[DOWNLOAD] Income Statement with Different Costing Methods

This assignment provides a detailed comparison of income statements prepared using three different costing methods: marginal costing (budgeted), marginal costing (actual), and absorption costing (budgeted). The problem presents sales data, direct material costs, direct labor costs, variable production costs, fixed costs, and closing inventory values. Students are required to calculate the cost of sales for each method, contribution, and profit, highlighting the differences between the three approaches.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1 (LO1).................................................................................................................................3
Explaining management accounting and essential requirements of various systems of
management accounting..............................................................................................................3
Explaining various methods used for reporting under management accounting. ......................5
Evaluating the benefits and the application of the management accounting systems within the
organization.................................................................................................................................5
Evaluating the integration between the system and the reporting of the management
accounting. .................................................................................................................................7
TASK 2(LO2)..................................................................................................................................7
.........................................................................................................................................................9
LO 3 Planning tools used in Management Accounting...................................................................9
LO 4 Ways in which organisation uses management accounting to respond to financial problems.
........................................................................................................................................................12
CONCLUSION .............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
Management accounting refers to the concepts and the methods that are essential for making
the planning function effective. These methods are used for selecting the best alternative course
of action for the business and for efficient implementation of the controlling function through the
interpretation and evaluation of performance of the entity. ABC Ltd company in respect of
enhancing their stability in the market they came across with the planning activities which
represents the proper accounting format (Otley, 2016). Cash is the major aspect for the company
which is to be managed in accounting so that it helps company to take risk or brings their
products or increasing the productivity in the company.
The present report is based on the ABC Ltd company, a medium sized manufacturing
industry deals in producing and providing products and services. Furthermore, the report
includes the meaning of the management accounting and the reasons for the requirement of the
management accounting systems. The report also describes the various methods of the
management accounting reporting and its evaluation with the description of the integration
between the systems and the reporting. Profits are evaluated through the application of marginal
and absorption costing technique. It also includes the various planning tool which is used by
company to manage their accounts in accurate way. Lastly ABC Ltd. Uses various ways to
respond to their financial problems.
TASK 1 (LO1)
Explaining management accounting and essential requirements of various systems of
management accounting.
Management accounting is the practice of determining, measuring, assessing, interpreting
and presenting or communicating the information to the managers of the ABC Ltd for attaining
the goals of the organization effectively and efficiently (Hiebl, 2018). The basic difference
between the management and the financial accounting is that management accounting helps the
managers in making decisions within the company whereas financial accounting aims at
facilitating information to the external users of the enterprise. There are various systems that are
involved in management accounting such as-
Management accounting systems Essential requirement
Cost accounting system This system involves the process of

identifying, recording, categorizing, analyzing,
evaluating and allocating the cost attached to
the processes for developing suitable action in
controlling the costs (Latan and et.al., 2018). It
is required by the firm for estimating their
product cost so that profit can be analyzed.
Job costing system It is known as the expense tracking system that
helps the ABC Ltd in assigning its
manufacturing cost to each of its product so
that managers can monitor the expenses
effectively. It is essential as it improves the
controlling over the expenses which in turn
boost the profits of the organization.
Price optimization system It is the system that mathematically analyze the
varying demand of the customers at changing
price levels so that price for the product can be
fixed accordingly (Horton and de Araujo
Wanderley, 2018). It is very important tool as
it helps the enterprise in fixing the price as per
the demand and purchasing power of the
customers so that large customers can be
attracted towards the product and leads to
increase in sales.
Inventory management system This system is the combination of the
technology, procedures and the processes that
enables the managers in maintaining and
monitoring the inventory so that it can be
evaluated that whether those products are
assets, raw material or the finished production
for the ABC Ltd (Curry, Hersinger and

