Financial Accounting and Costing Systems

This report provides a comprehensive analysis of how financial statements satisfy the informational needs of stakeholders, including shareholders, management, employees, and external parties. It also delves into the advantages and disadvantages of absorption and marginal costing systems, and identifies suitable costing methods for different types of businesses, such as job costing for a garage service and activity-based costing for a construction firm.

Introduction to Accounting

TABLE OF CONTENTS
INTRODUCTION......................................................................................................................3
PART 1.......................................................................................................................................3
a. Identifying and describing relevant stakeholders as per conceptual framework................3
b. Explaining how financial statements meet the information need of stakeholders.............3
PART 2.......................................................................................................................................4
a. Describing advantages and disadvantages of marginal & absorption costing method......4
b. Identifying costing system which is adopted by each type of business.............................5
CONCLUSION..........................................................................................................................6
REFERENCES...........................................................................................................................7

INTRODUCTION
Financial accounting field laid high level of emphasis on summarizing, analyzing and
reporting financial transactions which are related to the business. Further, management
accounting system or tools furnish information about the internal operations and functions.
The present report is based on Morrison’s, a leading retail business unit of UK, which
provides customers with wide range of products or services at suitable prices. In this, report
will provide deeper insight about the manner in which financial statements satisfy
information need of stakeholders. Further, it also develops understanding about different
types of costing system such as absorption and marginal.
PART 1
a. Identifying and describing relevant stakeholders as per conceptual framework
In accordance with International Accounting Standard Board (IASB), main
stakeholders of Morrison’s include shareholders, management team, employees, financial
institution, suppliers, customers and government authority (IASB, 2018). On the basis of
accounting rules and regulations company needs to prepare as well as publish financial
accounts & report at the end of financial year.
b. Explaining how financial statements meet the information need of stakeholders
Financial report which is published by Morrison’s at the end of accounting year fulfils
information need of concerned stakeholders to a great extent in the following manner:
Internal stakeholder
 Management: For making effectual operational and financing decisions management
team of Morrison’s undertake as well as evaluate financial statements. Moreover,
annual report clearly furnishes information about profitability, liquidity and solvency
aspects. Hence, considering such information management team would become able
to take suitable and strategic decisions for the near future.
 Employees: With the motive to assess future growth in both monetary and non-
monetary terms personnel make evaluation of final accounts. Moreover, profitability
statement clearly presents the growth take place in income level of the firm and
thereby assists in making estimation about salary, incentives and other benefits.

External stakeholders
 Shareholders: Investors make evaluation of annual report to ascertain financial
position and performance of firm (Users of financial statements, 2018). Hence,
financial statements help investors in taking decision whether they should hold the
investment or sell it now.
 Financial institution: Financial statements mainly balance sheet helps lending
institution in identifying that Morrison’s is able to payback loaned funds along with
the relative interest charges or not.
 Suppliers: Using final accounts and reports suppliers can decide whether they should
extend credit to a company or not.
 Customers: Now, customers prefer to purchase products or services from the retailer
which carries out operations in a sustainable manner. Hence, by reviewing annual
report customers can assess that company is performing activities in an eco-friendly
manner or not.
 Government: Profitability statement and balance sheet is evaluated by the government
authorities to assess whether business unit has paid appropriate tax amount or not.
Hence, the above depicted aspects clearly show that financial statements satisfy
informational need of the stakeholders to a great extent.
PART 2
a. Describing advantages and disadvantages of marginal & absorption costing method
Absorption costing system: This is also known as full costing method which
considers both fixed and variable production expenses as product cost. As per GAAP and
IFRS such costing technique is highly recommended to the business units.
Advantages Disadvantages
 It highlights the significance of fixed
cost in production
 Highly effectual method which assists
in preparing financial statements in
the best possible way.
 Absorption costing method shows
 It is not highly helpful in preparing
flexible budgeting framework
 Apportionment of fixed overheads by
arbitrary method also affects the
significance of such costing method.
 It avoids relationship which takes

less fluctuation in net profit margin
when production level is constant and
sales level changes.
place between cost, volume and profit
(Advantages and Disadvantages of
Absorption Costing System, 2018).
Marginal costing system: In this costing system, only variable or direct expenses are
charged to the unit cost produced. Under marginal costing method, fixed cost is recognized as
a periodical cost, whereas variable expense considered as product expense.
Advantages Disadvantages
 Assists in determining and exerting
control on production cost
 It is highly simple and understandable
 Helps in eliminating variance cost per
unit
 Provides assistance in short-term
planning and demonstrating BEP as
well as profitability graphs
 Facilitates assessment of accurate
overhead recovery rate (Marginal
Costing System, 2018)
 Such costing system ignores fixed
cost
 Marginal costing system fails to
ascertain that, in long-rum, fixed cost
may become variable Hence, cost
classification in terms of fixed and
variable expenses give misleading
results.
 In this, problem pertaining to under
and over-recovery of overhead takes
place
 Such costing method does not
provide clear or suitable information
in the case of increasing cost and
production
b. Identifying costing system which is adopted by each type of business
Business Costing system Reason
Kwik Fit: a garage specialising
in servicing cars, vans and other
vehicles.
Job costing method This is suitable for garage
company because it places
emphasis on cost accumulation
regarding material, labour and
overhead (Waters, 2018).
A construction firm specialising
in building offices and or
Activity based costing method With the motive to assess and
present suitable view of cost

houses. construction firms undertake
ABC costing system. The
rationale behind the adoption of
such technique is that it helps in
allocating cost to the products
or services as per their
consumption level.
A car manufacturing industry:
producing cars and SUVs
Activity based costing In this, ABC costing method
produces highly suitable results
over other methods. Moreover,
it lays emphasis on recognizing
relationship which takes place
between cost, activities and
products (Jurek and et.al., n.d).
Hence, such relationship helps
in assigning indirect cost or
expenses more effectually.
CONCLUSION
By summing up this report, it has been concluded that annual report presented by
Morrison each year provides high level of assistance to the stakeholders in taking appropriate
decisions. Besides this, it can be inferred that absorption costing system is highly suitable
over marginal because it considers both fixed as well as variable expenses while determining
production cost.

REFERENCES
Online
Advantages and Disadvantages of Absorption Costing System. 2018. [Online]. Available
through:
<http://www.accountingexplanation.com/advantages_and_disadvantages_of_absorption_c
osting_system.htm>.
IASB. 2018. [Online]. Available through: < https://www.iasplus.com/en/resources/ifrsf/iasb-
ifrs-ic/iasb>.
Jurek, P. and et.al., n.d. Activity-Based Costing Applied To Automotive Manufacturing.
[Online]. Available through:
<http://www.manufacturing.gatech.edu/sites/default/files/uploads/pdf/Final%20version
%20_Jan%2026%202012_.pdf >.
Marginal Costing System. 2018. [Online]. Available through:
<https://toughnickel.com/business/Advantages-and-Disadvantages-of-Marginal-Costing>.
Users of financial statements. 2018. [Online]. Available through: <
https://www.accountingtools.com/articles/users-of-financial-statements.html>.
Waters, E., 2018. Cost Accounting Practices in the Service Industry. [Online]. Available
through: < http://smallbusiness.chron.com/cost-accounting-practices-service-industry-
42794.html >.