Management Accounting Report: Financial Analysis, Decision Making

This report provides a comprehensive overview of management accounting, focusing on its role in financial analysis and decision-making within Home Furniture Ltd. It explores the requirements of management accounting, methods used for reporting, and the application of marginal and absorption costing through cost cards and profit statements. The report delves into the merits and demerits of various planning tools, such as zero-based and incremental budgeting, and examines how companies use management accounting to address financial challenges. Key functions like data presentation, modification, and forecasting are discussed, along with the importance of different accounting systems like cost accounting, inventory management, and price optimization. The report also analyzes different types of accounting reports, including budget, performance, and inventory management reports. Overall, the report offers valuable insights into the practical application of management accounting principles in a business context.

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................4
LO1..................................................................................................................................................4
P1 Requirement of management accounting...............................................................................4
P2 Methods are used for reporting ..............................................................................................6
LO2..................................................................................................................................................8
P3 Income statement by using marginal and absorption costing ................................................8
LO3................................................................................................................................................14
P4 Merits and demerits of planning tools
LO4 ..............................................................................................................................................19
P5 Companies are using management accounting to respond to financial problem..................19
CONCLUSION..............................................................................................................................21
REFERENCES..............................................................................................................................22

INTRODUCTION
Management accounting is associated with accounting information and provisions which
is provided by accountant top managers in order to make business decisions. It is important for
business industry to evaluate the information and make right decisions. All accounting
information are collected managers and by analysing accounts and financial data and use them to
enhance business (Saunila, Pekkola and Ukko, 2014). The main aim of using management
accounting to make decisions and control business functions. To know the importance of
accounting management Home furniture Ltd has been taken whose manager are using
management accounting in order to make decisions. This report will contain various points
which are management accounting system, reports which helps to make decisions and planning
tools that can be used to control the excessive budgets. Along with this calculation of overall cost
and solution of financial problems will cover in such report.
LO1
P1 Requirement of management accounting
Management accounting is related with organization that can be used by accountant and
managers to evaluate information and make business decisions. The manager of business
industry make financial plans and implement them through managing accounts in order to
increase profitability. All business information are connected with the accounting system,
reporting and controlling a business. Such as manager of Home furniture Ltd are using
management accounting practices in order to make decisions and achieve business objectives. It
performs key functions such as provide data, modifies data, interpretation, facilitates accounts
control, quantitative and qualitative information (Pace, 2014). Some key functions are used by
Home furniture that are as given:
Presentation of data: This means profit and loss account and balance sheet are not
useful to take decisions in accounting. Therefore, Home furniture Ltd needed to present all
business information which are require to make correct action.
Modifies data: Financial and accounting information can be modified according to
management expectations. For instance, managers of Home furniture Ltd modified the total
purchase figures according to month wise, product wise and territory wise.

Forecasting: This is main function of management accounting that helps to forecast the
achievements of objectives for short and long term. Such as accountant of Home furniture
provide necessary information and data for the purpose of forecasting.
Management accounting system: It is associated with internal system which is used by
organization to measure and evaluate its processes for the purpose of managing business
organization. Such system has essential requirement to support decisions, control organization
and managing the investment. For instance, Home furniture is using such system to support the
decisions, managing profits and investment which is essential required for organization.
Financial accounting system: This is another system which is used maintain the
financial information in systematic manner. Such system deals with providing information from
outsiders like stockholders and creditors. It considers rules and procedure, internal control,
auditing and accounting information system in order to manage financial information. It is most
important for all organization use financial accounting system in order to make financial
decisions. For example, Home furniture is following rules and procedures, accounting
information system and auditing rules which helps to maintain the financial information correctly
and decisions can be taken accordingly (Green and et. al., 2014).
Tax accounting: It can be consider as system of management accounting which helps to
get exact revenues after deducting tax amounts. In other words, it is a structure of accounting
method which focuses on taxes rather than showing public financial statements. Taxes are
charges according to individual, partnership, corporation, international tax etc. which helps to get
net revenues. It is required for all organization to get legal revenues by filing federal and state
income tax returns. For instance, accountant of Home furniture maintain all financial information
and fill income tax returns that maintain client's trust and helps to get net revenues.
Different types of management accounting system are as defined:
Cost accounting system: To estimate the cost of product and services, for analysing
profitability, inventory valuation and cost control organizations are using such system. It is
essential required to calculate overall cost of business organization and increase production by
including product and activity based costing. For instance, Home furniture uses product costing
for allocating direct and indirect costs to individual units where as activity cost are used to assign
costs in to activity centre in order to evaluate cost of business firm.