Nilsson, 2019). It is essential as it tracks the
inventory from the storing in the warehouse to
delivering it to the ultimate users.
Explaining various methods used for reporting under management accounting.
There are different methods that are used by the ABC Ltd for reporting under the
management accounting like-
Budget report- Budget report are the report that present the budgeted amount of revenues
and expenses for the firm. Budget reports are very crucial for the ABC Ltd as it helps in
measuring its operational and overall performance of the business. Budget report is prepared on
the basis of past years’ experiences to cater the unforeseen events that might arise in the future.
Budget report include the list of all the sources that generate income and the expenses of the
company (Rikhardsson and Yigitbasioglu, 2018). ABC Ltd tries to attain its mission and the goal
within budgeted amount.
Account receivable report- Account receivable report are the report made on collection
of the money due for sale of the stock. This report plays a great role when the business has
excess of credit. It enables the managers in determining the defaulters and finding any issue if
present in the collection process of the entity. Through this report, managers can ascertain the
due amount and amount payable so that better management can be achieved in meeting its
working capital needs.
Performance report- Performance report means the preparation of the report for
analyzing the performance of the operations and the employees. Such reports are framed by the
managers of the ABC Ltd for reviewing the performance of its overall business and its
employees at the year end (Usenko and et.al., 2018). Managers utilize this report for making
strategic decisions relating to the future of an enterprise.
Cost accounting report- It refers to the report formulated for ascertaining the cost related
information within the organization.This report evaluates the cost associated in manufacturing
the product. It offers the summary of all the cost such as overhead, material cost, labor cost etc.
This report assists the managers in developing better understanding of the expenses so that
optimization could be gained.

Evaluating the benefits and the application of the management accounting systems within the
organization.
Cost accounting system-
Merits Demerits Application
This system highlights the
grounds for rising and decline
in the profits of the business
(Jansen, 2018). By these
managers can take corrective
action in maintaining the
profitability of ABC Ltd.
The cost information provided
by this system enables the firm
in making suitable decisions
whether to produce or buy the
product in the open market.
Under cost accounting system,
cost are absorbed based on the
pre-determined rate. Due to
this it results in over and under
absorption of the overheads.
It fails in resolving the
problems in context of work
study, motion study, research
and time study.
It is applied by the ABC Ltd to
attain optimum use of its
resources by keeping full
control on the cost.
It is used for making the
operations cost effective.
Job costing system-
Merits Demerits Application
Profitability earned from each
job can be determined
individually under this system
(Dávila, 2019).
Efficiency of the plant can be
controlled by evaluating
confined cost towards the
individual job.
The chances of the errors get
increase through this system as
it involves more of clerical
work.
It is counted as expensive
system to operate because it
needs detailed clerical work.
Job costing system is applied
by ABC Ltd for assessing the
cost of each job so that proper
record of the direct material,
labor and overheads can be
maintained.
price optimization system-
Merits Demerits Application

Under this system, the firm
can determine the need and
wants of the customers to
adjust their production process
accordingly.
It helps the firm in attaining its
sales target by facilitating the
product at reasonable and
affordable prices.
Low profit margins are gained
under this system as prices are
set at normal value and not
premium value (Nishimura,
2019).
Prices are determined on the
basis of the ability of the
people to pay which prevents
the poor people in getting the
things at the price they need.
This method is applied as the
mathematical tool to determine
the demand of the customers
so that best prices can be fixed.
inventory management system-
Merits Demerits Application
It helps the firm in increasing
the efficiency of its
productivity and chances of
the mistakes get lower down as
it tracks the inventory of the
organization.
This system is considered as
complex as it involves
handling of technology that
include hardware and
software.
It is applied by the ABC Ltd
for monitoring and managing
the inventory level effectively.
Different methods are used for
its application such as LIFO,
FIFO etc.
Evaluating the integration between the system and the reporting of the management accounting.
Management accounting reporting are dependent on the management accounting systems
as the reports are prepared on the basis of system. For instance, cost accounting system facilitates
preparation of the cost accounting reports which tells the ABC Ltd about the cost ascertainment
and allocation. Thus, both systems and reporting are integrated with each other under the
management accounting. Integration can be in both ways positive and negative as if the system
are not implemented effectively then the report framed will not be considered as appropriate.
However, Effective execution of the system leads to a better formulation of the report.

