Management Accounting Report: Financial Planning, Budgeting & Analysis

This management accounting report provides a detailed analysis of financial planning and budgetary control, utilizing both marginal and absorption costing methods to assess a company's financial performance over three years. It includes income statements, cost calculations, and reconciliation statements to highlight the differences between costing methodologies. The report further explains the advantages and disadvantages of various planning tools such as variance analysis, balance scorecards, and ABC costing, emphasizing their application in preparing and forecasting budgets. It evaluates how organizations adapt their management accounting systems to address financial challenges, focusing on financial planning, cost measurement, decision-making processes, and budgetary control. The analysis demonstrates how effective management accounting can lead organizations to sustainable success by improving financial stability and strategic decision-making. Desklib offers a range of similar solved assignments and study resources for students.

Management accounting:

Contents
Introduction:...............................................................................................................................3
Task 1 (Part A)...........................................................................................................................4
Prepare income statements using marginal and absorption costs for the three years................4
Task 2:......................................................................................................................................10
Report:......................................................................................................................................10
P4 Explain the advantages and disadvantages of different types of planning tools used for
budgetary control.................................................................................................................10
M3 Analyse the use of different planning tools and their application for preparing and
forecasting budgets...............................................................................................................13
P5 Evaluate how organisations are adapting management accounting systems to respond to
financial problems................................................................................................................14
M4 Analyse how, in responding to financial problems, management accounting can lead
organisations to sustainable success.........................................................................................17
D3 Evaluate how planning tools for accounting respond appropriately to solving financial
problems to lead organisations to sustainable success.........................................................19
Conclusion:..............................................................................................................................21
References:...............................................................................................................................22

Introduction:
Management accounting is a tool for collecting managerial data, organise financial
information in order to interpret effective and relevant decision related to sales, purchases,
production and forecasting activity. This report will be prepared to provide an excellent result
related to uses, application and functions and significance of management accounting systems
and planning tools in relation to adopt financial stability and sustainable growth in the
company. This report will explain various kinds of management accounting systems and
benefits in order to respond financial problems. At the starting, proper analysis will use to be
made through marginal and absorption costing as provided data to monitor company's
financial performance. A letter to line manager will be penned in the form of report initiate
and respond financial changes in the management and uses of management accounting
systems in order to regulate such changes.

Task 1 (Part A)
Prepare income statements using marginal and absorption costs for the
three years
Calculation of Absorption costing: -
Good Clothing Ltd.
Income Statement
Marginal Costing
Particulars Year 1 Year 2 Year 3
Sales Revenue (A) 221000 297500 272000
Cost of Sales (B)
Opening Inventory 0 27000 36000
Add: Cost of Production 105000 114000 109500
Less: Closing Inventory 27000 36000 49500
Less: Variable distribution and distribution
costs:
distribution expenses 24000 24000 24000
Administration expenses 89,000 89,000 89,000
Contribution 30,000 79,500 63,000
Less: Fixed Costs 92,000 92,000 92,000
Net Profit -62,000 -12,500 -29,000
Calculation of marginal Costing: -
Income Statement
Absorption Costing
Particulars year 1 year 2 year 3
Sales Revenue 221000 297500 272000
Cost of Sales:
Opening Inventory 0.00 50657.14 65052.63
Add: Cost of Production 197000 206000 201500
Less: Closing Inventory 50657.14 65052.63 91089.04
Gross Profit 74657.00 105895.49 96536.41
Less: Distribution and Administration Costs:
distribution expenses 24,000 24,000 24,000
Administration expenses 89,000 89,000 89,000
Net Profit -38343.00 -7104.51 -16463.59

Working notes:
1.
Calculation of Costs
Marginal Costing
Particulars Amount
(£)
Direct Costs:
Direct Material 13
Direct Wages 10
Direct Expenses 7
Total Cost per
unit
30
2.
particular (unit) year 1 year 2 year 3
cost of production 105000 114000 109500
unit produced 3500 3800 3650
per unit cost 30 30 30

