This assessment will cover following questions:
- Generate an understanding of the management accounting systems in the Prime Furnitures.
- 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?
Management Accounting is that branch of accounting that deals with the evaluation of the financial data that is associated with the company and the financial statements are interpreted so as to evaluate and forecast the business performance. In the current report, different aspects related to management accounting will be evaluated and distinction between management and financial accounting will be discussed. The report will also identify the different product costing techniques and the inventory costing techniques along with development of proper budgets that are associated with the company. Further, financial data of Prime Furniture will be evaluated and appropriate interpretation will be made in the report.
Techniques of Management Accounting
Cost is the value that is spent by the organization in producing and delivery of product. There are different types of cost such as fixed and variable cost, direct and indirect cost etc. Cost analysis is a measure of determining the cost incurred and how well it can be organized which can help in increasing the productivity (Weetman, 2019). Different types of cost analysis techniques that can be used by Prime Furniture's are stated below.
- Cost Allocation: It refers to process of identifying and assigning cost to different cost objects, products or departments. The cost is allocated because it is not possible to directly trace te cost for the specific object.
- Cost effectiveness analysis: It is the technique that is used to analyze and compare the relative cost to the outcome (Holopainen, Niskanen and Rissanen, 2019). It considers both monetary and non-monetary aspects for comparison.
- Cost benefit analysis: It is a process that is used by the organization in analyzing decisions regarding systems, processes. This method provides evidence based view which is not influenced by any politics or partiality.
This method helps in determining how variation in cost and volume can affect the operating profit of the organization. This analysis requires company's all cost to be divided into fixed and variable which includes manufacturing, selling and administration (Burney and Malina, 2019). This method is based on several assumptions such as sales price per unit and variable price per unit is constant, total fixed cost are constant, everything produced is sold.
Flexible budget is a budget that adjusts with the change in volume and activity. As flexible budget includes variable rate per unit of activity instead of total fixed amount. It uses revenue and expenses based on current production and estimates how it will change with the change in output (Bogt and Scapens, 2019). This helps management in comparing the figures to know the area of improvement and areas improved.
It is a way of showing financial performance of a project. It is the difference between the actual performance and the standard performance. These variances are bifurcated into different types of cost such as direct material price variance, labor rate variance, variable overhead spending variance, fixed overhead spending variance and purchase price variance.
Absorption and Marginal Costing
Absorption Costing helps in ascertaining the costs that are incurred by the organization by incorporating both direct and indirect expenses in an economy.
Marginal costing technique is that technique where the variable cost is charged to every unit and the entire fixed cost is written off in the period when it is incurred.
The calculation above shows that for Prime Furniture, the profit is more when it is calculated under the absorption costing technique because the fixed and variable cost both is charged on an yearly basis. The net profit for first quarter under absorption cost is 4700 and 5900 for second quarter. But, under marginal cost, it is only 1900 for first and 4700 for second quarter. This is because of charging fixed costs collectively and thus it can be interpreted that the absorption costing is a better method.
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Different types of costs
There are different types of cost which are classified based on the relationship with level of output (Hopper and Bui, 2016). Following are cost in relation to how they change with respect to the change in the level of output.
- Fixed cost: It refers to the cost that do not vary with the change in the level of output. This change is fixed with respect to short term changes and but in long term it may change. For example, Office rent, insurance expenses, depreciation etc.
- Variable cost: This cost changes with the change in the level of production. Variable cost increases with the increase in production volume and decreases with the decrease in production volume ((Otley, 2016)). For example, direct material, labor cost, packaging cost etc. It has direct relation with the level of output.
- Semi-variable cost: It is the mixture of both variable and fixed cost. These cost vary with output but not in direct proportion. In such cases, cost is fixed for certain level of activity and becomes variable after that activity. It is also known as mixed cost. It includes administrative cost, maintenance cost etc.
It is the method used in determining the cost of a product. The components included in this method are actual cost of material, labor and overhead rates that are mostly used for allocation purpose. This method is used in determining the cost of the product where there is no sudden change in the costs, mainly increase in cost.
It is the system used by manufacturers to identify the variances between the actual performance and the standard performance in terms of cost, that is, actual coat incurred and cost that should have incurred to produce the actual products. The standard cost includes direct material, direct labor and other manufacturing overhead costs. It involves creation of estimated cost for the activities.
