Management Accounting: Budgetary Control, Pricing and Systems

This report provides a comprehensive overview of management accounting, focusing on budgetary control and various planning tools. It analyzes the advantages and disadvantages of techniques such as flexible, fixed, incremental, variance, and zero-based budgeting. Furthermore, the report explores how companies adapt management accounting systems to address financial problems, including benchmarking, ratio analysis, and Key Performance Indicators (KPIs). It also covers pricing strategies, including value-based and cost-plus pricing, along with their merits and demerits. The report aims to offer insights into effective financial management and strategic decision-making within organizations. The report also provides a detailed analysis of ratio analysis, its merits and demerits. The report concludes by providing a overview of variance analysis and its advantages and disadvantages.

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
P4 Analyse advantages and disadvantages of different types of planning tools which are used
for budgetary control..............................................................................................................1
P5 Evaluate how companies are adapting management accounting system for responding
financial problems..................................................................................................................7
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................15

INTRODUCTION
Accounting is the process for recording, analysing, interpreting data and information in
systematic manner. Each and every organisation should follow proper accounting system in their
business for running various activities and task (Adler, 2013). Budgetary control is procedure for
managing budget and set financial goals and compared actual results with set standard. This
report highlights about merits and demerits of various planning tools which are used in budgetary
such as flexible, fixed, incremental, variance and zero based. It also covers pricing strategies
along with management accounting system to respond financial problems. Thus, it includes
benchmarking, ratio analysis and Key Performance Indicators.
P4 Analyse advantages and disadvantages of different types of planning tools which are used for
budgetary control.
Budgeting refers to process of preparation of detailed projections with respect to future
amounts. It is a financial plan which assists in carrying out activities in future. It comprises of
sales budget which includes production, other departments, capital expenditure, products and
other budgets. Basically, it is financial or quantitative statement which is formed for particular
duration of time to attain desired goals and objectives. It helps to compare standard offered with
what is obtained. It is approximation of future requirements which are arranged in sequential
manner. This is referred to as detailed plan for peculiar time period within future. They are
followed by system of records which acts as check on plan.
Budgeting control refers to a system in which budget specifies mode of planning for
controlling different aspects which are related with producing and selling of services. It is
advance planning of various aspects of organisation which require budgets and must be
controlled. Major feature of this is to plan tracing actual performance, comparison in standard
budget and potential performance, coordination among various departments, carrying out follow-
up action and identification of deviations (Agbejule, 2011). It is a plan for specific time interval
which comprises of numerical values. This plan can be developed by organisation as per their
requirements like it can be for different departments, divisions, units or for organisation as a
whole. Normal duration of budget is around one year and it is created every year. Moreover, it is
represented in financial terms. They acts as foundation of almost all control systems. There are
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different techniques and tools for planning of budgetary control they are mentioned below along
with their merits and demerits.
Ratio analysis: It is a financial statement analysis which is used to analyse financial
performance of organisation in different areas. Basically, it is a tool which is used by
organisation (Arroyo, 2012). By usage of this organisation can make comparison between
different organisations which differ in size. This is measured by taking proportion of one year's
financial variable to other year's financial variable. By this organisation can formulate important
decisions which can assist them to carry out their operations in future. These financial variables
are collected via usage of financial statements such as balance sheet, profit and loss account.
Their merits and demerits are mentioned below:
Merits
 It is used to measure both short term and long term financial conditions of organisation.
Moreover, it also analysis efficiency of organisation in terms of both profit and
managerial activities.
 It is used to analyse structure of organisation in context of finance as well as it can be
used to accounting performances with respect to previous and current accounting.
 Furthermore, it also assists in making decisions with respect to their performance in
future and also coordinates different functional activities of organisation.
Demerits
 Suppose if data which is attained from accounting department is not correct, then
information which will be attained from ratio analysis will not be certain.
 Result is dependent on historical data, which means that derived ratio will not be
dependent on current condition of organisation (Banerjee, 2012).
 To attain idea about performance of organisation they need to calculate different ratios as
single ratio will not furnish required results and decisions cannot be taken. Each and
every factor must be considered.
Budgets: It corresponds to objectives of organisation which are based on significance of
prediction and activities which they have planned. It is not estimation but it is just hypothesis. Its
advantages and disadvantages are shown below:
Merits
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 Budget assists organisation to make primal and timely scrutiny of problems which may
arise in future. This assists them to control both expenditure and income.
