Financial Planning Tools and Techniques in Management Accounting

Desklib provides solved assignments and past papers to help students succeed.

Management Accounting
1

Table of Contents
Introduction....................................................................................................................................3
LO 1.................................................................................................................................................4
LO 2.................................................................................................................................................7
LO 3...............................................................................................................................................11
LO 4...............................................................................................................................................16
Conclusion....................................................................................................................................19
References.....................................................................................................................................20
2

Introduction
The operations of a business occur on the basis of proper planning. Organizations runs
production of products on large scale and this needs efficient utilization of available resources.
To manage the financial operations of a firm, management accounting is applied by various
firms. The process of evaluating the financial and operational actions by applying various tools
to take adequate measures is known as Management Accounting. Its techniques are used to
monitor the activities and take respective decisions that can aid the firm in achieving its set
goals. The main objective of management accounting is to increase the productivity and
profitability of the firm by application of respective tools and techniques. These tools are very
beneficial for controlling the costs incurred, comparing the performance, etc.
3

LO 1
Management AccountingThe strategic method of decision making after monitoring and
evaluating very aspect of business from financial and operational view in order to increase
productivity and profitability is known as Management Accounting (Hopper and Bui, 2016).
There are various factors induced in the functions of the organization. The manager has to
closely comprehend the purpose of the activity and its effect on the production process. There are
various systems in management accounting that aids the managers in doing vital tasks such as
cost controlling, budgeting, variance analysis, and so on.
Management Accounting Systems are the intricate part of accounting that are used to evaluate
the processes involved in the production. These systems guides the managers in taking key
decisions that are beneficial in the long run. There are different types of accounting systems that
aids the firm in improving the performance. Few systems are mentioned below:
 Inventory Management SystemsIn a manufacturing firm, inventory is the most
important aspect.When the organization runs on a large scale and it has to deliver goods
to various demographic areas, then the managers have to efficiently manage the costs of
inventory (Messner, 2016). There are several database that are run by the firms to
monitor the flow of inventory from the stage of production to the stage of dispatch. These
database records every single detail of the produced good.Accurate supervision of stock
saves a lot of cost of the company.
 Job-Costing SystemsThe accounting systems that emphasizes on the production of a
particular product is known as Job-Costing Systems. When a product is manufactured in
bulk, the material costs, overhead costs and other costs are kept together. But, when the
product is made in limited quantity, then the costs changes. It varies from product to
product. Some firms make customized products, these products are manufactured on
specified requirements and the cost incurred to manufacture these products are different
from the normal ones (Bromwich and Scapens, 2016). Under such situation Job-Costing
Systems are applied.
4

 Price-Optimising SystemsSatisfaction of the customers is the primary objective of all
the companies. If the customers does not agree with the price of the product, they may
not purchase it and rather shift to some other brand.To manage such kind of situation, it is
important that the firm balances between the prices of the product and the demand of the
customers, price optimization Systems are applied (Nguyen, et.al., 2017). These guide the
managers about the right price that is floating in the market in accordance to the
competitors and that will satisfy the needs of the consumers and will also facilitate
margin for profit.
 Cost Accounting SystemsIn order to attain higher profits, the manager has to monitor
the costs that are involved in the production, operational and administrative costs. There
are plenty of miscellaneous costs that are incurred which do not have an immediate
effect, but may pose a disastrous effect in the long run (Yigitbasioglu, 2016). To curb
these, the manager keeps a close track of all the expenses being incurred in the
organization and take required steps through Cost Accounting Systems to control the
unnecessary costs. This is a very vital action in an organization.
After in-depth analysis of all the activities of all the departments of the firm, the manager has to
report the findings to higher authorities so that appropriate action can be taken to resolve the
issues. Timely action can save the firm from excessive costs. There are several methods that are
used for Management Accounting Reporting. These are mentioned as below:
 Budget ReportsThese reports represents the total allocation and consumption of costs in
the different departments of the firm. Budget reports are an estimate of the expenses that
will be incurred in one financial year. Budget reports are highly beneficial in controlling
costs.
 Receivables Ageing ReportsThis report is used by the management in tracing the credit.
This is very vital in managing the account receivable of a firm. If the firm has
outstanding credit, then it will face loss as there will be less revenue encountered in a
year.This report represents the strategy applied by the firm to collect its outstanding
credit and how efficiently they do it (Averina, et.al., 2016).
 Job Costs ReportsThese reports are made to present the expenses that have been
encountered for manufacturing specialized products. The costs incurred for
5

