Management Accounting Report: UCK Furniture - Cost Analysis Techniques

This report provides a detailed analysis of management accounting techniques, focusing on cost analysis and financial reporting within the context of UCK Furniture. It explores the application of marginal and absorption costing methods for income statement formulation, comparing their advantag...Read More

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1 Application of cost analysis techniques for formulation of income statement.....................1
1.2 Application of management accounting techniques regarding financial reporting ..............3
1.3 Advantages and disadvantages of Marginal and Absorption costing...................................3
TASK 2............................................................................................................................................4
2.1 Advantages and disadvantages of different planning tools used for budgetary control.......4
2.2 Estimation of expenses if change in number of hours..........................................................5
2.3 Preparation of cash budget....................................................................................................5
TASK 3............................................................................................................................................6
3.1 Application of different management accounting systems to respond financial issues .......6
3.2 Contribution of management accounting to improve financial performance.......................8
3.3 Application of planning tools to reduce financial issues to achieve success........................8
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9
.........................................................................................................................................................9

INTRODUCTION
Management accounting includes the use of different cost techniques like Marginal and
Absorption for preparation of income statement. Marginal costing method helps in ascertainment
of cost which is considered most important for decision making. Absorption costing provides the
information regarding total manufacturing cost including fixed and variable. It is considered as
important profession which includes devise planning and performance management systems
which helps in control and formulation of organisational strategies. UCK Furniture deals in the
manufacturing of Table and Drawer division (Chiwamit, Modell and Yang, 2014).
In the present report explain about, advantages and disadvantage of planning tools used
for budgetary control, application of marginal and absorption costing for formulation of income
statement. Also, adaptation of different management accounting systems to respond financial
problems.
TASK 1
1.1 Application of cost analysis techniques for formulation of income statement
Cost: It is an amount which is given up by organisation to attain something new. It is an
monetary evaluation of efforts, resources, material, risk, time and utilities etc. It can be of
different kind which is defined below:
Fixed and variable costs: Fixed cost remains constant and never fluctuates with change
in level of output. But per unit fixed cost is diminished with the increase in level of production.
It includes rent and depreciation. On other hand, variable cost changes with the variation in level
of production. This cost has direct relation with production. It includes raw material, labour etc.
Opportunity and outlay costs: Outlay costs are also called as actual cost which is
incurred by organisation for machinery, material etc. Such costs are calculated on the basis of
accounting cost concept. Opportunity cost is the cost in terms of revenue which is foregone while
selecting next best alternative foregone.
Difference between Marginal and Absorption costing
Marginal costing: This method helps in calculation of increase in total cost due to
change in the level of output by one unit. This technique only consider variable cost while
calculating total cost of production. Important characteristics of marginal costing are mentioned
below:
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 Classification of cost into fixed and variable
 valuation of stock
 Determination of price
 Profitability
Absorption costing: It is cost accounting technique helps in valuation of inventory. This
method includes both fixed and variable costs which are incurred on manufacture of product.
Direct includes material cost and indirect includes overhead costs (Albu and Albu, 2012).
Marginal costing Absorption costing
The value of closing stock which is ascertained
as per this method is lower in comparison to
absorption costing.
Value of closing stock ascertained as per this
method is higher.
It is suitable for decision making It is not much relevant for decision making
PARTICULARS January February
Sales (35 per unit) 315000 402500
less:
Cost of Production (12+8+5) 275000 237500
variable selling overheads (1 per unit) 11000 9500
variable cost 286000 247000
Contribution 29000 155500
less:
fixed manufacturing overheads 20000 20000
Fixed Admin & selling cost 2000 2000
total fixed costs 22000 22000
NET INCOME AS PER MARGINAL COST 7000 133500
NET INCOME AS PER ABSORPTION COSTING:
Sales (35per units) 315000 402500
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less:
Cost of Production (12+8+5+1.82) 295020 254790
Gross Profit 19980 147710
LESS:
Fixed and variable cost:
variable sales overheads (1 per unit) 9000 11500
Fixed selling cost 2000 2000
Total costs 11000 13500
NET INCOME AS PER ABSORPTION COSTING: 8980 134210
1.2 Application of management accounting techniques regarding financial reporting
Marginal and Absorption are two different techniques of costing used for the valuation of
inventory. Marginal costing not includes the element of fixed. It is best for decision making for
short span of time. As per this method, stocks of organisation are undervalued. On other hand,
Absorption costing includes the element of fixed cost. It provides the actual value of stock. It
helps in preparation of external parties (Callahan, Stetz and Brooks, 2011).