3.
Calculation of Costs
Absorption Costing
Particulars Amount
(£)
Direct Costs:
Direct Material 13
Direct Wages 10
variable
Expenses
7
Cost per unit 30
4.
calculation of the cost of production under absorption
costing
Particular year 1 year 2 year 3
variable cost 105000 114000 109500
fixed cost 92,000 92,000 92,000

the total cost of
production
197000 206000 201500
unit produced 3500 3800 3650
per unit cost 56.29 54.21 55.21
5.
Reconciliation statements:
Reconciliation statement year 1 year 2 year 3
Particular
Income as per Absorption costing -38343.00 -7104.51 -16463.59
less: Closing stock 23661 23661 23661
income as per marginal costing -62004.00 -30765.51 -40124.59
Analysis and comments on Absorption and marginal costing:
1. Income calculated as per absorption and marginal costing has arisen on the basis of
differences in the overall treatment of closing stock in the company. In the above
computation, the overall analysis has been made based on three years information.
2. As per absorption costing, the cost is categorised into following operations such as
production and other operations in order to measure the total of variable and fixed cost. On
the other hand, under marginal costing, whole costs would be classified into two variable and
fixed costs (Kalpan Financial, 2012).

3. Reconciliation statement has been made to describe differences between marginal and
absorption costing, the product of units have been taken and comprised of two components of
fixed and variable attributes in case of absorption costing technique. In the case of marginal
costing, the production units are valued at only and only variable costs.
4. Under three years of absorption costing, the whole differences arise due to closing stock
and valuation differences from a marginal activity.
6. The variables of closing stock are lower or less in marginal costing than absorption costing
which indicates differences in costing methodologies (Kalpan Financial, 2012).

Task 2:
Report:
From,
Junior accountant
To,
The Line manager
Introduction:
Budgetary tools can be considered as a concept of measuring required information of
financial and operational activities of a business. It is a medium of evaluating and monitoring
budget requirement in order to recognise and control cost. Budgetary tools are variance
analysis, balance scorecards, porter five analyses, ABC costing techniques and standard
costing etc. budgets are usually prepared to visualize and evaluate the actual results compared
with estimated variables. This report will explain importance, functions and benefits of
management accounting.
P4 Explain the advantages and disadvantages of different types of planning tools
used for budgetary control.
1. Variance analysis: variance analysis is the concept which is used while preparing the
budget in order to make the relevant comparison between estimated variables and actual
financial outcomes in relation to make the fruitful decision and forecasting effectively.
2. Balance scorecard: Balance scorecard is useful for the company to monitor and track
Company’s work in order to convert actual financial goals into reality. This technique is
basically performed to evaluate access and achieve four perspectives in the company: 1.
learning and growth, 2. internal business concept, 3. Customers and 4. Financial and
investment concept
3. ABC analysis: ABC analysis is Activity-based costing technique which is helping in
examining the competitive edge of the company in the terms of financial benefit. ABC

analysis is used to monitor basically whole financial works in a proper way in order to run
business operations perfectly.
Advantages and disadvantages of the budgetary planning tools have been given below:
Serial no. Budgetary tools Advantages Disadvantages
1 Variance analysis Variance analysis is
basically used while
preparing budgetary
process. It is used in
evaluating and
comparing actual
results and estimated
values of a variable
(Bragg, 2017).
Variance analysis
allows the company to
recognise each products
productivity and
flexibility to control
additional expenses
It is not able to make
comparison and observation
variables based on qualitative
analysis (Holt, 2014).
2 ABC analysis ABC analysis is major
costing techniques
which are used to
understand changes in
the cost of each project
which making budgets.
ABC is activity-based
costing technique which
is applied while making
ABC analysis is basically
based on assumptions and
estimated reviews at the time
of revising each variable.

sales and production
budget to monitor
actual visionary
objectives and business
outcomes of the
company (Ravinder &
Misra, 2014).
3 Balance scorecard Balance scorecard is
generally beneficial at
the time of measuring
and evaluating
company's goals and
achievements. It is
helpful to convert
business ideas into
reality to ensure
whether goals would be
achieved or not.
Uses of balance scorecard are
the time-consuming process.
Sometimes manager feels
difficulties in to analyse the
whole process effectively
(Monetary matters, 2017)

