Cost Accounting Methods Comparison

This assignment delves into a comparison of two fundamental cost accounting methods: marginal costing and absorption costing. It examines the principles underlying each method, illustrating how they differ in allocating costs and calculating profitability. The assignment also explores the practical implications of these methods for businesses, highlighting their suitability in various situations and their impact on decision-making processes.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1 ...........................................................................................................................................1
P2 ...........................................................................................................................................3
TASK 2............................................................................................................................................5
P3 ...........................................................................................................................................5
TASK 3............................................................................................................................................7
P4 ...........................................................................................................................................7
TASK 4..........................................................................................................................................10
P5..........................................................................................................................................10
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Management accounting plays a vital role in business that it helps to manage and control
various operational activities and resources costs in order to increase profitability and production
which also help to respond financial issues. The report will cover management accounting with
different types of accounting systems and its importance towards decision-making. The report
will also demonstrate a well understanding of method used for management accounting reporting
and Income statement using marginal and absorption costing methods for Guildford. Planning
tools for budgetary control and management accounting techniques used to respond finance-
issues within firm will be discussed in this report.
TASK 1
P1
Management accounting: It can be said that in Guildford tyre business management accounting
is important for managers in order to manage and control operational activities. Management
accounting systems are used by managers to determine the cost of different resources within firm
in order to prepare financial reports that helps to control the cost effectively. Such reports can be
financial or non-financial, internal or external efficiently (Abdullah and Said, 2015). This will
also help to make strategies and plans that helps to manage operational activities in order to
maximise profitability and production. Management accounting is also known as managerial or
cost accounting.
Accounting system: Management accounting system helps managers by providing useful
information and data that helps to facilitate various business resources within firm effectively.
Information regarding business operational activities will help to meet requirements and
demands of business in order to make decision-making process more effective and efficient.
Management accounting system involves costs of production, operational activities and data and
service.
Cost accounting system: Cost accounting system is used by managers to evaluate the cost of
various resources within business such as cost of products and services offered by firm in the
market towards customers and cost of departmental activities etc. this will provide some useful
information to managers that helps to manage and control cost of business resources (Botes and
Sharma, 2017). This will also help managers to make effective decision making in order to
control the cost of business operational activities. For an example, the cost system will be
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applied on retailers, manufactures, government departments and proprietorships effectively. It
will help to evaluate price of product and service.
Inventory management system: Inventory in business refers to business resources such as
Guildford tyre products, raw materials, finished goods and work in progress. The system helps
managers to control and manage inventories at various inventory levels effectively. This will also
provide information to evaluate availability of stock, how much quantity should organisation
order and haw can the quality of products can be managed that will help to drive business
performances in various departments effectively (Budding, Grossi and Tagesson, 2014). Cost of
inventory refers to cost of raw materials, facilities, insurance, utilities and tax as well as capital.
For an example, The business is able to evaluate cost of transportation, stock and raw materials
against shortage in order to manage work in progress. This will also help by providing
information regarding shortage of stock and planning for managing business resources and
activities.
Job costing system: Job costing system is a procedure of accumulation and cost recording. It
will help managers in Guildford to determine group of people n which the cost of various human
resources can be managed and controlled effectively. For an example, job costing system is
useful for only those organisations where the production of products and services is 'One off'. It
is also undertake by managers for a special or specific requirement or customer. A short period
of time is consumed by firm to complete the order provided by customer in the market
effectively. This will also help to control and manage decisions regarding employees
performance that will help to increase production and profitability.
Price optimising system: It is system in which the price of products and services offered by firm
in the market towards customers is changed according to their demands and requirements
effectively. This will help to enhance profitability and production by knowing sensitive
customers in the market to change the prices accordingly. Price optimising system is normally
based on customer feedbacks and suggestions to make necessary changes efficiently. This will
help managers to achieve customer satisfaction and sensitivity that helps to increase profitability
and production. This will help to retain customer satisfaction and loyalty towards brand which
helps to enhance productivity and profitability. In addition to this, managers are also able to take
decisions that helps to improve and develop price optimising system effectively.
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Thus, it can be said that management accounting system will help managers to determine
cost of various resources in order to increase profitability and production (Fuzi, Habidin and
Effendy, 2016). This will also help to retain target customers in the market and changes prices of
products accordingly to enhance satisfaction and loyalty.
P2
Management accounting reports are very useful for the firm in order to take decisions
regarding financial and non-financial operational activities. Such reports provides information
and data regarding financial ad non-financial activities which helps to take various decisions in
order to increase production and profitability effectively. Proper allocation of cost can be
managed by such reports. Such information will help to make fruitful decisions for Guildford
business effectively. It will also help to underline corporate social responsibility that helps to
make and effective, peaceful and sustainable environment within business. Management
accounting reports are described below in order to manage and control profitability level.
