Management Accounting: Analysis of Prime Furniture Private Ltd

This report analyzes the management accounting practices at Prime Furniture Private Ltd, a UK-based furniture retail company. It covers various aspects of management accounting, including understanding management accounting systems such as cost accounting, lean accounting, throughput accounting, and transfer pricing, and different methods used for management accounting reporting like budget reports, performance reports, and account receivables aging reports. The report also discusses the benefits of applying a management accounting system, techniques of cost analysis to prepare income statements using marginal and absorption costing, and management accounting techniques to produce appropriate financial reporting documents. Furthermore, it examines the advantages and disadvantages of various planning tools used for budgetary control, such as variance analysis and financial budgets, and ways in which organizations can use management accounting to address financial problems. This comprehensive analysis provides insights into how management accounting can enhance operational efficiency and financial decision-making within the organization.

Management
Accounting

Table of Contents
Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
LO1 Understanding of management accounting system............................................................1
LO2 Application of management techniques..............................................................................4
LO3 Planning tools used in management accounting.................................................................6
LO4 Ways in which organisations could use management accounting to address financial
problems....................................................................................................................................10
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................13

INTRODUCTION
Management accounting or managerial accounting is a tool which is used by management
of organisation to take long and short term and decisions regarding organisations operational
activities. To increase operational efficiency of an organisation with help of using provisions of
accounting information systems is management accounting. Prime furniture private ltd is a UK
based furniture retail sale company and this report is conducted in context of this company.
Accounting management, accounting management systems, accounting methods, financial
reporting, planning tools used for budgetary control and use of management accounting systems
for financial problems are explained in organisation’s context.
MAIN BODY
LO1 Understanding of management accounting system
P1 Management accounting and management accounting systems
Management Accounting: This also known as cost accounting, management accounting
is a process of interpreting, analysing and identifying information relevant to operational
activities of firm and provide it to managers so that, they can achieve business goals. Internal
management accounting systems are used in providing critical information to management to
make decisions regarding operational activities of business (Agrawal, 2018). These systems can
be valuable for costing and managing different operational processes. Following are different
management accounting systems which are used by management of company.
Cost Accounting: This is a traditional accounting system which is used in measuring
cost by using job order costing or process costing. Allocation of cost is also done on basis of cost
accounting such as direct labour, direct material, manufacturing overhead etc. this traditional
accounting system measures a single overhead rate and that rate is applied to each job or
department. Job order costing is used in accumulation of manufacturing cost distinctly for every
job whereas process costing accumulates manufacturing cost for each process. Activity rate and
application of overhead is measured with help of activity-based costing on basis of activity
usage.
Lean Accounting: This management accounting system is used by lean organisations,
this system is used for gathering all financial and non-financial information to perform lean
strategies of organisation and attain financial growth. Lean accounting system not only focuses
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over cost but it helps in reducing cost and eliminating waste by providing efficient strategies
(Alawattage, and Wickramasinghe, 2018). Financial information is gathered on basis of these
strategies with help of that information accountants can take immediate decisions and excess cost
which a waste can be cut down. Implementation of various lean accounting principles and effect
of these principles on business is also measured with help of lean management accounting
systems.
Throughput Accounting: This accounting system is used in improving profitability of
company with principle-based and simplified management accounting approach. Throughput
refers to number of units which go through a process in a particular period of time. All revenues
which are generated by process and minus all expenses which are incurred during that particular
process presents throughput. In this process all constrains revenant to production system of
organisation are identified. These constrains include inadequate levels of production capacity,
labour and materials of company. Cost of individual products can be reduced and production
volume can be increased by putting more throughputs and reducing constraints.
Transfer Pricing: This is a pricing accounting system; it is used when one department of
organisation sells or provides its manufactured goods to another department of same
organisation. So at what price particular department will provide products to other department is
decided with help of transfer pricing accounting management system (Almasan and et. al. 2019).
Transfer pricing common management accounting system under this method, goods are costed
when they move through different departments. Common cost of product is added with transfer
price, opportunity cost and variable cost. Opportunity cost refers to price which company would
have to pay otherwise if company outsources production.
P2 Different methods used for management accounting reporting
Management accounting reporting: This reporting purposes at informing managers
various aspects of business so that, mangers can make better decisions. Data is collected and
tacked from different departments of company through key performance indicators (Ammar,
2017). Financial and operational information of a specific period is disclosed, on basis of that
worth of business is measured. These reports are used in decision making, regulating, planning
and measuring performance. Various methods of management accounting reporting are
explained below.
