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
1

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
2

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
3

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).
4

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).
5

6

7

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).
8

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.
9