Management Accounting: Cost Analysis, Budgeting, and Reporting

This report provides a comprehensive overview of management accounting, focusing on cost analysis techniques and budgetary control methods. It defines management accounting and its essential requirements, highlighting its role in decision-making within organizations like Prime Furniture. The report explores various methods of management accounting reporting, including budget reports and accounts receivable reports. It delves into cost analysis, explaining marginal and absorption costing, job costing, process costing, and ABC costing, with practical applications demonstrated through income statements. Furthermore, it discusses the advantages and disadvantages of different planning tools used for budgetary control, such as operating budgets and master budgets. The report concludes with a comparison of organizations in terms of adapting management accounting systems to address financial challenges.

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1. Management accounting and essential requirements of systems..........................................1
P2. Different methods of management accounting reporting......................................................2
TASK 2............................................................................................................................................3
P3: Calculate costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costs...........................................................................3
P4: Explain the advantages and disadvantages of different types of planning tools used for
budgetary control.........................................................................................................................8
TASK 4..........................................................................................................................................10
P5: Comparison of organizations...............................................................................................10
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Management Accounting refers to the use of a wide range of methods and techniques
through which the organizations are able to ensure that they can attain their goals and objectives
by properly managing the financial data, facts and information in the right manner (Golyagina
and Valuckas, 2020). It is quite important that the use of Management Accounting is made by the
organizations for the particular purpose of taking of important decisions which can be quite
useful in managing the different types of needs and requirements in a proper way. Management
accounting is related to presenting information to forecast inconsistencies within finances in
order to make rational decisions to maximise profits together with minimise losses. For the
presentation, Prime Furniture is selected company which is a growing London Based
organisation. It is making plan for starting training courses for new internes.
The report covers definition of management accounting and essential requirements of
each management accounting system. It also highlights methods which are used by businesses in
management accounting reporting. The report highlights key management accounting techniques
for preparing income statement. It also explains usage of multiple planning tools in budgetary
control. At last, comparison among organisations in aspect of adapting management accounting
systems for the purpose of responding to problems related with funds are discussed.
TASK 1
P1. Management accounting and essential requirements of systems
Management accounting is defined as practice for recognising, measuring, evaluating,
interpreting and exchanging information about financial aspects to top management with pursuit
to goals of entity. In Prime Furniture, purpose which management accounting serve is to guide
users internal to business in well informed and rational decision making. Role of management
accounting in Prime Furniture is to conduct relevant cost analysis with the hope of determining
current expenses along with giving suggestions about future practices. It also plays role of
creating financial plans for any type of organisational undertaking related to financial department
(Johnstone, 2020).
Management accounting system could be described to internal systems of entity which
provides critical information to top managers for operational decision making. Prime Furniture is
a type of manufacturing entity that opts management accounting systems for costing addition to
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managing processes. Management accounting system tracks efficiency associated to internal
operations along with associated tasks to determine effectiveness of establishment in competitive
environment. It minimises errors, improves stock management, provides real time information
and data, enhance stages of decision making, gives high flexibility as well as enhances financial
visibility.
Kinds of management accounting systems that are used by Junior Accountant Manager of
Prime Furniture are as follows:
Cost accounting system: It refers to a system that is opted for estimation of cost of
offerings with the hope of profitability analysis and controlling unnecessary costs (Mahmoudian
and et.al., 2021). In Prime Furniture, essential requirement of cost accounting system is to keep
detailed and proper record of production activities, determine actual costs of manufacturing a
product and control redundant costs. It is flexible and specific system for subdividing costs and
value inventory.
Inventory management system: It is a system through which managers track goods
throughout supply chain that starts from purchase of raw material to end sales. Within Prime
Furniture, essential requirement of the system is to make process and practices to manage stock
or inventory easier and reduce risk of understock or overstock. It streamlines whole process and
eliminates inventory costs related to errors from human side.
P2. Different methods of management accounting reporting
Management accounting reporting is termed to a mechanism for planning, regulating,
measuring, making decisions and analysing performances through various reports (Zyznarska-
Dworczak, 2018). Within Prime Furniture, there are various methods opted for generating
management accounting reporting as per requirements. With these reporting methods, Junior
Accountant Manager of the entity highlight certain patterns additions to transmit them towards
useful information for the business.
Some methods that are used by managers of Prime Furniture related to management accounting
reporting are as follows:
Budget report: A method of management accounting reporting which lists past forecasted
budget projections over particular period and assist in devising budget for upcoming accounting
period for company is budget report (Pirilä, 2021). In Prime Furniture, budget report is opted for
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making comparison among estimates of budget and actual outcomes during designated
accounting period.