 Budget assists management to centrifugal responsibilities without suffering from loss of
business. It depicts inefficiencies, weaknesses and deviations can be addressed so that
desired goals can be attained (Blocher, Stout and Cokins, 2010).
 Budget also aid organisation to formulate road map which will provide them with
guidance by which they can follow right directions.
Demerits
 Forecasting, budgeting or planning is based on judgements and approximations which
mean that budget cannot be exactly accurate.
 Primary role of budget is to manage cash flow with respect to different activities which
are carried out within organisation. This is a time consuming process.
Fixed budget: It refers to rigid budget which is based on assumption that there will be no
alteration in level of budget.
Merits
 With usage of this budget organisation can set up their expenses on the basis of
antecedence.
 By usage of this organisation can make differentiation between needs of organisation and
what is needed to make business consistent.
 By fixed budget organisation can make sure that all the payments are made within time or
not.
Demerits
 Fixed budget is based on assumption with respect to different level of activities but it is
not sure that these activities will not alter within year as every circumstance cannot be
predicted (DRURY, 2013).
 Actual values will change with respect to activities which were planned as situations
cannot be completely identified.
Flexible budget: This budget is also referred to as variable budget. It is a financial plan
which estimates expenses and revenues which are based on behaviour between fixed and
variable cost with respect to turnover, fluctuation in output, alteration in variable factors and
many others.
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Merits
 It assists in prediction of performance and income level of sales and different activities
which are conducted by organisation (Håkansson, Kraus and Lind, 2010).
 By usage of flexible budget suitable assessment of managerial and organisational
performance can be obtained simultaneously.
Demerits
 Assumptions are made related with linearity of cost which do not relies on assumptions
of continuity when cost is discontinuous.
 These budgets tend to maintain fixed cost at homogeneous levels of sales and fixed costs
are based on range of output of these costs.
Incremental budget: It is essential contribution of accounting management with respect
to carrying out minor alterations in existing budget so that innovative budget can be derived.
With usage of previous budget, it is initiated.
Merits
 It is easy to understand orientation with respect to other methods of budgeting which are
used within organisation.
 It is flexible as this budget can be carried for a month and if there is any loss then this
method can be changed otherwise it can be continued. For this detailed analysis of
funding is not needed. Therefore it takes less time to prepare this (Herzig and et. Al,
2012).
Demerits
 This budget can lead to excess of funds which are spend which might not be required and
management may opt to spend more as budget is available easily.
 This advances large spending of budgets which is required to be maintained in next year.
Zero based budget: It is a method of budgeting in which all expenses are justified for a
specific period of time. It starts from a zero base and it is identified for their cost and budget. All
expenses are evaluated and needed to be justified so that budget remains in an order.
Merits
 This budgeting helps in achieving objectives of firm as it ignores data, information and
figure of past years (Hiebl, 2014).
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 This advantage of zero based budgeting helps in cost benefits as it does not focus on
analysing or studying changes took place in expenses and prepare variance analysis.
 The main objective of enterprise is to maximize profits and enhance stakeholder’s wealth.
As this can be done by using zero based budgeting which focus on allocating resources
economically.
Demerits
 This budgeting is time consuming for organisation or government body which need to be
dome every year against incremental budgeting.
 This budget requires large number of manpower for making entire budget which is not
possible for each and every department. Also many organisations cannot obtain such
budget as human resource and time consuming is more.
 The zero budgeting need large volume of data and forms as there is no one in
organisation to know about each and every detail of decisions and contents. It is very
risky to compress details and information which can leads to remove significant data.
Variance analysis: It is quantitative investigation that is between planned and actual
behaviour. Such type of budgetary control helps in maintaining control over firm. For example,
sales budget to be $20,000 and actual sales is $15,000 here, variance analysis is $5,000. This can
helps in making effective decision in an organisation. The variance is calculated and reason
behind is calculated. There are some advantage and disadvantage are as follows:
Merits
 This budgeting helps in making effective decisions to organisation as variance can be
calculated easily (Hilton and Platt, D. E., 2013).
 The manager of organisation finds reason behind more changes in estimated and actual
data and information.
 There is gap between estimated and actual which can easily help business man for
making next budget plan.
