Cost Reduction Strategies in AS Diverse Limited: An Analysis of ABC Costing

The assignment content discusses the importance of management accounting (MA) in addressing financial constraints faced by AS Diverse Limited, a company operating in the dynamic sector. The company's inability to meet success and targeted performance has led to various financial problems, including cost improving, profit declining, and reducing productivity levels. To overcome these challenges, MA systems such as budgetary targets and Key Performance Indicators (KPIs) are adopted. These approaches enable the company to analyze its financial performance, identify areas for improvement, and make informed decisions. By adopting effective MA systems, AS Diverse Limited can improve its financial performance, increase sales, and ultimately achieve its business goals.

MANAGEMENT
ACCOUNTING

INTRODUCTION
Accounting is a process which is used by every kind of business entity in order to
manage, diversify, interpret, prepare, explain etc. to financial data and informations in effectual
manner. When the financial data are to be manage in appropriate way then the company is easily
able to fulfil and meet different financial goals and objectives. Further, with the help of
management accounting business organisation is highly able to control over the expenses and
enhance level of sales and revenue at the financial years ending. In order to explain about the
management accounting there is a AS Diverse Limited company is chosen which is a small
business and UK based. Further, it is a private limited firm and operates in the service sector i.e.
dancing industry (AS Diverse limited, 2016). The study helps to analyse about different systems
of management accounting and their essential requirements at the workplace. It shows different
methods and ways which are used by the AS Diverse Limited for reporting management
accounts. In addition to this, the study describes calculation of net income using absorption and
marginal costing. At the end of report, it focuses on planning tools and methods which are
helpful for AS Diverse limited in budgetary control.
TASK 1
P1 Defining management accounting and its important requirements of various kinds for its
approaches or systems
Business Report
To,
General Manager,
AS Diverse Limited
Date: 4th October 2017
Subject: Management accounting systems
In the business world, every company has key motive is that to maximize level of profit
by controlling costs and expenses. Higher the costs lead to reduce net profit at the end of year
and hampers overall financial performance. The aspect by which AS Diverse limited highly
able to know lack of problems in the firm regarding finance department is identified as a
management accounting. In the accounting scenario, there are very broad tools and methods are
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included. Furthermore, by applying such kinds of techniques and approaches the As Diverse
Limited is able to achieve different financial targets and objectives in effectual manner. Apart
from this, the respective aspect the firm able to determine data regarding finance and accounts
for the present and future as well (Burritt and et.al., 2011). Various systems of the management
accounting along with their requirements for AS Diverse limited are delineated as below:
 Cost accounting system: Key approach of management accounting is related to cost
which is very sensitive aspect of business process. By using such kinds of system, the
AS Diverse limited is able to determine different kinds of expenses such as direct,
indirect, fixed, variable, overhead costs etc. After adding all such expenses, it calculated
total cost or production and on the basis of it determine selling prices. Hence, the
essential requirement of the cost accounting is to determine cost of total production as
well as each unit. When it knows that how much cost is to incurred for producing one
unit then it able to calculate selling price and sale to customers.
 Inventory management system: The system by which management can know level of
stock or inventory which is available at the AS Diverse limited. When there are higher
inventory remains with firm then it reduces profitability and performance of company
and hamper smooth functioning as well (Kaplan and Atkinson, 2015). Key requirement
to use respective accounting system is to control over and stock and utilize it in effective
way by which AS Diverse limited able to generate higher amount of sales. Hence, it can
become highly financially sound and create better image across the industry where it
operates in UK.
 Price Optimisation: The system where product prices are analysed and fixed by the
management of AS Diverse Limited company is known as the price optimisation. In
general, each and every business entity selling its products and services after changing
in the selling prices. Further, a specific price level where more customers purchasing
goods then using this method profitable price can be determined.
 Job costing: As per this system, cost and expenses incurred in each job of the company
are analysed and taken into account by the managers. Within workplace of AS Diverse
Limited, different product range are manufactured. For assessing and deriving cost
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comes into consideration at each job level, this system is required by the firm.
 Transfer pricing: As per the method, the company AS Diverse limited purchases
different raw materials and services from large and parent organisation which provide at
lower charges compare to market rate. When the AS Diverse limited uses respective
type of management accounting systems then easily able to reduce total cost of
production and selling prices as well. Essential requirement to employ transfer price is
to decline level of total cost which is incurred in the production and operation process
(Håkansson, Kraus and Lind, 2010). Further, when cost of every unit reduces then prices
also by which more number of buyers attracts and helps to enhance financial
performance in the dancing industry of UK.
