Management Accounting Report: Prime Furniture Cost Analysis

This report provides a comprehensive overview of management accounting principles and practices, focusing on their application within a business context, specifically using Prime Furniture as a case study. It begins by defining management accounting and outlining the essential requirements of different management accounting systems, including cost accounting, inventory management, and price optimization systems. The report then delves into various methods of management accounting reporting, emphasizing the importance of reliable and accurate information for effective decision-making. A significant portion of the report is dedicated to cost analysis, explaining different cost types, and calculating costs using marginal and absorption costing techniques to prepare income statements. Budgetary control tools, along with their advantages and disadvantages, are also discussed. Finally, the report compares the ways organizations adopt management accounting systems and concludes with a summary of the key findings and implications for businesses seeking to improve their financial management. The report aims to provide practical insights into how businesses can leverage management accounting for better financial performance and strategic decision-making.

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
P1 Explain management accounting and give the essential requirements of different types of
management accounting systems................................................................................................1
P2: Explain different methods used for management accounting reporting...............................3
TASK 2............................................................................................................................................5
P3 Calculate costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costs...........................................................................5
P4 Budgetary control tools along with their advantages and disadvantages............................10
TASK 4..........................................................................................................................................13
P5 Comparison within ways that adopts by organisation to adopt management accounting
system........................................................................................................................................13
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
Management accounting can be defined as the process that keep records to perform all
work as per internal information and monetary benefits. This refers that with strategic decisions
organisation is able to get better results by managing task with proper budget. Internal
stakeholders determines employees, managers, leaders etc. to analyse business entity for
performing all work with in market. This also leads external stakeholders to understand current
status of enterprise. Moreover, this report is written from perspective of Prime furniture which is
operating their business at small scale level. It also highlights on management accounting to
provide management accounting that is leading company to perform all work as per management
accounting system. Absorption and marginal costing that is used by management to analyse
actual cost of production. In the last, adoption of management accounting system to respond
financial problems will also included in this report.
P1 Explain management accounting and give the essential requirements of different types of
management accounting systems.
Management accounting: This is an operation in which financial information are being
analysed by the help of financial statement so that decision can be obtained and pre decided
goals can be achieved within the given specified time (Ansoff and et. al., 2018).
Evolution and origin of management accounting: At the time of industrial evolution
the management accounting concept was introduced. When the need of decision making was
based totally on financial information these concepts came into existence. Transportation and
textiles are two major components of Prime furniture in management accounting.
Management accounting system: Various type of system which are required to be
followed by organisation so that to get competitive edge and for analysis of financial
performance. Management accounting includes system of cost accounting, price optimisation
scheme etc. Prime furniture is involved in manufacturing activities in order to recognise benefits
of the systems and establishing them considerably. These factors are explained below:
Difference between financial and management accounting:
Management accounting Financial accounting
 This helps the manager to take profit
generating decisions for the business
 This helps the management team in
recognising real financial position of
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entity.
 This assist in providing all kind of
monetary and non monetary
information.
the organisation with the help of annual
financial statements.
 It renders information only for
monetary terms.
Different management accounting systems are as under:
Cost accounting system: This is a system which assist in rendering information which
are related to cost of the company that are engaged in manufacturing numerous products and
services. In the context of Prime furniture, this system renders all the relevant information of
manufacturing activities so it is necessary for them to follow this system. Preparation of efficient
budget will be easier for department of finance so as to forecast future activities related to the
business (Bryce, 2017). Two types of coast are incurred during production process which is
direct and indirect costs. Direct cost are allocated directly to the manufacturing activities
although indirect cost s are allocated to provide assistance in direct manufacturing activities.
Inventory management system: It is a system which helps in proper maintenance of
existing stock level so that to fulfil requirements of customers. Prime furniture is supposed to
acquire this system so as to establish effective relation with clients and by keeping appropriate
level of stock in warehouse and supplying products on time to the customers they can increase
customer loyalty (Certo and et. al., 2016). Inventory management system is of three types which
are FIFO, LIFO, AVCO. LIFO can be defined as the last purchased inventory will be processed
first. FIFO means earliest purchase will be firstly processes and AVCO means the method in
which cost get distributed on the basis of produced units. Management of Prime furniture is
accountable for collecting information regarding these inventories through this system of
inventory management.