1.3 Advantages and disadvantages of Marginal and Absorption costing
Through application of Marginal and Absorption costing many advantages and
disadvantages are gathered by UCK Furniture which is mentioned below:
Marginal costing
Advantages
 It helps in planning about the profits which is associated with completion of project
 This method also helps in management reporting
 It provides the opportunity regarding controlling of costs
 It also helps in production planning
Disadvantages
 Difficult to separate costs into fixed and variable
 Through application of this method stocks are undervalued because fixed cost is not
included
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 It is true in short span of time
Absorption costing
Advantages
 Not includes the process of separating the costs into fixed and variable.
 It is useful in determination of price of products
 It is helpful in preparation of external reports for stock valuation
Disadvantages
 Profits of organisation is affected by production volumes
 Difficult to calculate variations in cost which is occurred at various production level
 Difficult to take good decisions regarding operational efficiency
TASK 2
2.1 Advantages and disadvantages of different planning tools used for budgetary control
Budget: Budget includes the forecasting of financial results and position of organisation
for future period of time. It can be used for two main purpose by the management of UCK
Furniture which are planning and performance measurement.
Budgetary control: It is management control system which helps in comparison of
actual income and expenses with planned income and expenses. UCK Furniture brings an
obligation upon their employees to adhere such standards in order to make large number of
profits (DRURY, 2013).
Steps of budgetary control
Establishment of plan: It is the prime function of manager of organisation to formulate
the plan. It provides the opportunity regarding improvement of the understanding between
different departments and bring coordination in their functions.
Record actual performance: It is the duty of manger to record actual performance
which is given by following such plans.
Comparison with budgeted: It includes comparison of actual with standards for
identification of deviation and reason behind them.
Calculation of variations: Under this step, reason and consequences of deviations are
identified.
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Remedy of situation: Providing of appropriate solutions which helps in achievement of
targets.
Planning tools: It is a tool which provides the direction to different organisational
actions which helps in effective implementation of program. Advantages and Disadvantages of
different tools are mentioned below:
Forecasting tools: This tools helps in determination of the internal and external factors
which impact the business activities. It is useful for growth prospect of company.
 Advantages: It provides visualisation of the future models and actions. It is effective risk
management tool.
 Disadvantage: Forecast are based on assumptions as per their personal knowledge. So,
large number of chances of failure.
Scenario analysis tool: This tool brings identification of the fears in open and
application of rational and professional framework which helps in exploring their capabilities
regarding completion of tasks. Process of using this tool includes certain steps like define issues,
collection of data, separation of certainties from uncertainties, development of sceneries and
planning about actions (Fourie and et. al., 2015).
 Advantages: Helps in preparation of strategies and identification of uncertainties. It
provides the opportunity regarding development of contingency plan.
 Disadvantage: Wrong identification of situations provides negative results.
2.2 Estimation of expenses if change in number of hours
Calculation of variable cost per unit using identified high and low activity level:
Total cost= (Expenses of high activity- expenses of low activity)/(Highest activity hours spent -
lowest hours spent)
Total expense per units = (9820-7410)/(795-505)=8.31
Total expenses for July:
650*8.31=5401.5
For August:
750*8.31= 6232.5
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2.3 Preparation of cash budget
Cash budget Amount
Particulars September
Opening balance 9000
Cash sales 39000
Sale on account 5648
Total Cash collected 53648
Purchase -16800
Selling and administration
expenses -13000
Equipment cost -18000
Dividend paid -4000
1848
Add: minimum cash balance 5000
Expected cash in the end of
September month 6848
TASK 3
3.1 Application of different management accounting systems to respond financial issues
Financial problems means the issues regarding profitability faced by organisation. Large
number of adverse impact are ascertained by the management of UCK Furniture. It causes stress
in workplace which effects the working efficiency of employees. This will also have impact on
the mental health of employees and manager of organisation.
UCK Woodwork's is another organisation which manufactures the components of desks
and supply to UCK Furniture and many other locations. Due to having their functions worldwide
large number of issues are faced regarding fulfilment of regulations and legislations which
creates financial issues (Melnyk and et. al., 2014.).
Financial problems in UCK Furniture
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 Profit level: Functions of UCK Furniture depends upon UCK Woodwork's which
reduces the profitability of organisation. Their activities are interdependent which affects
their ability to earn large number of profits.
 Product and service quality: Due to having the low quality of the components supplied
by UCK Woodwork's the quality of final products is not satisfactory. It also affects the
ability of UCK Furniture to provide timely delivery of products to their customers.
Tools to overcome from financial problems
There are large number of tools which are used by the manager of UCK Furniture to
overcome from financial issues which are defined below:
 Key performance indicators: Such indicators provides the information regarding actual
performance of different departments of organisation. Financial indicators like income
statement and profit and loss account helps in identification of financial issues and
improve short term decision making.