 Process costing: Another method is process costing which is used by AS Diverse
limited and helps to determine cost of each process in better way. When it able to known
that expenses incurred in particular business process such as manufacturing, production,
accounting etc. By using such kind of approach of management accounting the AS
Diverse limited is highly able to become financially sound in the overall industry.
Reason to employ the process costing in the firm is to analyses different costs and
expenses of each process which are comes into consideration at the workplace. It can be
said that, the process costing is effective and integral part of the business entity and
helps to take decisions related to different processes.
 Activity based costing (ABC): Other approach of manage accounts is activity based
costing method which shows costs of each and every activity of different processes.
Here the AS Diverse limited requires to collect every financial transaction related to
each activity of a process. It is widely used method by several firms because it can know
that which activity incurring higher expenses at to produce products and services. On the
basis of expenditures of every cost it able to know that overall production process
incurred how many costs.
P2 Explaining various management accounting reporting methods used by AS Diverse Limited
Business Report
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To,
General Manager,
AS Diverse Limited
Date: 4th October 2017
Subject: Reporting methods of management accounting systems
In the company, different kinds of reports are prepared by the management which helps
to analyse various aspects of the business process. When the firm prepare effective reports of
each and every financial transaction then able to determine that in which order AS Diverse
limited is generating profit. Along with this by using reporting methods it can derive
performance in the dancing industry of UK and can make business strategies as well decisions.
(Andor, Mohanty and Toth, 2015) Different method which are employed by AS Diverse limited
for reposting different management accounts are analysed as below:
 Account receivables report: Moreover, method of reporting in which various
receivables in terms of cash are recorded and analysed is known as report of account
receivables. By this management of AS Diverse limited is highly able to know that how
much cash is received from internal and external environment in one financial year.
When the company receives amount from various debtors is to be transacted in the such
report. Higher the debtors are not better for the firm because it reduces cash collection
efficiency within a year. Apart from this, products and services which are selling at the
credit rather than cash then credit amount is also recorded in the accounts receivables
report. Such kind of report requires for the company in order to know that how much
amount is to be receive at the accounting year ending (Islam and Hu, 2012).
 Operating budget report: The approach of reporting which shows various inflows as
well as outflows of business and helps to determine future financial data is identified as
budget. In this, various kind of future information’s are to be predicted and make proper
strategies according to that which is highly profitable for AS Diverse limited. Apart
from this it helps to make comparison between actual results as well as budgeted data
estimated through budget report. By comparing this, it able to know business
performance at the closure of a financial year. Different kinds of financial data are
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derived by adopting budgeting at AS Diverse limited which are like as cash, sales,
turnover, level of production, required material, labour costs etc.
 Inventory management report: A method of reporting in which overall information
about the stock in the workplace is transacted. When value of total stock is higher at the
end of an accounting period then leads to decline total revenue of the firm. The reason is
that, employees unable to utilise inventory level in an optimum direction. Further, in this
basic two values are included like closing and opening stock. Total of inventory
management report treated in the assets side of balance sheet.
 Departmental report: Another method in which cost, revenue, sales or any other kind
of financial data recorded on the basis of functions is known as the departmental report.
After considering total of this particular report AS Diverse Limited easily able to assess
that which of the department performing well in the industry.
 Report of payroll: The method of reporting by which AS Diverse limited able to record
various financial transactions which are related to the employees and members of
organisation. It includes those expenses and some of money which is given the workers
such as wages, salary, compensation, allowances, monetary appreciation and rewards
etc. After doing summation of all such expenses of employees it making treatment in
books of profit and loss account. All the companies prepared the respective report which
helps to determine total expenditures incurred for employees.
 Report of expenses: Another kind of report is related to expenses where all the
disposals are to be recorded. By using the report management of AS Diverse limited can
derive that how many expenditures are incurred in the business in within specific period
of time. If it founds that expenses are higher as compare to the incomes then take
corrective actions in order to control over costs (Jacobs and Cuganesan, 2014). Further.
The report shows about all the disposals related to employees, production, direct and
indirect, fixed and variable overheads etc. These all the expenses are treated in the profit
and loss account in the expenditures side.
 Report of revenue or turnover: As per the revenue report, those amounts which are
generated and come in the firm from selling products and services is to be transacted
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(Hammad, Jusoh and Yen Nee Oon, 2010). Every business expects that level of turnover
or sales at the end of year will be higher which lead to increase profit of entity. AS
Diverse limited make such report for determine that it is how much efficient to attract
consumers and sale its dancing services in the country UK. Higher the amount of
turnover is profitable for the company.
