Management Accounting Report: Prime Furniture Analysis, Planning

This report delves into the core concepts of management accounting, focusing on a case study of Prime Furniture, an East London-based company. It begins with an introduction to management accounting, emphasizing its role in providing financial information to internal stakeholders. The report then explores cost analysis, comparing marginal and absorption costing methods to prepare income statements, and highlights the impact of closing stock valuation on profit. Different types of planning tools, including capital budgets, cash budgets, and zero-based budgets, are discussed, along with their advantages and disadvantages. The report also covers pricing strategies like penetration and skim pricing. Finally, a comparative analysis is presented, examining how Prime Furniture and East London Furniture adapt their management accounting systems to address financial challenges, including the identification of financial problems through benchmarking, key performance indicators, and budgetary targets, and the use of financial governance and management accountant skill sets to improve financial outcomes.

Management Accounting
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Table of Contents
Introduction......................................................................................................................................3
Task 1 ..............................................................................................................................................3
Task 2...............................................................................................................................................3
P3 Cost analysis to prepare an income statement using marginal and absorption costs.............3
Task 3...............................................................................................................................................5
P4 different types of planning tools............................................................................................5
Task 4...............................................................................................................................................8
P5 Comparison between organisations to evaluate how they adapt to different management
accounting systems to respond to financial problems.................................................................8
Conclusion.....................................................................................................................................10
References......................................................................................................................................12
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Introduction
Management accounting is that branch of accounting which is primarily concerned with
providing information to the internal stakeholder of an organisation (Cockcroft and Russell,
2018). This report aims at exploring various concepts related to management accounting in
context of Prime Furniture, a growing East London based company. In this report, various
planning tools related to budgetary control are discussed with a mention of their advantages and
disadvantages. Further, a comparative analysis has been drawn up between Prime Furniture and
East London Furniture to understand the different management accounting systems used by two
firms to face different kinds of problems related to its financial planning. A practical illustration
has been provided to demonstrate cost analysis under different management accounting systems.
Task 1
(covered in PPT)
Task 2
P3 Cost analysis to prepare an income statement using marginal and absorption costs
Cost is that amount which has to be incurred by company in order to produce goods and
services. Prime Furniture can bifurcate their cost into two parts - fixed cost and variable cost.
Fixed cost is that cost which company has to pay irrespective of any unit produced while variable
cost is that cost which company has to produce for every additional unit produced. Company can
undertake cost-accounting on two basis:
Marginal costing
It is a costing technique that is concerned with identifying only that part of cost which has
been incurred in producing one extra unit of cost. Therefore, it takes into account only variable
manufacturing cost. It will enable Prime Furniture to identified the cost incurred to it for
producing one extra unit.
Absorption costing
It is a costing techniques which undertakes both fixed and variable manufacturing cost
into consideration (Kenyon and Kenyon, 2016). Therefore, it is taken as costing technique that
absorbs all types of cost while assigning cost to the product. It shows better picture than marginal
costing. It will enable Prime Furniture to better assign total cost incurred in production to all the
units produced.
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It can be seen from above practical illustration that difference in profit amount in income
statement under absorption costing and marginal costing is due to the difference in element of
closing stock in them. By adjusting level of closing stock under two methods, profits reconcile.
Task 3
P4 different types of planning tools
Using budgets for planning and control:
Budgets are the future looking documents prepared by the accountants on the basis of
past performance of the firm and in anticipation of the future trends (Guan, An and Liang, 2020).
An organisation prepares various types of capital and operating budgets for a reporting period
and then combined them together to form a master budget. Budgets thus prepared are planning
tools that act as standards for monitoring and controlling:
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 Capital Budget - Capital investment requires huge outlay which is capable of
compromising financial health of the organisation. Therefore, it is imperative that Prime
Furniture prepares capital budget so that it can identify required capital outlay as well as
finance cost which it will be required to pay later.
