in among its peers which helps them in
maintaining sustainable success. Budgets help company in identifying room for paying its debt
by trimming budget. Funds for launching new products can easily allocated. Company get help
in control over spending. Budgeting also helps company in identifying their future position and
make well prepared for it.
Prime furniture follow its accounting transaction to analyse the trend for the past period and
make decision. It helps company in building future ready and well identified for future potential
growth. Company also have well skilled professional which helps them in recording correct
transaction and leads to making good decision by the management. Good decision always make
a organisation successful. Most of the company uses accrual based accounting system which
depicts the accurate and current position of company that helps them in gaining loyalty through
its investor and debtor therefore healthy relationship are always good for the company(Rinaldi
and Jonsson, 2020).
Financial problems management accounting:-
Risk of default:-
Their are various way in which management accounting is applied to deal with its issues
like financial problems and prevent from any uncertain circumstance. To assist a team in
planning and make them understand better about the scenario with quality data of accounting
principal used. To make decision for the organisation, it uses financial ratio to understand the
current situation. According to ratio try to get a view of future and considering the accounting
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reports with current situation, Prime furniture try to optimize its resources. To reduce the risk of
default and show healthy ratio to others company uses debt turnover ratio.
Enhance profit margin:-
Prime Furniture's effective management accounting helps in reducing the cost of product
by making the accurate estimate and optimize resources to work with full potential by the work
force. Management accounting helps in getting a clear picture of data and crux of the numbers
rather then getting into all the financial transaction which makes financial decision a hard.
Effective accounting helps in prediction the future financial state of the company and make
advanced information to reduce the unnecessary expense for the future and helps in increasing
the profit margin.
Cost of debt:-
Prime furniture's effective management procedure prevent in building wrong forecasting
reports and enhance in organisation financial health by increasing the transparency among is
management. The healthy key performance indicator shows positive growth for the
organisation(Ghafari and Khozein, 2020). It helps company to get easily credit facility from
creditor with less rate of interest which saves the companies cost of acquiring debt from many
small creditor and less legal proceeding are follows in compare to many creditor facility.
Absorption and Variable Costing techniques:-
Absorption costing technique :- Absorption costing technique is a accounting method in which
it include all costing process like fixed and variable cost. Direct costing include rent , insurance
and many more. Indirect include as raw material(Zadorozhnyi and Yasyshena, 2019).
Quarter 1 Quarter 2
Opening Stock 0 12,000
Production 78,000 66,000
Sales 66,000 74,000
Closing Stock 12,000 4,000
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£ Quarter 1 £ Quarter 2
Sales 66000 74000
Production Cost of Sales:
Variable 42900 48100
Fixed 13538.46 -56438.46 15179.49 -63279.49
9561.54 10720.51
Selling & Administration Costs(fixed) -4290 4810
Profit 5271.54 5910.51
Calculations
Fixed cost = 16000/780000 = £ 0.21 /- Per unit fixed cost
Fixed cost for Quarter 1 = £ 0.21 x 66000 = £ 13538.46
Variable cost of sales = £ 52000 / 80000 units = 0.65/- per unit
Variable cost for Quarter 1 = £ 0.65 x 66000 = £ 42900
Selling and administration cost = £ 5200 / 80000 units = 0.65/- per unit
Selling and administration cost for Quarter 1 = £ 0.65 x 66000 = £ 4290
Profit for Quarter 1 = 5271.54
Variable costing technique:- Variable costing techniques is accounting method which is used
for finding a cost for a product. In this method fixed cost are not allocated according to unit sold.
According to this technique it is used whole of the fixed amount is deducted in profit and loss
statement.
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Quarter 1 Quarter 2
Opening Stock 0 12,000
Production 78,000 66,000
Sales 66,000 74,000
Closing Stock 12,000 4,000
£ Quarter 1 £ Quarter 2
Sales 66000 74000
Production Cost of Sales:
Variable 42900 48100
Fixed 16000 58900 16000 64100
7100 9900
Selling & Administration Costs(fixed) -4290 4810
Profit 2810 5090
Fixed cost for Quarter 1 = £ 16000
Variable cost of sales = £ 52000 / 80000 units = 0.65/- per unit
Variable cost for Quarter 1 = £ 0.65 x 66000 = £ 42900
Selling and administration cost = £ 5200 / 80000 units = 0.65/- per unit
Selling and administration cost for Quarter 1 = £ 0.65 x 66000 = £ 4290
Profit for Quarter 1 under variable costing technique = 2810
In the above discussed method variable and absorption costing technique there is big difference
in calculation of the cost. It is above noticed the difference between the in the profits, that is
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because of the variable costing don't include fixed cost in it it. It say company should charge its
whole amount at once not partially because it is getting paid at once(Namazi and Rezaei, 2019).
Initially it show less growth but in future terms it show high profit for the company. Absorption
costing technique allow company to allocate its fixed costing according to the unit sold which
show a constant growth and expense for the company.
CONCLUSION
The above report conclude that effective management accounting and planning for the
organisation. The issues which are faced by the organisation while operating in a competitive
market and the way financial ratio helps in analysing the data. Report also shows the advantages
and disadvantages of the management accounting. Later a practical to show difference between
absorption costing and variable costing techniques.
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