Price optimisation system: The system of price optimisation involves taking out
information regarding concept of client for newly established pricing policy that is necessary to
keep loyal customers in the business. For Prime furniture it is most suitable as this helps in
maintaining current clientele by fulfilling expectations in reference to any change in price.
Job order costing system: This is a system which support all the information regarding
actual cost allotment in process of manufacturing of every unit in the organisation. This helps the
organisation in maintaining proper records of overall costs that generates easiness for the
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manager to forecast the estimated profits. This removes difficulties for the manager of Prime
furniture to terminate the manufacture of those products which are giving less profits and include
larger amount of cost so that it enhances the overall profits of the organisation.
Benefits of management system:
Management accounting system Benefits
Cost accounting system This is used by prime furniture as to keep
records of numerous costs which are incurred
in a business.
Inventory management system This is applied in prime furniture as this helps
a manager to recognise need of stocks in an
organisation.
Price optimisation system Prime furniture uses this system to set proper
prices so as to meet customer's expectation in a
considerable manner.
Job costing system Prime furniture acquire this system for the
benefit so that to ascertain cost allotment at
different level that are carried out to fulfil
customer's expectation.
P2: Explain different methods used for management accounting reporting.
Management accounting reporting: This is a function under which business
transactions are recorded so that management can take decisions which are profit generating to
the organisation and helps the company in long run. This system of reporting involves cost
account6ing reports, report of inventory management etc (David and David, 2016). The manger
of prime furniture are required to make this type of functional report so that to recognise the
actual financial position.
Characteristics of good information system:
 Reliability: Reliability is generated through good information system so that this
provide assistance in recognising current position of the company.
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 Accuracy: If information system is reliable then the gathered information is accurate and
can be trusted by all the stakeholders.
Reasons behind understanding and overall easy to comprehensive of reports:
The management is required to understand and interpret all the reports so that it provides
assistance in taking appropriate decisions for future growth of the business. Stakeholders of
prime furniture are assisted by analysing all the information which are related to accounting
reports.
Types of managerial accounting reports
Performance report: This is a report which helps in keeping records of overall
performance of the company for each operation (Engert, Rauter and Baumgartner, 2016). This is
used by prime furniture for equilibrium asset management so that to record individual and
overall data. This is helpful in giving bonus and recognition as according to the performance so
that incentives can be given as per the objectives attained. This report is advantageous for the
company as this is helpful in preparing efficient strategies to increase performance.
Budget report: This is an intrinsic report which is used by businesses in designing
budget to numerous functional and operational departments (Ginter, Duncan and Swayne, 2018).
This is used by managers to make a comparative study on actual and standard cost of prime
furniture. This is essential for the businesses as this provide assistance in recognising cash
liquidity.
Account receivable report: This report represents the amount of receivable from
numerous customers. Majorly this is prepared by those companies which are giving products on
credit to their customers. Prime furniture uses this to maintain record of outstanding amount hold
by clients. This is benefited to the business as this aid in recognising the amount which is unpaid.
By the help of this report the business can make rigid policies of credit so that to avoid fund
shortage.
Various management accounting system are integrated in organisational process. Price
optimisation system is used by prime furniture in order to set proper prices for the furnitures
made by them. Accounting receivable report are helpful in making appropriate credit policies so
that to recognise money owed by the clients.
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TASK 2
P3 Calculate costs using appropriate techniques of cost analysis to prepare an income statement
using marginal and absorption costs.
Cost : This is termed as the total sum which is supposed to be paid by the purchaser to
the seller in the lieu of the product. As to attract huge amount of customer prime furniture set
suitable cost for their furniture.
Various types of cost are explained as under:
 Direct cost: The costs are which are directly allocated to the manufacturing of a product
is known as direct cost such as material cost etc (Hanson and et. al., 2016).
 Indirect cost: The cost which are not directly related to the manufacturing but still
essential in manufacturing process is known as indirect cost such as rent, salaries etc.