Inventory management system: Such system is used to track the inventory properly
which helps to maintain record of all stocks. It is required to manage all inventory which are
available in organization and place order for purchasing material accordingly. For instance, the
manager of Home furniture is dealing in furniture who maintain all records of all stock by using
such system. Under this system, manager place order for purchasing material which are not in
stock. Moreover, it helps to analysis and reporting about inventory which is important for
organization.
Price optimization system: It can be consider as model and mathematical programme
that helps to know how demand varies at different prices. As people are more concerned about
prices of products and services so such system is required within organization to set the prices of
product after involving all costs. For instance, manager of Home furniture set the prices of all
furniture item under this system that attracts people and improve profits.
P2 Methods are used for reporting
Planning, decision making, regulating and measuring performance is the prime function
of any business organization which is performing by managers with the help of management
accounting reports. The main aim of managers is to analysis the information and prepare report
so profits can be maximize within organization. Reports are generated throughout accounting
and bookkeeping period in order to know all further activities. Such as manager of Home
furniture make plans by using regulations and measure performance for the purpose of preparing
accounting reports. Some information are used in preparing management accounting report that
are as defined:
Trading and profits and loss account: It is a statement which is prepared by
organization to know the profits and loss while running a business. The main purpose is to show
whether a business has made profit and loss during a financial year. Home furniture uses this
account by including all income and expenses in order to ascertain profits.
Balance sheet: This is a financial statement which is prepare by organization by
involving assets and liabilities end of the financial year. The main purpose of making balance
sheet is to know the financial status of business. Such as Home furniture is preparing balance
sheet on the specified date which helps to know the financial position of such business (Nam and
et. al., 2014).

Cash flow statement: It is presented in a format that shows inflows and outflows of cash
within organization. It involves operating, investing and financial activity for preparing cash
flow statement. The main purpose of preparing financial report is to present cash inflows and
outflows in a particular period. Home furniture uses cash flow statement to get the correct
information and make decisions accordingly.
Different types of accounting reports are prepared by organization-
Budget report: Such report is prepared by managers in written document that shows the
ways of managing funds by a business. It helps to get profits by evaluating all statements. The
main purpose is to see how organization spends available funds and how is available for new
products. Home furniture is using budget report to managing funds in to business activities
which helps to make profits. Such report is prepared by accountant of respective company and
presented to managers for getting profits.
Performance report: It is a part of communication management plan which helps to
collect information related to work performance and analysis them in order to make
improvements. The main purpose of this report is to analysis the employees performance and get
improvements by rewarding them, so profits can be maximize in business organization. This is
used by Home Furniture for instance, manager decide the goals and assigns task among all
employees. After assigning task, manager analysis performance and rewarded employees which
helps to motivate them and increase production (Tung, Baird and Schoch, 2014).
Inventory management report: It is critical to understand for all organization that how
much inventory need to have in warehouse and how much can give order. Therefore, managers
are preparing inventory management report which helps to give information about inventory.
The main purpose is to track inventory level properly. For instance, Home furniture is using this
report to track the stock level which is used to prepare designing furniture.
LO2
P3 Income statement by using marginal and absorption costing
a) Cost Card (Marginal Costing):
£/unit
Direct material 75
Direct labour 25

Variable Production Overhead 15
Marginal Cost 115
Selling price 160
Less- Marginal cost 115
Contribution / Profit margin 45
Case 1(b)
Profit Statement as per Marginal Costing:
Statement of profit/loss DR CR
Sales revenue @ £140 2880000
Direct material @ £60 1500000
Direct labour 500000
Variable cost 300000
Less : Closing stock -115000
Fixed production overhead 140000
Less: Cost of sales
-
2325000
Profit 555000
Case 2
Case 2 (a) Cost Card (Absorption Costing):
£/unit
Direct material 82
Direct labour 22
Variable Production Overhead 17
Total cost 121
Absorption cost of product 140000 / 20000