manufacturing special products require different cost structure. These are then reconciled
to evaluate how much profitability the firm will gather.
 Inventory and Manufacturing ReportsThe reports that present the flow of stock in the
manufacturing firm is known as Inventory Reports.These are very beneficial to track the
flow of goods from the point of inception till the point of consumption (Hopper and Bui,
2016).
The accounting systems applied in the firm are integrated with the management reporting. The
purpose of management accounting is just not limited to analyzing the key functions of the firm
and evaluating the process. The finding are then reported to higher authorities for the purpose of
accurate decision making that will aid the firm in generating higher profitability. We can
conclude from the below given points that management accounting and reporting are integrated
in an organization:
 It leads the organization in eliminating unnecessary costs.
 It aids the managers in making key decisions regarding the long term plans.
 It guides the managers in effective and efficient utilization of resources.
 It aids the managers in analyzing the areas that needs special attention.
 It guides the managers in focusing on the areas that are capable in increasing profit.
6

LO 2
Marginal CostingIt is the method of costing under which, only variable costs are taken into
consideration for calculating the final cost of the product. In the production process, there are
several types of costs, namely fixed and variable that changes from time to time and product to
product, but the fixed costs remains the same (Messner, 2016). In marginal costing, the price of
the product changes if there is any change in the quantity produced, therefore it affects the
variable costs.
Absorptional CostingIt is the method of accounting that involves the overall costs- fixed and
variable while calculating the final price of the product. It is also termed as full costing as it
incurs all the direct and indirect expenses (Yigitbasioglu, 2016). The method of absorptional
costing is more accurate than that of marginal costing and various manufacturing firms relies on
this method. The method helps the firm in acquiring higher net income valuation compared to
variable costing calculations.
Production of units:
Particulars November December
Sales (Units) 10,000 12,000
Production (Units) 12,000 10,000
Opening Stock (Units) - 2,000
Closing Stock (Units) 2,000 -
Cost Sheet as per Absorption Costing:
Particulars November December
Amount ($)
cost per
unit Amount ($)
cost per
unit
Direct Material 216,000 18.00 180,000 18.00
Direct labour 48,000 4.00 40,000 4.00
7

Prime Cost 264,000 22.00 220,000 22.00
Variable Production Overheads 36,000 3.00 30,000 3.00
Fixed Production Overheads 120,000 10.00 100,000 10.00
Factory Cost 420,000 35.00 350,000 35.00
Fixed Admin Overheads 26,000 2.17 26,000 2.60
Cost of Production 446,000 37.17 376,000 37.60
Add: Opening Stock - 37.17 75,200 37.60
Less: Closing Stock 74,333 37.17 - 37.60
Cost of Goods Sold 371,667 37.17 451,200 37.60
Over/Under Absorption of
Overheads (10,000) (1.00) 10,000 0.83
Fixed Selling Costs 14,000 1.40 14,000 1.17
Cost of Sales 375,667 37.57 475,200 39.60
Profit 124,333 12.43 124,800 10.40
Sales 500,000 50.00 600,000 50.00
Cost Sheet as per Marginal Costing:
Particulars November December
Amount ($) cost per unit Amount ($) cost per unit
Sales 500,000 50.00 600,000 50.00
Less: Variable Cost
Direct Material 216,000 18.00 180,000 18.00
Direct labour 48,000 4.00 40,000 4.00
Production Overheads 36,000 3.00 30,000 3.00
Add: Opening Stock - - 50,000 -
Less: Closing Stock 50,000 - - -
8

Total Variable Costs 250,000 25.00 300,000 25.00
Contribution 250,000 25.00 300,000 25.00
Less: Fixed Costs
Fixed Admin Overheads 26,000 2.17 26,000 2.60
Production Overheads 110,000 9.17 110,000 11.00
Selling Overheads 14,000 1.40 14,000 1.17
Total Fixed Costs 150,000 12.73 150,000 14.77
Profit/Loss 100,000 12.27 150,000 10.23
Absorption rate:
Particulars Amount (£)
Budgeted overheads 110,000
Normal level of Activity 11,000
Absorption rate 10
Reconciliation
Absorptional and Marginal are two different methods of costing that are applied by the firms to
extract the right price for the product. The calculated price is very effective in predicting the
profit margin. The results derived from the absorptional costing are more accurate than marginal
costing.
Under this question, the profit earned from those two methods are:
Profit earned through Absorptional
Costing
£ 128,400
Profit earned through Marginal Costing £ 150,000
9

