Management Accounting: Planning Tools and Financial Issues

This report delves into the realm of management accounting, exploring its role in organizational planning and financial stability. It examines the purpose and different forms of budgetary control, including cash flow, capital, zero-based, rolling, and operational budgeting. The report highlights how man...Read More

Running head: MANAGEMENT ACCOUNTING
Management Accounting
Name of the Student
Name of the University
Author’s Note

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Table of Contents
Introduction................................................................................................................................2
Answer to Question 1.................................................................................................................2
Purpose of Budgetary Control................................................................................................2
Different Forms of Budgetary Control...................................................................................3
Cash Flow Budgeting.............................................................................................................3
Capital Budgeting...................................................................................................................3
Zero-based Budgeting............................................................................................................4
Rolling Budget.......................................................................................................................4
Operational Budget................................................................................................................5
Answer to Question 2.................................................................................................................5
Answer to Question 3.................................................................................................................6
How Management Accountants will use KPIs.......................................................................6
Advantages and Disadvantages of the Use of KPIs...............................................................6
Answer to Question 4.................................................................................................................7
Conclusion..................................................................................................................................8
References..................................................................................................................................9

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Introduction
Management accounting can be defined as a process to assess the costs of the
businesses and operations to prepare internal financial reports, records and accounts for
assisting the managers’ process to make decision (Maas, Schaltegger and Crutzen 2016).
Planning is a crucial activity to the management accountants which involves in forming
short-term and long-term plans and actions for achieving organizational goals and objectives.
There are different management accounting planning tools that the management accountants
can utilize for making sure financial steadiness and performance; and these tools also play a
crucial role in solving different financial issues within the organizations. The main aim of this
report is the analysis of the use of different planning tools for gaining competitive advantage
and solving financial issues.
Answer to Question 1
Purpose of Budgetary Control
 The main purpose of budgetary control is to ensure planning for future through
establishing different budgets through the anticipation of enterprise requirements and
expected performance.
 Another purpose of budgetary control can be seen in operating different cost centres
and departments efficiently and economically (Isaac, Lawal and Okoli 2015).
 Budgetary control is established with the intention to eliminate waste so that
profitability can be increased.
 Anticipation of the future capital expenditure is another key purpose of budgetary
control.
 Budgetary control assists in centralizing the control system within the organizations.

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 Another major purpose of it is to correct the deviation from established standards
(Isaac, Lawal and Okoli 2015).
Different Forms of Budgetary Control
Various types of budgetary controls can be seen that the management accountants use;
they are Cash flow budgeting, Capital budgeting, Zero-based budgeting, Rolling budget and
Operational budget.
Cash Flow Budgeting
Advantages
 Cash flow budgeting assists in ascertaining whether there is adequate cash balance for
fulfilling the regular business obligations.
 This also helps in ascertaining whether cash and liquidity requirements stipulated by
banks are maintained.
Disadvantages
 Excessive use of estimates in relation to future events for forming this budget is a
major disadvantage.
 There is not any scope in changing the numbers of this budget once it is developed
and this makes this budget less flexible (Cull 2017).
Capital Budgeting
Advantages
 Capital budgeting largely assists the companies in understanding different risks
involved in an investment project along with the opportunities.
 This plays a crucial role in the informal decision-making process on the investment
projects (Andor, Mohanty and Toth 2015).

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Disadvantages
 There are long-terms decisions that are associated with capital budgeting and the
nature of these decisions are permanent.
 This technique is based on large assumptions and estimations which is a key
drawback.
Zero-based Budgeting
Advantages
 The main advantage of zero-based budgeting can be seen in emphasizing on the
decision-making process in the most accurate and efficient manner.
 This budgetary control method aims at the cost-benefit analysis.
 This leads to efficient allocation of resources.
Disadvantages
 This method is highly subjective in nature which creates difficulty in judging some of
the expenses.
 Zero-based budget is rigid in nature which makes it difficult for the management
accountants in brining changes in them (Hopkins 2015).
Rolling Budget
Advantages
 Rolling budget contributes towards more accurate planning and controlling processes
which leads to the reduction in budgeting uncertainty.
 This works as a guiding tools to the management accountants in spending financial
resources more wisely.
Disadvantages

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 Preparation of this budget needs more time, effort and resources.
 Since the budgeting targets are changed constantly under this budget, employees may
fees demoralized.
 This budget is not updated for the entire period (Karhunkoski 2016).
Operational Budget
Advantages
 The main benefit of operational budget is that it assists in tracking the whole business
by keeping track of the money spend and the projected required money.
 This caters to the long-term planning needs of the organizations.
 This is flexible in nature as this provides scope to bring changes in it.
Disadvantages
 One major disadvantage of operational budget is that it leads to major tax
complications that affects the company’s profitability (Wnuk-Pel and Christauskas
2018).
Answer to Question 2
Different planning tools are utilized by the management accountants for the
preparation of budget and gaining competitive advantage. Cost accounting is a key planning
tool in which budget is considered as a financial plan that consists of both financial and non-
financial information. Cost accounting assists the management accountants in preparing a
budget by projecting revenue and expenses. This also helps in projecting the number of
employees required. Accurate projection of revenue and expenses helps in gaining the
required competitive advantage (Ellul et al. 2015). After that, Budget Control is another
crucial tool used by the management accountants for effective planning and governing the
aspects of producing or selling products. This helps in developing the budget since this