TASK 2(LO2)
Marginal costing- It is the technique where the marginal cost that is the variable cost is
been charged to the unit of the cost whereas the fixed cost for a specific period is entirely written
off against the contribution. It implies the cost that is additionally involved in the production of
an extra unit of the output. It is computed as the sum of direct material, direct labor, direct
expenses and the variable overheads (Alamri, 2019). Under this method, profitability of the
department and the product is ascertained on the basis of contribution margin. This technique
brings together the methods of the cost reporting and the recording. In this system, costs are
classified based on their variability that is into the variable cost and the fixed cost. It enables the
managers of the ABC Ltd in taking several decisions like machine replacement, discounting of
the product or the service etc. It also helps in ascertaining the adequate level of the activity with
the help of break-even analysis that states the influence of decreasing and the increasing
production level on the overall profits of the enterprise.
Absorption costing- It the method of valuing the inventory. It includes the computation
or absorption of all the costs of the product manufactured including both variable as well as the
fixed cost. It means all the costs such as direct cost, indirect cost and the overhead cost are added
in the inventory price. It facilitates a more accurate and comprehensive view on the amount of
cost incurred to produce the inventory of the ABC Ltd. It is also known as the full costing
method. In this method the cost per unit of the output remains same only at the time when output
level remains same (Latan and et.al., 2018). However, as output changes then the cost per unit
also get changes due to the presence of the fixed cost that remains constant. Such changes pose
the problem towards the management for taking the managerial decisions. This method is useful
when the firm produces a single product, there will be no rate of inventory and the overhead
recovery based on the normal capacity rather than on actual capacity.
PER UNIT TOTAL
£ £ £ £
SALES 50 800000
COST OF PRODUCTION
DM 10 190000
DL 20 380000
VOH 5 95000
FOH 5 95000
40 760000

OPENING INVENTORY 0
CLOSING INVENTORY -120000
COST OF SALES 40 -640000
STANDARD PROFIT 10 160000
ADJ. FOR UNDERABSORPTION -5000
BUDGETED PROFIT 155000
LO 3 Planning tools used in Management Accounting
Planning tool reflects the missions and mission of the company and they had to vary on
various factors and elements which helps company to run their internal working smoothly. The
management accountant duty is to enhance various planning tool to identify the proper standards
and norms to achieve goals in the company. ABC Ltd. Company adapt the planning tool to
manage their accounts in stipulated format (Qian, Hörisch and Schaltegger, 2018). The major
aspect is regarding to the budgets which defines the integrity and stability of the company to
raise their productivity in the market. Budgets means a planning which is used by the company
to make an estimate regarding their expenses and income which they prepared to maintain their
stability in the company. Budgets can be prepared on the bases of estimated or actual expenses
incurred in the different department in the company. There are various types of planning tool
which is used by the company to prepared their accounting methods inaccurate format.
 Zero based budgeting: In this budgeting, all the income and expenses are to be prepared
for the new period and accountant not take any help from any of the previous budgets.
They start to prepare their budgets making from the starting (Quattrone, 2016). Thus, the
budgets itself represent the Zero base which depends upon the needs and demands of
every department regarding their results which they need in managing their work.
The advantages of zero based budgeting are:-
1. It helps company to communicate with their employees and other department to know the
needs and changes in the company structure. This helps to motivate employee and also
provide an open door scheme to discuss any matter and issue with their supervisor.
2. With this zero based budgeting, its major advantages is that it gives the accurate results
and also new budgets are prepared which helps to increase their productivity and new
changes in their work premises.

