Management Accounting Report: Prime Furniture Company Analysis

This report provides a comprehensive overview of management accounting principles and practices, focusing on their application within Prime Furniture Ltd. The report delves into the definition and essential requirements of management accounting systems, exploring various types such as financial, cost, and tax accounting. It examines different methods of management accounting reporting, including cost accounting reports, inventory reports, and performance reports, along with the purpose of financial statements like trading accounts, income statements, and balance sheets. The report also discusses the benefits of management accounting systems, such as cost analysis and inventory management. Furthermore, it covers the integration of these systems and reports within organizational processes and provides examples of income statement preparation using marginal and absorption costing methods. The report also analyzes the advantages and disadvantages of different planning tools like budgets and concludes with the importance of management accounting in decision-making and organizational performance.

MANAGEMENT
ACCOUNTING

INTRODUCTION
The term MA is a important part of accounting which is associated to preparation of
internal reports with help of monetary and non monetary information about companies (Quinn
and Jackson, 2014). This part of accounting is very crucial for companies because it helps to
organisations in making important decisions. The role of MA is becoming important as financial
accounting. In project report, Prime furniture limited company is selected which is involved in
manufacturing process. In report different management accounting systems, techniques as well
as role of planning tools is described in an broad sense. Along with in the end part of project
report, comparison of organisations is included to solve the financial problems.
TASK 1.
P1. Management accounting and essential requirement of management accounting systems.
Definition of MA- The management accounting is a process of assessing business cost
and operation to produce internal financial reports for managers (Bennett and James, 2017). The
aim of this accounting is to helping managers in decision-making.
Functions of management accounting system:
 Provide data- This is key function of management accounting system that provides data
including financial and non financial information.
 Modifies data- Another function of this accounting is to updating recorded information as
per the changes in business activities.
 Analyse and interprets the data- The management accounting system, analyse and
interprets the recorded data so that managers can take crucial decisions.
 Mean of communication- This is a way of communication in an organisation because
with the help of it, managers can aware about actual position of company. As well as on
the basis of it, they can communicate with employees.
 Financial and non financial information- The MAS contains financial and non financial
information that become basis for preparation of internal reports (Moser, 2012).
Types of accounting systems:.

 Financial accounting system- It is related to an accounting system that involves only
financial information and produce financial statements. The financial accounting system
consists different kind of rules and procedures that are required to be followed. Such as
preparation of financial statements at the end of an accounting period. As well as it is
essential for companies to conduct auditing of prepared financial statements so that
accuracy can be evaluated. For example in Prime furniture limited company, they
produce various financial statements(balance sheet, P&L account) as accordance to
accounting rules and procedures.
 Cost accounting system- It includes information for cost of various activities. It is mainly
categorised into two parts that are product costing and activity based costing
( Spraakman, Askarany and Akroyd, 2015). Like in selected furniture company, they
estimate and calculate cost of their manufactured products as well as compute each
activities' cost separately
 MAS- As per the above description of management accounting system, it is helpful for
decision-making, controlling activities as well as in investment management. Like in
Prime furniture limited they use it in process of further decision-making on the basis of
prepared reports.
 Tax accounting- This accounting can be defined as an accounting that contains various
kind of rules which must be followed by companies during preparation of tax returns.
There are various kind of taxations rules and standards for individuals, partnerships,
corporations. Along with, it contains Her majesty's revenue and goods service tax for
those companies who computes tax returns. Like in Prime furniture limited, they use it at
end of year when they need to calculate total payable tax to UK government.
P2. Different methods of management accounting reporting.
MA reports:
 Cost accounting report- Under this report, information related to direct material cost,
labour cost, indirect cost is included. It is prepared on the basis of total financial
transactions done for their operations and activities for a specific time. It helps to
companies for future cost estimation. For example in above prime furniture limited

