Management Accounting Report: Prime Furniture, East London, UK

This report, prepared as part of a management accounting assignment, provides an overview of management accounting principles and their practical application within the context of Prime Furniture, a furniture manufacturing company based in East London, UK. The report delves into various aspects of management accounting, including cost accounting, inventory management, price optimization, and job order costing systems. It highlights the importance of these systems in supporting managerial decision-making, financial planning, and performance evaluation. Furthermore, the report explores different types of management accounting reports, such as cost accounting reports, accounts receivable reports, and inventory management reports, and their significance in monitoring and controlling financial performance. The report also examines costing methods like marginal and absorption costing, including the preparation of profit and loss accounts and reconciliation statements. Finally, it discusses budgeting techniques, including capital and operating budgets, and alternative budgeting methods like zero-based budgeting. The report emphasizes the role of management accounting in addressing financial issues and driving organizational growth.

Management
Accounting

INTRODUCTION
Management accounting is defined as a procedure of analysing business cost recorded under
the financial statement so as to make reliable and profitable decision for an organisation. For this,
accounting manager need to provide an adequate support to the management in terms of giving
relevant information about current financial position of company. This will encourage managers
to update their current policies with an objective of achieving financial growth in an organisation.
The present assignment report is based on Prime furniture which is engaged in manufacturing
furniture products located in East London, UK. As a junior management accountant, presentation
is made which includes the concept of management accounting along with its benefits. Apart
from this, accounting and reporting system, planning tools, costing methods and role of
management accounting in dealing with financial issues has been also discussed under this report.
P1:
Management accounting is a process of making an effective decision for the betterment of an
organisation by analysing the financial information of company taking books of accounts into
consideration. It is the way of analysing business cost by summarising financial statements of an
organisation (Bryson, Crosby and Bloomberg, 2014).
Prime Furniture is growing East London based company which requires an adequate support
from different management accounting systems in order to maintain books of accounts containing
information about the business cost and transactions happened on daily basis. Using various
kinds of accounting system help managers of Prime Furniture to increase the performance level
by updating policies and plans according to the current financial situation. These management
accounting systems includes:
 Cost accounting system: On the basis of cost accounting report, the managers of the
organisation analyse different cost associated with manufacturing which are related to raw
material, labour, indirect expenses. It will help the management of Prime Furniture to
have a detailed analysis of all the expenses related to the manufacturing of furniture and
other related services. In cost reports all the expenses whether direct or indirect all are
covered and organisation by analysing it tries to minimise these costs (Damodaran, 2012).
 Inventory management system: Inventory management system is generally followed by
those organisations who has to deal with a lot of inventory which help them to manage it
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well. Prime Furniture is required to manage their inventory which in been used in the
process of manufacturing furniture products. The different approaches that are used to
manage the inventory are LIFO, FIFO and AVCO.
LIFO is an approach in which inventory that is received in the last is used first. While in
FIFO, the inventory which is receives first is used first. Whereas in AVOCO, inventory is used
on the basis of average cost of production. In case of Prime Furniture, FIFO method is used as
they are into manufacturing business (Fowzia, 2011).
 Price optimisation system: This system is used by the organisation in order to minimise
the prices of the goods so produced by the organisation. This help Prime Furniture to
determine the cost of the units produced by them. This further help the managers of Prime
Furniture to decide the prices for their customers. Price optimisation system helps the
Prime Furniture to compete their project in the cost that they have quoted to their
customer for the projects (Garrison and et. al., 2010).
 Job order costing system: This system helps an organisation to allocate cost to the
activities or a particular job. For Prime Furniture this system is very important as they can
divide their total cost into different furniture that they have constructed for their clients. It
will help Prime Furniture to advertise their projects with the prices to the customer, which
are complete dependent on the cost provided to them by the manufacturing company. This
also help the companies to manage the cost of different activities in relation to their
performance.
M1:
Management accounting system Benefit
Cost accounting system It is used by the Prime Furniture to analyse the different
costs associated with direct materials, labour and other
direct expenses.
Inventory management system This system is applied in Prime Furniture to manage the
inventory used in manufacturing process by their
managers so that they can monitor the cost.
Price optimisation system Prime Furniture uses this system to determine the prices of
the building they have to provide to the customers which
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are based on the expectations of the clients and the
estimated cost provided by the constructor.
Job costing system Prime Furniture uses this system as it helps them to
determine the cost of different activities individually.
D1
There is somewhere linkage between management accounting and reporting system as the
using or preparation of these kinds of report or systems depends on each other. For an instance,
cost accounting system provides information about the total business cost which further be
recorded under the cost accounting report. The reliability and accuracy of cost accounting report
is very much based on cost accounting system.
P2
Management accounting reporting: It is considered as a process of recording business
transactions occurred on daily basis. This will require support from managers to maintain reports
containing all financial information so that the performance of an organisation can be easily
analysed and compared with previous year performance. There are several kind of reporting
system that manager of Prime Furniture can use which includes:
Cost accounting report: It is a document specifying information related with amount
invested in different business operations so that allocation of cost can be done with an
expectation of getting maximum return in future. The manager of Prime Furniture can use such
kind of report to prepare an effective budget in which allocation of funds can be done according
to the requirements. It will help manager in analysing the actual financial position of an
organisation by comparing invested cost with return (Honggowati and et.al., 2017).
Account receivable report: It is another document specifying information about the
unpaid debtors along with interest amount. The main motive of maintaining such kind of
document is to recover the due amount from debtors so that financial position of an organisation