M3 Analyse the use of different planning tools and their application for
preparing and forecasting budgets.
1. ABC analysis: ABC analysis is the major budgetary planning tool in order to organise and
classify cost material in the process of inventory optimisation. It is a costing measuring
method in order to identify the activities that allow the firms to perform and assigning an
indirect cost of the product to control additional cost if each product.
Application of ABC analysis:
 ABC analysis is applied in an accounting based activity of the company in which
those events are affected which are monitored with specific goals; like setting up
plants and machinery, consumption of overhead resources.
 It is the major medium of driving cost in an effective manner to refer then at the time
of allocation of cost. Such as power consumption, maintenance consumption,
purchasing order etc.
 It enhances the costing and budgetary process in three ways: 1. It expands the plenty
number of cot pools which is utilised to classify and allocate overhead costs. 2. It
creates the new base to assign overhead costs in order to allocate the cost based on
activities in which the volume measure such generated cost such as direct labour
costs. 3. It alters several natures of indirect costs in relation to making them
previously considered such as depreciation etc. (Ravinder & Misra, 2014).
2. Balance scorecard: Balance scorecard is the medium of recognising and implementing
performing management tools, it is used to make the semi-structured report in automated and
designed costing techniques. It is utilised by the management in order to keep tracking of
those activities which are to be executed while arising the consequences of actions.
Application:
 It is utilised to refer primarily to perform management report by management.
Balance scorecard is basically focused on implementing strategies relate to
management and operational activities.
 It allows the management to track individual managerial performance in relation to
manage and evaluate large survey in an effective manner.

 It critically observes and focuses on strategic agenda and aims at the organisational
concern. It selects small data and sample in order to put those results upon large
surveys based on financial and non-financial data (Ravinder & Misra, 2014).
3. Variance analysis: it is concept based on quantitative observation in relation to comparing
relation between budgeted attributed and actual variables. It is utilised to manage and control
overall task and works over the businesses.
Application:
 It is the quantitative investigation of actual and planned behaviour to monitor and
evaluate differences in the actual outcomes and assumptions.
 It studies the observed cri8tieris of business task in order to deviate actual behaviour
versus estimated attributes of budgetary control tactics (Bragg, 2017).
 It is applied to investigate and isolate the various causes of deviation in the financial
performance from the assumptions to actual outcomes.
P5 Evaluate how organisations are adapting management accounting systems to
respond to financial problems.
Basis Uses of management
accounting systems
Considerable points

Financial planning Management accounting
tools are utilised in the
management to observe,
collect and evaluate data &
monitor companies' tasks in
order to implement that
information at the time of
financial planning.
A company should MIS in
order to do following takes
while planning financial goals:
 To make Market analysis.
 To manage inherent risk
factors.
 To take organisation
towards organisational
success (Monetary matters,
2017).
Cost measurement MIA is based on cost-benefit
analysis. It is utilised to make
the comparison between
actual attributes and
estimated variables in
relation to measuring
additional costs of each
project based cost-based
analysis (White, 2015).
In the terms of cost
measurement:
 Measurement of
additional cost
behaviour of each
project (Kaplan
Financial Knowledge
Bank, 2017).
 MIS allows the
company to reduce the
cost while making profit
maximisation.
Decision-making process MIS is utilised to measure
cash flows, actual fund flows,
a requirement of cost-based
projects and in making
effective budgetary
decisions. It collects data,
To respond financial problems:
 Proper utilisation if
financial and
operational data and
information (White,

organises facts and
implements them while
making and measurement of
financial statements and
reports of the company.
2015).
 Effective comparison
between actual and
planned behaviour of
data in order to make
forecasting, costing,
budgetary decisions.
Budgetary control MIS provides better sources
and facts relate to production
to the sales department. It is
allowed the company to
generate additional
information for the budgetary
control process (Matambele,
2014). MIS are helpful in
controlling internal and
external auditory reporting to
make effective control over
risk factors.
 Quality of facts and
information is needed to
promote budgetary
control behaviours in
the management.
 Proper evaluation and
monitoring of each cost
if the projects reduce
inherent risks of the
company.
 MIS should be used
perfectly to define and
describe effectiveness
and relevancy of data in
relation to managing
cost and revenue
process while making
budgets (Monetary
matters, 2017).

