Prime Furniture: Evaluating Management Accounting Systems & Reporting

This report provides an in-depth analysis of management accounting practices at Prime Furniture, a renowned furniture organization headquartered in London. It covers various aspects including the types of management accounting systems used, methods for management accounting reporting,...Read More

MANAGEMENT
ACCOUNTING
1

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
LO1..................................................................................................................................................3
P1 Management accounting and types of management accounting system................................3
P2 Methods for management accounting reporting.....................................................................6
LO 2.................................................................................................................................................8
P3 marginal and absorption costing.............................................................................................8
LO3................................................................................................................................................10
P4 Advantages and disadvantages of different types of planning tools used for budgetary
control........................................................................................................................................10
LO4................................................................................................................................................12
P5 Compare organization how are they adapting management accounting systems ...............12
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................16
2

INTRODUCTION
Management accounting is primarily the presentation of wide variety of business
activities for internal management in order to facilitate the decision-making process (Ríos
Bastida and Benito,2016).
Prime furniture is basically one of the renowned furniture organization who has its
headquarter in London, U.K. It provides a range of furniture and its related products and thus
have its chain across different parts of the world. It covers all range of furniture and is exporter
of the furniture.
This report gives a brief about Management accounting and types of management
accounting system, methods for management accounting reporting, techniques of cost analysis
for calculating cost, benefits and disadvantages of planning tools for budgetary control and
comparison between management accounting system used by organizations.
LO1
P1 Management accounting and types of management accounting system
Management accounting
Management accounting is basically the process as well as method in which financial
information as well as resources are being provided to managers for the purpose of decision-
making. Management accounting is primarily used by internal team of organization and thus
helps in the overall administration (Sledgianowski, Gomaa and Tan, 2017).
Management accounting system
Management accounting system is the system and framework which is developed to
assist the managers and top management in taking the range of decisions related to the financial
information of company. This system aids the Prime furniture to make effective decisions and
thus recognize various ways through which organization can function efficiently (Manyaeva,
Piskunov and Fomin, 2016).
Importance of its integration
In order to function appropriately and efficiently, it becomes highly important for the
Prime furniture to have a well-through management accounting system. The main reason for
integrating it within organization lies in its importance
Cost analysis
3

This is one of the importance of management accounting system and the primary reason
for establishing system in company. Through this system, top and middle level managers in
Prime furniture are able to conduct the cost analysis for determining expenses as well as profit
that will occur in the future (Wang and et.al, 2017).
Audience targeting
Another reason for developing an efficient management accounting system is to pay
attention to relevant consumers. Through management accounting, Prime furniture is able to
assess the value of their customers which helps them in investing appropriate resources for
satisfying their needs (Lowe, 2019).
Difference between management and financial accounting
Financial accounting is basically the process through which the organizations prepare a
detailed financial statement which is later on used for comparing the financial position with other
firms. On the other hand, management accounting is mainly focused in assisting the management
as well as overall operations of organization.
Management accounting system primarily provides information and data to people inside
organizations . Financial accounting provides the data and assist the outside stakeholders
especially shareholders (Yin and et.al, 2015).
Management accounting does not follow and law or standards and is not bound by any law.
Financial accounting is basically required by some specific law ad principles. It requires
particular formats and standards.
Types of management accounting system
There are different types of management accounting system that prevails within
organization and thus assist them.
Cost-accounting system
Cost-accounting system is basically the framework or tool which is utilized by
organizations for estimating cost of products and services and for detailed analysis of profit and
revenue. The main aim of this accounting system is to capture the total production cost of the
Prime furniture through analyzing variable cost at every step of production and fixed cost like
lease expenses. The main benefit of this system is that it discloses the profitable as well as non-
profitable activities of firm. As this system minutely calculates selling price, cost etc thus
4