TASK 2
P3 Calculating cost and profit based on various costing methods such as absorption and marginal
Profit is the very important element of every organisation and due to achieve and
maximize respective aspect company operates in the industry. When the company generates
higher the amount of profit then it able to provide better services and return to potential
employees and shareholder respectively. Hence, image of the firm creates better in the overall
dancing industry of UK which lead to enhance market share. For determine level of net profit
there are various approaches are used where marginal and absorption methods used by AS
Diverse limited. On the basis of such two-method calculation of net profit are stated as below:
Use of absorption method of costing in for calculating profit or net income:
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Using marginal costing method for computing financial gain or net income:
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Interpretation
From the above computed net profit, it can be assessed that, while calculating profit and
cost on the basis of marginal and absorption costing values are differs. When level of net profit is
to be determined using absorption costing method then net profit is coming out worth of 9300
GBP. On the other side, when AS Diverse limited uses another method of costing i.e. marginal
net profit is generated worth of 12600 GBP. There is huge difference between net yield
generated by the company at the end of year. If talking about the level of expenditures and costs
it can be visualised that in terms of marginal method total expenses are worth of 1800 GBP and
in the absorption costing it is worth of 5100 GBP. For occurring such difference reason is that
both methods consider different amount of costs and then calculate net profit (ullen and et.al.,
2013). Marginal or variable method of costing include only direct and variable expenditures for
determine net profit at the end.
Furthermore, another method such as absorption costing uses all the costs and
expenditures which are comes into consideration are the workplace of AS Diverse limited. Here
all the direct, indirect, variable and fixed overheads and miscellaneous expenses and added and
then derive net yield. Most of the firms use absorption method because it helps to recover all the
expenses and then charge price from consumers of the dancing services provided by it.
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Difference among two mentioned costing approaches
Marginal approach of costing Absorption approach of costing
As per the method there are only variable and
direct kinds of expenses are included in order
to analyse total costs and final Income.
The system of costing where management
needs to use and include all the costs which are
comes into consideration at the workplace
whether they are direct or indirect, fixed or
variable is identified as an absorption method
(Arroyo, 2012).
Amount of total expenditures is lower in case
of marginal because it uses only direct and
various variable expenses which are varied as
per the level of output.
In case of absorption costing, total amount of
expenses and costs are comparatively higher
than marginal method. Due to this AS Diverse
limited thinks that costs are high for producing
services.
When talking about profitability then
performance of AS Diverse limited is higher
and shows that management is able to control
over the costs. Because profitability ratios are
higher and net profit as well of same company
(Klychova, Faskhutdinova and Sadrieva,
2014).
Business performance of the company in terms
of profitability is lower when AS Diverse
limited calculated yield by using absorption
method.
The method is less used as well as not that
much reliable because here the company
cannot recover all the expenses.
Absorption costing method is more used by the
company’s due to taking all the costs and
disposals for computation of net profit at
financial year ending.
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TASK 3
P4 Merits and demerits of different types of planning tools used by AS Diverse limited
Planning is very important aspect of every business firm which helps in smooth
functioning and make it profitable. In context to this, various types of tools and methods are to
be adopted by the AS Diverse limited in order to prepare highly effective plan. Tools for making
effectual plan are described as below:
Budget
The tool or method by which a business entity derives future financial information and
formulate strategies in accordance to that, is identified as a budget. Higher the net cash balance at
the end of period is more profitable for the AS Diverse limited because it clearly indicates that
management is able to generate high revenue in comparison to expenses (Drury, 2013). In
reference to this, various types of budgets are to be formatted which are like as cash, labour cost,
material purchase, sales or revenue, production etc. Hypothetical example of cash budget and
labour cost is as follows:
Budget report for cash
Particulars Amount (in GBP)
Cash inflows
Sales 145600
Trade receivables 115400
Other incomes 89500
Summation of cash inflows (A) 350500
Cash outflows
Expenses on raw materials 64670
Maintenance cost 12564
Electricity bills 15478
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Payroll expenses 84165
Marketing and selling cost 38450
Insurance 8450
Tax 6542
Compensation of employees 19875
Other costs 14562
Summation of cash outflows (B) 264756
Net cash balance at the end (A-B) 85744 GBP
Budget report for labour cost
Labour Quarter 1 Quarter 2 Quarter 13
Number of units to be produced 2540 3640 4210
Labour hours for each unit 3 4 5
Required total labour hours 7620 14560 21050
Cost of labour per hour 9 9 10
Total cost of labour 68580 GBP 131040 GBP 210500 GBP
Advantages:
 Very main benefit of the budget is that, it helps to estimate future value and performance
of the firm at the end of an accounting period. Due to this, AS Diverse limited can make
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highly effectual business decisions and strategies in order to achieve financial objectives
and goals.
