Management Accounting Systems

By Mian khushal ahmad

Unit Number and Title - Unit 5: Management Accounting Systems

Academic Year - 2016 - 2018
Unit Assessor - Syeda Sana Naseem
Assignment Title - Management Accounting Systems
 MANAGEMENT ACCOUNTING

LO1 - Demonstrate an understanding of management accounting systems.

P1 - Explain management accounting and give the essential requirements of

different types of management accounting systems.

Management accounting involves the overall process of analyzing business operations and costs,
to prepare and provide timely management reports including internal financial reports, accounts
and records, to help aid the business manager’s decision making process.
Management accounting, which is also known as cost or managerial accounting, primarily
focuses on producing reports for a company’s internal stakeholders. It is the exact opposite in
financial accounting, whereby reports are produced for external stakeholders.
In order to paint a complete picture of the business, Management accounting helps combine
financial information with non-financial information data which helps drive business success.
In contrast with the financial accounting, Management accounting focuses on many facets of
accounting. These include constraints, margins, trends, capital budgeting, product costing,
forecasting and valuation.

Management Accounting Systems

Management accounting system as a whole is more of a collection of all the financial data from
different business operations such as shifts in inventory, sales data and changes in material costs.
All of this information is then converted into analysis reports.
There are a number of management accounting systems, and the most important amongst them
are the cost-accounting systems, inventory management systems, job-costing systems and price
optimising systems.

Cost-accounting systems
For almost every business/company, it is critical for their operations to estimate the accurate cost
of its products. This is exactly why in order to estimate the general costs of their products, one of
the most important frameworks used is the Cost-accounting systems. Whether a company has to
estimate the closing value of materials inventory, work-in-progress and finished goods inventory
for financial statement preparations, Cost-accounting systems is the framework that is used.
When looking into the Cost-accounting systems, it requires these specific five parts, that include:

- An input measurement basis

- Inventory valuation method
- Cost accumulation method
- Cost flow assumption
- Capability of recording inventory cost flows at certain intervals

In general, the Costing accounting system monitors the costs incurred by a business. The
framework in itself comprises of two main costing systems. Companies can collect information
based on either of these systems. Not only this but a hybrid approach can also be adopted that
mixes the two systems in accordance with company’s needs.

Two of the primary Costing systems are:

- ​Job-costing system
This method is more of a method/way of assigning costs to a specific unit of product. Whether
it's the labor, material or overhead costs, all of them are compiled for either a job or an individual
unit. It is known that this particular method works best for unique products such as consulting
projects or custom-designed products. One of the biggest reasons for this is that the overall
cost-accumulation process is highly detailed and labor intensive.

- ​Process costing system

Process costing is usually used for assigning costs to mass quantities a service or product. Over
here the overhead costs, material or labor costs, all are compiled in aggregate, first for an entire
production, and are then allocated to the individual production units. This particular method is
seen in large production runs of identical items, such as cell phones, laptops etc. Not only is the
overall cost-accumulation process highly efficient, but portions of it can also be automated.

There are a number of management accounting systems. Amongst them, is the inventory
management system.

Inventory Management Systems

In the simplest of terms, Inventory management is the ongoing process of efficiently overseeing
the overall constant flow of parts and products into and out of an existing inventory. Inventory
management is done on a daily basis in companies, as new orders are placed and products are
shipped out to its customers. It is important for business leaders to control the transfer of units so
that they can be able to prevent the inventory from either become too high or going down to
levels that could possibly bring the operations to a halt. Also, along with this, competent
inventory management seeks to control the costs that are related with the inventory. From
knowing how much time it would take for a supplier to process an order and execute a delivery,
time taken to for the materials to move out of the inventory, to understanding when to place an
order, and how many units are to be ordered in order to keep the production running smoothly.
All of these are the key aspects of any inventory.
Companies today look for newer solutions to solve the challenge of proper inventory
management. With rapid advancement in technology over the years, companies turn their heads
towards software that helps in tracking orders, inventory, vendors etc. Companies invest in
finding software that are affordable and robust enough.

Price optimisation systems

As the technological innovation takes place at a rapid pace, more and more companies come up
with innovative solutions for their customers. Today, a customer might just be looking at a
product in a store, and may decide to search it online, while still being in that store. If a customer
finds a better deal online, he’ll simply leave the store and get his desired product somewhere else
at a better price. This is exactly why companies focus highly on the purchase decisions of today's
budget-conscious shoppers.
Price optimization in its simplest terms would be the overall process of finding that sweet spot,
or for a fact maximizing price against the customer's willingness to pay. Price optimization is
also widely used in order to retain their best customers. Companies nowadays spend massive
amounts of time towards price optimization. Not only does it help ensure that their products are
sold of quickly at the right price while still making a profit, but it helps to understand the
customer’s lifetime value to a company.
Companies implement their price optimization strategies in different ways. Companies calculate
how demand varies at different price levels by understanding how sensitive their existing
clients/customers are towards changes in product prices. Companies choose different solutions
and models to help businesses determine the initial pricing, promotional pricing and discount
pricing.
One of the key factors in carrying out price optimization is good analytics and performance
management. Advanced analytics helps in identifying multiple opportunities in pricing and las
well as any leakages that might be present. This helps in recommending changes and pushing
people to make the right decision.
P2 - Explain different methods used for management accounting reporting.

In order for a business to have a complete picture of how the overall performance is,
Management accounting reports are crucial. Management accounting reports help in monitoring,
planning and determining decision on the way forward, and gives a holistic view of the
company’s finances.
There a number of management accounting reports that companies develop regularly. These
include:

- Budget Report
Budget reports are known to be probably the most fundamental reports in management
accounting. Budget reports help in analyzing the company’s performances. From analyzing the
performance of various departments, to controlling costs; it is the budget reports where the
estimated budget is created based on actual expenses from prior years. As the overall budget is
created from all the data of the previous years, therefore feasible ways are found to trim costs
and make changes for the future.

- Cost Report
In a business, there are a number of items whose costs need to be computed. These are generally
produced through unprocessed data. Therefore, cost reports help in computing these costs. Often,
such data is known to include all the overhead costs, labor costs, cost of products etc. It is the
cost reports that helps in evaluating this data, monitor them, and plan accordingly in order to
increase profit margins.

- Performance reports
In order to understand the substantial expenditure and revenues to amounts that have been
allocated, companies use performance reports. It is the disparities that are computed and then
critically analyzed helping in deciding new budgets. Big and successful companies are known to
compute performance reports monthly and quarterly as it helps them forecast and determine the
future of the company production increases and increase in costs.

- Income statement
Companies use various tools/methods in order to assess its performances and overall financial
position. Income statement is one of them. It’s more of an accounting scorecard on the financial
performance of the business that not only reflects the quantity of sales occurred, but also the
expenses incurred and general net profit. It’s a combination of all these elements which helps
illustrate the income a company makes or loses, by cutting the cost of expenses and goods from
the total revenue. This gives us a net result, which is either a profit or loss.
M1 - Evaluate the benefits of management accounting systems and their application
within an organisational context.

Over the years, the role of management accounting in organisations has become increasingly
important. It is now more than simply reporting scores to the managers, rather it is about seeking
influence to the scores by using various theoretical techniques and approaches in order to
improve the overall business processes. It is important for managers to understand the use and
usefulness of traditional accounting systems, as well as look towards introducing various new
techniques which can bring practical advantages to the firm. There’s a wide range of accounting
systems being used in different organisations, and each of them provides unique advantages in its
very own ways.

Coca Cola
Having formed in 1892, Coca Cola Company is by far one of the biggest manufacturers,
distributors and marketers of beverages in the world. Offering more than 500 brands in upto 200
countries, Coca cola ranks 4th most valuable brand in the world.
Having operated for almost more than 125 years, Coca Cola has been able to live up to its very
purpose in making, selling and delivering products and services better than anyone else. Having
been so successful over the years, there are a number of factors that has helped Coca cola stand
ahead of everyone else. These include various internal and external factors that contribute to its
success.

One of the most important parts of the company, is its management accounting systems. Such
systems are a necessity in any given company for various reasons. One of the most vital reasons
being the fact that it helps the company/enterprise forecast and measure expected outcomes of
it’s very business processes.