It is observed that Oshodi PLC has acquired more profit after applying Marginal Costing.
10

LO 3
Planning ToolsAn organization needs to have proper and detailed planning of each and every
activity that it is going to encounter in one financial year. The main objective of these tools is to
highlight and focus on the key areas that will enhance the productivity and profitability of the
firm (D'Onza, et.al., 2016). To achieve this target, it is important that the managers evaluate each
and every aspect of the organization.
Planning tools helps the managers in tracking the exact position of the firm. These tools also aids
in comparing the performance of the firm with that of its competitors and itself. Budgetary
control is one such planning tool that is used by the management to control the costs, monitor the
variance, monitor and improve the performance and achieve desired targets. It is extremely
beneficial in monitoring the flow of capital, it is vital for the growth of the company. It also aids
in allocating costs to different departments of the business for better performance.
Budgetsare example of planning tool. It is an estimated statement of all the expenses and income
that an organization will incur in one financial period. The budget is made on the basis of the
data of the previous year. The objective of framing a budget is to control the unnecessary cost
that are acquired in the departmental functions and that are leading to loss to the company.
Managers use different types of budgets that will introspect each and every aspect of the
functionalities and will respectively provide measures for resolving the issues (McLaren, et.al.,
2016). There are several types of budgets that serve different purposes. Few of the budgets are
provided below:
 Kaizen BudgetThis budget particularly focuses on the improving the performance of the
firm within certain period of years. This is originally a Japanese concept that emphasizes
on continuous improvement. The steps taken under kaizen budget is very beneficial when
the firm is working on a long term project. This requires flexible changes and kaizen
budget aids the organization in achieving its target without increasing the overall cost
over the span of years (Azudin and Mansor, 2018). It eliminates the unnecessary cost
from the system.
 Zero-Based BudgetThis budget is applied by companies that are restructuring their
business from the start.It is either implemented in the new firms or in companies that
11

have faced loss and are trying to figure out the reason for the same. Through this budget,
the costs are closely evaluated and then it is seen whether or not the application of costs
is justified. If the allocation of particular cost is not justified, than it is a loss to the
company. It is very helpful in providing minute details on the internal functions of the
firm.
 Activity Based BudgetThis budget is used by the managers to evaluate the purpose of
every single activity pertaining in the business (Arend, et.al., 2017). It helps them in
scanning the financial and operational activities and then allocating costs respectively.
Activity based budget is very helpful in large organizations. When a lot of operations are
running at the same time, there can be issues regarding the costs. To eliminate such kind
of problems, and to allocate adequate costs to the production activities, Activity based
budget is applied.
 Fixed Budget It is a budget that is mostly used by companies who are functioning on
limited resources. The firm that have almost fixed revenue and income every year uses
the fixed budget. Under this budget, the costs incurred in the previous year are carry
forwarded and this is henceforth used for conducting operations of the current year
(Gooneratne and Hoque, 2016). Fixed budgets are easily made and they are pretty much
accurate. These are also useful in those companies that have fixed production units.
 Incremental BudgetThis budget is similar to fixed budget. Under this budget, if a
company faces certain positive increments in production units, then there are changes in
the budget as well. If there is any change in the units produced, it is deeply impacts the
costs as well. To adjust the costs incurred, incremental budget is used. Medium sized
organizations use incremental budget as there is no major difference in the income or
revenue, but a little due to minor change in the units.
 Sales BudgetThis budget is used to monitor the costs incurred in the process of sales of
the organization. It is an estimate of the sales of the product that the firm will face in a
year. The firm uses sales budget to set goals of the department, an estimate of the total
earnings and forecast of the production. The sales budget is capable of affecting the
operating budgets and the master budget of the company. It provides an estimate of the
units that will be sold on the basis of certain factors and how much revenue the firm will
generate on the basis of the sale of products.
12