 It able to know that what are the various reasons by which level of profit gets reduces and
costs enhance. Further, it can control over the extra and miscellaneous expenses incurred
in production process (Hinkel and et.al., 2014).
 Apart from this, with the help of budget AS Diverse limited manage over the cash
collection and disposals as well as risk which can be comes into consideration at the
working environment.
 Helps to compare data which are estimated in budget with the actual results and
outcomes. Henceforth, AS Diverse limited can know business performance in the UK's
dancing industry.
Disadvantages:
 However, in order to make and prepare budget statements long time is taken by the
finance manager. So, it is vert time-consuming method by which efficiency and
productivity of potential employees get reduce.
 The budget is based on prediction and past financial data, it is not necessary that AS
Diverse limited will perform same. It may be possible that performance of the firm can be
reduce or increase at the end of year. Apart from this, for preparing budget AS Diverse limited needs to appoint and recruit
highly skilled and qualified finance employees who will charge higher amount of its
services (6 Main Limitations of Budget, 2012). Due to which level of profit of the
company reduces and financial performance as well.
Ratio analysis
Another kind of planning tool used by the AS Diverse limited for making effective
financial plan is ratio analysis which are determined with the help of different financial
statements. These helps to the business organisation in order to know that company is how much
financially sound in the dancing industry of UK where it currently operates. In this, various types
of financial ratios are to be calculated for determining performance and make plan in accordance
to outcomes. Each and every type of business uses and apply such tool at the workplace to make
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it more financially strong and create better image in customers and corporations both. Examples
of the financial ratios are such as profitability, gearing or solvency, investor, liquidity, asset
utilization, efficiency etc. Some of them with help of hypothetical example are stated below:
Financial ratios Formula Value
Net profit (NP) 38650
Net sales 145600
NP ratio NP / net sales * 100 26.55%
Gross income (GP) 84964
Revenue 145600
GP ratio GP / net sales * 100 58.35%
Operating profit (OP) 54892
Revenue 145600
OP ratio OP / net sales * 100 37.70%
Current assets (CA) 47892
Current liabilities (CL) 35842
Current ratio CA / CL 1.34
Debt 14596
Total equity 35624
Debt to equity ratio Debt / Equity 0.41
Merits:
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 Key merit of the financial ratios is to that, it helps to assess that AS Diverse limited is
how much financially strong in the overall dancing industry. Higher the outcomes of
profitability, efficiency and liquidity ratios are effective and better for the company.
 Furthermore, it can easily determine ability in terms of fulfil debt obligations with the
help of liquidity ratios at the end of year (Eichfelder and Schorn, 2012). When the ratios
are higher and meet with ideal ratios then good but in case it not able to meet such
criteria’s then can frame strategies according to that.
 In addition to this, by using financial ratios the AS Diverse limited is able to manage cash
and risks which can hamper overall business process.
Limitations:
 Key limitation of the financial ratios is that, it is fully and totally based on the
quantitative approach. Further, it not uses any kind of qualitative kind of research and
tools. In order to do research and make better plan qualitative method provides highly
reliable and latest data. The financial ratios ignore such methods by which AS Diverse
limited cannot frame effective decisions as well as plan. For calculating the such ratios highly qualified employees require who is from core
finance. When AS Diverse limited recruit and select such kind of employees then it has to
provide higher salary and wages which lead to increase total expenses and reduce net
profit at the end of year (Ward, 2012).
Investment appraisal techniques
In order to make and prepare effective business and financial plan another tool used by
the dancing company such as AS Diverse limited is investment appraisal methods. With the help
of respective method entity able to take decisions in terms of making investment when it has two
or more mutually exclusive projects. It is the most widely used tool for raking highly better and
effectual decisions. Further, when AS Diverse limited make investment in the project by using
respective techniques then it able to generate higher profit and return of potential investment.
Different tools of investment appraisal methods are such as, NPV, PI, IRR, Payback period and
ARR etc. Among these all IRR as well as ARR are described with the help of example are as
below:
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Internal rate of return
Year Cash flow (Amount in GBP)
Investment -245000
1 14568
2 46548
3 84631
4 138596
5 154893
IRR 16.86%
Accounting rate of return
Year Cash flow (Amount in GBP)
Investment -245000
1 14568
2 46548
3 84631
4 138596
5 154893
Total 439236
Average 87847.2
Investment 245000
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ARR 35.86%
Merits:
 The investment appraisal methods are highly helps to AS Diverse limited in order to put
money in oner project which provides higher future value, IRR and ARR along with
lesser period of payback of initial investment.