Costing system of Coca Cola

Being a global brand, it’s quite easy to understand that the demand at times can increase in one
market while decreasing in another. This is exactly why the company takes on a different
approach. Coca-Cola uses the Activity based costing system. This process in itself governs the
overall company’s daily business processes and helps determining cost of each product based on
the activities involved in the production process.
Coca cola’s production process in itself features three major activities. They are:

- Concentrate and syrup manufacturing

- Blending
- Packaging
The activity based costing helps determine the price of its products based on the number of
activities that are simply undertaken in the overall process of manufacturing such products. Not
only this, but the company is able to budget it’s operation expenses based on the number of
activities. In its simplest terms, the higher the activities involved in production, higher will be the
overall budget for production and vice versa.

Inventory management system of Coca Cola

Coca cola over the years has expanded not only nationally but also internationally by adding
licensed bottlers and distributors. With it’s vast network of operations, the company takes
various different steps to control inventory and its related costs.
Coca-Cola uses the perpetual inventory systems, whereby all the information on inventory
quantity and availability is updated on a continuous basis as a function of doing business. The
reason for this is that perpetual inventory provides a much more highly detailed view of all the
changes in the inventory and also allows real-time reporting of the amount of inventory in stock.
Having able to reflect on the level of goods accurately, it only helps aid the material control.
Coca cola has been able to bring in various systems under this, that helps continually update its
inventory records if there have been any additions or subtractions made for any activities.
Coca cola has been able to track its inventory accurately with the advent of:

- Manufacturing resource planning systems (MRPII)

- Material requirements planning systems (MRP)

These two systems, along with improved computer capabilities has let the company be able to
track its inventory in real time. Not only does this improves communications as it is able to
indicate when further acquisitions are to be made, but helps in reduction of inventories.

With perpetual inventory systems helping the company be able to keep a check on the inventory
in real time and the company’s policies of reducing lead time, regulation of usage and
minimization of safety status, helps the finance manager make sure that an optimum amount of
inventory is invented.

Price optimization
Coca Cola, being a global brand, spread over 200 plus countries, takes on various approaches
while pricing. Each of those 200 plus countries they serve in play a critical and important role in
the company’s overall growth.

While Coca Cola does take a number of approaches that contribute to its growth, there are these
few strategic actions that play a pivotal role. Some of them are as follows:
The first being the company’s ever increasing focus driving revenue and profit growth. Coca
cola having spread all across the world, has segmented its revenue growth strategies which are
varied by market types. The employee incentives are also aligned accordingly.
In the emerging markets, Coca Cola have been able to increase volumes and have kept the
beverages affordable. While on the other hand, in developing markets, the company has struck a
good balance between volume and pricing. Talking about the developed markets, Coca Cola has
not only relied more and more on the price/mix, but also offered various small packages and
premium packages like aluminium and glass bottles. It has only increased its profitability.
This has helped them increase their organic revenue by 4 percent, as the price/mix rose by 2
percent and so did the volume.

Another important step that Coca Cola has taken is investing in their brands and businesses. Just
like any healthy business, Coca cola requires continuous investment. Having increased both the
quantity and quality of their advertising, Coca Cola has been able to increase its advertising
expenditure by $250 million. This has only helped them to come up with and share more and
more stronger and impactful ads. Not only this, but Coca cola has also invested heavily across
their expansive beverage portfolio. With strategic new partnerships with Monster Beverage
Corporation, Coca cola was able to position itself in the energy category.

Probably one of the most important steps for large organisations is to become efficient. That is
exactly what Coca cola has been able to do for such a long time. Coca cola over the years has
taken some serious steps to rebuild their growth momentum. They needed to invest in better
marketing while being able to increase their financial flexibility as well. For that reason, Coca
cola needed to become more efficient and increase their productivity while reducing costs.
With numerous solutions being applied, part of them was the “Zero-based Work”. Under this,
organisational budget was assumed to start from zero and must be justified annually. Along with
this, the company was also able to cut spending on non-media marketing e.g. in store
promotions. With all of this, and a whole bunch of other new solutions, Coca Cola had been able
to find numerous new savings in their supply chain around the world.
D1 - Critically evaluate how management accounting systems and management
accounting reporting is integrated within organisational processes.

Management accounting systems are no less than a partner in the overall strategic planning of a
company/organisation. Not only does it play its role in handling matters related to performance
enhancement, it also looks into and plays a pivotal role in decision-making. Over the years many
organisations have incorporated various management accounting systems which has helped them
in excelling the profit margins, and also increased their possibilities towards making a place in
the competitive world.
Talking about management accounting systems, its adoption now remains an important event in
the life of young growing companies as well as the already established ones. Different elements
are associated in the adoption of management accounting systems. In particular, the presence of
venture capital, firm size, culture of the organisation and CEO experience are all associated with
this particular adoption decision.

McDonalds
Mcdonalds is a name quite widely known, and is a well recognized brand and business across the
world. Being one of the largest food service retailers in the world, having a number of 36,900
locations across and operating in 117 countries, Mcdonald’s is able to serve more than 60 million
people globally. With such an extensive network of affiliations, franchises and corporations
around the world, the total assets as of 2016 accounted for almost $31.024 billion.
Mcdonald’s remains as one of the original creators and innovators of the industry and it goes
without saying that it has successfully remained a strong leader in the industry for almost more
than half a century.
There always are a whole lot of different elements associated to an organization's success, and
the same can be said about Mcdonald’s as well. Yet, one of the most prominent reasons for
Mcdonald’s continuous growth and profitability has been it’s franchise structure that has helped
it achieve sustainability.

Mcdonald’s being one of the biggest players in the industry, always have an eye towards
improving and making the organisation more efficient and profitable. Their success is driven by
different strategies and process that they implement within their organisation. One of the most
important things that Mcdonald’s has been able to do over the years is that it gradually
introduced various management accounting systems and integrated it successfully. The need for
management accounting systems has now been more than it ever has been, and which is for
brands like Mcdonald’s it remains important to introduce mechanisms and systems that
contribute towards a productive and efficient organisation.
Mcdonald’s has been known for its management accounting information system. The known
enterprise has been able to adopt and introduce information systems in almost all levels of its
operations in order to bring in greater accuracy, efficiency and consistency within. It is important
to note that such systems should be introduced across the levels, which Mcdonald’s has been
able to do successfully. The information systems have helped Mcdonald’s collect and utilize
more correct and more substantial information regarding all of its operations. Not only does it
help Mcdonald’s control its budgets and costs quite closely, it also lets the individual franchises
cut down on its costs and as a result increase profitability. With such an extensive network of
franchises around the world, this helps by being good for the bottom line of over all Mcdonald’s
Corporation which does depend on the store sales and operations.

Another important tool has been the point-of-sale information that the company uses. Point of
sales basically records exactly what items are sold at the retail restaurant levels. The stores
thereby themselves and the corporation as a whole is able to a much more accurate data
regarding inventors costs and needs, and not only this but sales records can then also be
compared with the actual inventory, which helps identify any losses through waste or theft. This
thereby helps yield information regarding store’s efficiency and whether there’s room for
improvement of not. The information collected and is easily communicated directly to all the
relevant departments and areas of the corporation which is not only able to track and aggregate it
but also analyze all the information so that much more efficient and goal-oriented accounting
practices can be continued.

The accounting systems and practices that Mcdonald’s choose to integrate within their
organisation are highly personalized and adopted according to needs and wants. Proper time is
spent in introducing systems gradually and are made sure that they align with the organisational
structure, environment and management.

Management accounting as a whole plays a vital role in an organisation, supporting controlling,

organizing, planning and decision making of the organisation. If we take a look into how
companies adopt it, it can be easily understood while looking into how Mcdonald’s has been able
to do in the past and how it continues to do so. An important aspect that companies like
Mcdonald’s successfully have been able to identify and make use of is that management
accounting in itself integrates in each and every level of the organisation. This is because all of
the information regardless of that fact that whether its financial or non-financial, they’re all
related to the internal or external environment of the organisation. The information can also be
related to cultural or social issues that pre-exist within the organisation. To sum it up, all the
information that is related to the organisation and can affect the overall decision-making, is and
needs to be included in management accounting.
What is important to understand is that companies need to bring in tools and processes that fit in
their systems and can help it become even better. Getting rid of systems that do not bring any
betterment should be removed as soon as possible. Moreover, young and growing companies are
bring in different cost-effective processes that are helping them compete with big players in the
industry, which is why it is important for large organisations to be able to integrate different
management accounting systems across the levels. While it is quite difficult to do so, and takes
time, it really does bring in efficiencies and helps get rid of waste and also cut down on costs.
Mcdonald’s is one prime example of how being a large organisation and spread across the world,
it still has been able to continuously bring in various management accounting systems and
process, adopt it across all levels, and as a result achieved growth and sustainability.