Merit: Capital budget would enable company to ascertain the capital cost to the company so that
it is able to exploit the growth opportunities available to it.
Demerit: Budget is futuristic statement and based on estimation. Any decision made on the
wrong estimation can seriously compromise company's financial health.
 Cash Budget - It is an operational budget which is required to make an estimation about
cash inflow and outflow in the specified budgeted period (Ostaev and et. al., 2019). It is
capable of being a very crucial planning tool for the budgetary control of the Prime
Furniture.
Merit: Cash budget will act as standard for planning and controlling the cash conversion cycle
and working capital management of the company and help it ensure that no disruption arises in
operations management.
Demerit: Using cash budget as standard makes company cash planning a little rigid which
makes way for frictions to arise and difficult for company to arrange for the contingencies.
 Zero-based Budget - It is a budget which is not based on past trends and is only
developed with a zero-base i.e. from the scratch by evaluating current cash flow. It will
help Prime Furniture to develop budget for providing for the new opportunities that
comes its way.
Merit: It will help company in improving efficiency of budgetary performance as it is not based
on past trends rather it is based on the actual performance as demonstrated in the cash flow
statement.
Demerit: It is time consuming stuff as it does not involve continuing the trend and therefore,
requires expert to prepare budget. This increases cost for the company as well (Tucker, 2017).
Pricing strategies
 Penetration pricing - It is a pricing strategy in which prices of the products are
intentionally kept low to attract maximum number of customers. Prime furnitures can use
this strategy in newly launched products to help them establish in the market.
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Merit: It helps company in capturing larger share market as well as entice customers to switch
from competitors. It would also help in creating brand loyalty and enlarged customer base.
Demerit: This pricing policy increased expectations of customers and then, when company
increases price later, it loses brand image and customers to competitors.
 Skim pricing - It is another price discrimination policy in which prices are intentionally
kept higher to target high-end customers (Luft, 2016). Prime Furniture can keep
skimming pricing strategy for the innovative products it experiments and which has high
product cost.
Merit: It would enable company to cover all the costs of innovation, research and development
and will further, be able to provide money for all future endeavours as well as loss bore on
penetration goods.
Demerit: In the industry, company is, it is difficult to take patent for the patent, which means
that technology will be duplicated. Competitors will keep lower price on the imitated products
and this will reduce sales opportunities for the company.
Common costing system
 Job costing - It is a cost-accounting system under which production is distributed in jobs
and then cost-accounting takes place for those jobs separately. It is an appropriate system
for the Prime Furniture as it can bifurcate its various production lines in separate jobs.
Merit: This cost-accounting system helps company in ascertaining cost at any stage of
completion for that job which enables it to ascertain job-based profit and taking better control of
the cost-structure.
Demerit: It increases the clerical job of maintaining accounts in the company which is both cost
consuming and time consuming.
 Contract costing - It is the cost-accounting system of the customised product contract that
company enters into with clients (OGrady, Morlidge and Rouse, 2016). Prime Furniture
manufactures furniture ranges and can takes customised commercial contracts that will
not only broadens its product base but also client base.
Merit: It will enable company to ascertain cost related to each client and contract so that it can
determine on the basis of profitability that which project should it continue and which should not
be.
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Demerit: It is again a laborious task and will be cost and time consuming. Further, loss making
business if abandoned based on it, might result in loss of opportunities further.
Task 4
P5 Comparison between organisations to evaluate how they adapt to different management
accounting systems to respond to financial problems
Identification of financial problems - Financial problems refers to those problems
which have the capability of compromising the financial health of the organisation (Rugger and
Rizza, 2017). In order to identify factors causing financial problems, Prime Furniture can make
use of below mentioned tools and techniques:
 Bench-marking - Bench-marking refers to evaluating performance of company against
the best practices in the industry. It can be used by company to determine both qualitative
and quantitative practices that are contributing to raise financial problems for the
company in compromising its profitability or cost-structure.