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attempts in demonstrating the plans in financial terms. Since this is the planning in advance,
it is important for gaining the required competitive advantage.
Under the use of pricing strategies, management accountants take into consideration
the account segment, payment ability, conditions of the market, actions of the competitors,
trade margin and others. All these help in developing appropriate budgeting strategy that is
required for gaining competitive advantage. A budget describes the expectations of the
management for revenues and this is crucial for the allocation of specific resources. The
outcomes of the analysis of financial statements develop the basis of budgeting process as the
management accountants use the past financial information for projecting the future needs
and expectations (Robinson 2020). This helps in gaining the competitive advantage.
Answer to Question 3
The Process of Using KPIs by Management Accountants
Key Performance Indicator (KPI) refers to a core metric that the management
accountants use for monitoring the progress towards achieving specific goals and financial
outcomes. KPIs can be used by the management accountants for internal processes in order to
measure whether they are on track to achieve goal. It implies that the management
accountants can utilize the KPIs for measuring the performance of internal sections or
departments in the achievement of the key goals. In this process, the management
accountants are required to establish clearly defined goals for the internal processes and then
KPIs should be used for measuring the performance in achieving the goals. For the
management accountants, the best time of using KPIs is when a clearly defined target and
strategy has been set and the management accountants are ready in measuring the
performance of internal processes in achieving the goals (Parmenter 2015).

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Advantages and Disadvantages of the Use of KPIs
Advantages
 Since the main purpose of KPIs is tracking progress, accurate results are displayed by
it in the form of metrics, statistics and numbers.
 Large organizations may face difficulty in tracking the progress of all the employees.
In this situation, KPIs assists in staying everyone aligned to the organizational goals
and makes the results available to everyone (Lindberg et al. 2015).
Disadvantages
 Since the main focus of KPIs is to get the results for short-term goals, this creates the
chance that the employees loosing focus from work’s quality.
 Use of KPIs is largely disadvantageous in chasing long-term goals as KPIs are used
for short-term only (Lindberg et al. 2015).
Answer to Question 4
Carillion, the second-largest construction company of UK, collapsed under the
pressure of a massive £1.5 billion debt mound. KPMG, the audit partner of Carillion, did not
spot any key issue in the financial statements, but then the company announced a key profit
warning and inclined into terminal decline. Moreover, the debts of the company rose from
£242 million to £1.3 billion, but this was not mentioned in the 2016 annual report (tuc.org.uk
2020). It implies that the auditors and management accountants of Carillion failed in playing
the role in identifying and preventing these financial irregularities. The management
accountants play a crucial role in developing and implementing internal control systems that
recognizes major financial irregularities and frauds (Oommen 2015).
In Carillion, management accountants should have played the part in preventing the
fraud by detecting the accounting irregularities. It should have been required for the

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management accountants of Carillion to develop a Risk Management Framework would
incorporate four crucial facets which are prevention, detection, deterrence and response of
accounting irregularities. It would not be possible for the management accountants to apply
this framework without adequately considering the frauds as a part of the overall risk
management framework (Oommen 2015). All these indicate towards an essential role of
management accountants in enhancing the organizational capability of fighting accounting
irregularities and frauds.
Conclusion
The above discussion shows that budgetary control helps in organizational planning
process through developing different budgets. The major components of budgetary control
are cash flow budgeting, capital budgeting, zero-based budgeting, rolling budget and
operational budget. The use of various planning tools such as pricing strategies, budget
control, cost accounting and financial statement analysis help the management accountants in
predicting revenue and expenses. KPIs help the management accountants in measuring the
performance of different internal processes for the achievement of organizational goals. The
collapse of Carillion shows that management accountants have a crucial role to play in the
prevention, detection, deterrence and response of accounting irregularities and frauds within
the organizations.

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References
Andor, G., Mohanty, S.K. and Toth, T., 2015. Capital budgeting practices: A survey of
Central and Eastern European firms. Emerging Markets Review, 23, pp.148-172.
Cull, M., 2017. Cash flow, budgeting and managing credit. Financial Planning in Australia,
pp.145-195.
Ellul, A., Jotikasthira, C., Lundblad, C.T. and Wang, Y., 2015. Is historical cost accounting a
panacea? Market stress, incentive distortions, and gains trading. The Journal of
Finance, 70(6), pp.2489-2538.
Hopkins, M., 2015. Zero-Based Budgeting: Zero or Hero. Deloitte Consulting LLP.
Isaac, L., Lawal, M. and Okoli, T., 2015. A systematic review of budgeting and budgetary
control in government owned organizations. Research Journal of Finance and
Accounting, 6(6), pp.1-11.
Karhunkoski, P., 2016. Rolling budget: roles, complementing MCS, challenge areas and style
of use.
Lindberg, C.F., Tan, S., Yan, J. and Starfelt, F., 2015. Key performance indicators improve
industrial performance. Energy Procedia, 75, pp.1785-1790.
Maas, K., Schaltegger, S. and Crutzen, N., 2016. Integrating corporate sustainability
assessment, management accounting, control, and reporting. Journal of Cleaner
Production, 136, pp.237-248.
Oommen, R.B., 2015. The role of management accounting in fraud control: the case of the
City of Joondalup (Doctoral dissertation, North-West University (South Africa),
Potchefstroom Campus).

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Parmenter, D., 2015. Key performance indicators: developing, implementing, and using
winning KPIs. John Wiley & Sons.
Robinson, T.R., 2020. International financial statement analysis. John Wiley & Sons.
Tuc.org.uk. 2020. [online] Available at: https://www.tuc.org.uk/sites/default/files/Lessons
%20from%20Carillion%20report.pdf [Accessed 12 Mar. 2020].
Wnuk-Pel, T. and Christauskas, C., 2018. ANALYSIS OF OPERATIONAL BUDGETING
PRACTICES IN POLISH AND LITHUANIAN COMPANIES. Transformations in Business
& Economics, 17(3).