There remains a direct link between the growth of an organisation and management accounting,
which is why it is important to note and understand the usefulness of management accounting
systems as it impacts the decision-making of the organisation, and further leads to its success.

Learning Outcome 2 - Apply a range of management accounting techniques

P3 - Calculate costs using appropriate techniques of cost analysis to prepare an

income statement using marginal and absorption costs.

No. Material Cost Type

1 Wood Costing 3.00 pounds Direct Cost and
Variable Cost

2 Laminates Casting 6.00 pounds Direct Cost and

Variable Cost

3 Screws and Nails 0.50 pounds Direct Cost and

Variable Cost

4 Rods and Plates 1.50 pounds Direct Cost and

Variable Cost

5 Labour Wages - 4.00 pounds/hour Direct Cost and

- 1.5 hours to Variable Cost
complete 1 unit
- I.e labour wage 6.00
 pounds per 1.5 hours

6 Power Costs 50 pounds per 100 Indirect Cost and

attributable units made Variable Cost

7 Transport Costs 12 pounds per 50 Indirect Cost and

Units delivered Variable Cost

8 Costs of Insurances 1500 pounds per Indirect Cost and

and Permits 1000 units Variable Cost

9 Rental Costs 2500 pounds per year Indirect Cost and

Fixed Cost

10 Salaries 4500 Pounds per year Indirect Cost and

Fixed Cost

Predicted Sales per year: 3000 Units

Proposed Prices: 18 pounds and 30 pounds

Direct raw material cost - 11.00 pounds per unit

- 33000 pounds for 3000 units

Direct labor cost - 6.00 pounds per unit

- 18000 pounds per 3000 units

Manufacturing overhead 1500 + 720 + 4500 + 2500 + 4500 (pounds)

= 13720 pounds for 3000 units

Absorption Costing Income Statement

Price 1 (18 Pounds) Price 2 (30 Pounds)

Sales revenue 54000 90000

Marginal Cost of Sales

- Direct Materials 33000 33000
- Direct Labor 14000 14000
- Variable Overhead 6000 6000
- Fixed Overhead 2500 2500
= =
55500 55500

Gross Profit -1500 34500

Distribution and admin

cost
- Variable 720 720
- Fixed 4500 4500
= =
5220 5220

Net Profit -6720 29280

Marginal Costing Income Statement

Price 1 (18 Pounds) Price 2 (30 Pounds)

Sales revenue 54000 90000

Marginal cost of sales

- Direct Materials 33000 33000

- Direct Labor 14000 14000
- Variable Overhead 6000 6000
- Variable distribution and 720 720
Admin = =
53720 53720

Contribution 280 36280

Fixed Costs

- Production overhead 2500 2500

- Distribution and Admin 4500 4500
 expenses = =
7000 7000

Net profit -6720 29280

Through the cost analysis, it is quite evident that best proposed price for the company is 30
pounds. If the company was to chose the price of 18 pounds, it would’ve dealt with loss instead
of profit.

M2 - Accurately apply a range of management accounting techniques and produce

appropriate financial reporting documents.

Revenue (Amounts expressed in pounds)

Gross Sales 90,000

Services -

Less returns and allowances -

Others -

Total Revenue 90,000

The total revenue hereby generated in this particular scenario appears to be 90,000 pounds.

Total no. of expenses (Amount expressed in pounds)

Cost of Products sold 51,000

Cost of Services

Rent 2500

Insurance 4500
 Salaries and wages 4500

Utilities 1500

Maintenance and repair

Travel 720

Taxes

Telephone

Total expenses 64,720

Net income (Amounts expressed in pounds)

Pre-tax net income -

Net income 25, 280

With the total expenses calculated at 64,720 pounds, deducting it from the total revenue of
90,000 pounds gives us the net income that appears to be 25, 280 pounds. With no taxes in
between, the pre-tax net income is therefore not calculated.

Cost price
Talking about cost price, it is simply the total amount that it costs a manufacturer to produce a
given product or service.
The cost price is inclusive of the outlays that are required for production including costs of
material, power, workers wages/salaries, property, R&D, testing and all the other things that
must be paid for. This is exactly why it remains important for the manufacturers to calculate a
product’s costs with a lot of care in order to avoid themselves from taking a loss on sales and/or
not being profitable enough. The cost price is often considered as sensitive information and is
therefore protected from the customers and the company’s competitors.

In order to calculate the cost price, we have different sets of ways that can be used. One of them
is the ‘Full cost pricing method’.
In order to calculate the cost price in this scenario, we’ll use the ‘Full cost pricing method’.

Full cost pricing

Now the full cost pricing method is often used as a price setting method. Under this particular
method, a number of costs are added, including both the variable costs as well as the fixed costs.

Fixed Costs (Amounts expressed in pounds)

Salaries and wages 4500

Rent 2500

Total Cost 7000

Variable Cost for 1 Unit (Amounts expressed in pounds)

Wood cost 3.00

Power 0.5

Transport 0.24

Insurance 1.50

Rods and plates 1.50

Laminates casting 6.00

Screws and nails 0.50

Labor wages 6.00

Total variable cost 19.24

The company ‘Wood ‘N’ Tops Community enterprises’ had taken up a project of manufacturing
almost up to 3000 hifi tower units. Thus, for the company to sell 3000 units/year, the cost price
per unit would appear to be as follows:

Cost price: ​total variable cost + (total cost/total number of units to be sold)
> 19.24 pounds + (7000 pounds / 3000 units)

> 19.24 pounds + 2.3 pounds

> 21.54 pounds.

The cost price calculated appears to be 21.54 pounds per unit.

The full cost pricing method here used helps in setting long-term prices that are basically
sufficiently high enough to ensure profits after all costs have been incurred. The method in itself
is quite easy and simple to use, and with a given standard formula, it can be derived at almost
any level of the organisation. Another important point to note here is that as long as the budget
assumptions used to derive the price turns out to be correct, a company would be most likely to
earn the profits on sales using this particular formula. An even more important aspect to
understand is that this particular method remains quite justifiable. The supplier can always show
how the prices are simply based on costs, and how costs might have increased if in case the
supplier wants to persuade its customer for a mere price increase.

Break-even point
There are a number of different definitions to the term “break-even point’. It is basically the
revenues that are needed to cover a company’s total amount of variable and fixed expenses over
a specified period of time. In its simplest terms, it is the point at which revenues equal the
expenses or the point at which ‘gains’ equal ‘losses’.
It is the break-even point that helps companies be able to determine when they’ll actually be able
to turn a profit, and it also assists them with the general pricing of their products/services.

The scenario being given here is that of the Wood ‘N’ Tops Community Enterprises. In order to
calculate its break-even point, we’ll be using the best proposed price based on the income
statements already prepared.
The proposed prices by the management are as follows:
- 18 pounds
- 30 pounds.
With the best proposed price being 30 pounds according to the income statement already
prepared, we’ll use it to calculate our break-even point.

With the general formula of break-even point being:

B.E point in units = Fixed Costs/ (Sales price per unit - Variable cost per unit)

Thus, as the price per unit price minus variable costs of products is simply the definition of
contribution margin, we’ll simply rephrase the equation.

B.E point in units: Fixed Costs/Contribution Margin Per Unit

Contribution margin per unit can be calculate as follows:

Contribution margin per unit: Sales Revenue per unit - Variable expenses per unit

> 30 pounds - 19.21 pounds

> 10.76 pounds

Thus, as calculated above, the contribution margin per unit turns out to be 10.76 pounds.

With the value now calculated above, we can find out the Break-Even points in units.