Job cost reports: Job cost reports are prepared by managers in order to determine cost of work
and project running in business effectively. Such reports also provide information regarding
employees work which usually combined with business estimate revenues (García-Unanue,
Felipe and Gallardo, 2015). This will help to manage employees and their work in order to
increase profitability and production. The reports also calculate cost of work in progress that the
level of profitability can be determined by job cost reports efficiently. This will help managers to
demonstrate work between employees that helps to enhance their skills and knowledge and lead
towards achieving business and individual goals and objectives.
Inventory management reports: This report will help managers by providing information
regrading inventories in Guildford. This will also help managers to control and manage different
level of inventories efficiently. It can be said that it is the responsibility of a manager to
determine availability of stock, quality and quantity in order to manage production process. This
will reduce the unnecessary expenditure of resources that will help to produce effective
productivity and lead towards profitability effectively. This will help organisation to achieve its
goals and targets.
Debtors ageing reports: Such reports will help managers by providing information of receiving
money or funds from debtors over products and services effectively. This will be added in the
business account that it is a income for managers which will be received in a specific time period
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(Heinicke, Guenther and Widener, 2016). Thus, it can be said that it will help to drive
operational activities as well which lead towards profitability and production. This will help
organisation to achieve its goals and targets in order to maintain the position in the market
towards customers effectively. The estimated are always profitable for the business in terms of
providing accurate and correct funds from different resources and suppliers that helps to increase
net income and working capital as well effectively and efficiently.
Operating budget reports: Operating budget reports analyse the performance of various
department which help managers to manage and control cost of operational activities. This will
also help to evaluate best performance given by employees in order to give rewards and
incentives that will also help to motivate and encourage other employees at work place. This will
help to enhance productivity which lead towards profitability.
Accounts receivable ageing reports: Such reports will help managers to control and manage
cash flow activities in order to manage capital and investments effectively. It is also known as a
critical tool which break down the customer balance when they purchase something and owned
the business efficiently (Huefner, 2015). Accounts receivable ageing reports also provide
information regarding previous debts which helps to manage profitability and production in
calculation.
Performance reports: Performance reports are crucial for the firm that it helps to determine
performance level of employees and other members working in the business. This will help
managers to evaluate requirement of training and development programs in order to increase
skills and knowledge of workers towards their job effectively. This will help both employees and
business to achieve their individual and desired goals which lead towards production and
profitability efficiently.
Importance of management accounting: Management accounting reports are useful for
managers in Guildford that it helps to manage and control different operational activities in order
to raise profitability and productivity which lead towards organisation success by accomplishing
goals and targets. Apart from this, this also help to determine cost of business resources such as,
products and services, inventory, departmental etc. Management accounting reports will help to
manage and control service cost and inventory cost and other business resources costs etc. This
information will help managers to take decisions regarding financial and non-financial activities
which helps to increase profitability and production (Hussein, 2017). Such information and
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reports will help manager as a decision making tool for them. Thus, it will help them to take
decisions regarding business operational activities in order to enhance profits and productivity.
This will help Guildford to achieve its desired goals and objectives effectively and efficiently.
TASK 2
P3
5
Illustrat
ion 1: Marginal costing method

It can be said that the net income for both methods are different from each other. The
absorption costing method is showing 9600 and marginal costing method is showing 9300. There
is a slightly difference between these two methods effectively. It can be concluded from above
illustration that marginal costing system only take variable expenses in order to calculate the net
profit or income for the business (Ismail, Ramli and Darus, 2014). In addition to this, absorption
costing method takes both variable and fixed expenses to calculate the net profit amount
effectively. This will also help to calculate the cost of products and services offered by firm in
the market towards customers. It can be said that it is very important for the firm to take
measures from both approaches that both are important for the firm in their own region
effectively and efficiently. For the very first it is important to understand what are the expenses
that it is divided in three parts, variable, semi-variable and fixed expenses. Fixed expenses are
those activities which are crucial for the firm to manage and control business operational act. For
an example, salary of workers and managers is a fixed cost or a expense for business. Variable
expenses changes with time and changes in resources price such as raw materials, products and
services etc. for an example, production of products and services are variable costs that it
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Illustration 2: Absorption costing method

changes according to the operations costs. Semi-variable are those in which some part of the
expenses remain same and some changes accordingly and effectively. All expenses should be
considered by manager and professionals to calculate the accurate and correct net profit amount.