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Budget reports: These reports are generated department-wise for large organisations and
for small businesses these are generated for whole organisation. This is very critical in measuring
company’s performance; however, every company creates budget for specific time or period
according to their requirements. A well prepared budget can cater to unpredicted situations that
may arise in future. A good budget report is made on basis of past experiences and it includes all
estimated expenses and earnings of company. Company should work in its budgeted amount so
that it can effectively achieve its organisational goals in minimum expenses.
Performance Report: Such reports are created or generated by companies on the end of
a particular period or term which shows performance of organisation as a whole and for each
individual employee as well. In large organisations departmental performance reports are also
generated, all these performance reports play a vital role in making strategic decisions for future
of organisation (Bisogno, and Vaia, 2017). According to performance outputs individuals are
rewarded for their good performance and employees with not satisfied performance are also dealt
with accordingly. These reports present company’s growth, success and position in market. On
basis of performance reports, management of company can make strategies for future operations
of organisation.
Account receivables aging report: If a company runs its business on extending credits,
then company must have knowledge about all its creditors and this report is very essential for
such business. Management can divide creditors in specific time periods of according to their
debt and categories by this company can identify defaulters easily and collection process of
company can work well (Burger, and Middelberg, 2018). If report shows that there are so many
defaulters, then company should transform its credit policies and tighter credit rules should be
applied because cash flow is vital for smooth running of any organisation. Bad debts can be
identified and written off with help of this report.
M1 Benefits of applying management accounting system
Prime furniture private ltd uses management accounting system in its business and it is
very beneficial for company. Following are benefits of applying management accounting system.
Planning: For proper planning management of Prime furniture can prepare various
functional budgets and accounting information which can be arranged in organisation for better
operation of organisational activities
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Controlling: Performance of Prime furniture is measured and compared with key
performance indicators. Performance of individuals and whole organisation can be evaluated and
controlled. Standard costing and budgetary control both helps in management of company.
D1 Integration of management accounting systems and management accounting reporting
Management accounting system provides qualitative and quantitative on operational and
financial performance of organisation. Whereas management accounting report is created on
basis of management accounting systems and it focuses on external use of this information for
assessment of creditors and other performance measures (Chiwamit, Modell, and Scapens,
2017). Financial and non-financial decisions are taken on basis of management accounting
systems and management accounting reports. Management accounting systems are used in
various processes such as operational and financial processes of organisation and management
accounting report is prepared on basis of these systems.
LO2 Application of management techniques
P2 Techniques of cost analysis to prepare income statement
Monetary value for all expenditures such as raw material, labour equipment etc. is cost.
Cost analysis is a systematic approach which is used in determining cost in acquiring inputs to
get desired outcomes and how these inputs can be rearranged to achieve maximum benefit
(Collis, and Hussey, 2017). To prepare income statement two types of costing is used marginal
costing and absorption costing. Following are Income statements of Prime furniture private ltd.
Income Statement of Prime furniture private Ltd. under marginal costing
Income Statement
For the month of October 2019
Amount (£) Total (£)
Sales 40,000*25.00 1000000
Cost of Sales
Variable Manufacturing Cost:
Direct material 40000*10.00 400000
Direct wages 40000*8.00 320000
Variable Manufacturing Overheads 40000*2.00 80000
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Variable Selling Expenses 40000*4.00 160000 (960000)
_________
Contribution 40000
Less: Fixed Manufacturing Cost (150000)
Less: Fixed admin and distribution costs (50000)
______(200000)__
_
Actual Net Loss (160000)
Income Statement of Prime furniture private Ltd. under absorption costing
Income Statement
For the month of October 2019
Amount (£) Total (£)
Sales 40,000*25.00 1000000
Cost of Sales
Variable Manufacturing Cost:
Direct material 40000*10.00 400000
Direct wages 40000*8.00 320000 (720000)
Manufacturing Overheads:
Variable 40000*2.00 80000
Fixed 150000 (230000)
_________
Gross Profit 50000
Less: Variable selling expenses (160000)
Less: Fixed admin and distribution costs (50000)
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_____(210000)___
_
Actual Net Loss (160000)
M2 Management accounting techniques to produce appropriate financial reporting
documents
Income statement: This is also known as revenue and expenditure statement; this is a
financial statement which represents financial performance of a company for a specific time
period. Net income or loss = (Total revenue + gains)- (total expenses +losses) this is formula of
calculating net income or loss with help of income statement.
D2 Financial reports to apply and interpret data
Income statement or profit and loss statement can be prepared on basis of marginal
costing or absorption costing these are explained below.
Marginal costing: This is a technique of costing which identifies marginal cost by
dividing fixed cost and variable cost. Fixed cost is charged from profit and loss account whereas
variable costs are charged from operation.
Absorption costing: This is a method of costing to calculate cost of product or
organisation by taking direct expenses and all costs. These costs include direct and indirect cost.
