Management Accounting: Financial Analysis and Planning Tools Report

This report analyzes management accounting techniques and their application in the context of Prime Furniture, a growing London-based company. It covers cost accounting methods such as marginal and absorption costing, and explores the preparation of financial statements. The report delves into differentiated planning tools including budgetary control, capital budgeting, and cash budgets, outlining their advantages and disadvantages. Furthermore, it examines how management accounting systems are used to solve financial issues like inconsistent sales revenue and higher expenses, comparing approaches like benchmarking, key performance indicators, and financial governance. The report provides a comprehensive overview of financial analysis and planning in a business context, offering insights into the practical application of management accounting principles.

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 2............................................................................................................................................1
P3. Accounting techniques for preparing the necessary financial statements.............................1
P4. Differentiated planning tools.................................................................................................6
P5. Comparison among business to show how they uses management accounting systems for
solving financial issues. ..............................................................................................................8
CONCLUSION..............................................................................................................................10
REFERENCES .............................................................................................................................11

INTRODUCTION
Accounting primarily connects with finance-related operations, but there are other
various accounting approaches that emphasize all forms of transfers, like management
accounting (MA). MA is an accounting system that is important for monetary and non-monetary
documents control and reporting (Armitage, Webb and Glynn, 2016). This description is used
when the supervisors are expected to produce inner reports at all time. MA is intended
specifically for managers to take corrective action pertaining to the use of financial and non-
financial sources. In this study, a company named Prime Furniture is chosen. This business is
growing London based that provides accounting-related training courses to newly hired people.
The report highlights certain cost accounting techniques and planning tools,. While many
financial approaches and their practical impact on a given data set are described in the project. In
the end part of the report the role of management strategies and management accounting systems
are presented to solve the companies’ financial problems.
TASK 2
P3. Accounting techniques for preparing the necessary financial statements
Cost is a word which denotes value of money used in a venture to manufacture or
produce something. In Prime Furniture, cost plays significant role in devising pricing decision.
Various costs are analysed by managers of Prime Furniture that are named as controllable cost,
fixed cost, opportunity cost, sunk cost and opportunity costs. Applying marginal and absorption
costing assist managers to prepare required financial statements for an accounting year (Shil and
Das, 2018).
Cost volume profit is an analysis method that focuses on effects of varying levels
together with having operating profits. Businesses such as Prime Furniture uses cost volume
profit framework for looking towards the ways units they are required for selling so to achieve
break even. Application of techniques of cost analysis in Prime Furniture includes following:
Marginal costing-It is a strategy required for the preparation of income statement by
recognizing contingent expenditures as key costs and fixed expenditures as periodic costs.
Absorption costing- It is a process required for the preparation of the income statement
by recognizing the cost of variable costs and fixed expenses. This method accounts for direct and
indirect expenses, such as direct products, direct labour, leasing, and insurance.
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Inventory costs is cost involved within ordering as well as holding inventory. It also
comprises of administering related paperwork (Kumarasiri and Gunasekarage, 2017). Through
inventory cost, managers are able to examine level of stock for keeping on hand. In other words,
inventory cost is related with procurement, storage addition to managing available or required
quantities of stock. Valuation methods that are opted in Prime Furniture are DCF analysis,
precedent transactions along with comparable company analysis. These are widely used methods
for valuation which are best in areas of finance.
MA techniques for the preparation of financial statements.
There seem to be various types of accounting methods being used prepare the financial
statements by accounting professionals. These methods enable users with a mechanism to adopt
a standard methodology to attain beneficial results. As shown in this section , two separate
measures have been used that are marginal and absorption costing methods for the revenue
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statement. Both methods yield different results because of different approaches of recognizing
the costs (Braswell and Daniels, 2017).
Interpretation of data
As shown in this report, two distinct income reports are prepared and that are described
below.
As per the income report produced by marginal costing method, it can be find out that
there is net profit for quarter I that is achieved through absorption method is £ 4300. On the other
hands, under marginal costing net profit of the quarter is of £ 1900. The rationale behind
difference in total net profit under both techniques because of way of taking fixed and variable
cost in process of income statement preparation.
P4. Differentiated planning tools.
Preparing budget needs huge efforts and time. When managers of Prime Furniture work
to prepare budget then they are able to manage money effectively, improve decision making,
plan for future, allocate suitable resources to each department, enhance staff motivation, monitor
performance and meet objectives. Budgets are widely devised by organisation as they guide them
to look towards the areas for expense and generating revenues (Procházka, 2017).
Budgetary control- This could be characterised as a scenario involved in the preparation
of various budgets for the anticipated time span, with the goal of tracking results by evaluating
actual results with estimated values. The whole methodology has a correlation with certain levels
of business organisations to control corporate financial output by identifying multiple kinds of
fluctuations. The preparation methods for budgetary control may be used in the sense of Prime
Furniture helps in managing revenues and expenses of entity in more better ways. Some kinds or
categorisation of budgets that are devised in Prime Furnitures are as explained:
Capital budgeting- It can be understood as a form of budgeting approach which is used
to measure effectiveness of proposed financial plans (Abernethy and Wallis, 2019). This
evaluation of efficiency of projects’ is done in accordance of various methods named as net
present value, payback period etc. The objective of this budgeting is to guide managers to take
suitable steps for making huge investment in any project. This can lead to financial managers to
determine various types of alternatives in Prime furniture Limited above.
