Planning Tools and Techniques in Management Accounting

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[MANAGEMENT ACCOUNTING]

Contents
INTRODUCTION........................................................................................................................3
ASSIGNMENT PART A............................................................................................................... 4
LO1....................................................................................................................................... 4
LO2....................................................................................................................................... 8
Assignment part B.................................................................................................................. 11
LO3..................................................................................................................................... 11
LO4..................................................................................................................................... 15
CONCLUSION.......................................................................................................................... 19
REFERENCES........................................................................................................................... 20

INTRODUCTION
The main objective of this report is to highlight the fundamentals of management
accounting with respect to the business environment. It plays a important role in the
analysis of the financial data and acts as an aid in the decision – making process of the
organization.
It reflects upon the essential elements of the business activities for the purpose of
integrating with the management accounting reporting. Moreover, it enables to have better
understanding of the preparation of the income statement as per absorption costing &
marginal costing and thereby discusses the various tools of planning for the purpose of
budgetary control. The management accounting report also provides insight into various
systems in order to resolve financial problems (Adler, 2013).

ASSIGNMENT PART A
LO1
A Management accounting is a process of identifying, analyzing, presenting and analyzing
the accounting information. It plays a significant role so as to help the business manager in
managing the business operations of the enterprise in an effective and efficient manner.
Essential of management accounting
 Management accounting plays a vital role in measuring the performance of the
enterprise by comparing the actual performance with the standard performance.
 It helps the business manager in identifying and assessing the risk factors that could
be mitigated by the application of appropriate strategies (Ekholm and Wallin, 2011).
 It helps in the effective and efficient allocation of the resources and thereby ensuring
the long-term sustainability of the organization.
 It leads to a better presentation of the financial information and thereby helps in
decision-making.
Apart from this, the management accounting system plays an significant role in the
integration of the organizational process and to have better control of the overall cost of the
organization. Thus, the accounting system that plays a major role in management
accounting are as follows:
Price optimization
system
This system of management accounting emphasizes controlling
the prices of the product. This can be very useful for the
company dealing with multi products. It also records the
fluctuations in the demand at different price levels. Moreover,
the effective implementation of this system helps the business
manager in determining the preferences and attitude of the
customer based on different prices and thereby maximises the
profitability of the organization (Coulbeck, 2012).
Inventory management This system of management accounting help in proper

system supervision and managing the non-capitalized assets of the
enterprise. This further help the manager so as to manage the
proper flow of the inventory. Following are the essential
requirements of the management accounting system:
 Forecasting and replenishment strategies need to be
made in advance
 Management of inventory inappropriate manner in
order to gain the potential benefits
 Thus, the effective integration of the inventory
management system helps in saving time and money.
Job costing system The system aims to assign the individual job cost to the specific
product. This will help in keeping a track on expenses and
monitoring the overall system. Moreover, the procedure of job
costing refers to the receiving of the enquiry and estimating the
price of the job keeping in mind the taste and preference of the
customer. Moreover, every elements of cost is recorded in the
production process. After completion of the job, a comparison is
made with respect to the estimated costs.
Cost accounting system The system of cost accounting provides the framework to the
organization so as to calculate the accurate cost of the product.
It acts as an important basis for inventory valuation and
profitability analysis. a good cost accounting system requires
active and coordinated efforts of the various department so as
to improve the existing functioning of the organization.
Moreover, it must be flexible & simple so as to enable the user
for easy adaptation. The main purpose of the cost accounting
system is to improve the efficiency of the business process and
make improvement in the existing system (Adler, 2013).