I respect to this, managers should take both methods to calculate the net income. The method is
useful to evaluate the profitability level as well effectively and efficiently (Oboh and Ajibolade,
2017). Absorption costing method is also crucial that it takes all the expenses to calculate net
profit amount which is useful for the firm in many terms.
Thus, it can be said that both methods are crucial for the firm to reduce the waste
expenses and to increase the production and profitability. This will lead towards innovation and
profitability which also increases employees performance to enhance productivity. This will help
organisation to achieve its desired goals and objectives from which the firm is able to compete
others in the market and make a effective position. Thus, it will help them to take decisions
regarding business operational activities in order to enhance profits and productivity. Such
information will help to make fruitful decisions for Guildford business effectively. It will also
help to underline corporate social responsibility that helps to make and effective, peaceful and
sustainable environment within business.
TASK 3
P4
It can be said that budgetary control is crucial for every organisation in order to control
the cost of various business resources that helps managers to ensure effective production and
profitability effectively. There are different types of budget which are described below:
Financial budget
Financial budget will help managers in Guildford to manage and control the cash
revenues in order to spent them as a benefit for organisation such as in action plans and strategies
effectively.
Cash budget: In cash budget, managers are responsible for managing the cash activities within
firm which will be incoming and outgoing in monthly or a specific time period (Ramli, Sulaiman
and Zainuddin, 2015). This will help managers to take advantage of opportunities by evaluating
availability of cash in the firm effectively.
Capital expenditure budget: The budget will help managers to focus on expenditures in order
to reduce them which helps to purchase plan, machineries and assets for the business effectively.
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Such things are very useful for the firm that it helps to expand operational activities as well. This
will be acquired by managing long term bonds and securities.
Balance sheet budget: It can be said that proper management of balance sheet can be done by
organisation and managers by meeting all the demands and requirements that helps to manage
the budget mesh effectively.
Operating budget
Sales and revenue budget: Sales and revenue budget is mainly focused on income received
from sales and business operations effectively (Revellino and Mouritsen, 2015). This will also
help to determine business financial position efficiently.
Expense budget: The budget will provide information of anticipated expenses within firm that
helps managers to manage and control unnecessary expenses that will prepare for the future
expenses. This will increase the effectiveness of operational activities as well.
Project budget: The budget is known as difference between profitability and sales and expenses
as well. Project budget will help managers to control cost according to the the project overall
cost tat helps to increase production and profitability. For an example, if the anticipated profits
are low for the firm, then some important strategical decisions should be made by managers to
enhance profits and productivity.
Fixed and Variable budget
Fixed cost: Fixed cost are those activities which are crucial for the firm to manage and control
business operational act. For an example, salary of workers and managers is a fixed cost or a
expense for business (Wang and Gu, 2014).
Variable cost: Variable cost changes with time and changes in resources price such as raw
materials, products and services etc. for an example, production of products and services are
variable costs that it changes according to the operations costs.
IMPORTANCE OF BUDGET
Budget is a effective platform that helps managers to manage various business operations
and resources cost in order to achieve the financial targets effectively. This will help managers to
save money and increase capital which lead towards profitability and production efficiently.
Cost-based pricing: This will help managers to evaluate and determine cost of products and
services which will be offered in the market towards customer for the selling purpose effectively.
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Cost-plus pricing: This will help managers by providing information regarding cost of direct
labours, materials and manufacturing overheads effectively. Such cost are added to the final
price of products and services to derive the prices.
Profit pricing: Profit pricing is used to make profits from production and other operational
activities. While calculating profitability, manufacturing cost will be added to the price of
products and services on each sell (Weygandt, Kimmel and Kieso, 2015).
Transfer pricing: Transfer prices are those in which managers transact money with suppliers,
departments and labours to manage the resources availability and key functional area of business.
This will also help to manage the cost of products and services offered by firm in the market
effectively.
NPV: Net present value technique is useful for organisation and managers that it reflects the
present value of the future cash flow activities. Measurements are planned by managers and
professionals on estimate project for the future. This will also help to analyse profitability and
growth from projects effectively.
Advantages
 The planning is tool is effective to determine future growth and profitability.
 It also consider cost of capital while analysing it.
 Produce correct and accurate outcome for the firm and managers.
Disadvantage
 The technique is very complex and time consuming as well.
 Th results generated from this technique belong to the value of money.
Zero base budgeting: It can be said that the concept lies over the method that all the budgets
and costs of any projects or investments are starts from the zero bases (Huefner, 2015). It can be
said that the zero base budgeting do not consider past value of gain and income effectively. The
project starts with zero and value will be new for each project beginning.
Advantage
Zero base budgeting help to utilise all the resources and reduce expenses from the business
effectively.
