Management Accounting: Costing Techniques and Planning Tools

This document discusses the difference between marginal and absorption costing, reasons for variances in net profit calculations, and the use of planning tools in management accounting. It covers different costing techniques, such as fixed budgets, flexible budgets, incremental budgets, zero-based budgets, and variance analysis. The document provides insights into how these tools are used in preparing and forecasting budgets.

MANAGEMENT ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Calculating costs by applying different costing techniques for preparing income statements1
TASK 2............................................................................................................................................8
a) Explaining the use of planning tools used in management accounting..............................9
Analysing use of planning tools and implications in preparing and forecasting budgets ....9
c) Evaluating how organisations are adapting management accounting for responding
financial problems..................................................................................................................9
d) Analysing how management accounting leads organisations to sustainable success........9
e) Evaluating how planning tools helps in solving financial issues.......................................9
a) Explaining the use of planning tools used in management accounting............................10
Analysing use of planning tools and implications in preparing and forecasting budgets . .12
c) Evaluating how organisations are adapting management accounting for responding
financial problems................................................................................................................13
d) Analysing how management accounting leads organisations to sustainable success......15
e) Evaluating how planning tools helps in solving financial issues.....................................15
CONCLUSION .............................................................................................................................16
REFERENCES..............................................................................................................................17

INTRODUCTION
Management accounting is the technique or process of representing the financial
information in the most discrete way that could help the management in taking rational decisions
for the company (Kaplan and Atkinson, 2015). The present report is going to discuss the
difference between marginal and absorption costing, reasons for variances in net profit
calculations under these methods. Further the report will cover planning tools of budgetary tools
and how management accounting helps organisations in responding to their financial problems.
TASK 1
Calculating costs by applying different costing techniques for preparing income statements
Income statement 1st year (marginal costing)

Profitability statement as per marginal costing for 2nd year

Profit statement referring marginal costing for 3rd year

Income statement 1st year (Absorption costing)

2nd year profit statement (absorption costing):

Third year’s profitability statement according to absorption costing system:
The above depicted tables clearly shows that in the period 1st, 2nd and 3rd year profitability
is higher as per absorption costing over marginal. Moreover, absorption costing method presents
solution by referring both fixed and variable production expenses on the basis of units. Hence, in
the current times, absorption costing method is considered as highly appropriate as it provides

with suitable framework regarding cost and profitability aspects. Thus, business unit should
focus on following absorption costing system over marginal.
(a) Difference between Marginal and Absorption costing methods
Basis Marginal costing Absorption costing
Meaning This technique of cost
accounting recognizes only
variable costs in the product's
cost. It assumes fixed cost as
the cost for the period (Otley ,
2016).
The absorption costing method
of cost accounting considers
both variable and fixed
overheads in product's cost.
Profit calculation The profit is calculated by with
the help of PV ratio.
Fixed cost are included which
is the reason why net profit
derived from this method is
less than marginal costing
method.
Determines the cost of ... Marginal costing identifies the
cost of each additional unit or
cost of next unit.
This method determines the
cost of each unit of the
company.
Purpose The purpose of this costing
method is to reflect the
emphasis of contribution in
product's cost.
The purpose of this technique
is to reflect the accurate and
true treatment of product's cost
(Marginal Costing vs
Absorption Costing, 2018).
(b) Use of marginal costing in business
Marginal costing is a method of costing accounting that the deals with the identification
of cost of a product and analysation of cost information for assisting management in its decision-
making process.
The chair manufacturing company uses this technique in the following areas that are
discussed below:

