Unit 5: Management Accounting

Student: Vanya Ovcharova

Student N: CCL-20-249

Group: May20B

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Learner Assessment Submission and Declaration
When submitting evidence for assessment, you must sign a declaration confirming
that the work is your own.

Learner Assessor
Vanya Koeva Ovcharova
name: name:
Submission Submitted
Issue date: 14/9/2020 date: 13/12/2020 on: 12/12/2020

Programme: BTEC Higher National Certificate in Business

Unit 5 – Management Accounting
Unit:

Learner signature: Vanya Ovcharova Date: 12/12/2020

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 Table of contents

Executive Summary……………………………………………………………………………4

Introduction…………………………………………………………………………………….4

LO2……………………………………………………………………………………………...

P3 Calculation of Costs under Absorption and Marginal Costing………………………….….4

LO3……………………………………………………………………………………………

P4. Use of Planning Tools for Budgetary Control……………………………………….…….8

LO4…………………………………………………………………………..............................

P5. Comparison of Management Accounting systems to respond to Financial

Problems……………………………………………………………………………………….9

Conclusion………………………………………………………………………….……….. 10

References…………………………………………………………………………….………11

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Executive Summary

The first part of the task concerns a paper submitted by an accountant to a production
business Senior Manager outlining several management accounting frameworks and
techniques. The most important management accounting systems were addressed in depth
with a crucial assessment in the context of expense, employment costing, inventory
management and price optimization systems. Control accounts have since been briefed in
order to enhance the decision-making process. There have also been debates on incorporation
of accounting structures in management and reporting of the operational process. In the
association, variable and absorption costing strategies were applied by means of an acceptable
model, which defined income declarations according to two approaches. Reasons were also
briefed to reconcile profits according to the two approaches.
Section two of the task also contains a study from the Prime Furniture operations accountant.
That is engaged in a development organization and focuses primarily on the value of
forecasting techniques such as gradual, zero-based and rolling budgets for the settlement of
financial problems. The level of usefulness of tools was also applied to three planning
instruments. The functions of management accounting strategies such as primary performance
metrics, benchmarks, financial governance, etc. have also been detailed in addressing
financial problems.

Introduction

Management accounting is also known as managerial accounting and can be characterized as

a mechanism for financial reports and resources for decision makers. Management accounting
is used by the company's internal team only and is the only distinction between it and
financial accounting. Financial information and records, such as the invoice, are then
exchanged with the executive committee of the company by financial management. The
document is prepared by the newly assigned management accountant of Prime Furniture. In
this report the focus will be on how important planning tools are as well as the role of
management accountant in solving financial problems.
To
Senior Manager,
MNR Ltd.

LO2
P3. Calculating of Costs under Absorption and Managerial Costing

Cost ascertainment and control – the method of estimating costs on the basis of particular
facts. Historical costs are thus estimated, and cost estimates and cost predictions are expected
cost calculations. This means that Prime Furniture can help to further and deeper analysis the
business costing using marginal and absorption approaches.