M4 Analyse how, in responding to financial problems, management
accounting can lead organisations to sustainable success.
Management accounting tools and system are utilised to prepare successful budgets and
stable forecasting decision in order to manage reliable, effective and transparency in business
activities. It allows the company to make proper analysis regarding changes in the financial
performance of the business in relation to observing circumstances of the business while
allocating financial resources in order to prevent risks and future threats (Moore, 2014).
Financial governance, identification of financial issues, setting financial reporting and time
skills set are the option to regulate risks factors for the sustainable growth of the company.
1. Identifying management risk and financial issues:
Application of management accounting systems and planning tools is necessary to observing
changes and recognising the actual financial problem of the company. It is essential to adopt
facts and utilise them timely in order to avoid financial risks and inherent factors. MSIA
allows the company to make proper documentation, records by indicating financial key
performing procedures. Setting benchmarks and variance analsyi9s is the targeted process to
monitor each and review each company’s project.
2. Benchmarking:
Benchmarking is the process of setting decided goals in the company. Each employee has to
work according to set directions and norms opted by the company in setting benchmarking
process. This process helps the company to avoid those previous mistakes occurred by the
company in last year. This process helps the management to make and follow standards based
on high quality and transparency of data (Shopify, 2017).
3. Financial governance:
Setting long-term goals and financial governance is the concept in which all rule and
regulation regarding meeting financial objectives issued by the management as regulators and
governing parties. Setting financial goals is essential to follow those rules and adopted
guidance by the company in order to make beneficial decisions in the company.

Benchmarking and setting variances goals are the major part of this in relation to handling
regulatory measurement and reporting.
4. MIS skills set:
Proper adaptability of management accounting systems could be helpful in achieving those
targets which company needs to meet their future goals. MIS should be useful in helping the
company in a decision-making process, forecasting process and so on. The company utilises
planning to according to their requirements and market demand. MIS provides essential data
and information to classify and identify information at strategic, tactics and operational level
in order to make the considerable judgement over financial issues (Shaw, 2013). For
examples: MIS provides proper reliable information related to changes in inventory level to
increase stability in storage process and avoid additional cost for entrusting business with
enhancement of responsibility criteria in the company. MIS responds changes in inventory
level through variance analysis in favour to enhancing profit over reducing cost.

D3 Evaluate how planning tools for accounting respond appropriately to solving
financial problems to lead organisations to sustainable success.
There are different types of management accounting systems which help the company in
measuring cost revenue relation and making effective decisions in order to enhance sales,
purchases and production and profit decisions (Holt, 2014). Management planning tools are
adopted in nowadays to avoid future threats by identifying them timely. MIS planning tools
collect information and financial facts as evidence in order to provide them to the
management in time. These planning tools are ABC analysis, cost analysis, funds analysis
and cash flow analysis to minimise cost and additional spending by maximising profit and
giving an opportunity to the company to make the profitable decision by analysis forecasting
behaviour.
Planning tools are evaluated by following for responding and solving financial problems:
1. Cost analysis and measurement: MIS and planning tools allow a company to observe the
requirement of the cash and funds through variance analysis, fund flow analyse and managing
cash flow statements. Cash and funds flow statements provide a chance to the company to
analyse and observe actual requirement in order to measure cost. It helps the company to
reduce each project cost and maximise profit (CGMA, 2013).
2. Enhancement profitability: planning tools such as variance analysis and ABC analysis
utilise to achieve long-term targets. These tools create comparison between estimated and
actual behaviour of cost, sales and other financial components and give effective results while
making sales, production and purchases budgets. It creates a path for the company to enhance
productivity and maximise profit.
3. Maintain accuracy and transparency: MIS provide relevant information to the company.
These facts are those based which are based on accurate and transparent nature of accounting
principles. As per requirements, these planning tools such standards costing, absorption
costing, budgetary control variables are based in accounting principles, they give perfect
results in order to specify and recognise actual requirement of the company, by the
application of such planning tools company get their organisational goals. Setting benchmark,
variance analysis provides transparency in maintaining companies desired objectives
(CGMA, 2013).

