Management Accounting: Financial Planning, Cost Analysis, and Problems

This report delves into the core principles of management accounting, emphasizing its practical application within a business context. It examines the use of financial data for informed decision-making, monitoring, and control. The report provides a detailed analysis of income statements derived from both marginal and absorption costing methods, illustrating the treatment of direct and indirect costs. It also addresses various financial challenges such as low credibility, revenue shortfalls, and poor cost estimation. The report highlights the role of management accounting tools and techniques in mitigating these threats and fostering sustainable success, including budget control, cost-volume-profit analysis, and pricing strategies. Through calculations and explanations, the report offers insights into how these tools can be leveraged to overcome financial issues and achieve long-term organizational goals.

B07544
Management
Accounting

INTRODUCTION...............................................................................................................1
TASK 2...............................................................................................................................2
L.0.2: Apply a range of management accounting techniques...........................................2
P3 Calculate costs using appropriate techniques of cost analysis to prepare an
income statement using marginal and absorption costs................................................2
M2 Accurately apply a range of management accounting techniques and produce
appropriate financial reporting documents.....................................................................6
L.O.3: Explain the use of planning tools used in management accounting......................7
P4 Explain the Advantages and disadvantages of different types of planning tools
used for budgetary control:............................................................................................7
M3. Analyze the use of different planning tools and their application for forecasting
budgets...........................................................................................................................9
L.O.4: Compare ways in which organizations could use management accounting to
respond to financial problems..........................................................................................10
P5. Compare how organizations are adapting of management accounting systems to
respond to financial problems and sustainable success:............................................10
M4. Analyze how, in responding to financial problems, management accounting can
lead organizations to sustainable success:.................................................................14
CONCLUSION:................................................................................................................15
REFERENCES................................................................................................................16

