Management Accounting Report: Chair Manufacturing & Financial Problems

This report delves into the realm of management accounting, examining the application of marginal and absorption costing methods through income statements of a chair manufacturing company over three years. It provides a detailed analysis of various planning tools used for budgetary control, including fixed, flexible, incremental, and zero-based budgets, along with the significance of variance analysis. The report further explores how organizations leverage management accounting systems to address financial challenges, highlighting the importance of benchmarking, key performance indicators, and ratio analysis. The content covers practical applications of these concepts, offering insights into how management accounting contributes to effective decision-making and financial strategy formulation within an organization. It provides a comprehensive overview of the role of management accounting in optimizing financial performance.

Management accounting

TABLE OF CONTENT
Contents
INTRODUCTION...........................................................................................................................3
P3. Income statement of chair manufacturing company of three years using marginal costing
and absorption costing.................................................................................................................3
P4. Advantages and disadvantages of planning tools used for budgetary control.......................8
P5.Organizatiins are adapting Management accounting system to solve their financial
problems.....................................................................................................................................11
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................16

INTRODUCTION
Management accounting is the process of analyzing business costs and operations from
which they can prepare final accounts and which can communicate to its users which help them
in their decision making.
The report will explain about the management accounting system and how the organization is
habitual of accepting the management accounting system to solve their financial problems. Also
it includes the various planning tools available for budgetary control of the organization .in
addition to this the income statement of chair manufacturing business of 3 years will be
explained with different techniques of cost analysis.
P3. Income statement of chair manufacturing company of three years using marginal costing and
absorption costing.
year 1 year1
Income statement (by marginal costing) Income statement( by absorption
costing)
particul
ars
amount total amount Particul
ars
Amount total amount
Sales 2520000 Sales 252000
0
less: Marginal cost less: marginal cost
Direct
material
480000 direct
material
480000
direct
labor
640000 direct
labor
640000

variable
manufa
cturing
overhea
ds
800000 variable
manufa
cturing
overhea
d
800000
variable
selling
and
adminis
tration
overhea
d
10000 fixed
manufa
cturing
overhea
d
64000
closing
stock
4000 1926000 closing
stock
4000 198000
0
Contribution 594000 gross profit 540000
Less:selling&
distribution
overhead
10000
Less
administration
overheads
15000
less:
interest
expense
1000 less: selling and administrative
overhead
profit 568000 Variable 10000
Fixed 15000
interest
expense
1000 26000
year 2 net 514000

profit
Income statement (by marginal costing)
particul
ars
amount total amount year 2
Sales 2800000 Income statement (by absorption
costing)
less: Marginal cost Particul
ars
Amount total amount
Direct
material
576000 Sales 280000
0
direct
labour
768000 less: marginal cost
variable
manufa
cturing
overhea
ds
960000 direct
material
576000
variable
selling
and
adminis
tration
overhea
d
10500 direct
labour
768000
closing
stock
12000 2302500 variable
manufa
cturing
overhea
d
960000

Contribution 497500 fixed
manufa
cturing
overhea
d
64000
less: interest
expense
1250 closing
stock
12000 235600
0
profit 496250 gross profit 444000
less: selling and administrative
overhead
year 3 Variable 10500
Income statement (by marginal costing) Fixed 15000
particul
ars
amount total amount interest
expense
1250 26750
Sales 4200000 net
profit
417250
less: Marginal cost
Direct
material
612000 year 3
direct
labour
816000 Income statement (by absorption
costing)
variable
manufa
cturing
overhea
ds
102000
0
Particul
ars
Amount total amount
variable
selling
and
11000 Sales 420000
0

adminis
tration
overhea
d
closing
stock
3000 2456000 less: marginal cost
Contribution 1744000 direct
material
612000
less: interest
expense
1500 direct
labour
816000
profit 1742500 variable
manufa
cturing
overhea
d
102000
0
fixed
manufa
cturing
overhea
d
64000
closing
stock
3000 250900
0
gross profit 169100
0
less: selling and administrative
overhead
Variable 11000
Fixed 15000
interest 1500 27500

expense
net
profit
166350
0
Working note
Sales-marginal cost(direct material, direct labor, variable expenses,)-fixed expenses-overheads-
closing stock= gross profit.
P4. Advantages and disadvantages of planning tools used for budgetary control
There are many tools which are used by the organization for budgetary control which they can
use for their effective and efficient performance and to capture a strong position in the market of
business.
Some of the tools of budgetary control are explained below:
[Explain advantages and disadvantages of budgets, Fixed budgets,
Flexible budgets, Incremental budgets, Zero based budgets and Variance analysis].
Fixed budget is the budget which does not change with the change in sales or any other activity
increases or decreases. a fixed budget is also said ad static budget .for example actual sales of the
organization is ended up with $ 60,000 than the budget for the commission will does not change
and remain fixed to the amount of 50000 which TSR ltd. have decided.
Advantages
 It is easy to implement and follow as no changes are needed to be made in the budget.
 It offers a strong insight to the company’s costs and profits whenever variance analysis is
performed,
 It helps in comparing the actual cash with estimated cash by that it is being overestimated
or underestimated so that necessary changes can be made in the their strategy which is
going forward.
Disadvantages
 Forecasting sometimes lead the organization to face uncertainties.