company, their managers take cost regarding decisions on the basis of this report's
information.
 Inventory report- In this report, information related to available inventories in warehouses
is included (Bobryshev, Germanova and Glushko, 2015). The objective is keeping cost
of storage lower as much as possible. Like in furniture manufacturing company, they
produce this report to check availability of raw material such as Fevicol, wood,
equipments etc.
 Performance report- This report includes information about financial performance of their
activities and operations. In this comparative evaluation of actual and estimated
performance is done in an effective manner. Such as in above company, they manage
their financial performance of their manufacturing activities as per the information
provided by this report.
Purpose of financial statements:
 Trading account- Its objective is presenting gross profit and loss during an accounting
year.
 Cost of good sold- It is the difference between the sales and gross profit. The objective is
to find out total cost occurred in process of selling of goods.
 Income statement- Its objective is to providing information regarding financial
performance of a company for specific time.
 Balance sheet- Its purpose is to evaluate financial position of companies with the help of
assessing the assets and liabilities.
 Cash flow statement- Its purpose is to giving information to companies about cash
receipts, cash payments and variation in cash due to operating, financing and investing
activities (Budding, Grossi and Tagesson, 2014).
Types of management accounting system:
 Cost accounting system- It may be defined as an accounting system that is aligned with
the estimation and evaluating actual cost which occurs in various operational activities. It
is essential for limiting the cost of activities. Such as in prime furniture limited company,
they use it in getting information about total cost of purchasing of raw material,
manufacturing cost of furniture etc.

 Inventory management system-It may be defined as an important part of management
accounting just because it is aligned with the management of inventories. By this
companies assess the total cost that incurs in process of keeping the stock in stores. Like
in above company, they analyse the quantity of prepared furniture.
 Job costing system- It is related to computing cost of job for each activity. (Edwards,
2013). Mainly, it is essential for observing job cost so that it can be minimised. For
example in above company, their managers evaluate the cost of job regarding to process
of furniture manufacturing.
 Price optimisation system- This is associated with setting price of products and services
on basis of customer's feedback on various prices. One of the key feature of this
accounting system is that it is based on customer and organisational centric approach.
This is important for giving detailed information to companies about customer's feedback
of multi-pal prices so that they can fix a suitable price. Such as in above prime furniture
limited company, they set price of their prepared furniture as accordance to this
accounting system.
M1. Benefits of management accounting systems.
Cost accounting system- It helps for analysing and estimating future cost of different
activities. For example in above company, this is beneficial for them in producing furnitures as
per the below estimation which results in low cost.
Inventory management system- This helps for taking decision regarding to production
and purchasing. Such as in Prime furniture limited company, it helps to them in giving
information relates to availability of stock that becomes a basis for futuristic decision.
Job costing system- It helps for assessing cost of material, labour and overheads which
incurs in various operations. Such as the Prime furnitures limited company, get complete
information about job engaged in process of furniture manufacturing.
Price optimisation system- It is important in increasing sell of companies because this is
linked with setting price of products as per the customer's feedback (Youssef, 2013). In the
aspect of above company, they mark the price of their prepared furnitures on the basis of
customer's suitability.

D1. Integration of management accounting systems and reports with the organisational process.
The MAS and reports are integrated within organisational process. This is so because,
various types of MA includes cost accounting system, job costing system etc. Each one is linked
to the process of Prime furniture limited company. For example, cost accounting system is
aligned to the finance department so that funds can be allocated in an effective manner. Same as
the accounting reports like inventory reports, performance reports are also aligned to the process
of above company's process. Such as performance report, helps them in evaluation of
manufacturing activities.
The information provided by management accounting reports should be reliable, updated
because these are linked with preparation of internal reports which is useful for decision making
(Nørreklit, 2017).
Along with way of presenting the information should be under stable because in the absence of
this, managers will unable to make suitable decision.
P3. Preparation of income statements.
Marginal costing method- In this method, income statement prepared by considering
fixed cost as periodic cost and variable cost as product cost (Santini, 2013).