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Normal costing asserts actual costs for the goods and labour components of a company (Atrill
& McLaney, 2015). For instance, for the production of direct resources, labour and production
overheads for leasing, electricity etc.
Standard costing involves combining actual costs with the pre-arranged standard costs,
allowing management of Prime Furniture to examine factors and take corrective measures.
The actual cost for a good in Prime Furniture could be £5000, so the usual cost with an
undesirable gap of £1000 would be £2500.
Activity based costing (ABB) assigns overhead output costs for the commodity based on
drivers of activity. For example, component configuration costs for the output of a given
product in Prime Furniture can be delegated on the basis of different settings per batch as per
ABB.
Cost Accounting is for cost acquisition for inventory appraisal to satisfy external reporting
standards and internal benefit calculation criteria (Dury, 2015). The term applies to the cash
value of resources, inventory, raw materials, labour, goods, facilities and so on in accounting.
Cost is a sum reported as an expense in bookkeeping papers. The assignment of costs is the
method by which cost items may be allocated and calculated.
An economic report comparing the cost of different operations is a cost-effectiveness
analysis.
Cost-benefit analysis (CBA) is definite as the cost-effectiveness analysis as an investment
evaluation tool tailored for the intent of non-profit organizations that describes the risks and
advantages of a project far more broadly than those used in investment evaluations to
optimize profit.
The cost allocation framework for Activity-based Costs (ABC) seeks to leverage cost
distributions with causes and results by allocating costs for operations.
Absorption costing: This costing process stresses the incorporation of all available expenses,
whether they be discretionary (direct costs), or fixed costs (indirect costs), and of all other
overhead costs.
Marginal costing: -This costing approach stresses that all variable costs have been included
but the costs have not been included. For estimation only direct costs are used. They use the
marginal costing for the pricing of inventories and for calculating benefit since it involves all
the variable costs for their measurement without considering fixed costs because they are not
explicitly incurred during their output. It helps to concentrate on direct expenses, which on the
other side fluctuate with fixed costs that are identical across the entire process. The marginal
costs and absorption costs for benefit calculation like: - are essentially separated – As the
inventory volume is raised, large gains are extracted at absorption prices. The company of the
marginal costing approach earns greater benefit as its inventory volume reduces. If the
inventory is steady or has not shifted to a comparable benefit.
To value stock PRIME FURNITURE Ltd. Can use different methods:
First-in, First-out (FIFO) – The stock entered the firm first is sold first.
Last-in, First-out (LIFO) – The stock entered the firm last is sold first.
Weighted-average - The stock is calculated by weighted unit cost average, and the average
cost for equivalent goods is determined.

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 Weighted-average unit cost = cost of goods sold / total number of units sold

Calculation of Cost of Production per unit- Absorption Costing

  Cost per unit (£)

Variable cost per unit 0.65
Fixed cost per unit 0.2
Total budgeted cost per unit 0.85

Table.1.

Calculation of Cost of Production per unit- Marginal Costing

  Cost per unit (£)

Variable cost per unit 0.65
Total budgeted cost per unit 0.65

Table.2

Absorption Costing- Income Statement

      Quarter1         Quarter 2  
    units £ £     units £ £
Sales       £66,000.00         £74,000.00
production cost                  
Variable £0.65 £78,000.00 £50,700.00     £0.65 £66,000.00 £42,900.00  
Fixed £0.20 £78,000.00 £15,600.00     £0.20 £66,000.00 £13,200.00  
      £66,300.00         £56,100.00  
Add: Oppening
Stock   £0.00 £0.00       £12,000.00 £10,200.00  
Total Stock
available for
sale     £66,300.00       £78,000.00 £66,300.00  
Less Closing
Stock   £12,000.00 £10,200.00       £4,000.00 £3,400.00  
        £56,100.00         £62,900.00

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Gross Profit       £9,900.00         £11,100.00
Less:
Underabsorbtio
n of Fixed OH     £0.20 £400.00       £0.20 £2,800.00
Selling &
Admin Cost       £5,200.00         £5,200.00
NET PROFIT       £4,300.00         £3,100.00

Table.3.

Quarter
      1         Quarter 2  
    Units £ £     Units £ £
66,000.0
Sales       0         74,000.00
Production Cost                  
78,000.0
Variable Cost 0.65 0 50,700.00     0.65 66,000.00 42,900.00  
      50,700.00         42,900.00  
Add: Opening
Stock 0.65 0.00 0.00     0.65 12,000.00 7,800.00  
Total Stock
Available for 78,000.0
Sale   0 50,700.00       54,000.00 50,700.00  
Less Closing 12,000.0
Stock 0.65 0 7,800.00     0.65 4,000.00 2,600.00  
42,900.0
        0         48,100.00
23,100.0
Gross profit       0         25,900.00
16,000.0
Fixed OH       0         16,000.00
Fixed: Selling &
Admin Cost       5,200.00         5,200.00
NET PROFIT       1,900.00         4,700.00

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 Marginal Costing- Income Statement

Table.4.

