Management Accounting for Business Decisions - Prime Furniture

This report analyzes management accounting practices at Prime Furniture, focusing on essential requirements of management accounting systems, reporting methods, cost analysis techniques, and budgetary control. It covers various aspects such as inventory management, cost accounting, and price optimization systems. The report also examines different methods used for management accounting reporting, including budget reports, cost accounting reports, and inventory management reports. Furthermore, it calculates costs using techniques like absorption and marginal costing to prepare an income statement. The advantages and disadvantages of planning tools for budgetary control, such as capital and operating budgets, are discussed. Finally, the report compares how organizations adapt management accounting systems to respond to financial problems. Desklib offers more solved assignments and resources for students.

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
LO1..................................................................................................................................................1
Explain management accounting and give the essential requirements of different types of
management accounting systems.................................................................................................1
Explain different methods used for management accounting reporting......................................3
LO2..................................................................................................................................................4
Calculate costs using appropriate techniques of cost analysis to prepare an income statement
using marginal and absorption costs............................................................................................4
LO3..................................................................................................................................................9
Explain the advantages and disadvantages of different types of planning tools used for
budgetary control.........................................................................................................................9
LO4 ...............................................................................................................................................13
Compare how organisations are adapting management accounting systems to respond to
financial problems......................................................................................................................13
CONCLUSION..............................................................................................................................15
REFERENCE ................................................................................................................................16

INTRODUCTION
Management accounting is the continuous process of decision making in relation to
organization by analysing, identifying, measuring and interpreting the financial information. For
organization it is important to analyse the financial situation and use effective system of
accounting which can help to resolve the problems which are facing by organization and
supports to develop the business (Azudin and Mansor, 2018). This report is based on Prime
Furniture that is a growing East London based company that manufacture different design and
structure of furniture for customers. The management of organization plays an important role as
they analysis the activities and formulate strategic planning which helps to operate the business
effectively. The report covers management accounting and its essential requirement, methods
uses for management accounting, reports of accounting, and planning tools that supports to run a
business.
LO1
Explain management accounting and give the essential requirements of different types of
management accounting systems.
Management accounting and its definition: A process of preparing reports by analysing
the financial position of company is defined as management accounting. This can help to operate
the business by informing management to make right operational decision by developing the
activities.
According to Quattrone (2016), management accounting is a branch of accounting which
is concerned with identification, measurement, and interpretation of accounting information so
that management can make necessary decisions.
Origin, role and principles: Management accounting is origin by accounting institution
for the purpose of managing all accounting information. It origin during 1900's by focusing on
accounting standards. The role of management accounting is very important for any organization
as collection of financial information, recording, and reporting to managements so that right
decision can be made. The principle of management accounting are Influence, Relevance, Value,
and Trust that can help to operate a business effectively (Bromwich and Scapens, 2016).
Difference between management and financial accounting
Basis Management accounting Financial accounting
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Information mainly
produced
This is for internal uses as
management and employees
uses information.
This is uses for external as it consider
creditors, shareholders, banks and
lenders.
Purpose of information The main purpose of
management accounting is
planning, organising, and
making decision.
This uses to record the financial
performance and maintaining good
position at the end of period (Cooper,
Ezzamel and Qu, 2017).
Time period Historical and forward
looking
Main focus on historical records
Types of system
Inventory management system: In organisation inventory means stock which are needed
to maintain as it helps to increase the sales and profitability. For Prime Furniture it is essential to
maintain a proper record of stock and raw material which are available in market and take the
right decision (Kumarasiri and Jubb, 2016).
Cost accounting system: Cost means spending money which is done by organisation in
manufacturing products, transporting, and other activities in relation to business should be
consider while running a business. Prime Furniture is using cost accounting system for tracking
and analysing cost of their products that is essential to operate the business and develop
performance. This is important for organisation to manage the business by identifying cost of
organisation that uses in further activities.
Price optimisation system: The relation of pricing system with prices of products and
services which are offering by organization in order to operate and manage the business
activities. The management of Prime Furniture uses price optimisation system in order to set
prices of products and other activities in aspects of getting return in profits. As customers are
price sensitive, so it is essential for management to set the appropriate prices of their products
which can influence customers and increase the brand loyalty.
Benefits of management accounting systems
Systems Application and benefits
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Inventory management Prime Furniture uses this system for check the inventory that
give benefits of placing reorder of raw material. This also
helps to continue all activities and functions effectively.