Cost control : As the method focuses on variable costs, it provides the management a
tool for controlling these variable expenses in the company that are contributing directly to the
product's cost. Bifurcation of cost into fixed and variable helps the mangers of manufacturing
business in keeping control over the cost of production, making the operations efficient (Wouters
and et.al., 2018.).
Determination of cost of product : The cost accountant in the manufacturing
organisation applies this method for recording and finding out the cost of its chairs. Clear
distinction between the fixed and variable cost makes the cost determination clear for the
manager.
Decision making : The marginal costing is used by the business organisation for forming
rationale and optimum decisions. The method analyses the cost information that assists the
management in taking their day to day decisions. The areas where this method solves problems
are; profit planning, make or buy decisions, product mix and product's pricing (Maas,
Schaltegger and Crutzen, 2016).
(c) Reasons for variance in profits under different costing methods
From the above calculations, the difference between net profits under marginal and
absorption method is clearly visible. In the 1st year, net profit under marginal method is (£)
722000 whereas the net profit under absorption method (£) 711900. The difference was due to
the treatment of fixed overheads under the absorption method. Marginal costing only considered
variable expenses in product cost which became the basis for valuing the closing stock. The
absorption costing method considered fixed and variable both the expenses in its products cost,
which then became the basis for valuing its opening and closing stock. It is always for this reason
that absorption costing shows less net profit than marginal costing method. Likewise, in the
subsequent years, absorption costing is showing lesser net profit marginal costing because of the
treatment of fixed expenses (Messner, 2016).
TASK 2

Report on Management Accounting
By a management accountant
a) Explaining the use of planning tools used in management accounting
Budgeting is the process of formulating plans of incurring expenses for conducting business
activities for the future. It is expressed in numerical terms. The organisation prepares budgets on the basis
of divisions, departments or for the overall company. These plans or budgets are usually prepared for the
shorter period like one year, six months etc. Budgets are the most effective way of controlling the costs
and operations of the business organisation. The advantage of preparing budget is that it acts as guideline
for spending the funds appropriately. Limitation of the budget is that it is prepared on the basis of
historical data that does not help in forecasting expenses accurately.
There are different planning tools of budgetary control that are explained below:
Fixed budgets : These are those budgets that does not change due to change in other variables of
a budget such as sales volume, income etc., but remains constant. The costs and expenses under this
budget is estimated on the basis of the data gathered and analysed before the starting of budget period in
the company (Chenhall and Moers, 2015).
Advantages :
 The fixed budgets are easier to formulate and implemented because it does not call for continuous
updates of facts and figures during budget period.
 It helps the organisation in prioritising its expenses.
Disadvantages :
 The biggest limitation of fixed budget is that it does not provide room for flexibility. It does not
make any amendments in its estimated figure.
 These are prepared on the basis of historical data which is not so relevant for the decision making.
Companies that faces high fluctuation in their sales volume and income cannot use such budgets
because of lack of predictability and stability in performances.
Flexible budgets : These are those budgets that adjusts and amends the estimated figures relating
to sales volume and business activity of the organisation. It reflects the reality and changes that have
occurred in market places and provides fair and accurate picture of a plan (Malmi, 2016).
Advantages :
 It controls the costs better than the fixed budgets. Its main advantage is its flexibility especially in profit margins and changing costs of elements
that are used in the production of goods.
Disadvantages :

Disadvantages :
 These budgets involve complexities in its formation and also in their implementation.
 Regular changes in the budget makes the plan vague and makes it difficult for the people
in organisation to follow it.
Incremental budgets : These are those budgets are that are prepared by taking previous
year's data as the basis in which incremental amounts are added for arriving at the new budgets.
It promotes the ideology of spending up to the budget, in which employees are encourages for
incurring expenses up-to a certain level (Nitzl, 2018).
Advantages :
 Its simplicity is its biggest advantage. This is because these budgets are prepared on the
basis of recent financial results or recent budgets which could be easily verified. Incremental budgets helps in promoting and enhancing operational stability as
departments operates in a consistent manner.
Disadvantages :
 It promotes the idea of spending, lose it or use it. Unnecessary and inappropriate allocation of funds to different expenses whether required
or not.
Report on Management Accounting
By a management accountant
a) Explaining the use of planning tools used in management accounting
Budgeting is the process of formulating plans of incurring expenses for conducting
business activities for the future. It is expressed in numerical terms. The organisation prepares
budgets on the basis of divisions, departments or for the overall company. These plans or
budgets are usually prepared for the shorter period like one year, six months etc. Budgets are the
most effective way of controlling the costs and operations of the business organisation. The
advantage of preparing budget is that it acts as guideline for spending the funds appropriately.
Limitation of the budget is that it is prepared on the basis of historical data that does not help in
forecasting expenses accurately.
There are different planning tools of budgetary control that are explained below:
Fixed budgets : These are those budgets that does not change due to change in other
variables of a budget such as sales volume, income etc., but remains constant. The costs and