segregation of profitable ad non-profitable activities become easier (Sledgianowski, Gomaa and
Tan, 2017).
Inventory management system
Inventory management system is predominately the combination and mixture of various
technologies as well as processes which oversee reviewing and maintenance of the stocked
products. In short, this system mainly monitors that whether the products, raw materials, finished
products etc are ready for delivery to end consumers or vendors or not (Ríos Bastida and
Benito,2016). The major benefit of this system in Prime furniture is that it helps in smooth and
constant flow of the good and services through organization and in a particular disarray. This
eventually reduces the load on manufacturing and distribution department. Another advantage of
this system is that it enables Prime furniture to manage the centralized record and data of each
and every asset and thus provide credible information to end consumers, suppliers, vendors etc
(Shtiller and et.al.,2016).
Job costing system
Job costing system is basically the system for accumulating as well as assigning the
manufacturing cost of individual unit of the output. The main aim of job costing system is to
track cost as well as profit by jobs and thus enables the standardized reporting and monitoring of
job profitability. The major advantage of this system in Prime furniture is that it simplifies the
record keeping through relying on various statistical data and calculations instead of actual
inputs. Another important benefit of this system in the compnay is that it enables managers to
gather detailed data on production statistics within individual department (Wang and et.al, 2017).
When a production of a specified product or a contract has been produced by the organization,
the method which is used for valuation of the cost of the product is known as job costing. Job
costing system is a type of structure that helps the management in calculating the cost of a
single unit This method is mostly used in the enterprises which provides customised services and
product to their customers. The respective organization has adopted this costing system so that
the management of the company can calculate the production cost of the juice products which
are produced for different age brackets' customers. This system also provides the information of
effective utilization of business resources.
5

P2 Methods for management accounting reporting
Importance of relevant and up to date information
Management Accounting Reports: These reports are basically the result statements
which contain the variances between estimations, forecasts and actual outcomes related to
different activities and operations and are prepared and presented by management accountants to
help the management in controlling and planning appropriate guidelines and strategies for
betterment of the employees as well as the procedures These managerial reports provides
accurate statistical and financial information and data to the managers for making critical
organizational decisions and planning strategies for achievement of company objectives. . The
information which is being provided by management accounting system in Prime furniture
should be relevant to the end user and thus should be reliable in order to avoid any misuse of the
information. Having the relevant and up to date information helps the Prime furniture in effective
decisions making and thus makes the administration of various activities easier (Yin and et.al,
2015). The main decision-makers of the prime furniture like shareholder should trust accounting
information which is provided by company in order to make a good position in market. Hence,
having the reliable and relevant data is highly essential for taking the right decisions and this
right decision will help organization to enlarge their customer base and thus work towards the
interest of stakeholders (Nishimura, 2019). The relevance of information is also important from
calculation point of view. When organization will have right information then it will easy for the
to make calculation regrading inventory, value of products etc.
Importance of understandable information
Just presenting the information is not enough for the Prime furniture to establish its
position in market and to entice the stakeholders but the data which is being presented to
shareholder and other should be understandable and presentable as well (Sledgianowski, Gomaa
and Tan, 2017). Understandibility is one of the most important component of management
accounting system and thus relates to relevance, reliability and proper representation of the
information. Understandability is the quality of financial information that makes it presentable
and understandable by individuals having knowledge of business. Understandable information is
highly essential because it facilitates the end users in making effective decisions. This helps them
to take a reliable decision regarding Prime furniture (Yassin and Guindy, 2017). Another reason
for making information in understandable form is to simply the process for people. When the
6

stakeholder of Prime Furniturewill have information in correct manner and understandable form
then it will make it easier for them to systematically arrange the data according to its
prioritization and thus take the effective decision.
Types of accounting reports
Managerial accounting report is basically the report which is being prepared by top
management of organization to have a view of different cost and expenses as well as the profit
and revenue ratio (Wang and et.al, 2017). There are different types of managerial accounting
reports mainly
Budget report
Budget report is basically prepared for measuring the performance of company and is
developed as whole for small companies and divide into division for large companies. The main
aim of this report is to analyze how different department of Prime furniture are performing and
how much cost they incur individually (Yin and et.al, 2015). The main advantage of the budget
report is that it helps the Prime furniture to cater the unforeseen circumstances as well as
uncertainties that might occur in the future. Besides this, it also helps in achieving the goals of
organization by making appropriate utilization of the resources and thus allocating them in right
amount.
Accounts receivable aging report
This is one of the most critical and vital report which is being developed by organizations
for maintaining the cash flow if they extend credit to the customers. The main aim of this report
is to break down the left out and remaining balance of customers into particular period and this
allows managers for identifying defaulters and identify the issues within collection process of
company (Wang and et.al, 2017). The primary advantage of this report is that it allows Prime
furniture to maintain a constant contact with the customers in order to make them aware that late
payment and dues are not acceptable and that the organization is top of billing and collection
process. Another advantage of this report is that the information collected from this report
enables Prime furniture in creation of letters for sending to customers regarding overdue
balances.
Job costs reports
This is referred to the reports which are mainly designed for calculating the expenses and
cost for particular project which is financed by the organizations (Sledgianowski, Gomaa and
7

