Cost Accounting Methods Comparison

This assignment delves into the comparison of two fundamental cost accounting methods: marginal costing and absorption costing. Students are presented with illustrative income statements prepared using both methods and tasked with analyzing their variations. The focus is on understanding how these different approaches impact the reported profit figures and highlight their implications for decision-making.

MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
LO 1.................................................................................................................................................1
P1) Management accounting and essentials of its systems.........................................................1
P2) Management accounting reporting.......................................................................................3
M1) Benefits of management accounting systems and their applications for Nisa Ltd..............4
D1) Critical evaluation on management accounting systems and reporting...............................5
TASK 2............................................................................................................................................5
LO 2.................................................................................................................................................5
P3) Costing methods to prepare income statements...................................................................5
M2) Range of management accounting techniques and financial reporting...............................8
D2) Financial reports for applying and interpreting data for Nisa Ltd.......................................8
TASK 3............................................................................................................................................9
LO 3.................................................................................................................................................9
P4) Critical evaluation on budgetary control tools.....................................................................9
M3) Usefulness of analysing budgetary planning tools............................................................10
TASK 4..........................................................................................................................................11
LO 4...............................................................................................................................................11
P5) Importance of using management accounting systems to reduce financial problems of
Nisa Ltd.....................................................................................................................................11
M4) Method in which management accounting tools are used for responding on financial
problems of the enterprise.........................................................................................................12
D2) Importance of planning tools and management accounting systems for Nisa Ltd............12
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INDEX OF TABLES
Table 1: Marginal vs absorption costing methods...........................................................................7

ILLUSTRATION INDEX
Illustration 1: Income statement using marginal costing.................................................................6
Illustration 2: Income statement using absorption costing method.................................................7