can be stronger. Preparing such document by Prime Furniture help in rectifying their current
credit policies and update them to ensure that the chances in receiving payments from clients
after expiry of due date can be minimised. This will direct their investors to pay due amount to
company on time in order to make a better relation with them in future time period.
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Inventory management report: This is another document that must be prepared by
Prime Furniture to maintain sufficient level of inventory in their warehouses so that client’s
requirements can be fulfilled without any delay. This kind of document contains information
about the shortage of inventory which encourages manager to order further stock from suppliers
to meet future client’s requirements. The main advantage of preparing this document is that it
reduces storage inventory cost which makes positive impact on financial position and also
maintains a good relation with their loyal customers by providing them demanded products on
time (Linoff and Berry, 2011).
TASK 2
P3:
Cost is the amount which is invested in process of manufacturing furniture products. It
includes different aspects such as risk, efforts, resources, time, utilities and materials. It consists
of various types which includes marginal and absorption:
Marginal costing: It is the cost which includes only variable cost due to which t shows
more profitability than actual in the financial statement of an organisation. Due to this, Prime
furniture can use such costing method with an objective of attracting new investors by showing
them financial statement with high profitability (Lukka and Vinnari, 2014).
Absorption costing: It is a method which consists of both variable and fixed cost due to
which it is also known as full costing methods. It shows actual figures in financial statement
which can easily retain loyal shareholders. Thus, it can be used by large sized organisation.
Here are the preparation of Profit and loss account using marginal and absorption costing method.
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(b): Reason for analysing variations in profit
The above calculation depicts that there is difference in net profit due to changing costing
methods. The main reason of arising such differences is due to inclusion of fixed cost in
absorption costing method. The same is been presented underneath:
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)
(c): Reconciliation Statements:
It needs to be done by taking crucial difference those are arises in a project that can help
in reducing those gaps.
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M2
There are various accounting techniques which is used to make financial reporting
documents which includes financial statement such as profit and loss account, balance sheet, cash
flow statement etc. These are prepared on timely basis with an objective of identifying the actual
financial position of an organisation.
D2
The above calculation depicts that profitability generated from absorption and marginal cost
has been analysed properly. In first quarter, profit came is 4700 and 1900 in sales is achieved. In
second quarter estimated profits is 5900 and 4700. marginal cost must be effectively used to take
strategically right decisions.
TASK 3
P4
Budget: It can depict as an effective tool which is used by the business organisation to
estimate its future incomes and expenses for a specific period of time. Prime Furniture prepare
various budgets for its client as per their requirements (Budget, 2019). The organisation is also
using the budgetary control to asses that how the manager utilises various budgets to monitor
and control the cost or expenses. It is also used by the company to compare its actual results from
the expected one so that the deviations can be figure out and can adjust the performance.
Different types of budgets:
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Capital budget: This is the budget which is use by the company to record the
information related to the various activities in which the large capital has invested. This budget
also helps in keeping record of financial performance (Nitzl, 2016). Prime Furniture is engaged in
manufacturing business use to which it is important to prepare capital budget so as to make an
effective financial plan. The advantages and disadvantage of this budget are given below:
Advantages Disadvantages
This budget helps the business to manage all
those projects in which the large monetary
resources are endowed.
The lack of specificity take place in this budget
as it comprises the information of all
department.
It also helps the stakeholder of the business to
track the financial performance of the
business.
Due to high level of involvement of each
department this budget creates confusion and
problem in updating.
Operating budget: This budget is preparing by the business organisation in order to
record all the estimation of their sales and revenues which might occur in future. This budget is
helpful for the Prime Furniture in analysing that all the monetary resources within the
organisation are utilising properly or not.
Advantages Disadvantages
This budget helps the business in keeping
their eye on overall performance of the
business.
It can magnify incomes and other figures in
statements of firm.
The assessment of past and current expenses
and incomes is possible with this budget.
In this budget all the figures can easily
manipulated.
Other methods of budgeting: The other alternatives methods are also available in the
budgeting:
Zero based budgeting: This budgets is generated by Prime Furniture to decrease the cost
of the business activities by justifying the cost of each and every activity for a new period.
 Advantage: In this aspect a new budget is prepare for every activity in order to maintain
the proper accuracy.
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 Disadvantage: It is not suitable for a short term planning as the records can be biased by
managers.
Cash only or traditional budgeting: This is the most crucial budget which helps the
Prime Furniture in maintaining the balance between their cash inflow and outflow so that the
strong financial position of the business can be maintained (Senftlechner and Hiebl, 2015).
 Advantage: This will help the Prime Furniture to easily determine the loss in the
business. Disadvantage: It decrease the ability of the business to deal with the credit transactions.
Behavioural implications of budget:
 Budget allows Prime Furniture to properly allocate their resources as it focus on actual
data rather the budgeted figures.
 Other, budget is a complex task for the business as it requires higher monetary
investment.
Pricing strategies: Organisation are using the various pricing strategies in their business
for selecting a most appropriate price of their products and services. Here define some of the
strategies are:
 Penetration: In this strategy firms set lower price at the initial level for attracting a range
of customers.
 Premium: In this aspect the quality of the products and services are high due to which the
higher price is offering to the customers in this strategy (Suomala and Lyly-Yrjänäinen,
2012).
In the Prime Furniture, penetration pricing is used for determining the price of their
furniture products.
The way in which competitors ascertain their prices: Competitors of the Prime
Furniture like Lozi is determining their price by assessing the market segments by adopting the
market research strategies.
Supply and demand consideration: The various supply and demand consideration are
available like economics conditions, market situations and other which should be consider by
Prime Furniture.
PEST analysis:
Political Economic
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