= 7
Selling price 160
Less- Total cost 121
Gross Profit 39
Profit Statement as per Absorption Costing:
Particulars DR CR
Sales revenue
288000
0
Variable cost
Direct material 1640000
Direct labour 440000
Lees: Closing inventory -121000
1959000
Fixed production overheads 140000
Less: Cost of sales
-
209900
0
Profit 781000
Reconciliation Statement:
Between marginal costing and absorption
costing £
Profit as per marginal costing 555000
Increase in stock level
Marginal cost/unit
Absorption cost/unit
Difference 226000

Profit as per absorption costing 781000
LO3
P4 Merits and demerits of planning tools
Instruments are used by organization to get guidance and controlling budget is known as
planning tools. Different organizations are using various planning tools in order to make correct
budget and control it.
Budget: is the estimation of all income and expenses which are made by organization for
the purpose of running business activities successfully. It is set by accountant after evaluating all
expenses and past information in Home furniture firm. Therefore, it is important for business
organization to set a budget and use planning tools in order to control them (Varley, 2014).
Following budgets are preparing by different organization:
Zero base budget: This budget comprises all expenses should be justify and approve for
new period that helps to know the profits of current period. Such budget start with zero base at
the beginning of year by analysing needs and cost of every business activities. Home furniture
can use zero budget in order to drive value for such business by optimizing cost. Such budget
does not involves any past information and data while preparing budget that helps to get correct
amount of money.
 Advantages: Home furniture is using zero budget to get accuracy which make
sure that it is getting correct amount of money. It increase efficiency which helps
to judge the actual need by focusing on current figure rather than past budget.
 Disadvantages: It is bureaucracy in nature that can take enormous amount of
time, extra staff and efforts that is difficult for Home furniture to prepare such
budget. This budget requires department to clarify and justify their budget which
is not easy at different level (Kuznetsova, Ruiz and Zio, 2014).
Incremental budget: This is prepared by using previous period's budget with
incremental amounts added for new budget period. In Home Furniture, increment budget is
prepared by managers by focusing on previous year budget and actual performance. Manager
increase the budget amounts in new period that helps to operate business successful and maintain
profitability.

 Advantages: By using this budget management of Home furniture can operate
their business and department on a consistent basis. It is simple and easy to
understand as it involve previous year information (Doherty, Horne and Wootton,
2014).
 Disadvantages: It does not create any incentives for developing new ideas and
reduce costs. It increases spending during preparing budget which can reduce
profitability.
Capital budget: This is a statement which consider capital receipts and payments of
organization in order to get certain profits. Home furniture's manager prepare capital budget by
involving capital receipts and payments for the purpose of analysing and comparing potential
future investment. Moreover, this budget shows achievement of future goals by expanding their
operations (Sargeant and Jay, 2014).
 Advantages: Home furniture can understand long term risk and its effects by
using capital budget. It helps to create investment opportunities as it is based on
capital receipts and payments. Moreover, manager can chose their investment
activities wisely.
 Disadvantages: Decision are long term that involves different techniques which
are not real. Therefore, long term decisions can affects negatively long term
durability of Home furniture.
Operating budget: It is a layout of financial plans which is prepared by organization in
order to achieve business goals. Revenues and income s are cover in this budget which are
presented in income statement. Home furniture can focus on operating budget which targets
financial plans and helps to achieve business goals. In other words, operating budget is a
statement of future revenues and expenses that helps to introduce correct current profits.
 Advantages: It helps to meet with debt obligations which sustain growth over
time. Moreover, it helps to allocate money in short term which is used to maintain
day to day business activities efficiently (Palone, and et. al., 2015).
 Disadvantages: It is difficult to prepare because it requires lot of information so
it take ample time to find activities. Moreover, cost of organization can be
increase.