It is a costing method that is used in assigning the indirect and overhead cost to the products and services. This method is mostly used in manufacturing concerns and it is considered to be the most logical manner for allocating costs. The cost is first assigned to the related activities and then assigns cost related to those activities to the respective products. Sometimes it become difficult to assign indirect costs such as management cost, staff salaries etc.
Role of costing in deciding price of the product
Costs do not determine price but plays a crucial role in formulating pricing strategy. It is related to the sales level which involves cost of production, selling and administration. The price is decided based on what buyer is willing to pay, after which quantity required is determined. Cost affects the prices that is charged (Kaplan, and Atkinson, 2015). A low cost producer can price low and sell more because it will attract more price sensitive customers but it is not the same in high cost producer's, as they cannot afford to lower its cost, so it must target premium customers. Change in cost will force producers to change its price, for example, increase in price of fuel, material, labor etc. Thus decisions are taken to quantities to sell and the target market to serve plays an important part in forming pricing strategy. So, Prime Furniture's should consider these points in setting price.
Cost of inventory
Inventory cost and its types
Inventory cost is the cost related to the procurement, storage and management of inventory. There are three types of inventory cost which are stated below.
Ordering cost: It refers to the cost incurred for procuring inventory. It includes both cost of procurement and inbound logistics.
Carrying cost: It involves storage and management of inventory. This cost varies and depends upon management decision to manage inventory in -house, or outsourcing it to third party.
Shortage and stock out costs and cost of replenishment: These are the cost associated with unusual circumstances. This situation arises when business becomes out of stock and business have to incur cost such as paying salary to idle workers and other factory overheads even if production is stopped.
Benefits of reducing inventory cost
The benefits that an organization can enjoy by reducing its inventory cost are stated below.
- It will result in less money stuck in inventory management
- Saved cost can be utilized in other activity.
- Reduces the loss due to spoilage or expired products.
- Lowers the risk of loss and lower insurance cost.
Inventory Valuation methods
There are mainly three inventory valuation methods that are used in an organization which are discussed below.
FIFO Method: In this method, inventory is sold in the order of its purchase or production that is, first in , first out. This method is typically used as companies sells products in the order of purchase.
LIFO Method: It is the opposite of FIFO method. In this, the most recent purchased item is sold first. When prices increases, the cost of goods sold under this method is relatively high.
Weighted average cost: In this method, inventory and cost of goods sold are based on the average cost of all items purchased. This method is used when cost of units are same.
It refers to the all the indirect cost or expenses which includes advertising fees, legal fees, rent, repairs etc. it is important for budgeting and as well as helps business in determining the price of the product or service to make profit.
Budget and its types
Budget is an estimation of revenue and expenses for a specific period. It helps in tracking and managing resources. The different types of budgets that can be used by Prime Furniture's are stated below.
- Operating budget: It is a forecast of projected income and expenses for a specific period. It is prepared weekly, monthly or yearly (Otley, 2016). It includes factors such as material and labor cost, administrative expenses etc.
- Capital budget: This budget helps in determining which long term investment should be accepted or declined. It includes purchasing or replacing new machinery, R&D projects etc.
- Cash flow budget: It helps in projecting cash flows of the business and how well company is managing its cash. It is representing cash flow from different activities.
Alternative methods of budgeting
There are four other methods of budgeting which are discussed below.
Incremental budgeting: It uses previous year’s budget and add and subtract a percentage to create current year's budget. It is used when cost drivers do not change year to year. It is easy to use.
Activity based budgeting: This approach determines the amount of input required to achieve the target output. Company determines the activities and then cost associated with it.
Value proposition budgeting: This budget aims to avoid any unnecessary expenditure. It refers to the value that company promises to deliver to the customers so that customers buy their products.
Zero based budgeting: It is based on the assumption that all department budgets are zero and managers need to justify each expenses. It aims to avoid all unnecessary expenditure for company's success.
Behavioral implication of budgeting
Following are the behavioral implication of budgeting.
- Dysfunctional behavior: Budget can bring both positive and negative behavior among employees. The improper implementation of budget results in the negative behavior of the employees which impacts the organizational goals (Lavia López, and Hiebl, 2015). This negativity is known as dysfunctional behavior. It is in conflict with organizational goals.
- Participative budgeting: It is a bottom up approach which involves the people who are being affected by the budget, which includes lower level employees also. This helps in increasing motivation among employees and also reduces organizational conflicts.