 Financial governance: It is effective tool which helps in solving the issues regarding
fulfilment of different regulations and legislations while providing their services in many
countries. It helps in development of their image and prevention from financial penalties.
 Benchmarking: It is effective method which helps in setting out the goals and objectives
which are required to achieve by employees. It helps in improvement of the performance
and accomplishment of targets within stipulated period of time (Messner, 2016).
UCK Furniture UCK Woodwork's
It manufactures two different type of products
which are table and drawer.
It manufactures components of table and
drawer which are supplied to UCK Furniture.
Return which ascertained by organisation
through their total investments made by
organisation is 17.24%.
It only generates 8.56% of return from their
different functions and investments
The Asset turnover ratio of organisation is .68
time.
It is observed that, .10 times assets are moving
out of sales
The profit margin of organisation is 25.03% The profit margin of organisation is low due to
their large number of expenditures.
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Ratios Formula UCK furnitures UCK woodwork's
ROCE(Return on
capital employed):
Operating profit/Capital
employed*100
5890+3600/23100+
31930*100
=9490/55030*100
=17.24%
6955/81230*100
=8.56%
Assets turnover Revenue / Net assets 13000+24900/2310
6+31930
=0.68 times
8150/81230
=0.100 times
Operating profit
margin
Operating profit / sales *100 9490/13000+24900
*100
=25.03%
6955/81230*100
=8.56%
3.2 Contribution of management accounting to improve financial performance
Huge role is played by management accounting systems to attain sustainability in their
operations. Contribution of the different management accounting systems in improvement of
financial performance is mentioned below:
 Application of costing tool like standard costing helps in assessment of risk which are
associated with project. It helps in estimation of budgeted cost which is compared with
actual. It helps in reduction of unnecessary costs.
 Management accounting includes use of price optimisation system which help in
satisfaction of the demand of customer and improves their sales figure. It improves the
profitability (Mistry, Sharma and Low, 2014).
3.3 Application of planning tools to reduce financial issues to achieve success
Planning tools like forecasting and scenario are used for identification of issues and
preparation of the strategies which provides direction for accomplishment of targets. Such
planning tools also helps in preparation of annual budgets and standards which improves actual
performance of employees. KPI, benchmarking and financial governance are important tools
helps to respond financial problems.
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CONCLUSION
It has been concluded from the above report that, due to the use of planning tools large
number of benefits are achieved by UCK Furniture. Scenario tools helps in identification of
uncertainties and preparation of provisions regarding contingencies. Forecasting tool helps in
planning of future actions. Adoption of management accounting system provides financial and
non financial KPI like Financial governance, benchmarking to overcome from financial issues
and improve their profitability. Preparation of cash budget helps in determination of availability
of cash and operation of functions effectively.
REFERENCES
Books and Journals
Chiwamit, P., Modell, S. and Yang, C. L., 2014. The societal relevance of management
accounting innovations: economic value added and institutional work in the fields of
Chinese and Thai state-owned enterprises. Accounting and Business Research. 44(2).
pp.144-180.
Albu, N. and Albu, C. N., 2012. Factors associated with the adoption and use of management
accounting techniques in developing countries: The case of Romania. Journal of
International Financial Management & Accounting. 23(3). pp.245-276.
Callahan, K. R., Stetz, G. S. and Brooks, L. M., 2011. Project Management Accounting, with
Website: Budgeting, Tracking, and Reporting Costs and Profitability (Vol. 565). John
Wiley & Sons.
DRURY, C. M., 2013. Management and cost accounting. Springer.
Fourie, M. L. and et. al., 2015. Municipal finance and accounting. Van Schaik Publishers.
Melnyk, S. A. and et. al., 2014. Is performance measurement and management fit for the future?.
Management Accounting Research. 25(2). pp.173-186.
Messner, M., 2016. Does industry matter? How industry context shapes management accounting
practice. Management Accounting Research. 31. pp.103-111.
Mistry, V., Sharma, U. and Low, M., 2014. Management accountants' perception of their role in
accounting for sustainable development: An exploratory study. Pacific Accounting
Review. 26(1/2). pp.112-133.
Renz, D. O. and Herman, R. D. Eds., 2016. The Jossey-Bass handbook of nonprofit leadership
and management. John Wiley & Sons.
Robalo, R., 2014. Explanations for the gap between management accounting rules and routines:
An institutional approach. Revista de Contabilidad. 17(1). pp.88-97.
Schaltegger, S. and Burritt, R., 2017. Contemporary environmental accounting: issues, concepts
and practice. Routledge.
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