INTRODUCTION
Management accounting is considered as a multidisciplinary approach which is useful for
appropriate decision making regarding implementing business operations. It generates several
ideas to achieve entity's effectiveness and improving its quality services. Present report is based
on understanding significance of using management accounting tools for decision making
regarding business operations of Nisa Ltd. It is small scale and retail sector organisation of UK
which provides groceries and home products. In this regard, management accounting and
requirement of its systems are to be discussed. Including this, ways to prepare income statement
using marginal and absorption costing system will be introduced. Along with this, critical
evaluation on different budgetary control planning tools is to be discussed for appropriate
decision making and forecasting. However, importance of using management accounting
systems for decision making related to business operations of Nisa Ltd is to understood in this
assignment.
TASK 1
LO 1
P1) Management accounting and essentials of its systems
From: Management accountant
To: General Manager
Nisa Ltd
Subject: To understand the concept of management accounting and identifying essentials of its
systems.
Introduction: Management accounting is a useful approach which emphasis on appropriate
decision making regarding business operations. It is effective for managing all business
operations and increasing efficiencies of Nisa Ltd on large scale. Including this, several ideas
are generated for further implementations and creating balances between production and
distribution system of the small scale unit (Soderstrom, Soderstron and Stewart, 2017).
However, different systems are identified for management accounting that can be discussed
below:
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 Financial accounting system: Under this system, management accountant of Nisa Ltd
prepares and maintains financial transactions by which entity's economic position is
identified (Smith and Driscoll, 2017). However, manager of the enterprise analyses
profit and loss account, income statement, cash flow and fund flow of the organisation.
Therefore, different ideas are generated to increase monetary performance and creating
balance of cost incurred in expenditures for the small scale unit. Cost accounting system: This management accounting system is appropriate for
creating balance in expenditures and revenue of the company. It impacts on productivity
and profitability of Nisa Ltd effectively (Azudin and Mansor, 2017). However, it is
suitable for cost effectiveness and increasing sales revenue of the enterprise. Thus, cost
accounting system is effective for growth of small scale business and implementing its
operations in the future time. Inventory management system: This management accounting system is suitable for
managing inventories of the entity as well appropriate decision making for using
resources (Shevelev, Sheveleva and Gvozdev, 2017). It influences on productivity and
profit level of Nisa Ltd efficiently which impacted on further planning procedures. Thus,
inventory management system is identified in terms of effective decision making for the
entity.
 Performance management system: As management accounting is a multidisciplinary
approach which emphasis on company's workers' performance as well (Khan, 2017). In
this regard, different ideas are generated for encouraging them towards effective
contribution in achieving entity's goals.
Conclusion: It is recognised that management accounting approaches are effective for decision
making and increasing efficiency of Nisa Ltd. In accordance to this, different systems and tools
are identified which influences production and distribution system of the company (Carey,
Potter and Tanewski, 2014). However, different ideas are generated for further implementations
and enhancing its efficiencies at maximum level.
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P2) Management accounting reporting
From: Management accountant
To: General Manager
Nisa Ltd
Subject: To identify management accounting reports in terms of business operations of the
entity.
Introduction: Several reports are made for decision making in terms of implementing business
operations of the enterprise. For instance; cash, inventory, budget, performance and others
which demonstrate actual business performance of the company (Corona, Nan and Zhang,
2014). Therefore, different ideas are generated to create balances and enhancing business'
efficiency. However, some essential management accounting reports which are prepared by
management accountant of Nisa Ltd can be discussed below: Cash reports: This management accounting report is essential to record data related to
cash and incurred costs in business operations. However, liquidity position of Nisa Ltd
can be identified for which further decisions make for future implementations. Including
this, it is appropriate for enhancing its productivity and profitability on large scale
(Germak and et.al., 2014). Likewise, performance of company's cash flow can manage
effectively impacts on future business operations. Budgetary reports: Preparing budget is a planning and decision making tool for
implementing business operations and improving its efficiency. Moreover, it is good for
optimum utilization of resources and fund influences production system and profitability
of Nisa Ltd (Holden and Lunduka, 2014). In order to this, several kinds of budgets are
prepared such as; cash, inventory and performance management related. Therefore,
systematic planning is created for business operations and increasing small scale entity's
effectiveness on large scale. Performance reports: Management accountant of Nisa Ltd prepares performance
reports for identifying outcomes of business operations and employees' performance as
well. In this regard, different techniques are identified for managing and improving
performance influences development on large scale. However, on behalf of analysing
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these reports, decisions are made in context to manage business operations and
improving them as well more efficiently.
 Account receivable report: It is considered that management accountant of Nisa Ltd
records and maintains data regarding received amount on credit from its customers
(Pettersen and Solstad, 2014). Therefore, recording of information and data collection is
identified on which problems occurred in collection process are recognised. However,
several ideas are generated to tighten credit policy of the enterprise. It influences
economic position and management of fund for the entity and achieving its
effectiveness.
As it is recognised that preparing and recording management accounting reports are for
demonstrating current business performance of Nisa Ltd. In accordance to this, different ideas
are generated for creating balances of business operations and enhancing its efficiency.
Including this, it is related with productivity and profitability of the small scale enterprise at
maximum level (Quinn and Jackson, 2014). However, positive impacts are recognised on
business operations and remains effective for increasing entity's effectiveness at maximum
level.
Conclusion: From this report, it is recognised that management accounting reports are crucial
to make decisions regarding business operations and its implementations in the future time. As
it is effective to improve entity's effectiveness and managing its operations (Balance and et.al.,
2015). However, on analysing these reports, appropriate decisions can make in respect of
business operations and development of small scale entity.
M1) Benefits of management accounting systems and their applications for Nisa Ltd
It is analysed that management accounting systems are suitable for decision making and
forecasting on business operations of Nisa Ltd. In accordance to this, actual business
performance is analysed on which planning is created to manage its entire operations and
improving efficiencies (Van, 2015). However, it influences productivity and profitability of the
organisation as well management of its operations effectively. Including this, it is good to
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increase profit level and competitiveness of the company at higher level. Thus, it is suitable for
appropriate decision making and enhancing its efficiency effectively.
D1) Critical evaluation on management accounting systems and reporting
Management accounting systems are suitable for systematic planning in respect of
managing business operations and improving them. In accordance to this, variety of ideas are
obtained to achieve entity's effectiveness as well increasing its profitability on large scale. On
critical evaluation, it is evaluated that analysing and working on entire business operations
remains challenging for the small scale enterprise (Zandi and Abdullah, 2015). However,
identifying wrongful information of the business entity affect its decision making and
performance adversely. Therefore, it is essential to consider all these factors during decision
making regarding business operations for the entity.
TASK 2
LO 2
P3) Costing methods to prepare income statements
Costing method is a process of price determination and incurring costs on business
operations of the entity. It is beneficial for demonstrating business performance and its monetary
position (Costing methods, 2016). However, income statement is prepared by which monetary
position of Nisa Ltd is analysed. In this regard, income statement using marginal and absorption
costing methods are as follows:
Income statement using marginal costing method: For preparing income statement in
terms of marginal costing method, net profit is evaluated through deducting gross profit with
additional variable expenses only (Soderstrom, Soderstrom and Stewart, 2017). Therefore, it is
suitable for decision making regarding short term period for entity's growth. However, evaluated
income statement using marginal costing method for Nisa Ltd is as follows:
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Illustration 1: Income statement using marginal costing
Interpretation: As it is interpreted that 9100 of expenses is incurred on business
operations for Nisa Ltd on which revenue is gained of 21000 remains effective. However, gross
profit of the entity is evaluated as 132000 which demonstrate adequate profitability and able to
increase the performance in future time. