Computation of Costs Under Absorption and Marginal Costing

Running head: MANAGERIAL ACCOUNTING
Managerial Accounting
Name of the Student:
Name of the University:
Author’s Note

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Table of Contents
Computation of Costs under Absorption and Marginal Costing.....................................................2
Different types of Planning tools in Budgetary Control..................................................................4
Application of planning tools used for budgetary control...............................................................4
Management Accounting System Adopted to Control the Problems..............................................8
Reference.......................................................................................................................................12

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Computation of Costs under Absorption and Marginal Costing
In order to compute costs, most of the business uses a certain costing system which suits
the main needs of the organization. The costs of the business are considered after considering the
productions for the month of May and June and the same is considered to be 400 units and 500
units. The table which are presented below shows costing techniques which is followed by the
management for managing the materials, labour and overheads of the business. The treatment of
overheads of the business forms an important part of the total costs of the business. The
computation of the costs of the business under the methods of Absorption and Marginal Costing
is shown in the figure below:
Absorption Costing
Statement Showing Cost per unit under Absorption Costing
Particulars May June
€ €
Direct materials per unit 10 13
Direct labour per unit 6 9
Variable production overheads per unit 4 6
Fixed Overhead 10 8.0
Total Cost per unit of product 30 36.0
Profit and Loss Statement under Absorption Costing
Paticulars May June
€ €
Sales 20000 25000
Less: Cost of Good sold 12000 18000.0
Gross Profit 8000 7000.0
Fixed selling 4000 4000
Fixed Administration 1000 1000
Variable sales commission 1000 1250
Net Profit 2000 750.0
Figure 1: (Table Showing Computation of costs under Absorption Costing)
Source: (Created by the Author)

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The above tables show the computation of costs under Absorption Costing techniques.
Absorption costing techniques considers the indirect costs of the business and thereby include
the same in the cost of the product. The above table shows the different factors of the costs
which are material cost, labour cost and overhead costs of the business. On the basis of the costs
which is computed, an estimate of sale price is estimated for computing the total sales of the
business. The above computation shows that is more for the month of May and as the number of
units increases so does the costs which is associated with the product.
Marginal Costing
Statement Showing Cost per unit under Marginal Costing
Particulars May June
€ €
Direct materials per unit 10 13
Direct labour per unit 6 9
Variable production overheads per unit 4 6
Total cost per unitt 20 28
Profit and Loss Statement under Marginal Costing
Paticulars May June
€ €
Sales 20000 25000
Less: Cost of Good Sold 8000 14000
12000 11000
Operating expenses
Fixed overhead 4000 4000
Fixed selling 4000 4000
Fixed Administration 1000 1000
Variable sales commission 1000 1250
Net Profit 2000 750
Figure 2: (Table Showing Computation of costs under Marginal Costing)
Source: (Created by the Author)

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The above table shows the computation of costs under Marginal costing system and the
only difference which can be identified from Absorption Costing System is that the fixed
overheads of the business are written off against the contributions of the business. In many
businesses. Marginal costing is one of the tools which is used by the management for measuring
the costs of the business and in such a technique the treatment of overhead costs of the business
and thereby determining the profits of the business.
Different types of Planning tools in Budgetary Control
Application of planning tools used for budgetary control.
Budgeting tools are applied by the management of company for managing, planning and
forecasting the various aspects of the company’s budget. The management accounting will help
the company in identifying the various objective and results of the company. Budgetary tools
help the company in predetermining the various aspects and policies of the company. The use of
budgeting tools are used by the management for forecasting and planning the expenses and
revenue of the business. Organisation nowadays are getting more prone to apply various tools
and application that helps the management of the company in allocating the proper resources of
the company. In most of the organization, businesses utilize budgeting for any new projects and
also prepares a master budget for managing the entire operations of the business. In addition to
this, there are wide variety of budgets which cover different aspects of the business. Some of the
examples of budgets can be given are sales budget, purchase budgets and also different types of
budgets. Cloud based tools and software’s are some of the modern tools, which organisations are
applying for better management of the key resources of the company. Planning tools helps the
company in identifying various aspects and can be easily applied by the company (Mohamed,
Kerosi and Tirimba 2016). In addition to this, the budgets which are prepared by the

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management of the company are also used for controlling and measuring performance of the
business for a period.
The advantages which can be identified for budgeting as a planning tool are listed below
in details:
Forecasting: The application of budgeting tools will allow the company in forecasting the key
expenses of the company and the revenue base for the company. Forecasting will allow the
company in proper planning of the deployment of resources so that the management of the
company can apply the same, which would ensure optimum utilisation and efficiency of the
assets of the company (Giraud and Aubert 2018). The activity of forecasting in a business gives
insight to the management for make plans for the future of the business. Forecasting function of
a budgets helps the management of companies to formulate long term plans for the business and
also set effective date for implementing the same plans of the business.
Optimum Utilisation of Resources: The application of various budgetary tools and application
will help the company in proper planning and allocation of resources of the company. Budgetary
tools allow the company in proper allocation and utilisation of the key resources of the company.
Budgeting allows the management to appropriately manage the resources of the business and
also lead to optimum utilization of resources. A budget which is prepared by the management are
done considering the resources which are available to the management (Schaltegger and Zvezdov
2015). The budgets set certain standard which acts as a guide and the same must be followed by
everyone. In this way, the management of the company can achieve optimum utilization of
resources of the business.
Communication: Budgeting can be recognized as one of the most efficient tool which is
available with the management of a company for communicating the plans of the management to

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different departments. The budgets present the financial estimates which are anticipated by the
management which needs to be followed by every department in the company. The budgets
which is prepared by a business is approved by the senior managers and thereby can be
considered as a means of communicating with the employees of the business. In addition to this,
the budgets act as a guide which needs to be followed by the supervisors so that a unity of
direction is maintained in the organization.
Co-ordination: The budgets which are prepared by the management of a company are set for
promoting co-ordination among the departments and different enterprises. The practice of
budgeting control allows centralised regulations of diversified operations of the business. The
operation manager acts as a coordinator of production and other departments of the business
(Warren, Reeve and Duchac 2013). The management of the company needs to ensure that the
operations of the business are in accordance with the goals and objectives of the management of
the company.
Maximization of Profits: The aim of budgeting control is to effectively control the costs of the
business and thereby also enhance the revenue and profits which is associated with the business.
In order to achieve the objective of maximising the profits of the business. The resources of the
business can be effectively utilized and thereby bring about efficiency in the operations of the
business (Hilton and Platt 2013). The application of Budgeting can bring about optimum
utilization of resources of the business. Therefore, it can be said that appropriate application of
budgeting techniques can bring about maximization of profits of the business.
Controlling: One of the major advantages which can be identified for budgeting is that the
budgets which is prepared by the management of the company acts a means for control over the
activities of the management (Heinle, Ross and Saouma 2013). The supervisors and senior level

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managers of the business can monitor the operations of the business and can identify an
weakness in the operations structure of the business. The budgets can be used in combination
with standard costing so as to identify variances and establish the reasons for the same.
The disadvantages of budgetary control which can be identified and the same are listed
below in details:
Inaccurate Estimation: The budgets which are prepared by the management of the company are
based on estimation and therefore the management needs to identify whether the key areas which
can be developed for the business. However, in many situations the estimation process can be
affect due to ineffective judgement of the management of the company. This can affect the entire
decision-making process of the management and thereby also affect operations of the business.
Rigidity: The budgets which are prepared by the management of the company are a bit rigid in
nature and thereby cannot adapt to any unexpected changes. It can be said that changes which
takes place in business environment cannot be easily incorporated in a budget. In case of
continuous changing business environment, budgets become invalid and inaccurate.
Human Factors: Budgets are prepared by the accounting team and accounting professionals
and therefore the budgets which are prepared susceptible to human error. In addition to this, the
workload in preparing the budgets is also a lengthy process and thus it can cause error in the
budgets.
Expensive: It has been argued by many accounting professionals that the process of budgeting is
very expensive in nature and also the same requires a lot of time and effort from the part of the
employees of the business. It can be said that the budgets which are prepared by the management
requires time, effort, human resources and money of the business. As the time and effort required
for budgeting is immense, the management would be expecting quick results.

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Inflationary Changes: The budgetary control process does not consider the effects on inflation
on the prices and costs of the business. Inflation is a situation whereby the prices and costs of
products and raw materials increases continuously over time. This can affect the budgets which
is prepared by the management of the company. In case of inflationary changes, the estimates
which are anticipated by the management would be affected and thereby make the budget which
was initially prepared by the management of the company obsolete.
Management Accounting System Adopted to Control the Problems
Financial information and data are a crucial role, which plays an important role in the
measuring the performance of the company. There are various financial and non-financial
measurement process, which can be assessed by the users of the financial data if the organisation
adapt to management accounting policies and principles. Identification of key issues and
problems associated with the company in corresponding to the operations of the company are
some of the key issues that are dealt by the application of management accounting. Companies
can also apply various budgetary control tools in planning, organising and executing the various
activities of the company so that the company can focus on various aspects of the company and
bring efficiency in the utilisation of the key assets of the company (Höglund et al. 2016). The
decisions which are taken by the management of a business are of utmost importance for a
business and thereby also effectively manage the resources of the business. The management can
apply the management account principles for effectively controlling the activities of the business
and thereby also ensure that the resources of the business can be effectively managed by the
business.
Management accounting refers to the application of various accounting information by
applying the various data and information gathered from the cost and management accounting.

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Management accounting helps an organisation in identification, presenting and analysing the
various accounting information data and information gathered (Otley 2016). The application of
management accounting helps an organisation in measuring the performance of the company and
assessment of the various risk associated within the organisation. The accounting principles and
the policies should be such, which guides the management of the company in proper allocating
of the various resources of the company (Saeidi et al. 2018). Organisation are adopting to the
management accounting system so that they can create value for the stakeholders of the
company. The roles and principles of the management accounting are such, which would help
the organisation in responding to the financial problems faced by the various stakeholders. The
key benefit, which the organisation would be getting after adapting the concept and principles of
the management accounting are:
Influence: The financial data and information presented by the companies should be able to
communicate various financial information about the company and must include various
important financial data so that the stakeholders of the company are able to take relevant
information data about the same. The application of management accounting ensures that the
accounting policy of the company should be such that all the relevant informations related to the
company are included in the financial report of the company (Wouters et al. 2018).
Relevance: Financial information and data presented by the company as the users of the
financial statement have this as the common source for getting relevant data about the company
in contrast to the financial performance. Relevant and reliable information are some of the basic
principles of the management accounting, which would help the organisation in communication
correct financial data.

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Value Generation: Management accounting plays an overall impact on the financial statement
of the company as it considers various factors like proper analysis and classification of the
financial data and helps the company in exploring various opportunities that are available for the
company.
Organisation can apply various financial indicators and non-financial indicators that
would help the company in assessing the overall performance of the company. Measurement of
performance of the company in the company in contrast to various account heads helps the
company in identifying the various key performance areas and key lag areas where the company
needs to improvise (Maas, Schaltegger and Crutzen 2016). The key financial indicators, which
can be applied by the management of the company, are the profitability ratios, efficiency ratios,
investor’s ratio and liquidity ratio. The key ratio helps in covering the various aspects of the
company thereby showing the efficiency of the management of the company in various areas.
Efficiency of the management of the company in utilisation of the key assets and financial
resources like capital can be weal evaluated with the help of financial ratio for the company.
Proper management of the human resources of company and the quality of the products and
services could judge as the key non-financial performance indicators of the company (Christ and
Burritt 2015). However, there are other key non-financial indicators like brand awareness and the
profile of the company in terms of the goodwill and credibility, which helps the sustainable
growth, and development of the company. Thus, on an overall basis the management accounting
will allow the company to incorporate various aspects, which will help them address the
financial problems faced by majority of the organisation (Messner 2016).
In case of a management of a company, the manager of the business is responsible for
managing the operations of the business and thereby also ensure that the activities of the business

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are effectively undertaken by the management of the country. The managers are also responsible
for planning and organization the activities of the business and therefore effective management
accounting tools needs to be adopted in order to ensure that operations of the business are being
smoothly conducted (Christ and Burritt 2013). In an organization, there are various requirement
for reporting in a business such as cost aspects, financial aspects and other important decisions of
the business.
One of the most important tool which is used by the management is budgeting which is
used by the management for planning and forecasting the activities of the management of the
company. The budgets which is prepared by the management are used for planning the activities
and also monitoring the process of the business (Fullerton, Kennedy and Widener 2013).
Another important tool of management accounting is ratio analysis which effective measure the
performance of the business is different areas of performance such as profitability, solvency,
liquidity. Many companies use benchmarking techniques for understanding the business of the
competitors and then developing a completive advantage so that the rivalry can be combatted
effectively.
Therefore, from the discussion which is shown above, it can be clearly stated that most of
the businesses are now adopting management accounting practices with a view to improve the
business structure. There are a lot of techniques which is available to the management of a
company for managing the operations of the business.

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