Break-even points in units: Total Fixed Costs/Contribution Margin Per Unit

Total fixed cost: ​7000 pounds

Contribution Margin per unit: ​10.76 pounds

Break-Even Points In Units: 7000 pounds/10.76 pounds

=
​651 Units

In order for Wood ‘N’ Tops Community Enterprises to achieve its Break-Even, it has to sell
almost 651 units.
Break-Even Income Statement

Contribution Margin Ratio: Contribution Margin Per Unit/ Sales Per Unit

> 10.76 pounds / 30 Pounds

> 36 Percent (Contribution Margin Ratio)

Break-Even Sales: Total Fixed Costs/ Contribution Margin Ratio

> 7000 pounds / 0.36

> 19,445 pounds (Break-Even Sales In Pounds)

- Variable Expenses: 19445 pounds x 0.64 = 12445 pounds

- Fixed Expenses: 19445 pounds - 12445 = 7000 pounds

B.E Income Statement (Amounts expressed in pounds)

Total Sales 19,445

Less Variable Expenses 12,445

Less Fixed Expenses 7000

Contribution Margin 7000

Net income 0

Break-Even Price:
Businesses practice setting break-even price points at which they’ll earn zero profits on a sale.
Such practices are incorporated as a strategy introducing their products at low prices, using it as
a tool to not only gain market share but drive its competitors from the marketplace. Often by
doing so, companies are able to increase their production volumes to an extent whereby they can
reduce its costs and further on earn profits at what had been the previous break-even price. This
concept helps establishing the lowest acceptable price, below which the seller can and will start
losing money on sales. Often businesses/companies use this particular strategy in situations
where the customers often demand for the lowest price possible.
In order to calculate the Breakeven Price, the following formula is put into use:

(Total fixed cost / Production unit volume) + Variable cost per unit

Total Fixed Cost: 7000 pounds

Production unit volume: 3000 units
Variable cost per unit: 19.24 pounds

> (7000/3000) + 19.24

> 21.6 pounds

With the above calculations, we’ve been able to figure out the Breakeven price for Wood ‘N
Tops Community Enterprises, which has turned out to be 21.6 pounds.

Required Sales
Companies/businesses set certain targets for their income after their expenses. As for the case of
Wood ‘N’ Tops Community Enterprises, it aims to achieve a 10% of profit. In order to figure out
the sales volume, the formula used is nothing but an extension of the break even sales equation.

> Required Sales Volume (In Pounds): (Targeted Income + Fixed Costs) / Contribution Margin
Ratio
​Wood ‘N’ Tops Community Enterprises aims to achieve a 10% profit above its total expenses.
> ​Total expenses incurred: 64,720 pounds
> ​64,720 x 0.1
=
> 6,472 Pounds (Targeted Income)

Required Sales (In Pounds)

> 64,720 + 7000 / 0.36
=
> ​37, 422 Pounds
Required Sales (In Units)
> (Targeted Income + Fixed Costs) / Contribution Margin Per Unit
> ​64,720 + 7000 / 10.76
=
> 1252 Units

For Wood ‘N’ Tops Community Enterprises to earn a profit of almost up to 10%, it needs
to be able to make 37,422 pounds in sales. Or it should be able to sell around 1252 units, in
order to match that percentage of profit.

The 10% profit above is simply known as the markup price or markup percentage. This
particular phenomenon will be used in order to find out the selling price upon which the Wood
‘N’ Tops Community Enterprises would be able to that markup percentage/10% profit.

> Selling Price: Cost x (Percentage + Markup)

> 21.54 pounds x (1 + 0.1)
> 23.7 Pounds

The Wood ‘N’ Tops Community Enterprises, will have to sell its products at a price of about
23.7 Pounds​, which will help the company go on towards achieving a net profit of ​%10​.

Markups are quite widely used in the industry. It is simply an added amount to the cost of goods
covering operating expenses and profits. The Markup percentage is simply determined by the
company’s planned profit, the type of product or service that its offering, the amount of service
performed by the seller and how rapidly the product basically sells. Therefore it is important to
understand the fact that markups always must be sizeable enough to cover all anticipated
business reductions and expenses, and yet still be able to provide the business with a good profit.
D2 - Produce financial reports that accurately apply and interpret data for a range
of business activities. How these calculations will help in different business activities.

Financial reports play an important role in any business regardless of their size and structure.
Financial reports are no less than a formal record of all the financial activities of an enterprise.
These simply are written statements that basically quantify the performance, financial strength
and liquidity of an organisation.

Full-cost pricing
The full cost pricing method is just another pricing method, under which all business costs are
included in the final price. Whether it’s the direct labor costs, overhead costs, direct material
costs etc, all are included and further markup percentage is added up to it in order to derive the
price of the product. The very main objective of full-cost pricing method is to cover costs and
simply derive a predetermined package. Now the percentage might differ from firm to firm,
product to product and even industry to industry.
One of the major reasons for using the full cost pricing in the Wood ‘N’ Tops Community
Enterprises scenario was that it helped in setting fair and plausible prices. Not only this but it
remained economical for decision-making, and less risk was involved. With the use of full-cost
pricing method, the enterprise avoids price competition, as all exporters, more or less use the
same methods and pattern of pricing.
For almost any enterprise, the full-cost pricing formula remains a very simple method in
calculating and setting the price. Helping the enterprise easily set a price on their product.
Another important thing to note here is that, for a company like Wood ‘N’ Tops Community
Enterprises, the use of full-cost pricing remained the best method as it helped deal with
uncertainty and ignorance. Even if the demand is uncertain, the full-cost pricing method
safeguards the interests of the firm against all kinds of risks. And as all costs are already covered,
there remains little or no possibility of loss from the manufacturer or exporter.

Break-even point and pricing

Financial information remains crucial for any business operating in this world, as it is no less
than a key to understanding the profitability of a business. Not only this but it helps an enterprise
learn more about itself, and plan for its growth. The break-even point is simple the the point
where the business's total revenue equals total expenses.
The importance of the break-even point can be judged from the fact that it is the most simplest
way for any business to actually determine whether whatever it charges for its services or
products will cover all the costs that come up while making providing those products and
services. And it goes without saying that the higher the fixed costs will be, the higher will be the
break-even point as well.
Thus, if we take up the scenario of Wood ‘N’ Tops Community Enterprises, it remained vital to
first determine the break-even point, as it helped in figuring out what the true costs doing the
whole business were and as well as the prices. Also, it is important to note that the break-even
point allows companies to analyze, learn these figures and more importantly gives an insight into
the accuracy of their own prices and whether their goals are realistic or not. The break-even point
helped in understanding the amount of sales that Wood ‘N’ Tops Community Enterprises would
be needing to break-even.
Along with the break-even point, businesses also focus on having the knowledge about what
total contribution is made by each product and service to the company’s overall profits. This
helps the company understand and realise whether the products or services are profitable or not,
and whether the company needs to raise the price, reduce the cost of offering it, or possibly
discontinue it. The Wood ‘N’ Tops Community Enterprises therefore had to figure out their
selling price, by using the break-even pricing. This helped the enterprise set a selling price higher
than what the break-even price was, which helped them earn the profit that they aimed for and
preventing it from any loss.

Wood ‘N’ Tops Community Enterprises had already figured out the percentage of profit that they
wanted to earn. Thus, the required sales volume would help them understand as to how many
sales they need to make in order to achieve the targeted income. For this, the enterprise needed to
understand what the costs of all the operations were, so that if they can, they’ll be able to cut
down costs, and bring the prices down, helping it set a lower break-even point. Therefore they’ll
be able to put out a much easier-to-achieve selling price. That is exactly why it is important to
understand the required sales that enterprise need to make. The target income sales basically
helps them figure the amount of sales need to cover all the fixed costs, variable cost and targeted
income as well over a specified period of time. Wood ‘N’ Tops Community Enterprise had a set
a target income of 10% which they aimed to achieve. By being able to figure out the target sales,
the Wood ‘N’ Tops Community Enterprise could easily figure out all the objectives it needed to
set and activities for its operations, in order to meet the targeted sales efficiently and effectively.

With a bunch of financial reports used by companies in order to help with its business activities,
the Markup pricing strategy also adds in and helps cover overhead costs, products costs,
operational costs and also the profit that it aims to obtain.
It is important to understand that Markup pricing is also used as a tactic to draw customers
towards discounts. Often many stores simply foster the markup strategy by increasing the prices
of certain items in order to make the subsequent discount seem larger, which also increases the
odds of purchase. Companies that are able to pull off this tactic quite brilliantly, are able to draw
large number of customers, as everyone loves getting a good deal, or the perception that they got
a good deal. The markup pricing helps enterprises is negotiating with customers as well. If a few
customers do buy the product at the markup price, it only benefits the company, and if the
customers try negotiating the prices, the prices can be adjusted as it wouldn’t bring about any
losses.

Learning Outcome 3 - Explain the different types of planning tools used in

management accounting.

P4 - Explain the advantages and disadvantages of different types of planning tools

used for budgetary control.