Tan, 2017). The main aim of this report is to recognize the highest earning areas within business
so that the organization can focus their effort rather than wasting resources on low earning
divisions of organizations. The main advantage of this report which helps Prime furniture in the
business is that it allows the company to allocate cost to different divisions separately and thus
calculate profit margin that would be received. Another advantage of this report for Prime
furniture is that it enable company to analyze the employee's performance as this report provides
enough information for evaluating individual performance (Chenhall and Moers, 2015).
Performance reports
This is refereed to the reports which are developed for reviewing and monitoring the
performance of employees and the organization as a whole. The main aim of this report is to take
the significant strategic directions regarding future of organizations. One of the highly rated
advantage of this report in Prime furniture is that it helps to establish the apprehensive standards
which the employees can follow and thus these standards prevent employees from deviating
from their goals. Another benefit is that it helps to communicate current situation to stakeholders.
As the stakeholders are always concerned of company performance thus these reports helps
Prime furniture to clearly disseminate their performance (Ríos Bastida and Benito,2016).
LO 2
P3 marginal and absorption costing
Absorption costing
Cost per unit assessment:
Particulars Figures (in £)
Variable cost of production 0.65
fixed cost of production 0.20
Total cost per unit 0.85
Profitability statement
Quarter 1 Quarter 2
Particulars units
Figure
s (in £)
Figure
s (in £) units
Figure
s (in £)
Figure
s (in £)
Sales 66000 1 66000 74000 1 74000
8

Less: COGS 56100 62900
GP 9900 11100
Less: Selling
&
Administratio
n Costs 5200 5200
Net profit 4700 5900
Computation of COGS
Particulars units
Figures
(in £)
Figures
(in £)
Opening stock 0 0.85 0
Add: purchases 78000 0.85 66300
Less: closing stock 12000 0.85 10200
COGS 56100
Quarter 2
Computation of COGS
Opening stock 12000 0.85 10200
Add: purchases 66000 0.85 56100
Less: closing stock 4000 0.85 3400
COGS 62900
Cost per unit as per marginal costing
Particulars
Figures
(in £)
9

Variable cost of
production 0.65
Total cost per
unit 0.65
Income statement
Quarter 1 Quarter 2
Particulars units
Figure
s (in £)
Figure
s (in £) units
Figure
s (in £)
Figure
s (in £)
Sales 66000 1 66000 74000 1 74000
Less: COGS 42900 48100
Contributio
n 23100 25900
Less: fixed
expenses
production 16000 16000
selling &
distribution
expenses 5200 21200 5200 21200
Profit 1900 4700
Quarter 1
Computation of COGS
Opening stock 0 0.65 0
Add: purchases 78000 0.65 50700
Less: closing stock 12000 0.65 7800
COGS 42900
Quarter 2
Computation of COGS
10

Opening stock 12000 0.65 7800
Add: purchases 66000 0.65 42900
Less: closing stock 4000 0.65 2600
COGS 48100
Interpretation: Marginal cost refers the additional cost entangled in production of an extra
unit of product. Marginal costing is a method that assigned all the variable costs to the value of
sales while all the fixed overheads are written off from the contribution. The break even point in
this method is always equals to the fixed costs. Absorption costing method is a bit rational from
marginal costing method. According to this approach, all the costs related to the production
should be written off from the sales profit. In this method, all production related cost such as
direct material, labour, overheads and fixed manufacturing costs are deducted from the sales and
other fixed costs are allotted to the contribution. This can be interpreted that in the quarter 1
contribution was 23100. Net income generated in that quarter was 23100. And in the quarter 2
company has generated net income of 36300Pound. When it comes to absorption costing method
then sales revenues of quarter 1 was 1800000 (12000*150) and quarter 2 sales revenue was
2100000 (14000*150). Gross profit in this costing method was 901800 in quarter 1 and in
quarter 2 it was 1109200. Hence it can be interpreted that company should take support of
absorption costing method, this would be able to generate more profit in the company.
LO3
P4 Advantages and disadvantages of different types of planning tools used for budgetary control.
Budget control help managers to coordinate all resources available to their company. It
helps prime furniture to develop smooth working in an organization. Define standards to control
all system in a organization. Facilitate performance evaluations to manage overall working of an
organization. Budget help reduce wastage of resources and money in an organization. Help
organization to achieve their goals and objectives on time and effectively (Wang and et.al, 2017).
Advantages
Setting goals
Budget control help organization to set their goals and objectives they need to accomplish
in future by analysing resources available to an organization. By making efficient use of
11