LO3 Planning tools used in management accounting
P4 Advantages and disadvantages of various planning tools used for budgetary control
Budgetary control refers to control over operational and financial activities with help of
budget. Budget is a tool which helps in forecasting future income and expenses and on basis of
that company frames plan of action or strategy. Basically it’s an estimated financial plan which is
prepared for a specific period of time (Curry, 2019). Budget can be diversified in 3 categories;
surplus budget, balance budget, and deficit budget. In budgetary control numerous tools and
techniques are used for future financial planning of organisation. On the basis of measurement
financial requirements of business are arranged in orderly basis so that these can be fulfilled for
achievement of business goals. Budgetary control is useful in controlling financial activities and
decisions of organisation to move company towards attainment of desired objectives. Budgetary
control is a process in which estimated budget of a specific period is compared with actual
outcomes which company achieved in that particular time. On basis of outcomes of that
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compression strategies and policies are changed or modified to achieve organisational goals with
less cost and maximum profit. This budgetary control can be very useful in optimising and
controlling financial performance of company. Following are tools or techniques of budgetary
control.
Variance analysis: In process of this analysis budgets are created for each department
for specific period after completion of period estimated budgets are compared with actual
accounting results. Difference between estimated budget and actual accounting results of period
is deemed as variance (Dahal, 2018). Variances are diversified in two categories favourable and
unfavourable variances. For example, difference between estimated distribution expenses and
actual distribution expenses is distribution expenses variance. This variance can be useful in
reducing cost.
Financial budgets: These budgets determine company’s cash flow, from where company
is going to receive cash and in which activity or operation that cash will be used or spend.
Business can receive cash mainly from sales revenues, loan, stock issue or by selling any asset of
company. Whereas company can use its cash or revenue in purchasing new asset for company,
expansion of business, dividend payment to shareholders, repaying debts of business, and
settling all expenses of company. Financial budgets are used by company to manage its cash
flow, assets, income and expense following are various types of financial budget.
Capital expenditure budget: This budget is created by firm for purchase of fixed assets
such as plants and machinery, equipment required for new joiners, construction of new buildings
or upgrading existing assets of company (Diab, 2020). Any organisation weather small or large
needs to focus on this budget because this shows capital expenditure of company which a big and
long term investment. Most probably such expenditures are generated through long term
borrowing through issuance of securities or bonds.
Cash budget: This is a process of comparing estimated cash receipts and disbursements
of company with actual inflow and outflow of cash for a specific time period such as weekly,
monthly, quarterly or yearly. Business uses cash budget to identify weather company have
sufficient cash for all its operational activities or not. Organisation can have better control over
its cash resources and allocation of cash can also be done on basis of cash budget. Since cash
budgets can be prepared for any specific time period company can easily identify its current
obligations to meet. Cash budget also presents excess available cash in the business thus
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businessman can easily make investment of surplus. With help of this budget company can
manage its sales and expenses in certain way so that optimal cash flow level can be maintained
in business. Company can determine if it has sufficient budget to meet cash requirement for
operational activities of a specific time period with help of cash budget.
The balance sheet budget: This refers to estimated budgeted balance sheet of company
which forecasts assets, liabilities and equity available for company for particular accounting
period. Management of company uses this for taking various financial decisions (Horvat, and
Mojzer, 2019). For preparing and finalizing master budget this budgeted balance sheet is final
and very essential step. At the end of specific period actual account figures are compared with
budgeted balance sheet this represents current equity, assets and liabilities of company which
determines financial position of organisation.
Operating budget: This budget contains estimated income and expenses generated from
daily operations or activities of business. Operating budget includes operating expenses, cost of
goods sold (COGS) and income or revenue generated from operational activities (Nielsen, and
Pontoppidan2019).This budget concludes planned operations of an organisation for a particular
time period. Following are different types of operating budgets.
The expenses budget: Expenses are disbursements which are not a part of direct cost
such as rent and payroll. This budget estimates and presents anticipated expenses for a particular
time period. This budget also anticipates upcoming expenses which can be helpful for managers
because they can prepare or manage those expenses accordingly.
The project budget: This budget is prepared for estimation of total cost of a project by
project managers. Project budget is helpful in estimation of cost which is going to be incurred in
completion of individual project for a specific time period. This budget gets updated
continuously as project completes its levels (Rachmawati, and et. al. 2019). This project budget
focuses on differences between sales and revenue expenses. Sales budget can be increased and
expenses budget can be reduced if estimated profit figure is not adequate.
Sales or revenue budget: This budget forecasts selling expenses and sales revenue and
capital expenditures. Basically it focuses over estimated income which company may receive
from normal activities or operations of organisation. This budget includes sales revenue,
operational expense, capital expense, and number of units sold. This budget plays a vital role in
helping managers identifying and forecasting future financial position of organisation.