Looking into the present complex business and industrial world, management accounting now
appears to be a vital part of the overall management. It is known to guide and advise the
management at different important steps. Companies/businesses now benefit a whole lot from
management accounting. Not only does it help determine aims of an enterprise, but it helps in the
preparation of different plans. One of the most important points that stands out among the rest, is
that it provides an effective management control. All the different tools and techniques of
management accounting are helpful to the management in planning, controlling and coordinating
the activities of the business.

While talking about planning, it is important to note that there are various tools that are used for
planning in management accounting. Different tools when applied helps extract managerial
accounting information which also helps provide data-driven inputs to the various decisions of
the business. This then helps improve decision-making over the long term.

Under management accounting, different types of information is created and recorded, financial
and non-financial, which helps aid in the overall decision-making process. Effective business
strategies are created on the basis of all the information that is collected which helps in effective
long term decision making.

While there remain a range of tools that organisations use for budgetary controls, the two
categories often discussed and outlined are as follows:

Financial
-​ Budgets

Non-financial
- Benchmarking (Internal & External)
- SWOT Analysis (Strengths, Weaknesses, Opportunities, Threats)
- PESTLE Analysis (Political, Economical, Social, Technological, Legal, Environmental)

Financial Planning Tools

Probably one of the most important tools to record financial information is budgeting.

Budgeting
Probably the most used tool in almost all of the organisations is that of budgeting. It in itself is
often used as a good planning tool as well as a benchmark for determining business success. In
its simplest terms, it’s a financial document that is used to predict future income and expenses.
Budgets are compiled and re-evaluated on a periodic basis.
Often quite vital for analysing the results of various departments, making important decisions
whether to trim the expenditure in a specific area, or whether to increase the investment. Not
only this, budgets help measure the performance of the staff and also helps set productivity
targets. Its importance can be judged from the fact that since it allows the organisation/business
to create a spending plan for its money, it ensures that the company/business will always have
enough cash for the things needed or things that are important.

Taking a look into its developmental process, it starts off establishing assumptions for the
upcoming budgeting period. The assumptions are often related to the projected cost trends, sales
trends, and basically the overall economic outlook of the market/industry sector.
Budgets in itself are of different types. Different budgets are created depending on what
particular aspect of a business requires focus. A few of them are:

- Sales Budgets
Sales budgets are often known for detailing all the quantities of products and services that a firm
expects to sell, revenues incurred from all those sales and all the different expenses accrued
during the selling process. This particular budget indicates the sales a business/company expects
to make in units and dollars/rupees/pounds for a budget year. This kind of explains why Sales
budget is known to be control mechanism and a planning instrument. All the forecasts from the
sales budgets helps outline and determine the sales potential. It is often used as a yardstick
against which the actual sales performance is then measured and all the variables are then
controlled. The variables often include selling expenses, sales volume and profitability.
- Cash Budgets
Talking about cash budgets, it basically forecasts as to how the cash will be used throughout the
coming year. Often cash budgets focuses on the near future, since the strategies and goals of a
company can change with changing circumstances. All future expenditures and cash receipts for
a specific period of time are determined by cash budgets. Cash budgets in itself has four distinct
elements: cash Receipts, cash disbursements, new financing and net change in cash.

- Production Budgets
Now if we look into the production budgets, they are actually prepared on the basis of sales
budget while taking into account the stock levels required to be maintained. It is quite helpful in
anticipating the cost of production. Under the production budget, the whole schedule of
production is created by breaking it into smaller units to fulfill the target production. The
importance of production budgets can be understood by the fact that it leads to better inventory
control and most importantly improved maintenance of production schedules and targets.

- Material Budgets
This is what often comes under the production budgets. Materials are the first requirement in any
production budget to be considered. Material in itself is subdivided into two important
categories. The direct and indirect material. Estimates need to prepared of raw material required
for the products and the purchase of raw material in the required quantity at a required time.
While developing the material budgets, a number of factors are taken into consideration. They
include:
- Requirement of raw material
- Price trend
- Cost of raw material
- Company’s stocking policies

Advantages
Budgets have a whole lot of different advantages. A few of them are mentioned below:

- Budgets are more of an early warning system, highlighting where investigation and appropriate
action is necessary.
- Budgets provide a whole framework for delegation, helping coordinate different departments
aligning them towards shared objectives and goals.
- While budgeting is a vital tool for monitoring and control, it also helps promote forward
thinking as it shows the entire workforce an overall picture of the direction of organisation and
helps motivate them.
- One of the most important things to understand is that it helps in directing the capital and other
resources into the most profitable channels.

Disadvantages
Just like any other tool, budgets do not come problem-free. It is often argued that:

- Budgets are bureaucratic.

- Errors and inaccuracies are always there as it remains impossible to predict the future. Often
major external factors does act as a distortion in the process.
- Often rigid budget structures reduces innovations and initiatives at lower levels, making it
impossible to bring out spending for new ideas.

Non-financial Planning Tools

- Pestle Analysis

Pestle analysis is a tool/framework that is often used in order to identify and analyze the very key
and important factors that lead to changes in the strategic environment. The overall environment
surrounding a certain business/company has a huge impact on it. Whether it's the external macro
environment that the company is being affected by, Pestle analysis allows and aids in assessing
the current environment and mapping out for better potential changes that would affect a
company/business.
Pestle analysis is in itself an analysis of political, economical, social, technological,
environmental and legal factors of an organisation, which can have a certain effect on its
performance and activities.
This framework is used in order to achieve the aim of knowing and understanding the very
current factors that affect the organisation externally. From identifying and predicting certain
factors that may or may not change in the future to looking out in the environment (current and
future) in order to exploit the changes or protect and defend against them.

Advantages

- Pestle analysis is quite a handy tool. Not only is it simple but also an easy-to-use framework for
one’s analysis.
- The Pestle tool in itself involves cross functional skill and expertise, which also helps
encourage and develop strategic thinking within an organisation.
- Pestle is known to be cost-effective. Time and effort are known to be the only costs that will
incur while conducting the whole analysis.
- The framework helps analyze specific products, marketing plans and customer relationships
which leads towards an increased awareness in case of new developments.

Disadvantage

- Probably one of the most common disadvantages while using the Pestle framework is that uses
usually oversimplify the information that is used for making important decisions.
- With the society in general and technology as in overall, evolving at a rapid pace, it often
makes it difficult for the management to anticipate developments that can affect the growth
prospects of an enterprise in the long run.
- It is the assumptions that usually forms the basis for most of the data used, which is why
decisions made based on such data always remains subjective.

- SWOT Analysis
SWOT analysis helps businesses to understand the market well. SWOT in itself is a method for
analysing internal strengths and weaknesses, and the external opportunities and threats facing the
enterprise.
Whether it's a small or a large business, along the years they confront many opportunities and as
well as certain threats. Every organisation sets out certain plans and goals that they aim to
achieve with time. But in order to analyse the situation of a company, assessment of its
weaknesses and strengths is necessary. Those weaknesses and strengths that the company might
be presently facing or may encounter in the future. Such analysis and assessment helps the
company retain the very strengths that they already have and overcome weaknesses in order to
capitalize more on the opportunities and convert threats into strengths for the organisation.

Advantages
- The primary value of this particular framework can be judged from the fact that it holds the
potential to uncover profitable business opportunities.
- Its simplicity is one other advantage. SWOT analysis requires neither technical skills nor any
training. Rather it can be performed by anyone having the right knowledge about the business in
question and the industry that it operates in.
- Just like the PESTLE analysis, the SWOT framework remains cost-effective as well. Rather
than hiring an external consultant, the analysis can be conducted by a staff member as well.

Disadvantages

- When conducting the SWOT analysis, it is quite evident how it leads to four individual lists of
strengths, weakness, opportunities and threats. Yet, the SWOT analysis provides no as such
mechanism to rank the significance of one factor versus another within any list.
- Another major disadvantage is that remains more as a subjective analysis. The collection of
data and its analysis often reflects the bias of the individuals who conducted the whole process.
In addition it often becomes outdated quite quickly.

- Benchmarking
Now when we talk about Benchmarking, it simply a practice of comparing actual performance
results with a standardized performance goal or number. The entire process of benchmarking is
basically to search for the best practices within and across the industries. Benchmarking helps
with the continuous improvement of all the internal operations. Companies engage in
benchmarking to help themselves become more externally competitive as well as for
organisational survival. When we talk about benchmarking, they are further divided into two
primary types:

Internal - This is more of a comparison of performance and practices between individuals,

groups or teams within an organisation.