Managerial Accounting uses several information gathered through financial accounting for
the purpose of preparing a report. A managerial report serves an important basis for
planning, regulating and decision-making. This is an important aspect of measuring
performance. The authenticity of the report will certainly help the business manager in
order to generate useful information with respect to the company.
The different types of management accounting report are as follows:
Budget Report A budget report is prepared with the purpose of critically
evaluating the company’s performance. A budget estimate is
prepared for each department of the company and helps to
cater to the unforeseen circumstances. It includes all sources of
earnings and expenditure and thereby helps the company to
achieve the targeted goal and mission.
Moreover, the budget report can guide the business manager to
cut down the cost and renegotiate the terms with suppliers and
vendors. This is an important basis to offer better employee’s
incentives (Barret al., 2018).
Account receivable
report
This report plays a vital role in case of business heavily depends
on extensive credit. It breaks down the balance of the specific
client with respect to the specific period.
Moreover, it helps the business manager to identify the
defaulters and other issues associated with the collection process.
Henceforth, this report helps the business manager in deciding
the choice of credit policy with respect to the operations of the
business (Bienia and Li, 2011).
Cost managerial
accounting report
This report contains the cost of the manufactured product that is
associated with raw material, labour, overheads and other added
costs that are deliberately associated with the production. The
main purpose of the report is to summarise all the information
and help the manager to realise the cost price and selling price in
order to unlock the potential profit margins. Thus, cost report
provides a better understanding of all the associated expenses

and thereby helps in better utilization of the departmental
resources.
Performance report The reports are created with the purpose of reviewing the
company’s performance. it also helps to assess the departmental
performance and help the manager in making a strategic decision
with respect to the future of the organization. It helps to identify
the areas of underperformance and thereby frames policies in
order to appropriately deal with the requirement. Thus, it
provides deep insight with respect to the overall working of the
company (Clinton and White, 2012)
Another information
report
This includes different types of the report such as project report,
competitor analysis and many others for the purpose of
generating the information relevant to the business of the
organization. Thus, the credible and authentic business report
helps the manager to decide the best course of actions for the
firm.

LO2
Marginal costing
This is an significant technique of costing
that charges variable cost to the per unit
of the product whereas fixed cost is
charged for the period and completely
written off from the contribution.
Marginal cost means additional cost in the
production and is considered as the sum
of direct material, direct labour,
overheads and other direct expenses
(Coulbeck, 2012).
Important characteristics of marginal
costing
 This method of costing charges the variable cost as the product costs.
 It does the bifurcation of the fixed cost and the variable cost and fixed cost is
charged to the profit and loss for the period.
Absorption costing
Absorption costing is known, as full costing technique in the product, costs comprise of all
the fixed costs and variable costs (E. Dobbs, 2014). This technique of costing is generally
used for the purpose of complying with the reporting requirements. It serves as a basis for
financial and tax reporting. It presents the cost data in a traditional way.
The difference between both of the technique is only about the consideration of the fixed
cost. Under marginal costing, fixed cost is separately charged as the period cost and not
considered at the time of calculating the contribution whereas, under absorption costing,
the product includes both the fixed & variable costs.

Marginal costing
£ £ £ £ £ £
Sales 2,520,000 2,800,000 4,200,000
Marginal cost of sales:
Opening Stock - 192,000 576,000
Add variable production costs:
Direct materials 480,000 576,000 612,000
Direct labour 640,000 768,000 816,000
Variable overheads 800,000 960,000 1,020,000
Less closing stock 192,000 576,000 144,000
Marginal cost of sales 1,728,000 1,920,000 2,880,000
Fixed manufacturing costs 64,000 64,000 64,000
Gross profit 728,000 816,000 1,256,000
Selling and distribution expenses 10,000 10,500 11,000
Administration expenses 15,000 15,000 15,000
Profit /(Loss) from operations before interest and tax 703,000 790,500 1,230,000
Interest expense 1,000 1,250 1,500
Profit /(Loss) from operations before tax 702,000 789,250 1,228,500
Year 1 Year 2 Year 3
INCOME STATEMENT AS PER MARGINAL COSTING
Notes
1. Closing stock in units (In £) = Opening stock + Production - Sales
Year 1 = 0 + 40,000 - 36,000 = 4,000 units
Year 2 = 4,000 + 48,000 - 40,000 = 12,000 units
Year 3 = 12,000 + 51,000 - 60,000 = 3,000 units
2. Closing stock in £ = (Units unsold/ Units produced) * Total variable costs
Year 1 = (4,000/40,000)* (480,000 + 640,000 + 800,000)
Year 2 = (12,000/48,000)* (576,000 + 768,000 + 960,000)
Year 3 = (3,000/51,000)* (612,000 + 816,000 + 1,020,000)

