Management Accounting and It's Techniques

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Microeconomic techniques

Cost is the amount of money that has been invested to produce something or deliver a service to a customer in the market. In accounting terms, the cost is described as the money necessary to procure assets ready for use in the organization. There are many different types of accounting costs. Some of them are as follows:

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

Flexible budgeting is a type of budget which used to adjust to the change in the volume or activity of the organization. A flexible budget is used to show the expenditure appropriate to various levels of output.

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

Absorption cost and marginal cost

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

Marginal cost,

Marginal cost is defined as the cost of producing an extra unit of product in 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 the volume of production of Prime furniture, within the relevant period. These expenses have to be paid by the 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 Prime furniture. Variable costs generally used to rise with the rise in production and used to fall with the fall in production of the organization (Alsharari, 2019). For example, Sales commission, direct labor cost, and cost of raw materials.

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

Normal Costing is the costing in which Prime Furniture uses the actual or original cost for material and labor components, whereas standard cost is defined as a costing in which the predetermined cost of all the different aspects of the product is considered by an organization.

Activity-based costing (ABC) is a costing method which generally used to identify key activities in the organization beforehand. 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 prices in an organization, as 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 the company at the same rate in the market.

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 goods 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 an organization is used to compare the current inventory of an organization with other business inventory in an organization.

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

Cost variance is a difference between the actual cost incurred in the production of goods in an organization and the predetermined cost which is setup by the company in the past. Whereas Overhead cost cost on the income statements for direct material, labour and expenses.

Absorption costing

Cost per unit assessment

Profitability statement

Cost per unit as per marginal costing

Income statement

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

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Using budgets for planning and control

A budget is a document which is an estimation 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 used to determine whether an organization's long-term investments are worth funding or not. Long-term investment of the organization includes new machinery, replacement of machinery, new products and research & Development projects. Operating budgets the annual budget of an activity stated in terms of budget classification code. This budget used to estimate the total value of resources require for the performance of operation which is used to include reimbursable of work or service (Ax, and Greve 2017).

Different types 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 the Behavioural implications of budget are as follows

Dysfunctional Behaviour: As the budget is prepared by the manager in the organization when the goal and objective of the manager are found conformity with the goal or organization. Organizations is able to get a good budget but at the time the goals of the manager are not on the same line there are certain chances of hurting the performance of the business. Such negative impacts are known as Dysfunctional behaviour.

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

Pricing

Pricing strategies is the strategy which is used by the organization to set the price of company offerings 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 the company. The company generally used to maximize the profit margin in the market.

Penetration pricing: It is the strategy in which an 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 products in the market (Jack, 2019). Demand and supply in the market help the organization in finding out the profit margin which can be asked by the company and also will help the company in ascertaining the minimum amount of cost which can be incurred by the company to produce the product.

Common costing systems

An actual costing system is the recording of product cost by looking at a variety of different factors such as cost of material, labour actual overhead and cost of allocation. Normal costing is used in order to derive the cost of the 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 the actual cost of good and the already set budget for an organization.

Job costing used to not have that great an impact on the normal and actual costing systems but used to have an impact on the standard costing system, as organizations used to keep this cost in mind when setting up different standards. Batch costing is the costing that is used to take a homogeneous product as a cost unit. This activity used to have an impact on the Actual costing system more as compared to the other two. The reason behind the same actual costing used to look at the cost of material, labor 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

Porter's Five Forces

• Competition in the industry is very high as number of organizations in the industry is very high.
• The threat of new entrants in the industry is moderate for Prime Furniture.
• The power of suppliers is low in the market.
• The power of the customer is high as the customer has very few options to select from.
• The threat of substitute products is also low in the market

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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 activities.

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 required 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 skills which is required by all management accountants as they used to make different decisions in the organization on the basis of going through the different financial reports of an organization.

Organizational skills: This are another set of skills which need to be possessed by all accountants to carry out different operations of business.

Effective strategies and systems

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

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CONCLUSION

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

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