Cost accounting This helps chosen organization to disclose of profits and
control over material and supplies by identifying cost and
managing all activities.
Price optimization This helps Prime Furniture to attain the higher profitability by
deciding right price of products and making quick decision
(Christ and Burritt, 2017).
Relevancy of information
The information in relation to accounting should be reliable as it can help Prime
Furniture to know how it can arrange the income and expenses for running business. Information
should be accurate and up to date as it is important strategy where enterprises can decide how
much businesses can obtain the profitability levels after making changes is existing prices and
setting new relevant prices of products.
On the other side, information should be understandable as it can help to make right
decision by analysing performance and activities (Honggowati and et.al., 2017).
Explain different methods used for management accounting reporting.
Management accounting reports are specific document of organization which is prepared
by management by analysing their performance and expenses which may incur in performing the
activities. Prime Furniture is preparing accounting reports for the purpose of planning,
regulating, decision making, and measuring performance that can help to operate a business
effectively. Types of reports are as defined:
Budget reports – In business corporation, budget reports are defined as crucial reports
that uses to measuring company's performance and generated as whole for small and large
business. In Prime Furniture, management seek towards income and expenses of industry while
manufacturing then prepare a budget by involving all activities. This also help to maintain
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effective business performance in changing business environment and guide management to give
better employee incentives and cut costs.
Cost accounting report – This is a report which is prepared by management for
recording, analysing and reporting the company's cost in relation to variable and fixed. In context
to Prime furniture, management prepared cost accounting reports by considering all income and
expenses which they made for buying any equipment and products. They evaluate the
performance and determine profitability (Fiondella and et.al., 2016).
Inventory management report – This report is uses to manage the keep records of
inventory in their organisation orders can be managed and make happy to customers. The
management of organisation should be analysis the information in relation to stock. In Prime
Furniture, management is responsible to prepare inventory management report for providing
order and placing new one which can help to continue the business activities.
LO2
Calculate costs using appropriate techniques of cost analysis to prepare an income statement
using marginal and absorption costs.
Microeconomic technique
Cost: This can be explained as amount of money that spends by a organization for the
creation of goods and services.
Cost Cost analysis
 Cost is the value of product and
services which are providing by
organization.
 This helps to know the about products.
 This is the process of analysing cost of
product and services.
 This states quality, designing, and
price.
Cost-volume profit: This can be defined as method of cost accounting which uses to
know cost for the purpose of managing and operating profits.
Flexible budgeting: This technique is related to budget that can be adjust and flexes with
changes in volume and activity (Hopper and Bui, 2016).
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Cost variances: This can be explained as important technique which uses to difference
between earned value and actual cost of project. This can help to measure the activities which
can help to earn the profitability by deducting cost.
Applying absorption and marginal costing.
Absorption costing: This can be defined as costing system which uses to valuing the
inventory, and generating profits. Prime furniture apply this technique to analyse the
profitability. This does not involves cost of material, and labour.
Marginal costing: This technique states that variable cost is charged to units of cost,
while the fixed cost for the period is completely written off against the contribution. Prime
furniture is maintaining profitability by classifying cost in to fixed and variable, valuing stock,
and determining the price (Järvenpää and Länsiluoto, 2016).
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6

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Product Costing:
This can be defined as method of analysing the cost of product and service which can
help to operate the business. The allocation of cost is classified in to fixed and variable that helps
to manage the all income and expenses for getting profits. Fixed cost are those who remains
fixed in all situation. Whereas, variable cost is defined as changing cost that varies shifting in
units.
Activity based costing
This is costing method which uses by organization to identify activities in organization
and assign the cost of each activity that can help to operate the business and develop the
performance. This involves:
Standard costing: This is the practice of substituting an expected cost for actual cost in
the accounting records. It helps to define the difference between expected and actual cost by
dividing expenses.
Normal costing: This uses to set the price of products by analysing the cost and
managing the activities (Otley, 2016).
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LO3
Explain the advantages and disadvantages of different types of planning tools used for budgetary
control.
Budget: This can be explained as financial plan which is formulated by management
who are working in organization by collecting all financial information. In context to Prime
Furniture, management analysis the budget by managing and arranging the financial information
which can help to operate a business effectively. The type of budget are:
Capital budget – This consist of capital receipts and payments which are done in
organisation for the purpose of making long term profits. On the other side, capital payment
consider capital expenditure that means purchase of assets and equipment for long term. For
example, Prime Furniture is using the capital budget for completing the major project that
consumes more time which can help to provide the right information and increases long term
profitability (Järvinen, 2016).