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Advantages- This strategy is helpful to businesses as it directs managers to select the best
option among various options to shield them from potential financial risk. It is also useful for
businesses to retain sufficient control over investment-related expenses.
Disadvantages- The methods used to calculate project performance are based on
principles that can lead to incorrect estimates. In addition, this should not be extended to small
enterprises and small ventures.
Cash budget- This is a category of budget that includes details about certain operations
that within a specific accounting era are affiliated to cash inward and outward. With the aid of
this budget, managers will find it easier to determine cash needs in the future time span. For
example, in context of above business, this budget could be adopt for analysing cash inflow and
outflow activities to better manage the cash.
Advantages- This model is important for enterprises in allocating cash in compliance with
the activities budgeted. It also performs a crucial role in meeting the need for cash to make
payments for daily operational activities(Abernethy and Wallis, 2019).
Disadvantages- The key disadvantages within this budget seems to be that businesses
becomes limited by pre - specified plan to utilize the cash. In addition, due to the influence of
external environmental conditions on the output of businesses, it does not have reliable estimates
of cash receipts and payments.
Static budget- It is often called as a fixed budget that, over an accounting period, has the
essence of staying constant. This budget activities can not be altered in compliance with the will
of the management. Because of variations in the amount of output or revenues, this budget does
not have an effect (Braswell and Daniels, 2017). The goal of the budget is to establish a plan for
revenue , expenses, etc. The management team of Prime furniture limited will use this budget for
certain things that are required to stay unchanged like leasing fees, insurance, etc.
Advantages- It is ideal for all forms of businesses as it doesn't have to be adjusted
through a time of accounting. In addition , it leads to supervisors to evaluate unique employee
goals for various aspects.
Disadvantages- In the situations in which enterprises are supposed to make
improvements, it is not desirable, but because of this budget it will not do so. As in all pandemic
sales, large margins can be decreased and accounting professionals under this budget could not
allow a difference in sales value.
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Planning tools for estimation of budgets.
In order to prepare budgets, planning instruments or tools for budgetary monitoring may
be useful for managers. It may be possible through planning instruments or tools such as cash
budget preparation, the capital budget provide information on projected financial values.
Managers may use this knowledge to predict other forms of budgets. As per the presented
business scenario , for example, there are three mentioned budgets and each of them can
contribute to forecasting financial values for their accountants and managers (Yadav, Jain and
Singh, 2018).
P5. Comparison among business to show how they uses management accounting systems for
solving financial issues.
Financial problem- There are a variety of financial issues that businesses face because
of a lack of management. It's really difficult for managers to define any clear cause or entity
responsible for the financial problem. Some problems that are faced by two separate
organisations are listed below:
Inconsistent sales revenue- This is a kind of financial issue linked to fluctuations in
income from sales due to internal weakness or intensified competition. This financial problem
leads to a reduced graph of a business's progress(Burkina, 2017). For example, they faced this
financial issue due to inefficient pricing strategy in Prime furniture limited above.
Unwanted higher expenses- It is really a type of financial problem in which managers of
companies fail to retain control across expenditures (Posch, 2017). Due to several potential
causes, such as inadequate budgeting, unskilled workers, it may increase in firms. They faced
this problem mainly due to dynamic business environment as in above scenario of Prime
furniture limited.
All business have certain approaches of management accounting that guides them to
resolve financial problems that is been faced by the entity in an accounting period. In relevance
to prime Furnitures, managers have knowledge about using multiple approaches that are listed
below:
Benchmarking- It is defined as a methodology associated with comparing the financial
performance of a business with the average financial performance of manufacturing companies.
That's also beneficial to resolve those situations where the efficiency of an organisation is poor
or excellent. With this approach, managers will be able to measure performance of products of
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the entity against those business that are best in the field. It will also help the managers in
determining internal opportunities in order to make improvisation in practices for objective
attainment.
Key performance indicator- It is considered to be a form of accounting technique in
which both financial and non-financial components are evaluated. Information about benefit,
costs, returns etc. is included in the financial aspects (Burkina, 2017). From the other side,
details about turnover, political standing, etc. is included in non-financial aspects. This seems to
be essential for evaluating the reason of financial troubles. Organisation including Prime
Furniture will use KPI at certain levels with the purpose of evaluation of success so that great
heights are accomplished. Through high KPI, administrators looks towards overall performance
and with low KPI, emphasis is made on processes of departments.
Financial governance- It is considered as a means of systematically storing a firm's
financial records. Managers may use this defined knowledge to deal with any economic problem.
In Prime Furnitures, Financial governance will be use to solve all kinds of financial problems
with certain keys that includes creating a programme or policy which assist managers in
developing plans for resolving financial issues (Banta, 2018). With this, managers of the
company are also able to monitor sequential activities which provide with sufficient information
of finance.
Comparison:
Base for
comparison
Prime Furnitures George’s Limited
Financial
issue
In the last accounting period this
organization faced the issue of lower
sales revenue. In all contexts it led to
reduced growth.
They were faced with the problem of
higher costs for running various
activities. As a result, their sales
revenues began to fall along with
overall net margin.
Technique to
recognize
issue
The executives adopted benchmarking
methodology to compare financial
results with the overall sales revenue
from manufacturing firms (Whyte,
2016).
This company's administration has
adopted KPI approach to define their
financial issue. This was achieved by
concentrating on financial issues
related to sales, costs, etc.
MAS The management team of this entity
used price optimization system with a
aim of solving their financial problems.
According to this accounting method,
they set the rate for their goods at a
standard that attracts consumers. This
The manager of that business adopted
the method of cost accounting.
According to this accounting system
they classified their operations
according to the amount of
expenditures. They compared real
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