Cost analysis: This may be outlined as the procedure which is utilised in order to analyse
the numerous functions which are adopted by the business to generate maximum profit. Prime
furniture uses this aspect so that to formulate appropriate decisions to get long term profitability.
Cost volume profit: This method is adopted by management team of prime furniture in
order to recognise the key changes in profit due to change in cost and sales (Hill, 2017).
Flexible budgeting: This type of budget is used when any alterations and adjustments
are introduced in the level of activities in the organisation. This is adopted by prime furniture for
the aim to making any modification as according to fluctuating sales or cost.
Cost variance: This is defined as a functional tool which is used by prime furniture in
order to get analysis of actual and budgeted cost of manufacturing. This is majorly adopted in
business with the view to make decision strategically.
Marginal costing: This method of costing includes that per unit cost will always be
constant as it divided into fixed and variable costs. The under and over adsorption difficulties is
sorted with the help of using marginal costing. Management opt this method to plan their profits,
determination of break even point i.e. BEP and in fixation of prices.
Adsorption costing: This is a method which is used to prepare all the financial records in
order to get actual profit and transparent view of company's financial performance.
Fixed cost: The type of cost which remains constant irrespective of the level of
production such as factory rent, insurance etc.
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Variable cost: The type of cost which continue to change with increasing sales and
production such as cost of direct materials etc.
Cost allocation: This may be defined as the procedure of identification of the different
activities and assigning costs to them. As in prime furnitures this is used to assigning cost to all
the departments.
Standard costing: The method of standard costing is used to ascertain the variances
between actual and standards cost in prime furnitures.
Normal costing: This method is used to calculate variances of standard and actual
overhead occurred in prime furniture so that to measure performance.
Activity based costing: This is defined as bifurcation of cost on the basis of different
functional activities in prime furnitures. This is used by them so that to analyse actual
performance.
Role of costing in setting prices: Costing is essential in setting prices for furniture of
prime furnitures as it give clear picture of all the cost so that it become easy to determine actual
performance.
Cost variances: Various type of variances are assessed so that to determine the
variations between actual and standard activities (Hitt and Duane Ireland, 2017). In prime
furniture this method is used to ascertain variations between various actual and budgeted
activities.
Overhead costs: overall expenses incurred by prime furniture while manufacturing
furniture are termed as overhead cost such as taxation, depreciation etc.
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TASK 3
P4 Budgetary control tools along with their advantages and disadvantages
Budget- This is consider as the forecasting tool which is used to evaluate, monitor and
calculate future revenues, income and expenses of organisation for a longer period of time. From
the perspective of Prime furniture budgets are produced as demand of clients and requirements of
organisation which are mention as follow:
Preparation of budget- Budget preparation undertakes various steps that are considered
by organisation to identify number of existing resources and future requirements (Trigeorgis,
and Reuer, 2017).
Types of Budget
 Capital budgeting- This budgets are utilised by organisation to exercise and records all
activities which requires large number of investment or monetary resources to perform
operations of Prime furniture.
Advantages Disadvantages
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This record all information for finance which is
invested in projects to examine financial
performance of organisation.
Large number of records are managed by
organisation which is complex to control and
monitor.
 Operating budget- It is defined as the approximation related with future income as well
as expenses on basis of past sales. This is also used by organisation for supporting
associate and executives of business for identifying proper utilisation of resources
through allocating them in appropriate manner.
Advantages Disadvantages
This provides overall view related with
monetary utilisation of resources.
It is complex to changes figures due to
changes in overall period.
Alternative budgeting:
 Zero based budgeting- This start from the base of zero which is developed by Prime
furniture that respect customers with purpose of minimising operational cost after
justifying expenses.
Advantages Disadvantages
They are always accurate because it is
formulated on yearly basis.
This is not appropriate for short term plans of
organisation.
 Traditional budgeting- Traditional budget are based on outflow and inflow of cash that
is specified for specific time duration. It consider Prime regular expenses to track
financial resources of organisation.
Advantages Disadvantages
This represent profit and loss of organisation
within clear way.
It reduces ability of credit transactions which
also impact on sales.
Implication of behavioural budget- This helps organisation to perform their work in
coordinated manner that utilised organisation to focus on actual budget rather than it estimated
figures (Rothaermel, 2016).
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