 Key performance indicators - Key-performance indicators are those resources of the
company that provides it competitive advantage in the industry. It can be both financial
resources like IPR, strong cash flow or stable revenue or non-financial resources like
innovations and employee performance. Company can adjudge its performance according
to the objectives, targets and standards set to identify the factors causing problems.
 Budgetary targets - Traditional budgets are future looking document based on the past
trends. They also act as standard for measuring, monitoring and controlling actual
performance to identify variance in the performance. These variance can be the
contributing factors leading to the financial problems.
Financial governance
Financial governance for the company refers to the manner with which it collects,
manages, monitors and controls financial information related to it (Eaton, Grenier and Layman,
2019). Therefore, this includes tracing financing transactions, operations, compliance and
disclosures of management of performance and control of financial data. Tracking and tracing
financial details will enable company to ascertain those issues that are capable of causing
problems in financial health of the company. When problems are identified beforehand, it
becomes easier for managers to take corrective actions and save company from falling into any
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problem. Further, financial governance is also used to assess strategies adopted by company in
terms of suitability, effectiveness and efficiency.
Management accountant skill set
Management accountant are required to be possess both technical skills related to
accounts and finance field as well as soft skills such as communication skills, negotiation skills
problem solving skills, etc. (Hoque, 2018) They should be well versed in identifying and
analysing problems so that they can develop preventive strategies and also requires to possess
such pro-active and reactive both types of behaviours so that they can assist management in
developing solutions to the problems faced by company.
Effective strategies and systems
Prime Furniture East London Furniture
Financial problem observed Finance managers of the
company has been observing
that in spite of regular
improvement in revenue, profit
margin has not been
increasing. This has seriously
compromised growth
opportunities of the company.
Finance managers of the
organisation observed that its
revenue rate is declining even
without the impact of COVID-
19 being taken into account.
Decline in revenue has
disrupted both cash cycle as
well as working capital cycle.
Tools and techniques used to
identify financial problem
By using budgetary target
tools, it was identified that cost
-structure of the company had
been increasing
disproportionately thereby,
reducing profit margin (Hales
and et. al., 2016).
By using Key Performance
Indicators and bench-marking
together, it was identified that
company has neither been able
to retain its existing customers
nor transforming potential
customers into sales.
Management accounting
system applicable
Company employs cost-
accounting system. Cost-
accounting methods such as
Company must employ two-
fold method to tackle on this
problem. On one side, it
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job-costing or contract-costing
can be employed accordingly
to pin-point the financial
problem and then develop the
solution.
should use price-optimising
and price-differentiating
systems and on the other side it
should employ inventory
management system so that it
can develop strategies
according to the products
available and then develop
products as per the demand
available.
Effective strategy Employing cost-accounting
system, company identified
that raw material cost needs to
be optimised. It re-negotiated
with suppliers over payment
prices and terms. On arrival of
need, company can also
change suppliers.
Furthermore, it should employ
quality management systems
to prevent wastage which will
further help optimise cost-
structure (Firk, Schrapp and
Wolff, 2016).
For the time being, company
should employ penetration
pricing or competitive pricing
to retain existing customers
and attract new customers.
Then, using inventory
management, it should identify
inventory in the sequence of
longest handled. It should then
sell out such inventory in stock
clearance sale or with
additional incentives or
discounts. Once, all the old
stock is cleared, it should focus
on innovation and bringing
new designs in the market that
can attract customers.
Marketing policies also needs
to be revised.
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Conclusion
Above report illustrates the practical demonstration related to the various management
accounting concepts related to costs such as marginal costing and absorption costing. Further, it
was observed that management can employ various planning tools for budgetary control which
have their own advantages and disadvantages. Furthermore, organisations come across various
challenges in their daily operations which are capable of compromising their financial health.
Organisations employ different management accounting systems to ensure that financial
management of the firm does not disrupts.
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References
Books and Journal
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