 By taking effective decisions to put money it helps to the firm in order to generate higher
return and profit on sum of money which is invested in the project at the initially ( Parker,
2012).
 Different methods of capital budgeting uses all the factors like as time value of money,
cost of capital, cash flow of every year etc. while making calculation. Due to this, it
provides better decisions to the AS Diverse limited and make it more profitable after
completion of the project.
Demerits:
 It considers same cost of capital at every year for calculating value of initial investment at
the end of project. In the economy, inflation and interest rate changes over the time which
lead to fluctuate cost of capital as well by which AS Diverse limited cannot make
effective decisions.
 Apart from this, it provides decision for making investment for the longer period of time
like as for 3, 4, 6, 8 years. The AS Diverse limited is unable to take short term decisions
which is key limitation of such techniques (Zimmerman and Yahya-Zadeh, 2011).
TASK 4
P5 Different management accounting systems used by AS Diverse limited in order to overcome
financial difficulties
At the workplace various kinds of constraints occurs which lead to hamper overall
smooth functioning of the enterprise. In order to improve financial position and performance
various tools and systems of management accounting are to be implemented by AS Diverse
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limited. By using transfer pricing the company able to purchase raw materials at the lower prices
as compare to market price. By this level of total expenditures gets reduce and helps to entity for
generated level of more yield at the accounting year ending. In context to this, process costing
criteria where AS Diverse limited is able to determine cost of overall process like business,
manufacturing, recruiting etc. In every process there are different activities needs to complete
which also incur costs.
Moreover, costs of every stage of any particular process are to be derived by using
activity based costing (ABC). Cost can be increase in any phase which is identified by ABC
costing and then management of AS Diverse limited able to take corrective actions for reducing
and controlling over the expenses (Chenhall, 2012). Hence, financial constraint of enhancing
cost is to be overcome in effectual way. When the costs reduce then it will provide services to
customers by charging lower prices and they will attract at higher number. In result to this, sales
will increase which directly impact on the financial performance of AS Diverse limited in
favourable manner.
In an organisation wide range of problems arisen due to inability of meet success and
targeted performance in the industry. The issue can be in form of various kinds like financial,
productivity, employees etc. The present project is talking about the financial problems arisen
within workplace of AS Diverse Limited company. In the company those financial obstacles
which can be occur are stated below:
 Cost improving
 Profit declining
 Reducing productivity level
 Negative impact on return on investment
 Delivery time of goods and services
 Time of turn-around
 Declining business growth over the financial years
 Level of output in each department
 Decrease liquidity position
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When the above issues came into consideration within working environment of AS
Diverse Limited firm then some management accounting systems are adopted. Further, such
various approaches are explained below:
Budgetary targets:
Under this kind of system, estimated value in various budgets is taken into consideration
at the time of producing and selling products and services (ullen and et.al., 2013). At the end of
year, when budgeted value is lower as compared to the actual data generated then it can be said
that AS Diverse Limited company performs well. On the other side, it unable to achieve
estimated data then difference and reason both will be analysed in an appropriate direction.
Therefore, it is highly supportive tool for the cited entity in terms of resolving financial issues.
Key Performance Indicators (KPIs):
Another approach is KPI in which some indicators are undertaken by the management of
cited firm for analysing performance in proper direction. Different kinds of the indicators
available to measure performance which include quality of goods and services, sales, net income,
productivity, output level etc. For example: when taking to the sales aspect then from previous to
the current year if less revenue generated by AS Diverse Limited then it is poor performance of
the enterprise.
CONCLUSION
From the above study of MA system it can be said that, to manager accounts is highly
significant for the company like AS Diverse limited in order to become more financially strong
in the dancing sector. Different types of approaches of the management accounting such as cost,
transfer pricing, process costing, ABC costing, inventory accounting etc. are the most helpful
and require for the company for managing financial resources. When AS Diverse limited able to
manage resources of finance then it can easily improve financial performance in the industry.
Further, it can be concluded that when management calculate net profit or yield by using
marginal and absorption method then value differs because of taking different expenses. Various
kinds of tools for make financial plan like as budget, financial ratios and investment appraisal
methods are useful for the entity and having merits and limitations both. At the end, it can be
said that management accounting approaches highly helpful for combat shortfalls and obstacles
occurs at AS Diverse limited related to finance.
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