Demerits
 The accounting manager of organisation compiles variance at end of period or month
before issuance of outcome to management. In competitive era, business requires fast
feedback for improvement where they cannot wait for month to get results. Thus, this
analysis does not provide outcome timely (Kotas, 2014).
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 This analysis is considered as comparison between actual and standard which has derived
from political bargaining. Thus, as resulting variance does not provide any useful data
and information.
 There are many reasons which are not mentioned in accounting records so in this case
accounting manager need to get information from labour routing, bills of materials and
overcome for determining cause of issue in variance analysis.
Pricing strategies: It is used for pursuing various kinds of objectives like increase in
market share, driving competitors from workplace and expansion of profit margin. Due to
change in market, business needs to modify their pricing strategy for survival and growth. There
are various pricing strategies available which should be adopted as per nature of goods, service,
and size of organisation. Here, value based and cost plus pricing along with merit and demerit
are discussed below:
Value based pricing: It is the way of setting price for goods and service which is at
perceived value to consumer. This type of pricing strategy does not consider cost of goods and
service and market price for selling. It is set as per value of actual products in market and
accordingly price is charged (Lavia López and Hiebl, 2014). The advantage and disadvantage of
this pricing are as follows:
Merits
 This pricing strategy help organisation to generate maximum profits in market.
 This helps in knowing about how much customer can pay for goods and services.
 Value based pricing strategy helps in producing high quality of products.
 Through this strategy, consumer can get extraordinary service.
Demerits
 This strategy takes more time and resources as every product are charged as per
consumer value.
 In order to fulfil need and requirement of consumer, this strategy requires more
dedication.
Cost plus pricing: This strategy involve adding mark-up cost to products and service in
order to get it at selling price. In this approach, all cost such as direct material, direct labour and
overhead for goods and adding up to mark-up percentage for deriving price of products (Maas,
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Schaltegger and Crutzen, 2016). Such type of pricing is used within contract of consumer where
they reimburse seller the cost incurred by them and pay negotiated profit in respect of incurred
cost. The merit and demerit of this method are as follow:
Merits
 This method is very simple as price can be easily derived though overhead allocation
needs to be defined for calculation of multiple goods and service.
 This method does not carry any risk as contractor can accept where there is assurance of
cost reimbursed and profit.
Demerits
 This pricing strategy ignores competition and faces problem when their competitors
change prices suddenly. As it can impact on profit and market share which company
is expected to achieve.
 This engineering department simply design features and characteristics of products
which it want and launch.
 Cost plus is based on historical cost that has changed subsequently which ignores
replacement cost.
P5 Evaluate how companies are adapting management accounting system for responding
financial problems
The companies that are operating as an active part of corporate world detect the financial
issues within entity by making use of a number of tools which are described in detail below:-
Ratio Analysis: This refers to the analysis of financial statements of an enterprise in
order to gain quick knowledge about the financial performance of an organisation in a number of
key areas (Macintosh and Quattrone, 2010). This is a crucial profit tool while conducting
financial analysis and it directly tends to execute effective plans for the purpose of enhancing
liquidity, leverage, interest coverage and financial structure. By way of this analysis, investors
can easily gain access to important data about the company. When this evaluation and analysis
goes on for a long period of time, this provides assistance in ascertaining the defects present
within business operations and functions and provides the scope in relation to future performance
of an entity in a specified field of business (Otley and Emmanuel, 2013). This tends to contribute
significantly towards the facilitation of inter-firm comparison within the same business industry.
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In this regard, efficiency ratios should be assessed to gain knowledge about the inventory
procurement and management practices.
By way of average collection period, it tends to gain an insight into the average number
of days taken by customers for repaying the amount for purchasing products and services on
credit. To facilitate quick collection of payments, it is essential that company devise and
formulate clear and concise policies associated with credit. It is significant to ascertain financial
viability of business but ensuring that this is done in relation to other successful businesses
within the same sector.
Key performance indicators: It is defined as measurable value which demonstrates how
effectively company focus on achieving their set business objectives. This is used by
organisation for evaluating success at reaching their targets. It is type of communication which
aid firm to know about their performance (Renz, 2016). It requires relevant and clear information
which is absorbed and acted. In order to establish strategy for KPIs, it is very essential for team
to know about basic and understand goals and objectives of business. This process requires
proper feedback, analysis for improvement of performance. KPI is defined as per core objectives
of business. The objectives should be very SMART, so that it can be evaluated easily and
effectively. There are different types of KPI which are adopted as per nature and structure of
organisation. Thus, this can helps in improving and achieving performance of business and
objectives of firm.
