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Management Accounting and It's Techniques

University: CECOS College London

  • Unit No: 5
  • Level: Undergraduate/College
  • Pages: 18 / Words 4386
  • Paper Type: Assignment
  • Course Code: 2104AFE
  • Downloads: 86
Question :

This assessment will cover following questions:

  • Discuss the use of planning tool used in the management accounting.
  • Prime Furniture is a company that sells various types of furniture. What are the management accounting techniques?
  • Generate an understanding of the management accounting systems in the Prime Furnitures.
Answer :
Organization Selected : Prime Furniture

INTRODUCTION

Managers use the provisions of accounting information in order to better inform themselves before they decide matters within their organizations is known as management accounting. Prime furniture is wholesale manufacturer of furniture in United Kingdom. This report highlights the range of management accounting techniques. After that the report highlights different planning tool used in management accounting tool. In the end the report highlights the way in which organization uses the management accounting to respond to different financial problems.

LO 1

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LO 2

Microeconomic techniques

Cost is the amount of the money which has been invested to produce something or deliver a services to customer in the market. In the accounting term cost is describe as money necessary to procure asset and ready for use in the organization. There are many different type of accounting cost. Some of them are as follows:

Cost volume profit analysis is a method of cost accounting which looks at different impact that used to varying level of costs and volume which used to have an operating profit (Askarany and Yazdifar, 2017). Cost volume analysis is based on several assumption that sales price, fixed and variable cost are constant throughout the production.

Flexible budgeting is type of budget which used to adjust with the change in the volume or activity of organization. Flexible budget used to show the expenditure appropriate to various level of output.

Cost variance is define as deviation between what amount of cost which was planned by the organization and actual amount of cost incurred by an organization.

Absorption cost and marginal cost

Absorption cost is a managerial accounting method which used to look at both variable and fixed overhead cost in production. Absorption cost used to adopt all the manufacturing cost by including overhead by adding labour cost in it (Rikhardsson, 2017).

Marginal cost,

Marginal cost is define as a cost of producing an extra unit of product in an Prime furniture. It is the change in opportunity cost when one additional unit is added for the production of the good in an organization.

Product costing

Fixed cost, it is the type of cost which not used to change with the change in volume of production of Prime furniture, within the relevant period of time. This expenses has to paid by company irrespective of business activity. For example, Depreciation, Interest expenses and Rent.

Variable cost, variable cost used to vary with the change in volume of production in an Prime furniture. Variable cost generally used to rise with the rise in the production and used to fall with fall in production of organization (Alsharari, 2019). For example, Sales commission, direct labour cost, cost of raw material.

Cost allocation is process in the organization which used to look at identifying, ascertaining and assigning the different cost to cost object of organization. Cost object is define as any item for which separate cost need to be measure by an organization.

Normal Costing is the costing in which the Prime furniture uses the actual or original cost for material and labour components, where as standard cost is define as a costing in which predetermine cost of all the different aspect of product is consider by an organization.

Activity based costing (ABC) is costing method which generally used to identifies key activity in the organization before hand itself. On the basis of same the organization used to assigns the cost of each activity on the basis of actual consumption by each (Pradhan, Swain and Dash, 2018).

Costing used to play a very crucial role in setting price in an organization, as all the organization used to add the amount of profit margin in the original cost of the company and used to offer the product and service of company at the same rate in the market.

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Cost of inventory

Inventory cost are cost which is associated with procurement, storage and management of different inventory in Prime furniture. Different type of inventory cost are as follows:

Ordering Cost: Ordering cost are the different type of cost which is incurred by organization to process an order to a supplier for the purpose of procuring raw material and semi finished good in an organization.

Carrying cost: Carrying cost is the cost which looks at cost incurred for carrying out or holding inventory in an organization. This generally includes the warehouse cost and financial cost such as opportunity cost.

Reducing inventory cost generally help the organization in maximizing the profit margin of the organization. Also it helps the organization in improving the efficiency of production in an organization (Ahmed, 2019). As this used to help the organization in getting better number of product at the same rate of investment.

Comparable valuable method: It is the type of valuation method in which organization used to compare the current inventory of organization with other business inventory in an organization.

Discount cash flow: it is type of valuation method in which analysis used to forecast future unlevered cash flow and discount it back to today Weighted average cost.

Cost variance is a difference between the actual cost incurred in production of good in an organization and predetermine cost which is setup be the company in the past. Where as Overhead cost are cost on income statement for direct material, labour and expenses.