Account receivable report: Another method of management accounting reporting which
shows balances of unpaid voices with time period that have been outstanding is nature is named
to account receivable report. In Prime Furniture, accounting receivable report assist to determine
invoices which are open addition to allow keeping slow paying clients on top list.
TASK 2
P3: Calculate costs using appropriate techniques of cost analysis to prepare an income statement
using marginal and absorption costs
Cost – This means a monetary value that arises in business activities while buying any
products and services. To run a business and managing functions cost can be occurring that
needs to be pay out of income and profits. Within Prime Furniture, cost is considered as amount
of monetary resources that are spent on producing products. It restricts inclusion of mark-up for
profit. Different costs in manufacturing a product includes fixed cost, variable cost, operating
cost, indirect cost and many more.
Marginal costing – This can be explained as costing technique of presenting sales and
cost data where management are responsible to make short term decision like make or buy,
acceptance of special order, and sales mix selection. This involves variable cost of products and
services which are used to develop business. With usage of marginal costing, junior accountant
of Prime Furniture controls cost effectively, treats overheads in simplified manner, plan
production properly and attain better results.
Absorption costing – This is cost calculating technique that takes in to account indirect
expenses and direct costs. This involves manufacturing cost of products and services by
considering fixed and variable (Kozachenko, Panadiy, and Сhudak, 2019). Though absorption
costing, junior accountant of Prime Furniture is able recognise all costs that are involved in
manufacturing and accurately tracks profits within definite accounting period.
Job costing: It is a costing method which is used to determine the cost associated to
specific jobs or occupation that are performed as per customer’s specifications (Wells, 2020).
Junior accountant of Prime Furniture uses the method to analyse separate projects or contract
jobs.
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Process costing: In this method, costs are collected over a fixed time period, summarized
and allocated to all of the units which are manufactured during that period of time on a
consistent basis. Key purpose of using process costing is to look towards total cost of process
along with average it over the production units.
ABC costing: It is costing method for assigning indirect and overhead cost to products
and services. With this, Prime Furniture finds production costs by breaking down overhead costs
among various production associated activities (ABC Costing, 2021). It assists in assigning costs
to each activity that goes into production, like workers testing a product. By using ABC costing,
managers are able to set prices more accurately, consider direct and overhead costs for
manufacturing product and recognises distinct products needed various indirect expenses.
Application of absorption addition to marginal costing in Prime Furniture by junior
managerial accountant:
Quarter 1
Particulars
Amount (in
￡)
Sales 66000
Less: Cost of sales
Opening inventory 0
production cost (78000*0.65) 50700
Less: Closing stock (12000*0.65) 7800
42900 42900
Contribution 23100
Less:
Fixed overhead 16000
Fixed & selling expenses 5200
21200
Net profit 1900
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Quarter- 2
Particulars
Amount (in
￡)
Sales 74000
Less: Cost of sales
Opening inventory (12000*0.65) 7800
production cost (66000*0.65) 42900
Less: Closing stock (4000*0.65) 2600
48100
Contribution 25900
Less:
Fixed overhead 16000
Fixed & selling expenses 5200
21200
Net profit 4700
Reconciliation
Working note Q1 Q2
Variable costing profit 1900 4700
Opening inventory 0 7800
Closing stock 7800 2600
Absorption costing profit 4300 3100
Opening inventory 0 10200
Closing stock 10200 3400
Absorption costing for Quarter 1:
Particulars
Amount (in
￡)
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Sales 66000
Less: Cost of sales
production cost (78000*0.65) 50700 0
Semi-variable (78000*0.20) 15600
Total Variable cost 66300
Less: Closing stock 10200
56100
Gross profit 9900
Less: -400
9500
Selling and distribution as fixed 5200
Net Profit 4300
Absorption costing for Quarter 2:
Particulars
Sales 74000
Less: Cost of sales
Opening stock 10200
COGS (66000*0.20) 13200
production cost (66000*0.65) 42900
Total Variable cost 66300
Less: Closing stock 3400
62900
Gross profit 11100
Less: selling expenses -2800
8300
Fixed expenses 5200
Net profit 3100
Working note
Fixed costs 16000
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Budgeted cost of production
80000 per
units
Budgeted fixed cost 0.2
Variable cost per units 0.65
Product costing:
Fixed along with variable cost, allocation of cost: The term fixed cost is said to cost
which lacks changes with modifications in volume of activities. In contrary, variable cost is
defined to costs associated to activity volumes. Within Prime Furniture, cost allocation is an
aspect to classify, accumulate along with assigning of costs to objects.