It will also help manager to make strategies and plans in order to find new opportunities for
business operations.
Disadvantage
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 The process of zero base budgeting is time consuming and also managers spend a lot of
time to analyse requirement for operational activities.
 There will be lack of professionals and their expertise while preparing the budget plan
that skilled and qualified worker is required for the proper execution and training.
TASK 4
P5
Financial issues: It can be said that without proper management of financial issues the firm is
not able to manage resources and profitability. Financial issues and problems reduce the capital
as well as revenues which is required by the business in order to respond financial issues
effectively. This will affect the business production and profits which decrease sales and
effectiveness of operational activities (Hussein, 2017).
Profitability and production: Financial issues also arises when the cost of products and
services, raw materials becomes high which consumes cost for business. Increasing cost of
external resources decrease the opportunities and also a disadvantage for Guildford business
effectively. This will also effect the productivity and profits.
Funding: Financial issues remove the funding resources which are helpful for business
expansion. This will also reduce effectiveness and quality of work and operational activities.
Lack of funding causes different business financial problems such as purchasing of raw materials
and machineries for effective production.
Too many debts: Too many debts also a financial issue for the firm that there are many
customers who purchase the products and services as borrowing and many other important
aspects such as credit card expenses, interest, loans, too many debtors etc. this will lead to the
financial issues within business which also affect the decision-making of managers effectively
(Ismail, Ramli and Darus, 2014). This will also prevent banks to provide loan for business
expansion or any other operational activities etc.
Budgeting issues: Financial management requires effective budget management in order to
reduce financial issues. Businesses usually spend extra money as a expense for unnecessary
resources sometimes which also decrease profitability and production. This will also affect
innovation at lower level and cause perception of inequality. This will also reduce the innovation
at lower level and affect strategies and plans.
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Poor financial management: Managers should control financial activities in order to maximise
profitability and be prepare for future financial issues. Poor financial management affects the
revenue and sales and also decrease competitive advantage. For an example, no proper
management of financial activities and underestimating competitors. Poor financial management
also affect the output per member which creates negative perception in employees.
It can be said that there are various techniques from which the business is able to respond
its financial issues and problems which lead towards profitability and production. This will also
help Guildford top achieve its financial goals and objectives effectively.
KPI: Key performance indicator is one of the best techniques used by managers and many other
firms that it helps them to measure values which demonstrate the work done by employees and
business operators to achieve goals and objectives (Oboh and Ajibolade, 2017). This will help
manager to provide roles and responsibilities in order to reduce financial issues and increase
production. Such information will also help to determine training and development programs
needs effectively.
Decision making: The manager should make effective decisions regarding financial activities in
business which will be done by managing all the resources under the budget effectively. The
decisions should be monitored in order to retain their effectiveness in the firm that helps to
reduce financial issues.
Benchmarking: Benchmarking is a process in which the firm compare its current position and
profitability to any other business in the market operating in the same operations to measure the
profitability level and market position effectively (Ramli, Sulaiman and Zainuddin, 2015). This
will help to acquire some new techniques used by other firm to raise profitability and respond to
the financial-issues.
Just-in-time: The method I useful for the organisation that it helps to control unnecessary
expenses within firm and operational activities to respond finance-issues effectively. The method
also helps towards inventory management to reduce the costs of various inventories. This
methods required process to forecast demand accurately and effectively.
Selective nature of manage: The selective nature of manager will also help to collect useful
information and data which helps to reduce financial problems within Guildford effectively. The
manager requires effective decision making which will be done by acquiring all the information
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related to the operational activities which helps to respond financial problems by managing and
controlling financial activities.
Think beyond: The managers requires effective thinking for the future uncertainties in order to
prepare for them effectively.
Thus, it can be said that management accounting techniques used by managers at
workplace will help to respond financial issues within business by managing and controlling
financial and non-financial activities to drive operational activities effectiveness (Oboh and
Ajibolade, 2017). This will also help organisation to achieve its desired financial goals and
objectives and lead towards profitability and production effectively and efficiently.
CONCLUSION
It can be concluded from the above report that Management accounting systems are used
by managers to determine the cost of different resources within firm in order to prepare financial
reports that helps to control the cost effectively. Management accounting reports also provides
information and data regarding financial and non-financial activities which helps to take various
decisions in order to increase production and profitability effectively. The income statement also
determined using absorption and marginal costing methods. Management accounting techniques
used by managers at workplace will help to respond financial issues within business by
managing and controlling financial and non-financial activities to drive operational activities
effectiveness. This will help organisation to achieve its desired goals and objectives which helps
to respond financial problems within business which lead towards profitability and production
effectively.
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