Management Accounting Report: Costs, Budgets, and Financial Problems

This report delves into the application of management accounting principles within the context of Prime Furniture, a furniture manufacturer. It begins with an introduction to management accounting, emphasizing its role in organizational goal achievement and efficiency. The report then explores various cost calculation methods, including marginal and absorption costing, highlighting their advantages and disadvantages. Furthermore, it examines planning tools for budgetary control, such as fixed and flexible budgets, and personnel budgets, assessing their suitability for Prime Furniture. The report also analyzes financial problems faced by companies and compares how different organizations like Tesco and Sainsbury adapt management accounting systems to address these issues, offering recommendations for Prime Furniture to overcome its financial challenges, including debt and poor accounting practices, by utilizing techniques like Key Performance Indicators (KPI) and benchmarking. The report concludes with a summary of the findings and their implications for effective financial management.

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1: Management accounting systems..........................................................................................1
P2: Management Accounting Reporting......................................................................................1
TASK 2............................................................................................................................................1
P3: Calculation of costs...............................................................................................................1
TASK 3............................................................................................................................................7
P4: Planning tools for budgetary control.....................................................................................7
TASK 4..........................................................................................................................................10
P5: Comparison of organizations for adaption to management accounting systems to respond
to financial problems..................................................................................................................10
CONCLUSION..............................................................................................................................12
REFERNCES.................................................................................................................................13