expenses under this budget is estimated on the basis of the data gathered and analysed before the
starting of budget period in the company (Chenhall and Moers, 2015).
Advantages :
 The fixed budgets are easier to formulate and implemented because it does not call for
continuous updates of facts and figures during budget period.
 It helps the organisation in prioritising its expenses.
Disadvantages :
 The biggest limitation of fixed budget is that it does not provide room for flexibility. It
does not make any amendments in its estimated figure.
 These are prepared on the basis of historical data which is not so relevant for the decision
making. Companies that faces high fluctuation in their sales volume and income cannot
use such budgets because of lack of predictability and stability in performances.
Flexible budgets : These are those budgets that adjusts and amends the estimated figures
relating to sales volume and business activity of the organisation. It reflects the reality and
changes that have occurred in market places and provides fair and accurate picture of a plan
(Malmi, 2016).
Advantages :
 It controls the costs better than the fixed budgets. Its main advantage is its flexibility especially in profit margins and changing costs of
elements that are used in the production of goods.
Disadvantages :
 These budgets involve complexities in its formation and also in their implementation.
 Regular changes in the budget makes the plan vague and makes it difficult for the people
in organisation to follow it.
Incremental budgets : These are those budgets are that are prepared by taking previous
year's data as the basis in which incremental amounts are added for arriving at the new budgets.
It promotes the ideology of spending up to the budget, in which employees are encourages for
incurring expenses up-to a certain level (Nitzl, 2018).
Advantages :
 Its simplicity is its biggest advantage. This is because these budgets are prepared on the
basis of recent financial results or recent budgets which could be easily verified.

 Incremental budgets helps in promoting and enhancing operational stability as
departments operates in a consistent manner.
Disadvantages :
 It promotes the idea of spending, lose it or use it.
 Unnecessary and inappropriate allocation of funds to different expenses whether required
or not.
Zero based budget : These contains the estimated cost and expenses that are not based
on historical cost or on previous year's data. The accountant allocates funds by starting from the
scratch. For example, it is noticed that HR department of the company is not bringing in any
productive results for the past three years, fewer funds would be allocated to this cost centre as
compared to other profit making cost centres (Chiwamit, Modell and Scapens, 2017).
Advantages :
 The main benefit of this type of this type of budgeting is that it allows no room for any
error since everything in the budget has been started with zero. Effective tool of controlling the costs of business entity.
Disadvantages :
 The drawback is that each component in budget is taken into consideration on the basis of
its profit making capacity.
Variance analysis: This is the analysis of difference between planned or budgeted
behaviour of costs and actual costs in quantitative terms (Variance analysis, 2018).
Advantage:
 It serves as the significant tool of controlling the activities and costs by analysing the
differences between budgeted cost and actual cost through reasons for such variation
could be determined. This helps in taking corrective actions for controlling the costs.
Disadvantage:
 Reconciling the variances utilises large time of accounting department of the company.
 Finding out the reasons of variance requires lots of efforts in terms of cost and time (Hall,
2016).
Analysing use of planning tools and implications in preparing and forecasting budgets
Budgetary tools helps in the preparation and forecasting of budgets. Cash flows, fund
flows, are prepared for determining the estimated amount of cash inflow and outflow in the
organisation. Fund flow shows that what are the sources that will generate cash inflow and what