 Advantages – The technique of capital budget are various that can be uses to
make long term profits. Prime Furniture choose investment wisely, control over
long term expenses and maintain the good performance.
 Disadvantages – As this involves long term assets and equipments that are
irreversible in nature. It become difficult for Prime Furniture to find the skilled
and talented professionals.
Operating budget – For business concerns it is important to continue focus on their daily
income and expenditure which occurred over a set period. This is uses by management of Prime
Furniture to analyse the business activities on the basis of daily and manages the performance by
controlling activities.
 Advantages – This is defined as financial plan which mainly designed to meet
company's debt obligation and sustain growth in Prime and Furniture
organization. This can help small businesses for allocating the money and
completing them task in certain period.
 Disadvantages – This type of budget provide short period information in relation
to financial statements that cannot provide long term profits. There is need to be
more aware in accounting so daily activities can be record which is difficult for
chosen organization.
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Alternative method of budgeting: The meaning of this, organization can use another
method for the purpose of evaluating performance and generating higher profitability. The
methods which are involved traditional, activity based, priority based and zero base budgeting
which can help to calculate production level and profitability.
Behavioural implications of budgets: Budgets are important for each organization as it
brings positive behaviour between people in case of goals of individual and organization are
cleared. The management is responsible for preparing budget as it keep records of all
information and manage the activities by attaining goals and objectives.
Pricing
Pricing strategy is the planning which uses by management for deciding the right prices
of products and services that are offered by organization. This can help to arrange the all
activities and functions by analysing cost and developing the business performance. Types of
pricing strategies are competition based, dynamic, premium, high, low and penetration which
increases sales in market.
Competitors are setting prices of their product and services by formulating effective
planning after analysing performance of their competitors that can help to get profits. Prime
Furniture is applying premium pricing strategy as it provides better quality of products and
services in changing environment and maintain the higher performance (Mokhtar, Jusoh and
Zulkifli, 2016).
Supply and demand is economic term which is related to products as if demand of
product is high then there is need to supply the products in high range that can help to increase
sales and profitability effectively. On the other side, small shift in demand can be affected the
supply of products. Therefore, it is important for manufacturer to analyse the demand of their
products in competitive market and supply the products which can help to increase sales.
Common costing system
The cost system as actual, normal and standard are needed for business organization as it
can help to manage the all activities and functions affectively by analysing cost of products. The
system are differ as depends on costing activity:
Job costing: This is a method of recording the costs of a manufacturing job rather than
process. This can help to track the cost of each job which is required to be performed by
maintaining data (Lachmann, Trapp and Trapp, 2017).
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Process costing: This can be explained as accounting methodology that uses by
organization by accumulating direct cost, and allocates indirect cost of manufacturing process.
This can be use by Prime furniture by assigning products in to large batch that can help maintain
effective production.
Batch costing: This is the form of specific order costing which is quite similar to job
costing. In this, each batch is defined as number of identical units but their batch will be different
which can help to operate the business effectively.
Contract costing: This can be explained as tracking of cost which is associated with
specific contract with a customer. This can help to complete the project which mainly based on
construction (Maas, Schaltegger and Crutzen, 2016).
Strategic planning
Application of PEST:
Political: After Brexit the government of UK, is stable which has formulated the stable
trade policies. Prime Furniture is taking the opportunities of this factors as it can operate their
business and activities accurately.
Economical:In whole world, Pandemic (Covid-19) affected the productivity and selling
activities of customers as people gets unemployment. Due to this, their buying behaviour has
been reduced which influenced sale of Prime Furniture negatively.
Social: The Prime Furniture is taking opportunity for this factor as it design the furniture
as per customer demand in London that helps to operate the business effectively (Armitage,
Webb and Glynn, 2016).
Technological: By using new technology and innovation in their products chosen
organization is attaining the higher productivity and profitability in changing environment.
SWOT analysis
Strength Weakness
 Prime Furniture is a furniture
manufacturing company in London that
provides different design of furniture.
 It is managing all activities and
function by maintaining proper records
 Having many competitors who also
design the furniture.
 Changes in trade policies
 Lack of training in employees
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of financial transaction.
Opportunities Threats
 Understanding needs and wants of
customers in relation to design of
furniture.