resources organization is able to achieve their goals(Islami, Mulolli and Mustafa, 2018.) . Set
goals by proper allocation of resources available to organization. By using this application
company can met proper goal and can set the strategies in effective manner.
Clarifying strategies
Setting budget help prime furniture to prepare strategy and provide different plans and
ways to achieve their goals and objectives. It help to coordinate working of all other departments
in an organization. Proper allocation of budget help reduce wastage and develop new products
for their company (Yin and et.al, 2015).
Pricing strategies
Budgetary control help Prime Furniture to prepare pricing strategies for their products
and services. Budget need to be effective that help organization to achieve their goals and
objectives. Helps to analyse price of their competitors and develop plans according to their
requirement.
Strategic planning
Help Prime Furniture to prepare planning for their product and services. With help of
swot and pestle analysis to development of organization and their financial abilities to develop
their business in near future (Sledgianowski, Gomaa and Tan, 2017).
Develop effective control
Budget help to control working of organization and develop their business at a large
scale(Brookes and Locatelli, 2015.) . Develop communication about financial position of
organization and coordinate efforts for development of organization.
Disadvantages
Unpredictability
Controlling budget will not predict development of organization. Prime Furniture
developing products and set their budget but customers demand are not predictable change in
customer demand will effect overall growth of organization and make them inefficient to
develop their business at a large scale.
Management of Price
If prime furniture set prices of their products according to their set budget an even after
customers are not willing to pay that amount then it effects overall development and working of
organization. If company increase price of their products then customers will not like to purchase
12

their products and services. But low prices also reduces profitability of their company (Ríos
Bastida and Benito,2016).
Profit analysis
Sales of product is constant but demand for their product is changes with consumer
preference and demand. To analyse profit a particular period is analysed and after that it effects
overall working of their organization.
Problem while setting budgets
It demotivates employees of prime furniture as they are not able to participate in
budgeting as well as reduces their moral to work effectively in an organization(Kerzner, 2019.) .
It make budget rigid which reduces abilities of employees to bring innovation as they are not
able to develop business of their organization (Wang and et.al, 2017).
Strategic planning
If budget is not fixed and fluctuating with time that make an organization ineffective to
develop their business at a large scale and reduces their overall efficiency.
LO4
P5 Compare organization how are they adapting management accounting systems .
Basis Prime furniture IKEA furniture
Key success factors Prime furniture brings
innovation in their products
and services(Uyar and Kuzey,
2016.). Innovation help them
to satisfy their customers
wants and desires. Developing
effective products that are
reliable for their customers.
Well equipped products are
available so that customer are
satisfied with their services.
IKEA provide their products at
low prices that have ability to
engage large number of
customers. Provide well
designed furniture that attracts
large number of customers
towards their services and have
ability to explore their business
(Wang and et.al, 2017).
13

Technology Technology to develop
innovative product help prime
furniture to develop their
business at a large scale and
develop their effectiveness to
achieve their goals and
objectives.
IKEA have effective
technology to manage their
accounting system and use
available resources that help
them to achieve their goals and
objectives.
Leadership Effective leadership in prime
furniture help them to achieve
their goals on time with full
efficiency of their employees
in an organization and develop
their business at a large scale
(Sledgianowski, Gomaa and
Tan, 2017).
Leadership make an
organization to develop
smooth working and require to
develop and effective
utilization of their resources
and make their organization to
develop at a large scale.
Benchmarking Benchmarking help prime
furniture to analyse working of
their organization and help
them to develop performance
of their business and increase
effectiveness of their services.
It helps IKEA to analyse
internal opportunities that help
them in their improvement and
development. They analyse
their competitors products and
services and develop their
products according to that
analyse that help them to
achieve their goals and
objectives. They develop
effective customer relation that
help them to attract large
number of customers with their
products and services.
Key benefits They are able to develop and They emphasize more on
14