Case 1 (b)

Absorption costing- This is a technique in which fixed and variable costs are taken as product
cost.
Case 2 (a)

Case 2(b)
For month of January:
DR(£) CR(£)
Sales revenue 400000
Cost of sales
production cost 1848000
(-) Closing inventory -308000 -1540000
Gross loss -1140000
Fixed selling expenses -3000
Net loss -1143000
For month of February:
DR(£) CR(£)
Sales revenue 500000
Cost of sales
production cost 1617000
+ Opening stock 308000 -1925000
Gross loss -1425000
Fixed selling expenses -3000
Net loss -1428000
For month of March:
DR(£) CR(£)
Sales revenue 460000
Cost of sales
production cost 1463000
-Closing stock 308000 -1155000
Gross loss -695000
Fixed selling expenses -3000
Net loss -698000

P4. Advantage and disadvantage of planning tools.
Budget- This is also known by the fund planing. In general, it can be defined as a
prediction of upcoming expenses and income which may occur in a particular financial year. On
the basis of it, companies make plan to allocate their financial resources into various activities.
Such as in above prime furniture limited, they produce various kind of budgets like sales budget,
production budget, material usage budget as well as material purchase budget etc. All these
budget play an important role to them in effective management of materials to produce different
products.
Different types of budgets:
 Zero based budget- This budget is produced by ignoring past year's budgets information.
In it, budget is produced from a new edge by assessing the each activity before adding
into budget. The prime furniture limited can make it in activities that are estimated to be
crucial in future.
Advantage- This helps in providing accurate results just because it is prepared from new
activities.
Disadvantage- Its drawback is the higher cost and time consumption which is not possible for all
organisations.
 Incremental budget- This budget is different from ZBB because it is produced as per
previous year's budgets ( Schaltegger, Burritt and Petersen, 2017). As well as in this
incremental amount is added if any change occurs in new budget. Such as in Prime
furnitures limited , they can use it financial activities which remain same year by year.
Advantage- Simplicity is the main benefit of this budget because it is produced by previous
year's budgets.
Disadvantage- This budget impacts to the potential growth of organisations because due to it
companies tend to follow a particular pattern of budgets year by year without making any
change.
 Cash budget- It can be defined as a kind of budget in which cash inflow and outflow of
companies is estimated for specific time in terms of months, quarter and year. Like above
company can take benefit from this budget by estimating cash position.
Advantage- It helps to companies in providing actual financial position in terms of cash.

Disadvantage- This forces to cost as a primary factor in the process of decision making.
 Capital budget- It can be defined as budget which is prepared to make plan for long term
investment as well as for evaluating the potential of financial projects. The prime
furniture limited company can make this budget for taking long term investment
decisions.
Advantage- It helps in choosing investment effectively.
Disadvantage- Higher cost of preparation of budget is the drawback.
 Operating budget- This is a kind of budget which includes detailed information related to
forecasted operational income and expenditures for specific time. The prime furniture
limited company can produce this budget for managing the financial resources as per the
estimation.
Advantage- It helps in tracking income and expenditures.
Disadvantage- This considers only financial outcomes which is a drawback of it.
Alternative method of budgeting-
 Activity based costing- This is method that identifies activities and manage the available
fund in a ratio as per the usage of each activity (Bryer, 2013). The above company can
use this budgeting method apart from above mentioned methods.
Behavioural implications of budgets- The budgetary slack and participative budgeting are
behavioural implication of budgets. The budgetary slack can occur when managers manipulate
the budgeted information in a wrong way to to present performance in a better way. While in
participative budget, there can be delay.
M3. Planning tools for preparing and forecasting of budgets.
The planning tools are useful lin aspect of preparation and forecasting of budgets. Such
as in Prime furnitures limited company, they use sales, production, material usage and purchase
budgets. All these budgets help in the forecasting and preparation of futuristic budgets. It is so
because on the basis of these above mentioned budgets above company can track previous year's
budget and can forecast. Apart from it, there are some other planning tools like ZBB,
incremental, cash, capital budget etc.