Normal and standard, activity based costing addition to role of costing in
establishing prices: In context to normal costing, actual data is preferred for deriving product
cost with exception of producing overhead rate. However, within standard costing, costs that are
used are predetermined that is based on budgeted costs. In Prime Furniture, role of costing is
setting price is to look towards all business activities and adding them to reach final cost prior
establishing product prices. It also helps in controlling unnecessary costs along with improving
price efficiency.
Analysing variation in profits:
For the first quarter:
Overhead absorbed= (66000*0.20)= 13,200
Fixed overhead costs= 16,000
Under absorption: (2,800)
For Second quarter:
Total absorbed expenses: (74000*0.20)= 14,800
Fixed costs= 16,000
Under absorption= (1200)
Reconciliation Statements:
Particular Q1 Q2
Profit from absorption 4700 5900
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-2800 -1200
Profits as from marginal 1900 4700
Working notes:
Fixed charges= 16,000
=66000*0.20= 13,200
Under absorption=(2800)
= 74000*0.20= 14,800
Fixed expenditure: 16000
Under absorption= (1200)
P4: Explain the advantages and disadvantages of different types of planning tools used for
budgetary control
Budget is described to a financial plan that outlines expenses and revenues for defined
accounting period. In Prime Furniture, preparing a budget is essential to manage money
effectively, improve decision making, identify financial problems prior to occurrence, allocate
funds appropriately to projects and monitor financial performances. Budget enables junior
accountant manager of establishment to take benefit of purchasing along with investing
opportunities, plan ways to lower debts and allocate funds in all business departments. Planning
tool are mechanisms to plan future of company. In accounting, planning tools are budgets that
guides management and team to make revenue with appropriate spending. Different kinds of
budget that are used as planning tool in Prime Furniture are as explained:
Operating Budget – This is a type of planning tool which is used by management to
contain the all income and expenditures that are generated from daily business function. In
relation to Prime Furniture, management uses the operating budget for the purpose of keeping
record of all day to day transaction and develop business activities. This can help to develop the
business activities and performance in competitive environment by keeping records of all
transactions (Aitken-Davies, 2020).
Advantages Disadvantages
 This helps management to make plan  This is time taken planning tool that can
be create the challenge for Prime
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for the day to day operations.
 This can help to manage each functions
and activity in accurate form.
 This can help to find out the errors on
daily basis.
furniture management.
 Federal tax complications that affects
the business negatively.
 This limits the creditability.
Master Budget: A planning tool that is aggregation of all budgets that are produced by
various functional areas of an establishment is master budget (Blankespoor, Hendricks and
Miller, 2020). In Prime Furniture, use of master budget is to combine all smaller budgets and
converting them into one overall budget in order to get comprehensive view about business
finances. Advantages and disadvantages of master budget in case with Prime Furniture are as
follows:
Advantages Disadvantages
 It assists managers to
measure performance of
business as whole and
improving departmental
efficiency.
 It helps in interdivisional
coordination with other
functional areas properly.
 It summarises budget and
identify unusual issues in
advance and fix them
accordingly.
  It is rigid in nature and
leads to low estimation of
revenues as it does not
consider new growth
opportunities for
entrepreneurial growth.
 Master budget is difficult
to modify as it comprises
lengthy descriptions as
well as charts.
Cash budget – This can be explained as estimation of cash flows of business over a
specific period of time. The cash budget is prepared monthly, weekly, quarterly and annually. To
prepare the cash budget there is need to focus on only cash transaction and keep records of all
activities. To prepare the cash budget management of Prime furniture is require to focus on cash
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related transactions and activities that can help to develop the organizational performance and
productivity (Wadesango, Tinarwo, Sitcha, and Machingambi, 2019).
Advantages Disadvantages
 In the cash budget debts which arises
while business activities can be
avoided.
 This makes management more
resourceful and develop the business
activities.
 In cash budget management become
able to communicate their financial
position.
 This limits the spending power of any
business so it might be creating the
challenge for Prime Furniture.
 Cash budget can be easy to lose.
 This maintain only cash related
transaction.
 This relies on estimation to meet future
needs.
From the above it can be explained that different types of planning tool and budget can be
prepare by Prime Furniture that can help to develop the business activities and performance.
Alternative method of budgeting:
Incremental budgeting: Budgeting method used in Prime Furniture that is prepared by
taking the current period's budget or actual performance as a base, with incremental amounts
then being added for the new budget period. Advantage of the method is only a few assumptions
are required in the budgeting method, help ensure that funding remains stable and reduces
internal rivalry (Tamimi, 2021). Limitations of the method includes discourages innovation,
promote unnecessary spending and fails to account for changes.