INTRODUCTION
The objective of this report is introducing the management accounting fundamentals
which can be practice in the wider business environment. This project report will
investigate about uses of management accounting financial data to get planning
decisions and the monitoring and control of finance within organizations.
This project report consists of two types of Income statement; Income statement
through marginal costing and Income statement through absorption costing methods.
How to solve financial problems of the business is discussed in this report. To
understand how marginal and absorption costing methods work, calculations has been
done which shows treatment of direct and indirect costs. There are many financial
problems and issues like low credibility, less revenue, poor cost estimation,
mismatching of data’s in financial statement and high debts taken from the market.
These threats can weak Company’s wealth. To handle such threat there are some tools
and techniques of management accounting systems which help business to overcome
from these financial issues. How these tools solve firms problems are shown in the
project. Additional to solving threats, the concept of sustainable success also discussed
in respect with management accounting systems.
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TASK 2
L.0.2: Apply a range of management accounting techniques
P3 Calculate costs using appropriate techniques of cost analysis to prepare an
income statement using marginal and absorption costs.
Quarter 1 & 2
First we need to calculate product cost per unit:
Quarter 1 Quarter 2
Variable Cost
(78000 × 0.65) 50700 42900
+ Fixed Cost 16000 16000
= Total Product
Cost 66700 58900
÷ Total Units
Produced 78000 66000
= Product Cost
Per Unit 0.85 0.89
After that the product cost per unit used to create the absorption income statement. The
Units sold on the income statement (and not units produced) taken to determine sales,
cost of goods sold and any other variable period costs.
Income Statement (Absorption)
Quarter 1 Quarter 2
Sales (66000 × £1/ unit)
6600
0 Sales (74000 × £1/ unit)
7400
0
- COGS (66000 × 0.85)
5610
0 - COGS (74000 × 0.89)
6586
0
Gross Profit
990
0 Gross Profit
814
0
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Less: Operating
Expenses: Less: Operating Expenses:
Selling & administ.
Expenses 5200 Selling & administ. Expenses 5200
Net Operating Income
470
0
294
0
Note: 1. Selling cost / unit is assumed to be £1/unit.
2. Variable cost/ Unit = Total variable cost/ No. of units produced
= 52000/80000 = £0.65/ unit
3. COGS = Cost of goods sold
Income statement through Variable costing technique:
Quarter 1 Quarter 2
Sales (66000 × £1/unit)
6600
0 Sales (74000 × £1/unit) 74000
Less: Variable Cost Less: Variable Cost
Cost of Goods Manufacturing
(78000 × 0.65) 5070
0
Cost of Goods
Manufacturing (66000 ×
0.65) 42900
Less: Closing Stock (12000 ×
0.65) 7800
Add: Opening stock (12000
× 0.65) 7800
Less; Closing Stock (4000
× 0.65) 2600
Contribution Margin
2310
0 Contribution Margin 25900
Less Period Expenses Less Period Expenses
Fixed Manufacturing cost
1600
0 Fixed Manufacturing cost 16000
Fixed Selling and Admin.
Expenses 5200
Fixed Selling and Admin.
Expenses 5200
Net Operating income 1900 Net Operating income 4700
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Explanation:
Cost of goods manufacturing Prime Furniture is calculated by multiplying total
production with variable cost per unit (£0.65/Unit). Cost of Goods manufacturing is
expense so it is subjected to be subtract from Sales revenue. On the other hand Closing
stock is subtracted from total variable cost because this stock has not been sold and
should not be subtracted from Revenue.
Difference in Profit & Loss or Income statement 0f Prime Furniture calculating by
Absorption and Variable techniques:
Absorption costing Variable Costing
Quarter 1 Quarter 1
Sales (66000 × £1/ unit)
6600
0 Sales (66000 × £1/unit)
6600
0
- COGS (66000 × 0.85)
5610
0 Less: Variable Cost
Cost of Goods
Manufacturing (78000 ×
0.65) 50700
Less: Closing Stock
(12000 × 0.65) 7800
Gross Profit 9900 Contribution Margin
2310
0
Less Period Expenses
Less: Operating Expenses: Fixed Manufacturing cost 16000
Selling & administ.
Expenses 5200
Fixed Selling and Admin.
Expenses 5200
Net Operating Income 4700 Net Operating income 1900
Interpretation: As from the above figure, the clear difference between Net operating
incomes from both the method is shown. The major reason behind this difference is that
in absorption costing technique cost is calculated only of those products of Prime
Furniture which has been sold, while in variable costing method total cost is calculated
for total products produced.
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Absorption costing Quarter 2 Variable Costing Quarter 2
Sales (74000 × £1/ unit) 74000 Sales (74000 × £1/unit)
7400
0
- COGS (74000 × 0.89) 65860 Less: Variable Cost
Cost of Goods
Manufacturing (66000 ×
0.65) 4290
0
Add: Opening stock
(12000 × 0.65) 7800
Less; Closing Stock
(4000 × 0.65) 2600
Gross Loss
814
0 Contribution Margin
2590
0
Less Period Expenses
Less: Operating
Expenses:
Fixed Manufacturing
cost
1600
0
Selling & administ.
Expenses 5200
Fixed Selling and Admin.
Expenses 5200
Net Operating income
294
0 Net Operating income 4700
Additional to the Income statement; BEP (Break even point analysis) is a strong tool to
identify the units at which Prime Furniture can attain a situation of no profit no loss. BEP
of above case is calculated below:
Break even point (In Units) = Fixed costs / (revenue per unit – variable costs per unit)
= £16000 / (£ 1/unit - £0.65/ unit)
= £16000 / £ 0.35/unit
= 45714 units
These 45,714 units is the total production required by a firm to attain no profit no loss
situation. BEP can also express in pounds:
Break-even point (Sales in £) = Sales price per unit × BEP in units
= £1/unit × 45714 units
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= £45714
Interpretation: Prime Furniture should generate 45714 pound sales revenue to attain no
profit no loss situation.
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M2 Accurately apply a range of management accounting techniques and
produce appropriate financial reporting documents.
There are various management accounting techniques which helps company in
achieving its objectives, these are discussed below:
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Management
accounting
techniques
Constraint
analysis
Trend
analysis
Capital
budgeting
Inventory
valuation
Margin
analysis