The biggest disadvantage of fixed budget is lack of flexibility as company needs to make
changes in their budget according to change in their situations.
These budgets are based on historical data so if the company have flexible trend of sales
and profits than these budgets does not provide the necessary information to the company
as company follows flexible trend.
Flexible budget are the budgets which adjust and changes can be made in the organization
according to the change in sales or volume. These budgets are depended on the revenue
generated. The changes can be made many times without being static and rigid.it can be used as
tool for comparing the actual and budgeted performances. etc (Maas, Schaltegger and
Crutzen,2016).
Advantages
 The major advantage of flexible budget is that adjustments can be done as and when
required for predictions.
 This is the type of budget in which changes can be made which make organization
efficient for adapting the changes..
Disadvantages
 These budgets requires continuous monitoring which makes wastage of time and energy
of the organization
 As these budgets are related to future predictions than sometimes organization makes
inaccurate adjustments which lead the organization in failure often achievement of their
goal.
 Incremental budgets are the company’s budgets which require a small change in existing
budget to reach and arrive with new budget that is only a incremental amount of change
is added to reach with new budgets. Budget used by the company for current year will
treated as base for working of the forthcoming year’s budget.
Advantages
 .this method is very easy to us and implement and does not involve any complex
calculations.

 This budget ensures the continuity of funding for various departments without doing
much analysis regarding the funding requirements.
 The impact of any changes can be seen immediately.
 It ensures no large deviations in the budget of year and after years.
Disadvantages
 Incremental budget generally leads to extra spending as each department tries to get more
and more funds which is required to fund their operations as departments will try to
spend more money as possible as they can to get similar amount for the next budget
which is wastage of financial resources.
 It does not consider the changes as this approach assumes that every element of the
budget remains same as last year as it fails to take minimum changes into the
consideration.
 Using of this budgets by managers will leads to growth with little revenue but with more
expenses as they do this budgeting to ensure that their organization always get the
favorable changes.
Zero base budgeting is the budgeting process which starts from zero base and ensures that
every function of the organization is being analyzed for its cost and needs. This is the method
of budgeting in which each and every expenses are justified for each new period and then
budget is made according to the requirements of the next period irrespective of the budget
that it is higher or lower with the previous budgets
Advantages:-
 These budget ensures that every managers needs to specify and justify for all the
operating This budget helps b in keeping the legacy expenses in check on timely basis.
 It ensures the careful planning of future expense and revenue.
 It encourages the executive management at all levels for the active participation in
complete budget process.
 Zero base budgeting ensures the careful planning.
 It helps in promoting operational efficiency expenses they spent for every period.
 As it is not based on incremental approach.

Disadvantages
 Zero base budgeting is basically a resource intensive that is it takes a lot of time and
effort of the manager to review the budget closely and justify each and every expenses of
the budget rather modifying the existing budget.
 This budget involves more paper work in the preparation of zero base budgeting.
 Administration and communication of zero base budget creates many critical poblems.in
the case of large organizations many number of decision packages are prepared it
includes more expenses.
Variance analysis is the process of computing the cause of variance between the actual costs
and estimated costs. Which also includes two phases that is computation if individual variances
and determining the cause for each variance.
Advantages
 The advantage of variance analysis that the reason for all the variances can be easily
evaluated and company can take remedial actions.
 The subdivision of variance helps in disclosing the relationship between the different
variances.
 It helps in fixing the responsibilities of every individual or department for each variance
separately.
 It can also be used for controlling the costs.
 It helps in highlighting all the inefficient performance so that they can be eliminated from
complete process or steps can be taken to make it effective.
P5.Organizatiins are adapting Management accounting system to solve their financial problems
Management accounting systems play the crucial role in the organization as these systems helps
mangers to plan accordingly and help them to solve their financial problems by offering and
performing various functions. These systems are made to provide such information to the
organization which helps management in aiming the good decisions (Otley,2016). The focus of
management accounting system is to provide the information to internal users so that they can
make good and sound decisions. Mangers are using these accounting systems for planning
functions and budgeting .budgets are made to compare the actual expense with estimate expenses

so that corrective actions ad decisions can be taken to correct the deviations if any occurs.
Management accounting system reaches in almost all departments of the organization including
IT, marketing, Human resource, finance, production, sales etc. The management accounting
system helps in formulating the financial strategies such as sales forecasting, budgets etc. they
also incorporate the data’s from final accounts of the organization to develop the strategies which
can improve the organization’s future performance. Through the system of management
accounting it help mangers to create static, flexible and rolling budges which help them to
monitor the expenses of the organization and this is important for any organization a sit directly
affects the bottom line profit. There are various tools through which managers can maintain
profitability of the organization including using of breakeven analysis.as to this point company is
able to k now its break even where they are in situation of that production level where they in no
profit no loss point. This helps in managing company’s production levels, their sales objective,
and various other factors which impact profitability of the organization Some of the major
function performed by these systems is:-
Benchmarking
It is the process through which TSR ltd is able to measure their performance of products,
services against of the other company (Duport Company’s) services and product which is
considered to be best in the industry and market. This helps TSR ltd to analyses and find out
their financial problems by continuously identifying, understanding and adopting the outstanding
practices which can be found inside and outside of eth organization. Through benchmarking
organization can recognize for their exemplary operational performances. In the company
benchmarked performances can be measured though using financial ratios, productivity ratios,
operating results etc.
Key performance indicators
It is a s et of quantifiable measures which company uses to compare their performance in terms
of meeting their strategic and operational goals .key performance indicators varies between the
companies depending on the priorities and their criteria of performance. These are directly linked
to goals of the company which help them to identify that in which key areas they are lacking by
measuring them through KPI”s as they measure and track the specific business goals .after