Reconciliation of Profits

RECONCILIATION     Quarter 1         Quarter 2  

Profit as per absorption
Costing       4,300.00         3,100.00
Adjustment for stock fixed
cost                  
Opening Stock 0.00         12,000.00      
Closing Stock 12,000.00         4,000.00      
Differences -12,000.00         8,000.00      
Rate of Fixed cost 0.20     -2,400.00   0.20     1,600.00
        1,900.00         4,700.00

Table.5.

Due to set overhead treatment the marginal gain and absorption costs will differ (Drury,
2015). In the quarter that existed under marginal costs, the full number of fixed overheads was
excluded. The estimation is limited to contingent costs per unit, 0.65 per unit. As part of stock
valuations according to absorption costs, calculated overheads were charged between
quarters. At opening and closing inventories, the entire output costs per unit of 0.85 were
assessed. In comparison, if the inventory rates change at the beginning and the end of the
period, revenue and absorption will differ according to marginal costs. It is seen that opening
and closing stocks are distinct in all quarters for the current scenario. Higher invents would
raise the cost of absorption when fixed overheads go to the next quarter (Seal, et al., 2014). A
fall in stock prices will result in higher profit labour costs as fixed overheads would be
lowered during market opening, with increased revenue and lower profits. In the present case,
the profit was high at absorption costs of rising inventory volumes.

LO3
P4. Use of Planning Tools for Budgetary Control

To
The Senior Manager,

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Prime Furnitures

Planing tools help to predict potential events in an enterprise and to manage the costs. In
order to maintain fiscal control, the price system, costing system and SWOT analysis should
be used in Prime Furniture.
Pricing systems involves the techniques and approaches of pricing and distribution of goods
and services.
The price strategies that Prime Furnitures could use in budget tests include penetration,
skimming, absorption and marginal pricing.
The price of penetration draws consumers by lowering the price of a new product that helps
to face competition and win market share.
Due to its special characteristics and advantages, skimming prices could in Prime furnitures
be used to set a high price for a commodity in the initial process. Suppose, for example, that
Prime Furnitures creates a new electronic widget with special characteristics and rivals, so
that it can draw buyers by implementing price skimming, collecting costs and improving
profit.
In setting the price of the commodity at maximum price, the price of absorption considers
both fixed and variable costs. In Prime Furnitures, only contingent costs, for example, direct
products, direct labor etc. could be charged at a marginal amount.
The costing system is designed to schedule and track a company's expense and includes the
optional and standard costing system.
Normal costing calculations of the expense and distribution of overhead costs in Prime
Furnitures focused on direct products, manpower and overheads of production.

The SWOT analysis is a strategy planning methodology used to analyse a company

organisation's capabilities, vulnerabilities, rewards and risks (Vanderbeck & Mitchell, 2015).
Factors that allow Prime Furnitures to complete his goal are strengths. PF is primarily
enhancing its continued development of the goods according to consumer requirements. The
PF products are highly advanced in their design and provide premium materials. It has a good
brand name because of its future-oriented nature and its loyal customers. PF has also
developed a highly trained workforce through active curriculum and training programs. Fresh
flows of income.

LO4
P5. Comparison of Management Accounting systems to respond to Financial
Problems

Key-performance indicators

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KPI reflects a collection of such uniform metrics, where an organization must correlate its
internal output with the individual relevant criteria. For instance, an organization should
equate the liquidity of business with that used to evaluate problem areas by using the most
agreed short amount of liquidity at 2:1.
The implementation of KPI tests structural efficiency against relevant requirements (Belfo &
Trigo, 2013). It allows the issue of areas that require changes to be found. Once these areas
are established, management has built and applied a related economic policy to urge the
removal of cash problems and ensure real property development.
Prime Furniture may use KPI's receivable sales to address debtors' financial difficulties by
tougher loan practices, factor classification, etc. Similarly, Prime Furniture's net profits in
relation with gross profit are smaller, so the performance can be increased by reducing both
operational and non-expense expenses. The Corporation will thus incorporate sustainability
problems into the decision-making process by the study of financial KPIs guiding the
enterprise towards sustainable progress.