- Budgetary slack: It takes place when management intentionally underestimated revenue and overestimates costs so that organization can request more funds. It is the difference between the resources required and actual allocated resources.
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Pricing strategy is the model used in establishing the price of the product. There are different strategies that can be used which are discussed below.
Competition based pricing: This strategy focuses on the prevailing market rate for the product and services. It usually takes competitor's price as the benchmark. Mostly company's prices their product below the competitor's prices.
Price skimming strategy: In this, company's set the price of the product higher initially and then lowers it as product becomes less popular. This method is good for new businesses, looking to enter the market.
Premium pricing strategy: This strategy is used when company's put the prices of the product high to make it a luxury or premium product. It is helpful in creating brand awareness.
Effect of supply and demand on price
Supply and demand is used in determining the price and it based on some laws. If demand increases, price of the product will also increase and vise-versa. If supply of the product increases, then price decreases. So, the price is decided at the point where quantity demanded and supplied are equal. It is known as the point of equilibrium.
Common costing system
It is the method that uses actual cost for recording the cost of the product. It includes the actual cost of material, labor, overheads incurred in the production. It is used to determine the cost to specific products.
Different costing system
- Job costing: It refers to the method of recording and tracking costs by job. It maintains the data which can be used in future for similar job. These costs are examined carefully so that costs can be reduced next time.
- Process costing: This method is used in mass production of similar products. In this, the cost of one unit is assumed to be same as that of others.
- Batch costing: In this method, products are manufactured in batches. The number of units in a batch may vary from batch to batch. In this, batch cost is used to determine the cost per unit.
- Contract costing: It is a specific order costing method. It tracks cost with specific contract of the customers. It is mainly used in construction and engineering projects.
Strategic planning is most effective and important for company to increase their sales by attracting customer towards company (Messner, 2016). This is process of defining strategy or direction for making decision for allocating resources to pursue strategy. This may extend to control mechanisms for guiding implementation of strategy. This creates my effectiveness for working in better and effective manner to complete task. For that here is use SWOT analysis model. This model is effective for analyse strength, weaknesses, opportunities and threats of company to know the position of company at market place and in competitive edge. In respect of that here is applied SWOT analysis assessing financial planning and position of company are as follows:
- Strength of Prime furniture is their clear vision, which is added the values to its customers irrespective of market conditions which is translated into well-defined manner to the business strategy (Otley, 2016).
- Another strategy of company is the clear concept translate in array of products which is assembled with the customer themselves leading to humongous cost reduction passed to customers.
- The weakness of company is to operate with multiple countries around the world, which is highlighted scale and large size business. This is very difficult to control standard across the locations.
- Another is to environment concerns about operation and company faces challenges for communicating their environmental policies to its customers, shareholders (Cooper, Ezzamel and Qu, 2017).
- Company have opportunity to expand into the emerging market and developing country. With the help of this, company able to attract more customers towards business because different market customer wanted to know about products.
- Opportunity to adopted new and advanced technology for building growth and production capacity of company in order to gain effective success of company.
- Threat of company is their competitors which have higher brand image and brand value within the market. This affect to sales and production process of company.
- Another threat of company, is online shopping and internet. Present days various online shopping apps comes, through that customer increase their interest to purchase products from online apps.
Balanced scored card:
A balanced scored card is the strategic management performance metric used for identify and improve various internal business functions and their result is with external outcomes. This is a tool in which company uses performance metric within the company identifying and improving various functions impact to resulting outcomes (van der Poll and Mthiyane, 2018). This is effectively used for measures and provide feedback to organizations. This method is help to company for measuring effective performance over four major aspects like financial, internal process, innovation and consumers (Cooper, Ezzamel and Qu, 2017). This reflects and represent the effectiveness for working in better manner by concerning financial, customer, internal process and organizational capacity. In respect of measuring financial position of company here is used Balanced Scored Card in Prime Furniture company in effective and valuable manner.
Financial position of company is good because company offers lower pricing products for increase revenue, when revenue is increase the productivity of company is highly increased for company. Through this customer relation with company is increased in effective manner. This creates more effectiveness for company to measures (Ax, and Greve, 2017). With this internal process of company is increase positive efficiency of company to working in better and in effective manner. With the all over production and process organizational capabilities and capacity is increase and improve knowledge skills as well as increased tools and technology for working in better manner (Cooper, Ezzamel, and Qu, 2017). This method is applied in company Prime Furniture to know that the fact which in respect of terms of finance and innovation where company is lacking and what they are measures for improving those aspects in effective manner.