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Non-monetary budgets: Such budgets are expressed in non-financial terms for example
how much quantities will be required, direct machine hours or direct labour hours for different
operational activities. Labour budget is an example of non-monetary budget.
M3 Use and application of planning tools in preparing budget and forecasting
Planning tools are those devices or instruments which are used in implementation of an
initiative, intervention, or programme in an organisation. There are various planning tools which
are used in management accounting which are explained below.
Fund flow analysis: This analysis shows inflow and outflow cash within business of a
specific time period. This presents difference between last year and current year’s balance sheet
that how well or not cash resources are used by company in current year in comparison of last
year. Sources of fund and applications of fund are shown for a particular period with help of fund
flow statement. Fund from operations is identified with fund flow analysis and working capital
also changes because of movement from one period to another period.
Budgetary control: This is a financial tool which is used for estimating and forecasting
income and expenses of company. Actual revenue or expenditures are compared with estimated
or budgeted revenue or expenditures to identify if strategy or plan of business are working
properly. Budgetary control can be very useful in taking financial decisions of company for
achievement of financial goals of company. It helps in identifying weather policies and strategies
of business need to get modified or changed to achieve desired success. Thus budgetary control
is a very effective planning tool.
Financial planning: Every organisation wants maximum profit in minimum possible
investment. Financial planning is a very crucial tool for achieving business objectives with
maximum profit This is a process of framing policies, budgets and strategies for financial
operations and activities of organisation. Proper or sound financial planning can be helpful in
many ways such as determining capital requirements, framing financial policies, determining
capital structure etc. adequate funds can also be ensured with help of financial planning for
attainment of desired business objectives.
Decision-making accounting: This tool is useful when there are various alternatives are
available and management have to choose best alternative out of them. Costs of these various
alternatives are compared and whichever alternatives consumes minimum cot gets selected. This
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method suggests option which will provide most revenue and lesser cost on basis of accounting.
Thus it is very useful tool in making important financial decisions of organisation.
Management information system: This system is used in business for effective
communication within organisation. Employees of organisation can use this information system
to understand and fulfil their duties. This system also concentrates over accounting and economic
aspects of organisation by identifying problems and resolving them.
LO4 Ways in which organisations could use management accounting to address financial
problems
P5 Adaptation of management accounting systems to resolve financial problems
Financial problem is a situation in which organisation cannot pay its debts or continue
business due to lack of financial resources or financial mismanagement. Organisations have to
face various financial problems these days such as problem of budgeting, poor cash flow
management, raising loans, unfavourable input-output ratio etc. without appropriate financial
planning (Sunarni, and Ambarriani, 2019. Management accounting systems are used by
managers of Prime furniture private ltd. to deal with such financial problems. Management
accounting system or managerial accounting systems are very useful in identifying and resolving
financial problems of an organisation. Adaptation of these management accounting systems in an
organisations according to current financial problems is explained below.
 Company can identify its financial issues with help of management accounting systems
such as using various budgets and with help of those budgets company can identify
variance in actual financial position of company and estimated financial position.
Strategies and policies can be modified or changed on basis of that.
 Several key performance indicators or benchmarking methods can be used in in finding
financial issues and problems of company. According to these methods standards of
performance of processes or operations are predetermined and actual outcomes are
compared with those standards to identify financial issues and resolve them.
 Skills of a managerial accountant can be very useful for recognize financial issues of an
organisation and address those financial issues.
 These systems can be useful for allocation of natural resources, appropriate use of these
resources can be ensured with help of managerial systems.
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 Various income and expenditure reports are generated with management accounting tools
and techniques which are helpful in strategy making and implanting in organisation.
M4 Management accounting helpful in organisational success
Management accounting can be very helpful for organisations to achieve success in
current changing environment. Traditional financial reporting cannot keep up with current
macro-economic trends, management accounting is an essential tool which not only helps in
financial reporting but various policies, strategies, plan of actions and scheme are also prepared
on basis of systems of management accounting (Zakirova, and et. al. 2020). Implementation of
global management accounting principles can be helpful in providing sustainable growth to
business, identify all internal and external factors, organisational information can be provided to
relevant people in organisation for smooth and better running of organisational activities within
the company.
D3 Role of planning tools in solving financial problems of organisations
Management system of any organisation uses various planning tools for effective
management and running of business. Theses planning tools are very helpful in implementing
strategies, forecasting business plans, and systematic planning of operational activities to reduce
or eliminate financial problems or issues of organisation.
CONCLUSION
This report concludes use of various management accounting systems in management
accounting reporting along with cost analysis techniques to prepare income statements. In
this report numerous planning tools of management accounting and application of these
tools in preparing budgets and forecasts is also explained. Further this report describes use
of management accounting in resolving financial issues of organisations.
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