Benchmarking
As an example of an associate degree, 18 net profit is assumable in UK retail markets, so a
business with a profit of eighteen or so is considered to be smart whereas an organization
which produces no income as per trading company this word represents a tag that is used to
equate industrial uniform value and after-effect. By applying benchmarking an organization
will boost internal efficiency to trade criteria in order to ensure sensible benefit and expansion
(Cooper. et., al, 2017). In Prime Furniture, each of the metrics could be compared and
evaluated, for example selling per product, cost per unit etc., or the industries benchmarks.
Benchmarking is an evolving procedure that requires frequent evaluation and is mostly
conducted by Prime Furniture’s top management.

Financial governance
Financial governance is part of the nursing indicator of those moral rules which required the
unit to be terribly applied to the organization, so that it would be safe against dirt because
ethical provisions were not present. In reality, theft loses or bribery is a major problem in
business money and the implementation of economic justice thus generates an associate in the
health care world of ethics at work. It also requires sound internal systemic controls, which
avoid the organization from wasting money (Paulsson, 2012). The three-part Balance Score
Card (BSC) that contains Business Scorecard, Board Scorecard and Executive Scorecard may
be enhanced to financial governance at Prime Furniture. For example, Prime Furniture faces
financial challenges by executive payments to encourage the workers to work towards
organisation, thereby leading the company to sustainable results. In this sense, the Board
scorecard offers a reward package.

Conclusion
It could be concluded that Prime Furniture used multiple budgeting strategies to use their
available funds properly. They identify costs and make the most use of their costs. They use
their prepared budget accordingly, such as performance assessment, beneficial knowledge
retrieval and even more in their decision-making phase. They follow the prepared budget for

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the systematic and desired degree of operation. In the end, they conduct variance analyses to
determine their efficiency in order to enhance processing.

References:

Paulsson, G., 2012. The role of management accountants in new public management.
Financial Accountability & Management, 28(4), pp.378-394.
Cooper, D.J., Ezzamel, M. and Qu, S.Q., 2017. Popularizing a management accounting idea:
The case of the balanced scorecard. Contemporary Accounting Research, 34(2), pp.991-
1025.
Belfo, F. and Trigo, A., 2013. Accounting information systems: Tradition and future
directions. Procedia Technology, 9, pp.536-546.
Turner, M.J. and Guilding, C., 2012. Factors affecting biasing of capital budgeting cash flow
forecasts: evidence from the hotel industry. Accounting and Business Research, 42(5),
pp.519-545.
Drury, C., 2015. Management and Cost Accounting. 9 ed. New York: Cengage Learning.
Seal, W., Garrison, R. H. & Noreen, E. W., 2014. Management Accounting. 5 ed. Columbus:
McGraw-Hill.
Atrill, P. & McLaney, E., 2015. Management Accounting for Decision Makers. 8 ed. Essex:
Pearson.

Barsky, N. P., 2017. Management Accounting. SanDiego: Cognella Academic Publishing.

Collis, J. & Hussey, R., 2017. Cost and Management Accounting. London: Macmillan
International Higher Education.

Couto, V., Plansky, J. & Caglar, D., 2017. Fit for Growth: A Guide to Strategic Cost Cutting,
Restructuring, and Renewal. New Jersey: John Wiley & Sons.

Drury, C., 2015. Management and Cost Accounting. 9 ed. New York: Cengage Learning.

Edmonds, T. & Olds, P., 2013. Fundamental Managerial Accounting Concepts. 7 ed.
Columbus: McGraw-Hill.

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