Those are the strategic planning tools which are important and effective for proper management working within the company (Rikhardsson, 2017). Those tools and techniques are help to analysis the financial position of the Prime Furniture. With the help of this company is able to increase effectiveness and successful growth at market place. By analysing those performances of company as per SWOT and performance company is able to make strategic planning for success of company in effective manner.
Compare different management accounting tools.
There are different types and kinds of problems and issues which are faced by company Prime furniture. The main financial problem is monetary terms which company faces doing the businesses. In any type of business situation company can face the issues relating to monetary problems and this affect profitability of company. The financial problems include lack of cash flow, poor accounting principles, debt repayments and other. Thus. For the management of these financial problem some management accounting principles help Prime furniture for dealing those problems by using some techniques and tools are as follows:
This is referring points which used to compare performance against performance of others. This comparing processes, products and operations. Under this technique and tool company is compare products and services with their competitors. This is the tool which is help to manage and know the position of company within the market place (Ax and Greve, 2017). This help to company for handle and dealing different financial problems like bad quality of product, higher cost, low production and other financial problems. In context of Prime furniture for compare product with the other competitor’s company used this model. This help to company for outlining the superiority which is based on quality of products and services. On the other side, company ABC Ltd use this tool for outline the difference of product as per sales to know profitability and the area in which they need to develop.
Key performance indicator:
This quantifiable measures used for evaluate the success of organization and employee’s n meeting goals and objectives for performance. This shows the big improvements and delivery times which have been reduced for working in effective manner with the business. This is help handle some problems like number of new contract, internal process, decrease in sales due or changes in job role of employees (Granlund and Lukka, 2017). This method is applied and used by Prime furniture for know the facts in respect of finance and innovation work where company is lacking and what are measures improve aspects. On the other side, ABC Ltd is using techniques for identifying their employees and retain them in higher competitive world.
This is tool that is help to company for determining deviation towards planned work. This is effective and valuable for company to analysis and solve different financial problems within the company like gap between actual and standard performance. This technique if help to management accounting of companies for solving different financial problems in respect of gap analysis. In respect of company Prime furniture use to sets some standard of working for quality of products and work for achieve high quality standard (Otley, 2016). But, in ABC Ltd uses variance analysis by setting the target the profits and the company works in direction of attaining direction standards only in effective manner.
Financial governance refers with ways a company to collect, monitor and manage or control financial information (Quattrone, 2016). This includes track of financial transactions, manage performance, compliance, operation and control the data. After that all the information are effectively managed and monitor for proper and effective evaluation of all this information which is done and management accountant take effective decision for the better success of company. This is mentioned which help to company for dealing financial problems like errors in material, lack of finance and many of others. The implementation of this tool in Prime furniture to analysis the past performance and future performance for analysis the current improvement within the company. On the other side, the company ABC Ltd. Used this technique for forecast the trends to increase sales of products and services in effective manner.
Management accounting skills sets:
There are various skills and knowledge which are important for accountant. For become an effective management accountant require some characteristic which includes leadership, responsibility, ability to react, team working, ability to manage deadlines and self-motivation (Cooper, Ezzamel and Qu, 2017). There are some characteristics which are as follows:
- Management accountant have a one good characteristic which is ability to react reflects on one own their work and the wider consequences of the financial decisions for working in effective manner.
- Organizational skills and ability to manage deadlines for working in better manner.
- To the effective management accountant team working and sharing important information on employees are more important and effective.
Those characteristic are help to accountant for solve different financial problem which are faced by company Prime furniture. For example: company faces problem which is decrease in sales due to lack of motivation employees (Rikhardsson, 2017). In this management accountant have responsibility to motivate employees by giving proper direction to complete work in effective manner. Through that employees are motivated for working in better manner and create higher effort in working to achieve goals and objectives of company. This is highly helped to managed work by solving problem in effective manner.
The research conducted in the report above helps in concluding that there are a variety of costs that are associated with the management accounting and different concepts were evaluated and discussed such as pricing strategies, product costing etc. the concept of absorption and marginal cost was also discussed and evaluated in t