External - External benchmarking relates to the comparison of the overall organisational

performance to industry peers or across industries.
Advantages

- One of the most prominent benefits of benchmarking is that it improves product quality. Often
companies purchase the products of their competitors, study them and determine what makes it
better than their product. This is where they learn and understand all the necessary improvements
that need to be made to their very own products.
- With using different benchmarking techniques, companies are able to improve its different
functions, operations, products and services which often leads to increased sales and profits.
- Internal benchmarking techniques are used to improve performances of different departments.
Managers study and emulate the best practices of other departments.

Disadvantages

- One of the biggest disadvantages that companies often overlook is that they keep an eye on
their competitors instead of focusing on their own growth. The obsession with another company
cannot lead the enterprise anywhere.
- Organisations often make the mistake of undertaking benchmarking as a stand-alone activity.
Benchmarking is simply worthless if not accompanied by a plan to change.
- Often companies overlook all the matters which increases their productivity along with their
customer satisfaction. This is why instead of incorporating ideas that other companies use for
themselves, the enterprise should check for its feasibility in their own.
M3 - Analyse the use of different planning tools and their application for preparing
and forecasting budgets.

In the world of today where there are many scarce resources, time and money are two vital
resources that definitely remain scarce to organisations and individuals. One must be able to take
use of careful planning in order to make efficient and effective use of these resources. Yet, at the
same time, planning alone might be insufficient and would require proper control in order to
ensure that all the plans are actually put to use. This is exactly where budgets come in.

Budget is one critical tool to individuals and organisations that helps plan and control the use of
scarce resources. Budgets are usually expressed in quantitative, more often in monetary terms,
covering a specific period of time. In any organisation, a budget is known to represent an
estimate of future revenues and costs. Budgets are further divided into two basic classes. They
are:

- Operating budgets
- Capital budgets

Talk about operating budgets, and well they are directed more towards successfully achieving
short term operational goals of the business/organisation. This may include the production of
profit goals in any business enterprise. Capital budgets on the other hand are more inclined
towards proposed expenditures for any new projects and usually do require special funding.

Organisations spend a great deal of time in undertaking the budgeting process, and it then
requires quite a commitment to stick to it and act accordingly. Budgets are not only made to help
businesses organize their finances, but it also helps them identify those feasible ventures in
which to invest and avoid committing funds to lackluster ventures. There are a number of factors
that affect and influence the overall budgeting process, and need to be taken into consideration
when making important budgeting decisions. A few of them are as follows:

- Organisational goals
Often companies fail to understand this but leaders should be able to align their corporate
objectives, strategies and opportunities with their budgets. With this, they should also be able to
understand the direct and indirect effects of capital and operating expenditure. A capital project
may impact an organisation’s technical infrastructure and quite possibly its personal
requirements such as technical support. This as a result would effect important budgeting
decisions because then it would have to include as to how much funds should be allocated to
develop personnel who support the infrastructure or how much exactly should be dedicated in
order to spend on technical infrastructure in various locations.
- Legislation and Government regulations
It has been quite often observed over the years how legislation and government regulations can
possibly disrupt a company’s production, marketing or financial plans. This is exactly why it
remains vital for the management to take into consideration all the government controls, laws
(existing or pending) and then make budgeting decisions, because there's a greater chance that
it’ll affect the organisation’s existing or proposed operations.

- Organisational structure
It’s the organisational structure that basically tells us how an enterprise is composed. Talk about
the approaches to budgeting that are basically controlled by the organisations structure, and
we’re able to classify them as:

- The top-down approach

- The bottom-up approach

It's in the top-down approach whereby the top management of a company dictates exactly how
much money is to be spent by each part/function of the organisation. There are chances that the
top management might allocate more money to departments which helps them expand their
operations and have themselves relieved of the pressure of working under a tight budget, but it
also does leave little room for negotiation as the decision-making is done by the top management
and at times they might make different decisions. On the other hand, we have the bottom-up
approach to budgeting. This is basically used by department when they draw up budgets and
have them submitted to the top management for approval. While this does slow down the entire
budgeting process and makes way for people to complain about favoritism, it allows heads of
departments to have more latitude with their work.

- Industry analysis
It is always important to conduct an industry analysis because it is known to provide a context
for many budgeting decisions. Whether it’s the industry trends or the global economy, it can
have major impacts on the company’s operations. International transactions, supply and demand,
and government regulations are some of the many factors that can also affect the operations of an
organisation.

When we try looking at every successful company, there’s always a number of factors at the
back of it. A dedicated team and effective strategic planning are two important elements that
always need to be there. Talk about the budgeting process, and that too requires these two, along
with a bunch of other important elements. Strategic planning can help the Wood ‘N’ Tops
Community Enterprises to set priorities, allocate resources and align their employees with its
mission and vision. Two of the very famous strategic planning tools used widely are as follows:

- SWOT Analysis
- PESTLE Analysis

Comprehensive use of these two important strategic planning tools can assist the business in the
budgeting process by understanding as to how to exploit its strengths, neutralise its weaknesses
and take advantage of its opportunities.

SWOT Analysis
It is quite important for companies to understand how to use SWOT analysis, as it helps develop
budget priorities. This helps guide the major decisions of a company in budget planning.

- Be able to invest in strengths

Strengths are known to represent the organisational competencies or assets, which basically
gives a business a competitive edge over its competitors. This section of the overall SWOT
analysis can help reveal important elements that can allow the Wood ‘N’ Tops Community
Enterprises to gain market share from competitors and also as to what exactly sets the company’s
value proposition apart. All of this can be analysed and used wisely to plan room in budgets so
that the strengths can be developed further.

- Being able to overcome weaknesses

Focusing on this part of the analysis, it helps identify all the weaknesses that a company needs to
overcome. Having identified the weaknesses, it can be determined as to how much of the
company’s budget should be devoted to address the weaknesses in the future periods. This only
leads the path towards continuous improvement.

- Being able to take advantage of the opportunities

Opportunities in most of the cases are simply the potentially profitable investments that
businesses can exploit, in order to lower expenses or increase their revenues. In order to be able
to take full advantage of opportunities, it’ll always require to deal with expenses and making
sufficient room in the budgets in order to be able to take full advantage of all the opportunities
that helps the company stay ahead of its competitors.

- Being able to prepare for threats

External threats in markets are known to weaken a company’s competitive position if it is left
unaddressed. Being able to assess future threats, the Wood ‘N’ Tops Community Enterprises can
set aside money in their budgets to address such potential threats.
PEST Analysis

While PESTLE Analysis might be just another exercise in data for some people, it actually does
give the decision-makers an understanding of any changes that might occur within a given
market. The term in itself stands for the political, economical, social and technological impacts
on any business/company/organisation.

Talk about the political changes, and well it definitely is the kind of news that gets the most
attention. Elections, regime changes, political rallies etc, can either remove pro-business
governments and replace it with the ones that are in favor of regulations. Strikes, rallies, protests,
all of these can potentially affect running businesses, and can also cause business closure for
days and also weeks. This is exactly why businesses should be aware of any such shifts or major
changes that can affect the businesses, and leave enough room in budgets to be able to deal with
any of these.

Along with this, businesses like the Wood ‘N’ Tops Community Enterprises should be in tune
with the economic changes that occur. With the ever changing market trends, it can either
handout out superior rewards or serve up bitter medicine, depending on the circumstances. Costs
of labor, interest rates, and most importantly the danger of inflation can impact the budget of the
Wood ‘N’ Tops Community Enterprise.

Social factors are quite critical as well. From changers in popular spending trends to age
demographics and behavioral changes, all require proper concentration.

Coming down to the technology, and well it is quite evident that our global economy is more
than ever heavily influenced by technology and other developments in electronic
communication. Technological innovation can even cause a needed revision in product design or
blueprints. This is exactly why it is important to understand as to what amount should be
dedicated in budgets towards improving the technological infrastructure, and other such future
further developments.

All these important factors heavily influence the decision-making process and simply help in
understanding the current and future needs. With the right level of understanding of all these
factors, proper budgets can then be devised accordingly that will only make way towards
improvement, and help the company increase its profitability.
Budgets for Wood ‘N’ Tops Community Enterprises

- Sales Budget

Months 1 2 3 4 5 6

Forecasted 250 200 300 350 400 500

Unit Sales

x Price per 30 30 30 30 30 30
Unit (pounds) (pounds) (pounds) (pounds) (pounds) (pounds)

= Total Net 7,500 6000 9000 10,500 12,000 15,000

Sales (pounds) (pounds) (pounds) (pounds) (pounds) (pounds)

Learning Outcome 4 - Compare ways in which organisations could use

management accounting to respond to financial problems.