1. Margin Analysis: This technique helps company in avoiding overproduction
situations. It helps company in knowing the unit to be produced to attain no
profit no loss situation through breakeven point analysis.
2. Constraint analysis: This technique helps company in evaluating the hurdles
which stops company in achieving optimum production and increased
revenue. It also states the reason behind this hurdle and provides suitable
solution.
3. Capital budgeting: This is very helpful tool or techniques which helps
company in taking strategic decisions related to capital expenditures. In this
method NPV (net present value) of all investments is calculated to know
which expenditure can give more returns.
4. Inventory valuation: This technique helps operation managers to know what
the actual cost is related with inventory. In this method direct and indirect
cost of production is separated to get the amount which directly impact
inventory production.
5. Trend Analysis: In this technique future estimation about revenue and
expenses is done to know how much fund is required to achieve desired
sales.
L.O.3: Explain the use of planning tools used in management accounting
P4 Explain the Advantages and disadvantages of different types of planning
tools used for budgetary control:
1. Budget control:
Advantages and Disadvantages of Budgets:
Budgetary control
Advantages Disadvantages
Coordinates important information
across staff managers.
It applies mechanically and rigidly
Interpret strategic plans and put
them into action.
Due to lack of participation,
employees can de-motivate.
Provides record of different Perception unfairness situation
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organizational activities. arises.
Improves relations with employees
through sound communications.
Politics and resources competition
arises.
Improves resource reallocations of
Prime Furniture
A rigid structure decreases initiative
and advancement at lower levels,
making it impossible to get cash for
another new project for Prime
Furniture.
Provides corrective action tools.
2. Cost volume profit analysis:
Cost volume profit analysis
Advantages Disadvantages
Simplicity of figuring, utilizes a lot of
standard recipes, numbers can be
changed rapidly to decide changes in
factors.
Accuracy: it accept all expense are
fixed, anyway there are blended cost
that changes with creation.
Planning: the breakeven point assists
supervisors with assessing future
spending and entire creation influence
the targets of the business.
Accept deals stays steady yet interest
for an item can change after some
time.
3. Pricing strategy:
Pricing Strategy
Advantages Disadvantages
Client base valuing takes a look at the
objective whether client is happy to pay
for the item to decide the perfect cost,
this outcomes sets the price to be
charged from customer.
The executives valuing, the item is
estimated at what the organization
perceive not what actually customer
can pay. This creates a gap between
actual price and what price should be.
Cost based pricing accepts and deals
stays steady yet interest for an item
can change after some time by Prime
Furniture.
Cost base pricing confuses Prime
Furniture managers and they fixed the
price more than competitors.
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M3. Analyze the use of different planning tools and their application for
forecasting budgets
There are various planning tools used by company:
1) Budget control: The budget is a quantitative as well as fiscal articulation
of approach for a characterized future period.
Application: It applied to forecast arranged incomes and costs for request
to accomplish the organization's objectives. In this manner, it is related to
the administrative and bookkeeping capacity of the business.
2) Cost volume profit analysis: Cost volume benefit examination is utilized
by the executives as arranging instrument to assess income from deals,
cost and benefits, this is finished by utilizing a scientific assessment that
ascertains whole changes to deals volume and cost influence benefit in a
future period.
Application: Cost volume benefit investigation is applied by the executives
to forecast the equal initial investment purpose of an item this is the point
that benefits from pay rises to the expense to deliver an item along these
lines there is no misfortune no benefit now.
3) Pricing strategy: Deciding standard price is difficult task for every
business, because company requires experts who have perfect knowledge
of customer demands, latest trends of the market and can do cost analysis
at different level of operations. The basic steps involved in deciding price
is searching price charged by competitors for similar product.
Application: It is applied to forecast how firm can minimize its cost to meet
competitive price and finally implement this strategy under experts’
supervision. Then the goal is decided, management pick an approach
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