Rolling budgeting: Another kin d of planning tool that includes updation to new budget
period when recent period is completed. In Prime Furniture, use of rolling budget benefits in
identifies struggle of anticipating requirements of business environment in one year from now
and adjusts forecast during the year in retort to variations in environment. However, limitation of
rolling budget is that it creates resentment when time spent predicting averts managers from
completing other serious errands.
ZBB: Zero base budget – This can be explained as budgeting method wherein all
expenses must be justified for new period. This mainly starts with new accounting period where
no previous data should be incurred. The management of Prime Furniture organization can
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prepare this budget in case of starting new venture or justifying all expenses from new period.
Advantage of the planning tool is that it is used for cost benefits analysis and promoting the
optimization in business process management. This is helpful for those business who have
started from accounting period and does not involves previous expenses. However, it creates the
unpredictable income that makes budgeting method impossible to use. Also, This create the
challenge in running the business due to not considering past data and financial statements.
TASK 4
P5: Comparison of organizations
Financial Problem- It refers to the financial difficulty which can be faced by a particular
organization which can affect its position of funds (Johnstone, 2020). Therefore, in this way it
can be said that an organization like Prime Furniture can also face financial problems and
therefore in this way it can create a particular level of impact on the firm's financial position. The
financial problems which are being faced by the company are as follows-
 Lack of profits in job orders- The company is facing an issue because it is not earning
the sufficient level of profits from its wide range of job orders. This is impacting the
overall level of profits in the organization and is affecting it a lot.
 Improper setting of price- The company is also facing a particular problem because it is
setting its price improperly which is thereby affecting the overall level of profits which it
is earning.
Techniques to be used to solve financial problems-
 KPIs- These are the Key Performance Indicators (Mahmoudian and et.al., 2021). It is
quite important that the company can make its use so that it is able to make sure that it
can effectively and efficiently manage its job orders in a proper manner and therefore
earn sufficient profits from it which will thus help in attaining the future goals and
objectives in a right way.
 Benchmarking- It is a technique through which a wide range of benchmarks can be set
and therefore improvements can be made if the performance is not according to the
benchmarks which have been set (Sari and et.al., 2020). Therefore, the company can
make its use so that it is able to set price in a right way for enhancing its profitability.
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 Financial governance: It is an approach for gathering, managing, monitoring as well as
controlling information about funds of entity. Use of financial governance in Prime
Furniture could help in tracking financial transactions, controlling data, managing
performances and following compliances. Effective financial governance encapsulates
legitimacy that holds exercise of power over financial resources of entity.
Comparison of organizations
Basis Tesco Sainsbury's
Financial problem Tesco is facing the financial
problem of higher-level of
costs which is therefore
creating an overall level of
impact on its profitability level
and is affecting it a lot.
Sainsbury's is facing the
financial problem of
mismanagement of the
inventory items which is thus
creating an impact on the
overall costs and is affecting
the company a lot.
Management accounting
system used
Tesco is making the use of
Cost accounting system
through which the
management of its costs can be
done in a proper manner
effectively and efficiently.
Sainsbury's is making the use
of Inventory management
system through which it can
make sure that it is able to
manage its wide range of
inventory items effectively and
efficiently.
Application of the system Tesco is making the use of this
system by ensuring that the
assessment of the costs can be
made and therefore the use of
methods and techniques can be
made so that the costs can be
reduced and profits can be
enhanced.
Sainsbury's is making the use
of this system by ensuring that
it can identify the way it can
manage its inventory items
which will thus help it in
maximizing its overall level of
efficiency and effectiveness in
a proper manner.
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From the above discussion, it can be concluded that the management of Prime Furniture
is required to make the use of Management accounting systems to solve financial problems. It
can use Job costing system to solve the problem related with job costs and can use Price
optimization system in order to solve the problem related with prices (Taschner and Charifzadeh,
2020).
CONCLUSION
From the above report, it has been concluded that management accounting is
essential for business as its scope is vast along with comprises multiple operations. It is using
statistical data to make better and accurate decisions for growth purposes. Management
accounting systems eliminates errors in cost analysis and inventory management, streamline
processes of entity, cater business requirements and are user friendly. Budget report and account
receivable report are some methods used in management accounting reporting of entity.
Therefore, the managers should make its appropriate use to be able to attain the goals and
objectives in the future. It is essential for managerial accountant of company to use appropriate
cost analysis techniques while preparing income statements. Key techniques for analysing costs
are marginal costing along with absorption costing. Planning tools are instruments that guide
accountant for taking steps to implement and control expenses and emphasising more on
generating revenues. Operating Budget, zero base budget and cash budget are some planning
tools that are opted by venture for budgetary control purposes. All entities face some financial
problems due to uncertain future. Financial problems are managed or responded through
management accounting approaches that are benchmarking, financial governance addition to key
performance indicators as per requirement.
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