P5 - Compare how organisations are adapting management accounting systems to

respond to financial problems.

When we talk about management accounting in general, it is known to be a discipline/profession

that basically includes the integration of all the financial and non-financial statements in order to
provide vital information to the management which would only help in making effective
decisions. The scope of management accounting can remains quite wide, as it involves a whole
lot of information that is evaluated and basically helps in controlling, planning, organising and
decision-making of the organisation.
Organisations in the world of today look towards integrating the whole management accounting
process in almost each and every level of the organisation. As it remains vital to collect and
evaluate all kinds of information present at each level in the very organisational structure. The
information can even relate to the social and cultural issues of the organisation.
Organisations face a number of challenges in their day to day operations. Whether financial or
non-financial, management accounting helps as it impacts the decision-making of the
organisation and can lead towards organisational success.

The management accounting systems help reduce costs in different areas of production and
operations, and this leads towards generation of higher profits. Organisations that have a hard
time figuring out how to deal with high production costs can introduce management accounting
systems, which increases efficiency of the different functions of management. As a result, costs
can be cut down, and saved up.
Probably one of the most vital functions of management accounting systems is that it helps
forecast and prepare budgets so organisation can estimate its income and expenses. With
organisation able to estimate these particular numbers, it can easily figure out how to plan out
their spending, and whether or not any investments would be required.

Organisations use a number of different management accounting systems in order to help

improve their efficiency and effectiveness. One of the most widely used accounting systems is
that of the Cost-accounting systems. Continuous improvement in an organisation can be
achieved if organisations are able to successfully develop and integrate cost-accounting systems
in their own organisations. Rather than simply focusing on controlling and budgeting solely at
the department levels, organisations can do so at different activity levels as well, e.g billing,
inventory purchase etc. Companies here measure the costs of inputs, eliminate or reduce those
that add little or no value. This reduces the costs. All the major activities are measured and their
effectiveness is observed. Where possible, new activities are introduced to enhance the
performance. Cost-accounting systems help save up costs in many different places and
eliminates activities that add no value. This saves time and money for the organisation to invest
in different places.

A lot of the times organisations are not able to identify all the areas where improvements would
help them get out different financial problems. One of the most important functions of
management accounting systems is the quality management. Management accounting systems
help measure and monitor quality-related costs. Consumers in the age of now look towards
buying products of great products with high quality services. By being able to tap into this
particular characteristic of a consumer, companies can be able to sell their products to large
number of customers and generate higher profits. Management accounting systems help measure
quality related costs, and ties them to product or service quality. By being able to do so, one is
able to identify all the small incremental changes that need to be made, which will only have a
positive impact. By being able to focus improving quality at smallest of levels, companies are
able to build great products and deliver the services of higher quality, which further leads to
generation of higher profits.

M4 - Analyse how, in responding to financial problems, management accounting

can lead organisations to sustainable success.

Often when we talk about successful organisations, we tend to figure out all the right reasons for
its success. Yet, one of the most important elements that contributes to the long lasting success is
sustainability. Today, organisations face the tough question of how to adapt their business
models, practices and strategies to respond to the ever changing environmental and social
challenges, that too while being able to create financial success and value for their stakeholders.
Not all companies in the world are confident that they have the right skills and tools to meet
these challenges and compete in a sustainable economy. When companies fail to take advantage
of the management accounting skill set, they tend to miss out on valuable insights and analysis.
As of now, it is widely agreed that by integrating social and environmental factors into
organisational decisions, significant amounts of commercial and financial benefits can be
achieved. By being to include sustainability information, not only can it be used in
risk-management and strategic decision-making, but all of this data can also be integrated by
management accountants into procurement and supply-chain decisions. What it does is that it
helps understand how different risk factors such as social inequality or natural resource depletion
might impact on different operational issues such as pricing, productivity and also the future
strategies.

One of the most important things to note is that management accounting is not simply about the
different tools that are being used, but rather the different skill sets as well that management
accountants possess. It is important to be able to produce reports that include data on
sustainability impacts as it helps inform pricing decisions, strategic planning, budgeting and
investment appraisals.
Unilever​, which is known to be one of the biggest consumer goods company in the world, came
into being in 1929. 88 years on, and the company is still one of the most successful enterprises in
the world. Probably one of the major reasons for its success has surely been its sustainability.
Talking about its success, the company’s very own finance team has been highly applauded over
the years for its instrumental role in calculating the costs and benefits of its sustainability
programme. Unilever’s eco-efficiency program has helped the company cut down its operating
costs by $395 million since the year 2008.
Successful companies are able to bring in management accountants that basically focuses on
developing different KPIs and benchmarks that support strategic and sustainable goals. Not only
this, but it also remains important to take into account the resource efficiency and planetary
boundaries.

Coca cola​ has been able to introduce two important systems into their organisation, which has
helped them with track inventory in real time and basically manage resource efficiency.

The two systems are:

- Manufacturing resource planning systems (MRPII)

- Material requirements planning systems (MRP)

These systems help add to the overall tracking and communication of different sustainability
initiatives. By being able to track inventory in real time, considerable reductions are made
possible in the inventories. The company has been able to successfully keep a check on the
inventory and regulate its usage, which leads to inventing optimum inventory.

It is important to integrate management accounting systems in all the different functions and
levels of the organisation, as it helps with sustainability.
Sainsbury’s​, which is the second largest chain of supermarkets in the entire United Kingdom,
with a market share of 16.9, has also been known for working on their management accounting
systems. The Company teams up along with different finance, agriculture and buying teams, and
worked with dairy farmers in developing a Cost of Production Model. This particular
management accounting system basically readjusts the volatile costs that are associated with
milk production. This model has been so successful that it enabled the farmers to get a
guaranteed price while taking into account their costs. All of this independant of the retail price
of the milk. And while doing so, Sainsbury’s on the other hand has been to have a more strong
dairy supply chain. All in all, with a dairy strong supply chain, the financial conditions would
automatically improve.

For companies, it remains important to understand their organisational structure and functions,
and apply various management accounting tools and techniques (lifecycle costing, carbon
footprinting, scenario planning of natural resource availability), to basically help integrate
sustainability matters into the decision-making process of the organisation.
D3 - Evaluate how planning tools for accounting respond appropriately to solving
financial problems to lead organisations to sustainable success.

In the world of today, sustainability issues issues affect all kinds of organisations regardless of
their size, presenting potential opportunities and as well as significant risks. What remains as a
challenge organisations is how to adapt to their business models, practices and strategies to
respond to environmental and social challenges while creating financial value and success for
their share/stakeholders.

Management accounting helps guide organisations towards sustainable success in a number of

ways.

- It helps link sustainable challenges to the organisation’s business model, performance outlook,
strategy and license to operate.

- Management accounting enables organisations to develop KPIs that support sustainable

strategic goals.

- It allows businesses to be able to produce reports that includes data on sustainability impacts in
order to inform investment appraisals, pricing decisions, strategic planning and budgeting.

- Management accounting helps explain the impact of sustainability issues in more robust
business terms, including when and how could they affect a business.

- Management accounting also helps identify social and environmental trends that will impact on
the ability of the company to create value over time.

While these are a few of the many ways in which management accounting assists businesses and
leads it towards achieving sustainable success, what is important to understand is the fact that by
incorporating management accounting, the tools and techniques such as life cycle costing, carbon
footprinting, scenario planning of natural resource availability and most importantly budgeting
helps integrate sustainability matters into the decision-making process. Each and every business
is required to carefully plan and review their finances. With a whole bunch of tools and
techniques of accounting available, companies use them in order to identify, measure, analyze
and report their financial information. One of the most important accounting tools that
companies use are budgets.
Budgets basically provide guidelines for future planning and decision-making. A budget is
simply a detailed analysis of how a business expects to spend its money in the future periods.
Often companies are involved in drawing up budgets on an annual basis in order to carefully
outline the the expected needs of each department in the business.

There are a number of ways how budgets help organisations in important decision-making and
lead it towards achieving sustainable success.