Absorption costing

Cost per unit assessment:

Particulars

Figures (in £)

Variable cost of  production

0.65

fixed cost of  production

0.20

   

Total  cost per unit

0.85

Profitability statement

 

Quarter 1

Quarter 2

Particulars

units

Figures (in £)

Figures (in £)

units

Figures (in £)

Figures (in £)

             

Sales

66000

1

66000

74000

1

74000

Less: COGS

   

56100

   

62900

             

GP

 

 

9900

 

 

11100

Less: Selling & Administration Costs

   

5200

   

5200

 

 

 

 

 

 

 

Net profit

 

 

4700

 

 

5900

Computation of COGS

Particulars

units

Figures (in £)

Figures (in £)

Opening stock

0

0.85

0

Add: purchases

78000

0.85

66300

Less: closing stock

12000

0.85

10200

       

COGS

   

56100

Quarter 2

       

Computation of COGS

       

Opening stock

12000

0.85

10200

Add: purchases

66000

0.85

56100

Less: closing stock

4000

0.85

3400

       

COGS

   

62900

Cost per unit as per marginal costing

 

Particulars

Figures (in £)

   

Variable cost of  production

0.65

   
   

Total  cost per unit

0.65

Income statement

 
 

Quarter 1

Quarter 2

Particulars

units

Figures (in £)

Figures (in £)

units

Figures (in £)

Figures (in £)

             

Sales

66000

1

66000

74000

1

74000

Less: COGS

   

42900

   

48100

             

Contribution

 

 

23100

 

 

25900

Less: fixed expenses

           

production

 

16000

   

16000

 

selling & distribution expenses

 

5200

21200

 

5200

21200

 Profit  

 

 

1900

 

 

4700

Quarter 1

Computation of COGS

       

Opening stock

0

0.65

0

Add: purchases

78000

0.65

50700

Less: closing stock

12000

0.65

7800

       

COGS

   

42900

Quarter 2

       

Computation of COGS

       

Opening stock

12000

0.65

7800

Add: purchases

66000

0.65

42900

Less: closing stock

4000

0.65

2600

       

COGS

   

48100

From the above calculation it has been interpreted that it will be better for the Prime furniture to use absorption costing as the costing tool. As the profit derived by applying absorption costing is 11100. Where as applying marginal costing has shown the profit of 4700. This shows that absorption costing is better option, the reason behind the same is that it used to consider both variable and fixed cost as well.

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LO 3

Using budgets for planning and control

Budget is a document which is estimations of different revenue and expenses of Prime furniture for a specified future period of time. It is generally a financial plan for a defined period of time. There are many different type of budget such as capital budget and operating budget.

Capital budgeting is the financial plan which used to determine whether organization long term investment are worth funding or not. Long term investment of organization includes new machinery, replacement of machinery, new product and research & Development project. Operating budget is the annual budget of an activity stated in terms of budget classification code. This budget used to estimates the total value of resources require for the performance of operation which used to includes reimbursable of work or service (Ax, and Greve 2017).

Different type of budgeting

Incremental budgeting: Incremental budgeting is the type of budgeting which used to take the last year budget as a basis and used to adjust some amount of change by adding a subtracting amount of percentage to derive current year budget. This is one of the most easiest budgeting approach as it does not require a complex calculation only few assumption (Different budgeting method, 2019)

Activity based budgeting: Is the type of budgeting which used to follow top to down way. This budgeting approach used to determine amount of inputs require to support the target set up by the organization. This type of budgeting approach used to help the organization in managing the different operational requirement of organization as it provides better product, process and decision making basis.

Some of Behavioural implication of budget are as follows:

Dysfunctional Behaviour: As budget is prepare by manager in the organization, when goal and objective of manager are found conformity with goal or organization. Organization is able to get good budget but at the time the goal of manager are not on the same line there are certain chances of having adverse impact on performance of business. Such negative impact are known as Dysfunctional behaviour.

Participating budgeting: participation of different authority in preparation of budget also used to play a very crucial role. As in top to down budgeting top management used to prepare budget for whole organization and down to top budgeting employee are also involved in the process of making budget. Involving employee in budget making used to help organization in passing on the good message to the employee (Bawaneh, 2018). 

Pricing

Pricing strategies is the strategy which is used by the organization to set the price of company offering in the organization. Some of the pricing strategy are as follows:

Premium Pricing: This is the pricing strategy in which high price is used by the organization to sell the product of company. Company generally used to maximize the profit margin in the market.

Penetration pricing: It is the strategy in which organization used to keep the profit margin of company at low rate to attract the eye of customer in the market. Prime Furniture also uses the same pricing strategy in the market to offer product of company.

As this industry used to include good amount of competition in the market, organization in this industry generally uses the penetration pricing as common pricing strategy.

Prime Furniture used to consider the demand and supply in the market to decide the price of product in the market (Jack, 2019). As demand and supply in the market helps the organization in finding out the profit margin which can be asked by company and also will help the company in ascertaining the minimum amount of cost which can be incurred by company to produce the product.