are the applications that will utilise the funds of the company. These tools helps in forecasting
the budgeted cash income and expenses of the business entity.
Variance analysis also helps in preparing and forecasting the budgets for the next
accounting period by determining the reasons that why such deviations occurred and what could
be done for mitigating that deviation. Such analysis assists the management in forecasting the
budgets with more discretion (Tucker and Schaltegger, 2016). An example of cash budget is
given below:
c) Evaluating how organisations are adapting management accounting for responding financial
problems
Management accounting has evolved over the decades and has now become a significant
source of financial information for the managers which helps them in taking best decisions.
Earlier traditional methods of management accounting were used. Cost accountant used to
manually produce cost sheets for ascertaining the prices of products and there was not enough

cooperation from different department and cost centres. This used to become reason for
inaccuracy in the cost related data.
The modern management accounting is more about helping managers in their decision making
by various techniques such as planning tools of budgetary control, evaluation of performances,
digitally integrated systems for performing the operations for effectively.
Organisations identifies their financial issues by the way of conducting ratio analysis
such as liquidity ratio that tells the position of company in terms of cash and liquidity. Similarly,
solvency ratios are used for assessing the capability of companies in paying their debts.
Key performance indicators, benchmarking that measures the performances of firms are
applied by them for detecting where they are heading. Benchmarking is the process of comparing
the performance of company with that of best standards set in the industry. By analysing the
reasons why it is lagging behind, it can build strategies for reaching that standard and become
efficient. Operational effectiveness is achieved by proper evaluation methods that eventually
reflects in the low prices of products. This ultimately helps the organisation in increasing sales
and profitability. By this way, management accounting helps companies in responding financial
issues such as declining profitability and sales.
Thus, management accounting helps entities in overcoming their financial problems.
For example, Nestle, a food and drink company uses management accounting in
controlling its operations. The company faced issues in its production activities such as high
amount of abnormal wastage, high material handling and carrying costs, not ordering the
materials timely etc. for which it applied an integrated system of MIS with inventory
management control system.
It uses inventory management control system for becoming efficient in inventory management.
The proper inventory management makes great significance in the cost of the company, as it
requires large and appropriate inventory for ensuring continuous flow of production. Disruption
and wastage in production process causes losses to company, thus making its products costlier.
For that, Nestle uses balance scorecard as a management system because it helps to company to
meet the future goals such that it lower cost capital and also assist to brand formation and
development. On the other side, the company implement the same which helps to determine
future uncertainties and this tool helps to aware management about the same. Moreover, this
strategy helps the firm to analyse how their individual goal are link to the organizational strategy.

Unilever company, a consumer products company applies management accounting for
managing and controlling its cost of production. It faced problems in fixing its products prices.
Earlier it set the prices too high without properly considering the costs that incurred for
producing products. Thus, it employed an integrated management accounting system where
inventory management and other system works cooperatively for ascertaining the cost of its
products and services.
Price ascertainment through cost accounting system helps the company in setting appropriate
prices of its products called as price optimization. Such optimization helps the company in
delivery the products at the most competitive prices in market, helping it in overcoming its
financial issues related to profitability and revenues (Wouters and et.al., 2018).
Unilever adopt the Benchmarking as a management system through which quoted firm may
easily analyse how well the company perform its operations as compared to its competitors.
Through this management tool, company set a target which needs to be achieved and regular
review whether company have abilities to meet that goal or not. In this way, company used this
tool and attain the define aim which further helps to determine whether company have effective
resources that helps to meet future goals.
d) Analysing how management accounting leads organisations to sustainable success
Management accounting helps in identifying and exploring opportunities for developing
value to the organisation by effectively managing the costs and risks associated with the
business. The objective of management accounting is to present and analyse the finance related
information in such a way that assists the management of organisations in forming effective
strategies, policies and decisions for the business. The various management accounting systems
such as cost accounting, inventory management control system, job costing, price optimization
helps the managers in making their operations cost effective. Such effectiveness is passed on to
the customers in the form of low priced products. The altogether effect of management
accounting is enhancing stability in the profitability of firms.
e) Evaluating how planning tools helps in solving financial issues
Planning in general involves identification of objective and problem for which different
alternative course of actions are evaluated. The best course of action is taken for solving the
problem. Planning tools in organisations by preparing strategies and plans in advance helps the
company in dealing with the expected dynamics of the business environment. Planning tools