increase their employees
understanding that makes them
to achieve their goals on time
and increase effectiveness of
their products and services and
able to engage large number of
customers with their products
and services.
developing effective team that
help them to achieve group
goals(Schaltegger and Burritt,
2017.) . They are able to grab
opportunities for overall
improvement of their
organizations and their
objectives.
Vision To develop their business at
large scale and increase
profitability of their
organization and ability to
grab large number of new
markets to improve their
performance at a large scale.
Aim to increase presence of
their organization (Yin and
et.al, 2015)
To provide quality products
and services to their customers
to develop their everyday life
and make them familiar with
their organization.
Decision making skills Have decision making skills in
managers to guide their
employees. Skills help them to
reduce overall risk in an
organization to develop their
business at a large scale.
Have decision making skills in
manager to develop ethical
environment and have skills to
resolve conflicts at a large
scale. They guide decisions
towards development and
achievement of goals and
objectives.
15

CONCLUSION
It has been summarized that management accounting system plays an important role in
organization and thus assist them in effective decision-making. There are different types of
accounting systems as well as report which helps organization in controlling and managing
overall administration. In order to manage the operations of organization effectively, there are
various planning tools which are being used and these tools have their own advantages as well as
disadvantage like pricing strategies etc. Organizations respond to financial problems in the most
imperative way. They adopt various ways through which they are bale to overcome numerous
financial problems.
16

REFERENCES
Books and Journal
Brookes, N.J. and Locatelli, G., 2015. Power plants as megaprojects: Using empirics to shape
policy, planning, and construction management. Utilities Policy, 36, pp.57-66.
Chenhall, R.H. and Moers, F., 2015. The role of innovation in the evolution of management
accounting and its integration into management control. Accounting, organizations and
society.47. pp.1-13.
Islami, X., Mulolli, E. and Mustafa, N., 2018. Using Management by Objectives as a
performance appraisal tool for employee satisfaction. Future Business Journal. 4(1).
pp.94-108.
Kerzner, H., 2019. Using the project management maturity model: strategic planning for project
management. Wiley.
Lowe, E.A., 2019. On the idea of a management control system: integrating accounting and
management control. Management Control Theory.p.63.
Manyaeva, V.A., Piskunov, V.A. and Fomin, V.P., 2016. Strategic management accounting of
company costs. International Review of Management and Marketing.6(5S). pp.255-264.
Nishimura, A., 2019. Profit Opportunity, Strategic Innovation, and Management Accounting. In
Management, Uncertainty, and Accounting (pp. 97-127). Palgrave Macmillan,
Singapore.
Ríos, A. M., Bastida, F. and Benito, B., 2016. Budget transparency and legislative budgetary
oversight: An international approach. The American Review of Public
Administration. 46(5). pp.546-568.
Schaltegger, S. and Burritt, R., 2017. Contemporary environmental accounting: issues, concepts
and practice. Routledge.
Shtiller, M.V and et.al.,2016. Tax risks in the company’s accounting system: essence,
identification and control. International Journal of Economics and Financial Issues.6(4).
pp.1791-1797.
Sledgianowski, D., Gomaa, M. and Tan, C., 2017. Toward integration of Big Data, technology
and information systems competencies into the accounting curriculum. Journal of
Accounting Education. 38. pp.81-93.
Uyar, A. and Kuzey, C., 2016. Does management accounting mediate the relationship between
cost system design and performance?. Advances in accounting, 35, pp.170-176.
Wang, F. and et.al, 2017. Multi-objective optimization model of source–load–storage synergetic
dispatch for a building energy management system based on TOU price demand
response. IEEE Transactions on Industry Applications. 54(2). pp.1017-1028.
Yassin, M. and Guindy, M.E., 2017. Management Accounting Change and the Contemporary
Business Environment: An Article Review. Journal of Empirical Research in Accounting
& Auditing.4(01). pp.7-22.
Yin, S. and et.al, 2015. An improved incremental learning approach for KPI prognosis of
dynamic fuel cell system. IEEE transactions on cybernetics. 46(12). pp.3135-3144.
17

18