Common costing systems

Actual costing system is the recording of product cost by looking at variety of different factor such as cost of material, labour actual overhead and cost of allocation. Normal costing is used in order to derive the cost of product by overlooking the manufacturing overhead rate. At the same time standard costing is a system which is used to identify the difference or variance between actual cost of good and already set budget for an organization.

Job costing used to not has that great impact on the Normal costing and Actual costing system but used to has a impact on standard costing system, as organization used to keep this cost in mind at the time of setting up of different standard. Batch costing is the costing which used to take homogeneous product as a cost unit. This activity used to has impact on Actual costing system more as compare to other two. The reason behind the same Actual costing used to look at cost of material, labour actual overhead and cost of allocation. 

Strategic planning

PEST

Political factor: This factor is favourable as there is good level of political stability in UK.

Economical factor: This factor is also favourable as interest rate and inflation rate help the organization in getting capital at lower rate.

Social Factor: This factor is not that favourable for the business as the demand of the different product of organization used to change on regular basis (Gray, Adams and Owen, 2017).

Technology Factor: This factor is also not that favourable, as it get difficult for the company in deciding the best technology which can be used by organization to carry out business operation.

SWOT

STRENGTH

WEAKNESS

· Goodwill

· Financial position of business

· Profit Margin

· Outdated technology

OPPORTUNITY

THREAT

· Using new technology to update performance

· Expansion

· Competition

· Legal Policy

 

Poter's Five forces

  • Competition in industry is very high as number of organization in industry is very high.
  • Threat of new entrant in the industry is moderate for Prime Furniture.
  • Power of supplier is low in the market.
  • Power of customer is high as customer has very option to select from.
  • Threat of substitute product is also low in the market

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LO 4

Identifying financial problems

Benchmark Techniques: It is the type of analysis in which company used to compare the performance of company with the performance of other organization in the industry. Organization used to conduct the test by comparing product quality, efficiency or feature. This eventually help the company in getting better idea about competitor strategy on the basis of which organization can plan the different activity in the organization.

KPI: KPI is a measurable value that used to show how effectively a company is achieving the objective of an organization. In this organization used to define the key objective of business and on the basis of same used to set the standard to achieve the same. This technique eventually help the company in focusing on the key performance of business which used to help the organization in achieving the organizational objective very effectively (McLaren, Appleyard and Mitchell, 2016).

Variance Analysis: It is the technique in which the organization used to find out the variance or difference in the actual performance of the company on the basis of comparing it with the already set standard in the past. This technique used to help the organization in finding out the area where organization is lacking, on the basis of same used to plan different activity.

Financial governance

Financial Governance refers to different ways which is used by the organization to collect, manages, monitor and control different type of financial information in the market. Financial governance used to help Prime Furniture in identifying the different type of risk factor as it used to monitor and controls different information. Business risk are generally identified by Finance government.

Financial governance can be used as monitoring system as well, as this governance used to help the company in getting the knowledge of current situation of business at all the time in the organization. The reason behind the same is that it used to track financial transactions, manage performance and control data, compliance, operations, and disclosures (Sedevich-Fons, 2018).

Management accounting skill sets

Learner: This is the biggest characteristic which need to be showcase by the management accountant, as there are many different situation through which accountant has to go, so they have to make sure that they used are good situational learner.

Honest: It is another characteristic which is require by all management accountant, as they has to make sure that they do not drive the decision of an organization in the sack of their personal interest. They has to keep the organizational objective above.

Skills

Decision making: This is one of the biggest skill which is require by all management accountant as they used to make different decision in the organization on the basis of going through the different financial report of an organization.

Organizational skill: This are the another set of skill which need to be possess by all the accountant to carry out different operation of business.

Effective strategies and systems

It is the responsibility of all the department of organization to present a full disclosure of financial position of business and also providing timely report of the same to different department . This will eventually help the company in improving the efficiency of business and will also help the company in saving the time resources of organization.

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CONCLUSION

After going through the above report it has been summarized that their are many different type of cost technique such as cost volume profit analysis, Flexible budgeting and cost variance. After that the report summarized the concept of budget and different type of budget such as capital budgeting and operational budgeting. After that the report summarized the different pricing strategy and one used by selected organization. In the end the report summarized the different way through which organization uses the management accounting to dealt with financial problem.

You can also check out:-

Management Accounting and It's Benefit

REFERENCES

Books and Journals

  • Ahmed, M.S., 2019. Management accounting control and managerial bullying: economic, social, and political dynamics in Bangladesh RMG sector (Doctoral dissertation, University of Essex).
  • Alsharari, N.M., 2019. Management accounting and organizational change: alternative perspectives. International Journal of Organizational Analysis.
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