4. Decision-making process: MIS are used to provide relevant information related o sales
volume, changes in managerial performance, requirements of cash and funds and adaptability
of financial information in order to make transparent and reliable decisions. MIS gives an
opportunity to the company to state and describes their actual market and economic condition
so that proper decision could be made regarding enhancement of financial performance of the
company. MIS are utilised to promote business activities by allocating financial and
economic resources tactfully. It leads the company towards success through beneficial
forecasting decision through analysing financial reports and statements (Holt, 2014).
Conclusion:
This report has been concluded to provide an effective knowledge of used and significance of
management accounting systems. This report has been prepared to make the proper results
analysis of management accounting systems to responding financial problems and for the
sustainable growth in the company. These systems provide accurate decision making
information based on accuracy and perfection in order to allow the company to take effective
decisions related to forecasting, financial cost relates behaviour.

Conclusion:
Management accounting systems are those systems that help the company to access whole
financial procedure and managerial decision of the company. This report has been prepared to
make proper and effective decisions and provide knowledge of management accounting
systems and their application and utility in the management is subject to control and regulate
the budgetary process. This report has been provided knowledge in depth about uses and
analysis of costing techniques through using marginal and absorption method. This report has
also been described significance of management accounting systems in order to respond
financial crisis to avoid them and make the sustainable profit.

References:
1. Bragg, 2017. Material Quantity Variance. Available at:
https://www.accountingtools.com/articles/what-is-a-material-quantity-variance.html
[Accessed: 6 March 2018].
2. CGMA, 2013. Strategic Planning Tools. [Online] Chartered Global Management
Accountant Available at:
https://www.cgma.org/resources/tools/essential-tools/strategic-planning-tools.html
[Accessed on: 23 January 2018].
3. Holt, D. 2014. The role of management accounting within the development of
environmental management systems. London School of Economics.
4. Kalpan Financial, 2012. Marginal and absorption costing. [Online] Kalpan Financial
Ltd. Available at:
http://kfknowledgebank.kaplan.co.uk/KFKB/Wiki%20Pages/Marginal%20and
%20absorption%20costing.aspx [Accessed: 6 March 2018].
5. Kaplan Financial Knowledge Bank, 2017. Batch costing. [Online] Kaplan Financial
Knowledge Bank, Available at: http://kfknowledgebank.kaplan.co.uk/KFKB/Wiki
%20Pages/Batch%20Costing.aspx [Accessed on: 6 March 2018].
6. Matambele, K. 2014. Management accounting tools providing sustainability
information for decision-making and its influence on financial performance. The
University of South-Africa.
7. Monetary matters, 2017. Tools for Management Accounting. [Online]. Monetary
matters, Available at: https://www.cgma.org/resources/tools/essential-tools/strategic-
planning-tools.html [Accessed on: 6 March 2018].
8. Moore, K., 2014. Use Porter’s Five Forces to Widen Your View on Competitive
Forces. [Online] Business 2 Community. Available:
https://www.business2community.com/marketing/use-porters-five-forces-widen-
view-competitive-forces-01010538 [Accessed: 6 March 2018].
9. Ravinder, H., & Misra, R.B., 2014. ABC Analysis for Inventory Management:
Bridging the Gap between Research and Classroom. American Journal of Business
Education.
10. Shaw, J., 2013. How to complete a personal SWOT Analysis. [Online] Thrive Global.
Available: https://journal.thriveglobal.com/how-to-complete-a-personal-swot-
analysis-2f8769aebd5e [Accessed: 6 March 2018].

11. Shopify, 2017. Benchmarking. [Online] Shopify, Available at:
https://www.shopify.com/encyclopedia/benchmarking [Accessed on: 6 March 2018].
12. White, S. 2015. How management accountants can lead their organisations towards
sustainable success. [Online]. CGMA Magazine, Available at:
https://www.cgma.org/magazine/2015/jan/201511533.html [Accessed on: 6 March
2018].