such as fixed budgets, flexible budgets, cash flows, fund flows etc., helps the organisations in
overcoming their financial problems.
This is because the purpose of these planning tools is to prepare forecasted plans for the
employees according to which they have to conduct the activities. They serve the purpose of
controlling the costs of companies by which companies achieves their objective of being cost
effective. Such effectiveness helps the organisations in solving their finance related problems
and paves a path for sustainable success (Kaplan and Atkinson, 2015).
CONCLUSION
From the above project report, it can be summarised that management accounting helps
company in overcoming its financial issues. The system helps in managing and controlling the
costs of the company that helps it in making its operations effective and efficient. In the report, it
was shown that net profit is reflected differently by different methods of costing. The marginal
costing considers variable cost in its product's cost while absorption costing method recognises
both fixed and variable costs in its product's cost. This is the main reason for the variances in the
net profit calculation under these two methods. The report also concluded that planning tools of
budgetary control such as fixed, flexible, incremental budgets helps the organisations in
controlling their costs by preparing an estimated plan that becomes the guides for spending the
funds in the future.

REFERENCES
Books and Journals
Kaplan, R. S. and Atkinson, A. A., 2015. Advanced management accounting. PHI Learning.
Otley, D., 2016. The contingency theory of management accounting and control: 1980–
2014. Management accounting research, 31, pp.45-62.
Renz, D. O., 2016. The Jossey-Bass handbook of nonprofit leadership and management. John
Wiley & Sons.
Wouters, M and et.al., 2018. T Course: Management Accounting 1 [T-WIWI-102800]. Module
Handbook Industrial Engineering and Management (B. Sc.).
Maas, K., Schaltegger, S. and Crutzen, N., 2016. Integrating corporate sustainability assessment,
management accounting, control, and reporting. Journal of Cleaner Production. 136.
pp.237-248.
Messner, M., 2016. Does industry matter? How industry context shapes management accounting
practice. Management Accounting Research. 31. pp.103-111.
Chenhall, R. H. and Moers, F., 2015. The role of innovation in the evolution of management
accounting and its integration into management control. Accounting, Organizations and
Society. 47. pp.1-13.
Malmi, T., 2016. Managerialist studies in management accounting: 1990–2014. Management
Accounting Research. 31. pp.31-44.
Nitzl, C., 2018. Management Accounting and Partial Least Squares-Structural Equation
Modelling (PLS-SEM): Some Illustrative Examples. In Partial Least Squares Structural
Equation Modeling (pp. 211-229). Springer, Cham.
Chiwamit, P., Modell, S. and Scapens, R. W., 2017. Regulation and adaptation of management
accounting innovations: The case of economic value added in Thai state-owned
enterprises. Management Accounting Research. 37. pp.30-48.
Hall, M., 2016. Realising the richness of psychology theory in contingency-based management
accounting research. Management Accounting Research. 31. pp.63-74.
Tucker, B.P. and Schaltegger, S., 2016. Comparing the research-practice gap in management
accounting: A view from professional accounting bodies in Australia and
Germany. Accounting, Auditing & Accountability Journal. 29(3). pp.362-400.
Schaltegger, S. and Burritt, R., 2017. Contemporary environmental accounting: issues, concepts
and practice. Routledge.
Online
Variance analysis. 2018. [Online]. Available through
<https://www.accountingtools.com/articles/what-is-variance-analysis.html>
Marginal Costing vs Absorption Costing. 2018. [Online]. Available through
<https://www.wallstreetmojo.com/marginal-costing-vs-absorption-costing/>
TrueCommerce Datalliance Vendor Managed Inventory. 2018. [Online]. Available through
<https://www.truecommerce.com/uk-en/solutions/vmi-inventory-management/vmi-
inventory-management>

MAKING SUSTAINABLE LIVING COMMONPLACE. 2017. [Online]. Available through
<https://www.unilever.com/Images/ara-principle-risk-factors_tcm244-525944_en.pdf>