Its disadvantages are:-
1. With this method, it mainly results in bringing corruption in relation to the transaction
and entries which are prepared by the accountant or even guided by employees (Renz,
2016).
2. It is the time consuming concept as they had to take the reviews from every department
regarding the expense which they are facing in the premises or which restricts him to
bring more productivity in the business.
ABC Ltd. prefer this budgets to communicate more closely with their other department and also
take their feedback regarding the services which the company are offering (Smith and Driscoll,
2017). This helps to motivate employees working in the premises and bringing more confident
regarding their working and their decision and judgement are appreciated in the company.
E.g. If the Elite company expand their operational department, they had to appoint more
employee and more technologies are to be requires, which helps company to prepare the budgets
to be prepared according to the needs and demand so that department. The zero based budgeting
are to be prepared according to keeping in mind the basic needs which maintain the employees
interests in the organisation.
 Sales budget: Sales budgets are mainly prepared to examine the estimated sales activity
of the company in the near future. It is mainly prepared to reflect the overview of every
department as the resources and technologies are to be used by every department, so at
the time of selling the products it requires preparing the budgets to set the goals and
target of the department (Tucker and Schaltegger, 2016). The advantages of sales budgets
are as follows:
1. At the time of preparing the sales budgets it helps to identify the following resource and
raw material used, so that they can estimate the expense previously at the time of
consuming such products.
2. By having the proper budgets, it helps companies to bring more products in the market if
they estimated or prepared proper strategies.
The disadvantage of sales budget are as follows:

1. If the company didn't prepare their sales budget, they cannot set their vision and missions
in the company and also cannot guide their managers, supervisors to work accordingly
(van Helden and Uddin, 2016).
2. If the sales budgets are not prepared company cannot estimated there actual cash inflows
in their various activity.
ABC Ltd company uses this planning tools to manage their accounts in better way. If
company want to launch new products in the market, this budget is helpful for them to analyses
their outcomes and expenditure relation to that budgets.
For e.g. If organisation brings cosmetic products in the market, they prepare their sales
budgets by analysing the cost incurred for promoting the products or the demand in the market
and its also examines the overheads of the goods.
 Production budgets: In this budget it helps the companies to calculate the number of
units and quantity which is to be produces on day to day activity (Maas, Schaltegger and
Crutzen, 2016). This budgets are mainly based on sales and cost and without this it
cannot be estimated or not useful. The advantages of production budget are as follows:
1. It helps the company to continue their services if they are engages in production activity.
2. With this budget, they can also manage their cost and purchase prices to maintain their
minimum stock available for the resources (Production Budget, 2019).
The disadvantage of the production budgets are as follows:
1. It is the comprehensive process as the time is not same, this budget affects due to changes
in time and also cost (Kaplan and Atkinson, 2015).
2. This budgets affects when the resource are not easily available and the suppliers also
changes the prices according to the non availability or unique raw materials.
ABC Ltd. uses this planning tool to estimate their productions budgets and cost of labour
to producing such products. It also analysis the inventory management and raw material used in
increasing the productivity which represents the working capacity of the company.

For e.g. Silicon company is producing a plastic pails and they are making their
production budgets in relation to estimating their prices for the inventory of previous quarter and
the expenses incurred in respective of upcoming year.
 Cash flow analysis: This budgets is mainly prepared by companies to analyse the inflow
and outflow of cash on transaction and entries. It helps company to manage their funds
and also helps to raise their funds in some other company to increase their goodwill and
reputation in the market (Jansen, 2018). The advantages of cash flow analysis are as
follows:
1. If the organisation had surplus cash they maintain their stability in the company and also
expand their operation activities in large scale for more profits and growth.
2. If the company is clear with their cash flows they can retain more employees and also
borrow money from the investors easily having the good interest amount for security
purpose.
The disadvantages of the cash flow analysis are as follows:
1. By viewing the surplus cash in the company account its distracts the mind and interests of
the employees and they always demand more cash for the work which they committed
(Honggowati and et.al., 2017).
2. If the company carry surplus cash, it brings more theft and infringement of money which
affects the reputation and goodwill of the company.
ABC Ltd. Company refer this planning tool to manage their accounts, so that they can
analysis the risk which can appears in the near future. With the sufficient cash, they can also
balance various department functioning and organise more activities for the employees to retain
their interest for longer periods.
LO 4 Ways in which organisation uses management accounting to respond to
financial problems.
Financial problems arises in the way where the money factors is decreasing and the
company is not stable to carry their activities for longer growth. It can be arises at any time and
organisation had to be mentally prepared for the circumstances which they had to overcome in