Benchmarking: It is procedure for comparing process, policies and products of
organisation from one to another or measuring of standards. This is type of practice for
comparing actual with standard performance (Shields, 2015). This is mainly used in enterprise
for setting financial and budgetary goal performance. This help company to know about actual
result and judge it for better improvement. The result of benchmarking include following:
 Identification of different opportunities for the purpose of improvement.
 The ways where performance of peer companies are better for targeted areas.
 Development of performance improvement plan for good outcome.
 Reviewing results and identifying future improvement sections or areas.
This help organisation for maintaining focus on external market and generating best
performance (Taipaleenmäki and Ikäheimo, 2013). It can also provide assistance in terms
of showing about performance for achievement of target, enable process improvement,
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managing and accelerating change. There are different types of benchmarking like
internal, competitive, functional and strategic. All these have different roles and
responsibilities for carrying out activities and work.
Evaluation of management accounting system with actual example
Management accounting is defined as where managers uses information of accounting to
provide better information for managing and performing activities of organisation. This
management accounting is adopted by all types of organisation for better performance. Before
carrying out any accounting system, management should be done (Adler, 2013). It can be done
by organisation in terms of cost control, inventory management system and price optimisation
system. For example, Marks and Spencer has adopted new technology in their organisation
which need to be manage by management accounting in terms of purchase cost, implementation
cost and others. The different types of management accounting are performed by organisation are
described below:
Cost Control: It is practice for reducing and identifying expenses of business in order to
maximize profits and start with budgeting process. The manager compare actual with budgeted
expectation and in case actual is more than expected then management need to take action plan.
In order to run business and its activities, organisation needs to use cost control management
accounting for better outcomes. The main objective is to reduce and control unwanted or
unnecessary cost. There are various techniques for cost controls such as sue of earned value,
effective time management, planning project budget. With help of such techniques cost can be
controlled and result can be achieved. For example, Marks and Spencer uses cost control
techniques for reduction of cost of their goods and service. As it deals in many products where
wastage and production cost should be reduced which can be used for other purpose (Agbejule,
2011) .
Inventory management system: It is supervision for non capitalised asset such as inventory and
stock items. It is also defined as process of storing, ordering, and using inventory of organisation.
This system also consists of management of raw materials, finished goods, components,
processing and warehousing (Arroyo, 2012). Each and every inventory need to be managed by
the organisation with help of this system. It keeps records of purchase and sale inventory from
stock or organisation. In order to manager such, inventory manager is kept in warehouse. The
process begins from purchase of inventory to arriving at warehouse and from there to retailer,
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wholesaler and more. It assists in preparation of data and information with help of accounting.
For example, TESCO is big retail organisation in the market and deals in variety of goods and
services which provide help to consumers. Thus, it needs to maintain proper data and
information of inventory or stock which are purchase and sold to consumer. In case of
inappropriate maintaining of data and information it can face problem that can decline profit of
organisation. There are various types of inventory management system such as FIFO, HIFO,
LIFO, regular auditing, accurate forecasting and other. As per suitability of organisation, it can
adopt best method for them and maintain data and information related with inventory and stock.
In order to evaluate inventory management of IKEA and TESCO is explained here:
IKEA TESCO
It has faced problems in order to decide cost of
goods and services so for this purpose activity
based costing can be used.
It uses Sonette Retail Suite for managing and
controlling information across channel by
manager.
ABC aid in managing necessary information
required for better decision making and
planning.
This system was implemented by IVIS group
in order to handle online system management
programmes and SCIS.
This is used by IKEA for proper inventory
management of each and every activity.
As communication was not effective in
TESCO, with help of SCIM communication
was good.
Price optimisation system: It is mathematical system which helps in calculation of how demand
varies according to different price range and combining data with information on basis of
inventory level for recommending price that improve profits. This system focus on three pricing
elements such as pricing strategy, tactics and value of product for seller and buyer which manage
elements affecting profits. For example, TESCO can use this system for initial pricing,
promotional and markdown (Banerjee, 2012). In initial price optimisation system, TESCO can
adopt it as it is stable from long time. If prices changes in temporary time period then it can use
promotional prize. Similarly, in case of markdown helps organisation in selling short products
such as airline, hotels and others.
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