- Built-in growth
One of the most important things to understand is that budgets are known to assist companies in
leading them towards sustainable success. Companies can include sustainable growth in their
budgets by including purchases of equipment, property and plans for expansion in them. This lets
a business focus on not merely surviving, but rather setting aside money for future growth as
well. A company is able to make wise decisions then, as it starts planning on growing its income
for its future bottomline as well, and not merely its current bottomline.

- Budgets limit expenditures

Budgets are known to limit expenditures. Being quite a vital tool, one of its biggest benefits is
that it possesses the ability to limit the spending of money on certain operations. It helps in by
counting expenses and making sure that the capital is not wasted or the business does not
overpay for any of the resources used. This helps in decision-making, as the money saved can be
invested in some other area of the operations.

- Budgets are known for creating financial roadmaps

One of the most important reasons for incorporating budgets in a business is to create a financial
roadmap its operations. The budgets of the previous year’s are reviewed, in order to have a
greater understanding as to how well the company has followed the previously set guidelines,
and why budget variances have occurred. Variances can be of both types, positive and negative.
An unexpected growth revenue is quite positive for a company. Taking these variances into
account, a business can make effective decisions as to whether the budget amounts need to be
increased or not.

- Budgets help adjust the strategy

A budget lets a company know how it’s doing. The foundation of a company’s budget is its
income. If a company is missing out on its income targets and has to cut back on its
expenditures, then smarter decisions have to be taken about where to focus the money. Often
missing income targets can cause a company to relocate its funds for sales and marketing to
boost income levels.

- Budgets are known for eliminating emotionalism

When a company creates a budget, it has to be performed in the most rational moments and the
best ways to spend the money have to be considered. Concrete numbers allow business from
overspending, and lets one take decisions with extreme care and precaution.

Sales budget
One of the most basic components of an operating budget is the Sales budget. It is the sales
budget that helps list the revenues and units expected from a sales plan. It is quite widely
understood that the more accurate a company’s sales plan is, the more effectively will it be able
to manage the business. Developing a sales budget is quite vital as it allows companies to:

- Determine the future revenue of the business (Revenue forecasting)

- Plan for any demand (Volume forecasting)

Creating sales budgets help companies in a number of ways, including managing cash flow
better and taking advantage of sales rep expertise.

- Sales budgets help maximize expertise

When a company decides to give its sales reps discretionary budgets, each representative can
then go on spending it based on aspects of territory, clients and knowledge of marketplace. This
lets the sales reps maximize their expertise, and spend accordingly.

- Sales budgets ensures better cash flow management

If a business is having good sales, it can push towards increasing its marketing spending
depending. If sales drop is observed, a company might want to reduce its sales budget to stay
profitable. This is exactly why including sales projections in sales budgets helps businesses make
effective decisions and plan out for labor, shipping, materials, warehousing and production
needs.

- Sales budgets also help determine overhead.

By being able to create a sales budget, it helps determine overhead costs, assists with setting
pricing strategies as it lets one see potential profit margins. Sales budgets is often used as a
projection of expenses and revenue, which basically allow one plan all the other areas of the
budget.
- Sales budgets helps the organisation plan better
Each and every company formulates various sales and marketing objectives on an annual basis.
A sales budget helps determine how these will be met through a detailed breakdown of sales
budget among products, customers and geographic locations.

It is important to focus on carefully crafting a sales budget. The three things that should be
looked into are as follows:
- With an accurate sales budget, it can help companies track data and gain insights into areas
where improvements can be made.
- The findings then need to implemented in a scalable and measurable way.
- Continuous improvement should be practiced in order to make the most of it.

The sales budgeting is known for being a key function of the entire sales management. From
estimating future level of revenue and selling expenses to determine the profit contribution made
by the sales function, a sales process includes all of this.

Production Budget
The production budget is known to maintain an optimum balance between production, inventory
and sales position of the firm. It basically is a quantity budget that lays down the quantity of
units that are to be produced during the budget period. The production budget also depicts the
estimates of output for the budget period, and is exactly why it is also known as the output
budget.

The production budget in itself has a number of objectives and holds immense importance. The
production budget allows a business to:

- Make provisions for raw materials at the right time and place.

- Coordinate the different aspects of factory production operations in order to maximize the
profits.

- Consider all the relevant factors affecting the operational activities and sales of the firm.
- Help plan the sequence of operations necessary for economical production.

The importance of the production budget remains cannot be underestimated as it occupies a

space between the inventory and sales budget. Talk about its contribution and it helps in the
coordination of policies and plans concerning inventory, sales and production. The importance of
the production budget can be understood by the fact that a useful plan of sales and inventory
balances programmes can be only achieved after taking into consideration the production
position.
Production budgets are known for stabilizing production which further leads to many indirect
and direct economies. Economies as such may be in intensive use of capital and stability in
employment, purchase of raw materials, or planned utilization of plan capacity. It is known for
its assistance in physical control of work-in-progress, raw materials and finished goods stock.

For a production budget surely does help an organisation in the realization of profit
maximization, major financial objectives of the enterprise and most importantly, it helps assist
the organisation in towards achieving sustainable success.

Cash Budget
Cash budgets, simply put, are cash inputs and outputs of a business over a period of time. It is
one of the most important budgets because the entire process helps in understanding the
organisation’s expectations and plan for the future. Cash budgets are used to effectively manage
and monitor the immediate cash flow of a business budget.

The importance of preparing a projected cash flow budget can be judged from the facts that
allows companies to:

- Establish a concrete base for requesting credit.

- Invest part of accumulated positive balances in any period in the capital market to generate an
additional source of income. It can also be invested in equipment or technologies in order to
improve the management of the company.
- Anticipate future deficits, and hence make financing decisions beforehand.

The preparation of cash budgets is simply because it ensures that there will be sufficient cash in
hand. It might go on towards showing deficiency in future periods, which lets the business
arrange drafts or loans to deal well before. It might go on to show cash surplus which basically
allows the company to plan ahead for investing it appropriately in the future.

Cash budgets are quite vital and are simply an indication of the company’s liquidity or ability to
meet its current and future obligations. One of the most important things to understand is that it
answers some of the most important questions that are involved in the decision-making process
of a business. A few of them are as follows:

- Should the business grant credit or collect in cash?

- How much input can the business buy?
- Is it necessary for the business to request credit or can it purchase in cash?
- Can the business invest the surplus of money in new projects or financial instruments?
- Should the business ask for refinancing or can it pay off debts when due?

With a whole bunch of benefits that organisations get from budgets, it is important to understand
budgets are simply an assumption as it is mostly prepared based on the past records. With the
unpredictable environmental and social changes, it can cause huge differences in the actual
results. Along with this, budgets are known to be time consuming.

While budgets do have its fair share of drawbacks, business of today should invest in ways and
techniques to come up with more effective budgets. They should:

- Create budgets that reflects the organisation’s strategic plan for the company.
- Identify issues quickly and create a plan for immediate resolution.
- Use technology to consolidate and coordinate budgeting efforts with the team.
- Identify and involve decisions makers in the budgeting process.
- Engage teams in reviewing and comparing the budgets to actuals in order to highlight the
strengths and weaknesses.

While taking into consideration all of these aspects, it is important to understand that budgets do
not guarantee success, but they certainly help avoid failures. It is simply an essential tool that
translates plans into specific, action-oriented objectives and goals. For companies, by adhering to
the budgetary guidelines, the expectation is that the identified objectives and goals can be
fulfilled.
References

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- EDMONDS, T. and OLDS, P. (2013) Fundamental Managerial Accounting Concepts. 7th

Ed. Maidenhead: McGraw-Hill.

- HORNGREN, C., SUNDEN, G., STRATTON, W., BURGSTAHLER, D. and

SCHATZBERG, J. (2013) Introduction to Management Accounting. Global Ed. Harlow:
Pearson.

- SEAL, W. et al (2014) Management Accounting. 5th Ed. Maidenhead: McGraw-Hill.

- JOBBER, D. and LANCASTER, G. (2015) Selling and Sales Management. Harlow:

Pearson

- MCLANEY, E. and ATRILL, P. (2012) Accounting: An introduction. 6th Ed Harlow:

Pearson.

- ATRILL, P. and McLANEY, E. (2012) Accounting and Finance for Non-Accounting

Specialists. 8th Ed. Harlow: Pearson.

- ELLIOT, B. and ELLIOT, J. (2013) Financial Accounting and Reporting. 16th Ed.
Harlow: Pearson.

Websites: Hbr.org, Bbc.co.uk, Bloomberg.com, Businessinsider.com