the near future (Hald and Thrane, 2016). Thus, ABC Ltd. uses various ways to respond to
financial problems in better way such as:
Performance measurement: It helps the company to manage the performance of the company
which they actual worked on it by estimated the performance equals to the results given in the
performance reports. Performance is measured in various department and regarding to their
employees which helps companies to gather information regarding their working strategy and
targets which they are achieving in the organisation (Chenhall and Moers, 2015). As measuring
the performance of the employees and the supervisor are crucial in respect of following the
benchmark which is imposed by the companies to set some rules or standards which everyone
had to follow.
But in respect of measuring the performance it depends upon the capabilities of the
person and sometimes the targets as if the project are crucial it need time for the employees to
understand the work which requires more training facilities and it results in facing expenses. It
can also be measured by controlling the performance of the employees in case of there is no need
of such working and also assembles the proper planning method (Carlsson-Wall, Kraus and
Lind, 2015). So that they can plan their targets and also according to the objective which is
decided by the company. In case of ABC Ltd. they had to minutely examine the performance of
their employees and also check their working strategy to achieve goals. This helps them to know
their stability and the technique which they used to overcome from such challenges and secure
the management of the company.
Project decision making: To avoid or resole the financial problems mangers of the company
uses the costing reports and other managerial accounting reports avoiding the consequences
which arises in resulting of cost and other benefits (Otley, 2016). With the decision making it
makes the stronger relationship between the managers and their supervision and they can
communicate and resolve the matters directly by analysis the cost and other expenses which are
uncured in their projects. Communication is the best way to resolve the disputes. Mainly the
problems arises in respect of not communicating properly with the other department or
neglecting their reviews which further results in brining more consequence in their working to
achieve goals.

In case of ABC Ltd. The decision making criteria is equal as ever members are given
chanced to decide the matters and give their judgement and their judgement are appreciated to
handle the important matters in the company (Qian, Hörisch and Schaltegger, 2018). The project
report of decision making helps the companies to present at the time of demanding that
management report. It reflects the effective decision making which is committed by their
employees and senior staff and the work which they present is clear and presentable.
Key performance indicators: It helps the organisation to evaluate the overall objective of the
company. Mainly the companies imposed such polices by measuring the key performance of
their employees, senior managers regarding their working criteria. It helps the company to
measure their success by meeting certain objective which is to be examined at that level. In these
strategies, various techniques are to be used to achieve the objective and also the employees are
to be trained accordingly (Quattrone, 2016). They are set with proper work and also time
schedule is to be stipulated which helps them to achieve goal with more efforts. Thus, ABC Ltd.
set the goal accordingly and it depends upon them at what techniques they used to measure the
performance and also motivate them to achieve the goals. It carries certain attributes and good
KPIs strategy which results in favouring the positive impact and also results in saving the
financial problems. If company set some goals and targets, it's the duty of the managers and the
leaders to achieve with full security and also they had to maintain certain ethical norms and
standard and they are bound to work according to such norms.
CONCLUSION
From the above report it can be summarized that management accounting is an important
era for the organization as it provides for the framing of the essential reports and the accounts
that facilitate accurate and timely statistical and the financial information to the managers. By
this the managers can make decisions in order to achieve the short-term and the long-term goals
ayushi.agof the business. Moreover, management accounting systems also plays a crucial role in
managing the cost, inventory, price and each job which enhances and improves the operational
performance of the ABC Ltd. Management accounting reporting is also essential as it states the
information to the managers about the cost, performance and effective budgeted amounts based
on which the task can be performed with proficiency. Marginal and absorption are the two major

methods in management accounting that helps the managers in evaluating the profits after
considering all the cost.

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