Absorption costing
Notes
£ £ £ £ £ £
Sales 2,520,000 2,800,000 4,200,000
Cost of sales:
Opening Stock* - 198,400 592,000
Add total production costs:
Direct materials 480,000 576,000 612,000
Direct labour 640,000 768,000 816,000
Variable overheads 800,000 960,000 1,020,000
Fixed manufacturing costs 64,000 64,000 64,000
Less closing stock** 1,2 198,400 592,000 147,765
Cost of sales 1,785,600 1,974,400 2,956,235
Gross profit 734,400 825,600 1,243,765
Distribution expenses 10,000 10,500 11,000
Administration expenses 15,000 15,000 15,000
Profit /(Loss) from operations before interest and tax 709,400 800,100 1,217,765
Interest 1,000 1,250 1,500
Profit /(Loss) from operations before tax 708,400 798,850 1,216,265
INCOME STATEMENT AS PER ABSORPTION COSTING
Year 1 Year 2 Year 3
1. Closing stock in units = Opening stock + Production - Sales
Year 1 = 0+40000-36000 =4000 Units
Year 2 = 4000+48000-40000 = 12000 units
Year 3 = 12000+51000-60000 = 3000 units
2. Closing stock in £ = (Units unsold/ Units produced) * Total production costs
Year 1 = 4000/40000* (480000+640000+800000+64000) = 198400
Year 2 = 12000/48000* (576000+768000+960000+64000) = 592000
Year 3 = 3000/51000* (612000+816000+1020000+64000) = 1447765

Assignment part B
This part explains the various types of planning tools & techniques for budgetary control and
also emphasize on the costing systems depending upon the level of the activity. It further
highlights the different ways of management accounting system so as to respond to
financial problems (Ekholm and Wallin, 2011).
LO3
Budget
A budget refers to the financial statement that contains the estimation of the income and
expenses for the definite future period. This is an important basis for short term planning
and control (Helleiner, 2014).
Budgetary control
Budgetary control is a mechanism that helps to prepare the budget at various levels of
activities. It also set put the responsibility on the executive to compare the budgeted and
the actual performance for the purpose of deciding the appropriate actions in order to
achieve the business aims & objectives.
The application of various planning tools and techniques help to ensure the financial
stability and performance of the enterprise. The different types of planning techniques in
the preparation and forecasting of the budgets are as follows:
Fixed Budget
A fixed budget does not flex with respect to the increase or decrease in the level of sales. it
is also called a static budget. It is independent upon the variables like sales volume, units
produced or some other activity (Gabčanová, 2012). For Example- The amount of sales
commission on the projected sale will remain the same irrespective of the changes in the
level of sales.

Advantages Disadvantages
 It is an important measure of
profitability.
 Ensures financial discipline at every
level of the business for the purpose
of cutting down the costs.
 It is easy and simple to prepare the
budget.
 It provides strong insight into the
company's costs and profit.
 Actual performance cannot be
accurately measured
 It is based on the assumption
 It is unable to allocate the additional
resources within the budget
Flexible budget
The budget that can be adjusted with respect to the changes in the level of the activity and
is more sophisticated & useful as compared to static budget. A flexible budget recognizes
the difference between the behaviour of fixed cost, variable cost & semi-variable costs.
Advantages Disadvantages
 Helpful in assessing the
departmental performance
 Evaluating the impact of variances in
various activities
 Ascertainment of costs and control
of overheads
 Helpful in production planning &
profit planning
 Flexible budget involves more
planning so as to track the expenses
and make adjustments between the
periods
 It has more rules as compared to the
traditional budget
 Less discipline (Helleiner, 2014.)