 Employees are cooperative.
 Using proper system of accounting and
management.
 Changing in climate
 Not following regulation which are
made by government.
 Trade war and natural occurrence
Porter's five force
Power of suppliers: The bargaining power of suppliers in context to Prime Furniture is
low as many suppliers are available in UK. If suppliers has increased their price then
management has option to select another suppliers which provide the opportunity to run their
business continuously.
Power of buyers: This can create the challenge for Prime Furniture as having high power
of buyers in bargaining which might be affected the profitability.
Threat of substitution:The threat of substitution in context to Prime Furniture is
moderate as less number of product substitution are available in market which can create the
challenge in operation.
Competitive rivalry: In UK, many furniture manufacturer are available who provides
good design of furniture on customer demand. By reducing the price of their furniture Prime
furniture can attracts the large number of customers which can help to operate the business
effectively.
Threat of new entrance: In relation to furniture industry, threat of new entrance is high
as any person can enter in to new market by establishing their business. So chosen organization
can face threat of new entrants in their business.
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LO4
Compare how organisations are adapting management accounting systems to respond to
financial problems.
Financial problems can be defined as situation in which organization is not able to meet
with their expenses that occurs while performing the activities. Financial problems are related
money which create the problem for organization to entire their business. Prime Furniture is
facing the different type of financial problem such as:
Late payment by customers: When creditors are not making payment on time then it
will be challenging situation for organization to run their business. Prime furniture can face this
problem as its customers are not paying amount on time which create the problem in buying
more material and payment to suppliers.
Improper management: This means all financial and non financial activities of
organization are not managed that create the financial problem. This problem can face by Prime
Furniture as there is no proper records of inventory, arrangement and financial information.
Identification of financial problem
Key performance indicator: This is important for all organization to use this technique
for identifying the problem which are facing by organization. The management of Prime
Furniture uses this, for analysing financial and non financial activities that are involved in budget
(Bui and De Villiers, 2017).
Benchmarking: This tool also uses by chosen organization for identifying the financial
problems. In this, Prime furniture compare with other organization and formulate planning
accordingly which can help to make the right decision. BY using this management, identify the
variance that has occurred while preparing the budget
Financial governance – This means a governing body that formulates rules and
regulation for operating the business and provide suggestion how to reduce the financial
problems. This can be used by chosen organization to pre-empt and preventing the financial
problems. Such as it tighten their credit policy so organisation can receive payment on time from
customers, proper financial planning and other policies which support businesses and increases
the profitability.
Management accounting skill set:
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Management accountant is a person who have good knowledge and skills of managing
accounting information of organization by analysing, preparing budget and interpreting them
properly which can help to increase the organizational performance and profitability (Nitzl,
2016).
The skills of management accountant are oral and written communication skills,
knowledge about accounting principle and standard, accounting techniques, managing funds,
identifying financial problems, and arranging the activities which can help Prime Furniture to
operate and regulate their business effectively in changing environment. The management of
chosen organization uses system and prepare reports for managing activities by dealing with
financial problems.
Comparison between organization who are responding problems
Basis Prime Furniture Morrison
Financial problems This is furniture manufacturing
company which is facing the late
payment by customers financial
problems that has affected the
profitability.
This is large size organization
which is facing financial problem of
improper management in relation to
raw material, funds and other
activities.
Identification of
problem
Benchmarking tool is uses by
management to identify the
problem (Novas, Alves and
Sousa, 2017).
KPI tool is used by management to
analyse the problem that stated
management has considers financial
and non financial activity in one
budget.
System to be used Cost accounting system should be
use by chosen organisation which
can help to collect the all
information and financial
transaction which have incurred
and not involved in budget that
can help to manage the funds and
solve problems.
Inventory management system
should be use by organization
which helps to know how raw
material and funds should be
management according to particular
demand and activity that can help to
maintain higher performance and
profitability effectively.
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CONCLUSION
From the above report, it can be said that management accounting helps the managers in
taking of right decisions in the future time period. There are various systems of management
accounting. Its reports are very helpful for the management. It is quite helpful for them as it
makes sure that they take the right decisions in the context of the situation. The planning tools
for budgetary control ensure that the firm is able to achieve the goals and objectives. Also, the
organizations can make use of management accounting systems to respond to their financial
issues and problems.
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REFERENCE
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Nitzl, C., 2016. The use of partial least squares structural equation modelling (PLS-SEM) in
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