INTRODUCTION
Management accounting are techniques that break down, recognizes, measure, translate
and conveys information that empower organisations to accomplish their goals. They increases
efficiency of managers by ensuring that all resources are fully utilised.(Chung and Cho, 2018)
(Chung and Cho, 2018).These accounting focuses providing quality at justified prices that build
organisation image and increase customers. With help of these accounting companies become
cost conscious. This helps them to avoid extra cost by using capital budgeting, budgetary control
etc. to reduce expenses and earn profit on time. They are the most reliable source for
management as they provide genuine information. They assist companies to make better plan for
future activities. This can be done by providing financial data and non financial data on regular
basis to management. This report is based on Prime Furniture. This company is a manufacturer
of different kind of furnitures such as beds, sofas, modular kitchen and windows also. This
assignment mainly focuses on systems of management accounting, application of its techniques.
In addition to these, use of planning tools and different ways in which company this to solve
problems are also discussed.
TASK 1
P1: Management accounting systems
Completed in PPT
P2: Management Accounting Reporting
Completed in PPT
TASK 2
P3: Calculation of costs
Costs are calculated with different types of techniques. These cost are incurred within an
company. There describe as follows-
Marginal Costing- Marginal costing refers to the changes in production cost which
occurs from producing one extra unit. In this costing fixed cost is written off against contribution
and variable cost is charged to cost of units (Di Vaio and Varriale, 2018) (Ionescu, 2016).
Marginal costing is important concept as organisations can optimise their manufacturing. Prime
furniture with help of marginal costing can generate level of profit.
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Advantages-
 Cost comparison will be meaningful as fixed cost of Prime furniture will not be carried
forward to next accounting year.
 Problems relating to over and under absorption will not arise for Prime furniture in
marginal costing.
 Marginal costing does not includes fixed cost of production. On this basis for Prime
furniture techniques of marginal costing will be easy to operate and simple to understand.
Disadvantages-
 Segregation of total cost into fixed and variable cost will create problem for Prime
furniture.
 Management of Prime furniture cannot make quality decision. For decision company
cannot consider contribution alone and they might vary if new techniques are introduced
in production process.
 Exclusion of fixed costs do not make any sense for Prime furniture and these costs are
also incurred in manufacturing of products.
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Absorption Costing: Absorption costing implies all costs that are relating to
manufacturing of a product. They includes not only fixed and variable manufacturing cost, but
also labour and material cost (Khajavi and Mohammadian, 2018) (Hamamura, 2018). This
costing is required for reporting of tax and external finance reporting. Therefore, this costing will
help Prime furniture to derive cost from product manufacturing in order to get profit margin.
Advantages:
 Absorption costing include fixed cost, this will help Prime furnitures to get more realistic
product cost.
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 With the help of this costing company balance sheet will get true view as inventories are
valued at actual cost of production.
 It provides information regarding over and under absorption. It will help Prime furniture
to find efficient or inefficient use of production resources.
Disadvantages:
 This costing will not help Prime furnitures in decision making because it do not provide
information relating to margin of contribution.
 In absorption costing comparison of cost and control of cost becomes difficult. Prime
furniture will find it difficult and it become time consuming for them.
 This costing does not differentiate variable and fixed. Company cannot prepare fexed
budget as they are not formed without this differentiation.
TASK 3
P4: Planning tools for budgetary control
Budget refers to a thorough estimate of the different types of receipts and payments
within a specific period of time i.e. a year. For a company like Prime Furniture it is quite
important that it is prepared effectively and efficiently so that the different types of needs and
requirements can be fulfilled without facing problems and issues (Mikes and Morhart, 2017).
The following budgets can be used by the managers of Prime Furniture so that they can ensure
that financial management is carried out in a proper manner by them (Ionescu, 2016).
The budgets which can be used by the management of Prime Furniture for ensuring that
the estimation of a wide variety of financial requirements can be made are explained as follows-
Fixed Budget-
This is a budget in which the different types of figures and estimates which are taken so
that the overall level of estimation of the fund requirements can be made in a proper manner
(Nitsenko, Mukoviz and Sharapa, 2017). The use of this budget can be made by the managers of
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Prime Furniture so that they are able to ensure that they can make use of the fixed figures
effectively and efficiently.
Advantages-
 The use of this budget leads towards ensuring stability within the organizations. For the
managers of Prime Furniture this can be highly useful so that a stable organization can be
created by it effectively and efficiently (Hamamura, 2018).
 This budget can be helpful in ensuring that the overall level of needs and requirements of
the organizations can be fulfilled as it helps in ensuring the use of proper short-term,
medium-term and long-term plans for the same. In this way Prime Furniture will be able
to attain the desired goals and objectives.
Disadvantages-
 In this budget forecasting becomes a tough task. For Prime furniture, if their output differ
will create problems in predicting actual and budgeted volume.
 Fixed budget makes it difficult to allocate resource that are additional. This will create
problem for Prime furniture to keep check on increase sales volume with increase of
resources.
Flexible Budget-
These budgets are financial plans which estimates expenses and revenues based on
change in output. As the companies needs are not static these budgets helps them to work
according to changes. For upcoming periods management can see these budgets to analyse worst
and best scenario (Whitne and Juras, 2017). Prime furniture with help of these budgets can work
effectively with their changing needs of business.
Advantages-
 These budgets measure performance of manager because they are based on level of
activity. For Prime furniture this will be a great advantage as they can see how much they
have done in respect of their plan (Khajavi and Mohammadian, 2018).
 With help of these budgets managers can easily adjust figures regarding any change
happening in revenues or expenses. Prime furniture can do changes in their budgets.
 These budgets provide better control on cost as they react more fastly in situation of
adverse cases. For Prime furniture this will provide proper control on their revenues and
expenditure.
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Disadvantages-
 Flexible budgets require skilled workers. This would be challenging for Prime furniture
to work with skilled workers.
 Accounting books are properly revealed in these budgets For Prime furniture this will not
be helpful as any mistake in these books leads to wrong outcomes.
 Requirement of skilled workers is an expensive affair. For company it would be difficult
to pay these workers.
Personnel Budgets-
Personnel Budgets refers to support system of decision making and a tool of control
which focuses on cost of employment (Whitne and Juras, 2017). This could be done with the
data available to business. This budget helps business to forecast scenarios of employment,
calculation of over time cost, cost of employment and to simulates these costs. This budget will
help Prime furniture to predict the cost of its human resources.
Advantages-
 These budgets provide proper information regarding how much work force is required by
businesses. For Prime furniture this budget will help to get actual requirement of
employees.
 Personnel budgets provides details of all cost structure which will be important for Prime
furniture.
 Over time cost will also determine with these budgets. For Prime furniture this will act as
tool to get actual cost of overtime.
Disadvantages-
 Inaccuracy in cost estimation leads to false data. Prime furniture will get wrong
interpretation of its human resource cost.
 Estimation requires time. This will delay the functioning of Prime furniture.
Justification- For Prime furniture go with flexible budget. As they can make changes
easily if sudden unexpected expenses crop up. Company can maintain accuracy in their work by
keeping check on activities of different range. Flexible budget leads to coordination among
different departments of Prime furniture due to interdependency of different budgets. Company
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can easily control its cost by comparison of actual and budgeted costs. In these way Prime
furniture will be benefited from flexible budget.
TASK 4
P5: Comparison of organizations for adaption to management accounting systems to respond to
financial problems
Financial problems- Financial problems are situations in which inability to pay debts of
long or short term arises (Di Vaio and Varriale, 2018). These problems affect working and
ability of goal achievement. Prime furniture is also going through such problems. These
problems are explained as follows-
 Debts- Company has borrowed from many sources which is creating problem in
repayment. Due to this functioning of Prime furniture is impacted. Debt problem is
reducing its profit margin (Mikes and Morhart, 2017).
 Poor Accounting Practices- Lack of accountants creating problem for Prime furniture.
As data provided to company contain mistakes which lead to wrong budgeting and
accounting (Nitsenko, Mukoviz and Sharapa, 2017).
Techniques used by Prime furniture to overcome its financial problems:
 Key Performance Indicator (KPI)- KPI technique indicates performance level of
company. For Prime furniture KPI will determine its performance in terms of sales. This
technique lead to the efficiency of Prime furniture to pay its debts. Company can easily
analyse all those factors from where it can generate revenue (Whitne and Juras, 2017).
 Benchmarking- Benchmarking implies improvement in performance. Prime furniture
can use benchmarking to overcome the problem of poor accounting practices. They can
provide training to its employees to develop their accounting practices. Company can set
standards that will help employees to form budgets and to maintain book keeping books.
Comparison of two organisations-
Basis Tesco Sainsbury
Financial problem Tesco is a huge super market
chain. Due to its various stores
it becomes difficult for it to
manage store and to keep
Sainsbury faces huge
competitor from its
competitors. In order to
generate profit company
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check on it inventory
inventory.
should come out with good
pricing strategy.
Management accounting
system used
Tesco can go for inventory
management system. Company
will get full knowledge about
how much they have sold,
replaced and have in their
warehouses.
Company should use price
optimisation system. With the
help of this system company
they will find optimal price of
its products. Price optimise
system will help Sainsbury to
find how customers are willing
to pay for its product.
Application of system Company should work with
inventory management
software in order to collect
correct data of stock. They
should build proper
warehousing plans.
Company should analyse price
trends in order to beat
competition. Knowledge about
customers willingness will
help to crack prices. Sainsbury
can build brand image.
Thus, Prime furniture can use inventory management system in order manage its
inventory. This will help them to analyse the quantity of stock they have, sold and they have
replaced. Evaluation will help in making correct predictions regarding cost cutting, that will
leads to less expenditure. Price optimisation will provide customer knowledge and their ability to
pay . In this regard they can set correct price in order to beat competition and to increase sales to
generate revenue. Prime furniture will perform properly and can solve its financial problems by
using these systems.
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