Report on Cost Analysis Techniques

Management Accounting

INTRODUCTION
Management accounting is a process which helps in preparation of accounting reports.
These reports provide internal information about departmental functions of organisation. Internal
stakeholder like manager, employees are used such reports to enhance their performance and
achieve their predetermined targets. Marginal and absorption costing are two important methods
used by manager for valuation of their inventories. It helps in optimum utilisation of their given
resources. UCK Furniture is involved in the business of production business which produces
Tables and Drawers (Nørreklit, 2014).
In the present report explain about, application of two cost analysis techniques regarding
preparation of income statement, application of accounting techniques which helps in production
of financial reporting, advantages and disadvantages of marginal and absorption costing. Also,
application of different planning tools for budgetary control, ascertainment of the availability of
cash through preparation of cash budget and use of management accounting systems to respond
financial issues.
TASK 1
1.1 Application of cost analysis techniques for formulation of income statement
Cost: Amount which is paid by the management of organisation to deliver the quality
products to their final customers. It is important for manager of UCK Furniture to track the cost
which helps in attainment of success in business actions. The different elements which are
included while calculating cost are efforts, materials, labour, time, risks etc. Cost are of different
kinds like fixed and variable cost, historical and replacement cost, opportunity and outlay cost
etc.
Fixed and variable cost: Fixed cost is the amount which remains unchanged whether
change in output level and sales revenue. This includes the cost which is incurred on plant and
machinery, building, equipments etc. Due to the increase in the production, the per unit fixed is
decreased simultaneously. On other hand, variable cost means which is changed with the change
in production of total number of units. This includes the cost which is going to incur by
organisation on raw material, labour etc.
Marginal costing: It is one of the effective technique which is used by the manager of
UCK Furniture to calculate the value of their inventories. This method helps in ascertainment of
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increase and decrease in cost due to production one more extra unit. Under this method, only
variable cost are charged to units and fixed costs are totally write off. The value of inventories
which is calculated by this method is undervalued to due to the ignorance of the cost of fixed
assets (Quinn, 2014).
Absorption costing: It is important method which helps in actual valuation of
inventories because of the consideration of fixed cost. As per this costing technique both fixed
and variable cost are apportioned to cost centres. While using this method, all the resources and
expenses which are incur by organisation during production of their products are used for
calculation of costs.
Distinguish between marginal and absorption costing
Marginal costing Absorption costing
This method is useful in short term decision
making
This method is useful in long term decision
making and preparation of pricing policies for
long term.
This method provides large emphasis on
selling and pricing aspects
While using this method more focus should be
provided on production
It values the inventory at full production cost It values the inventories at variable production
cost
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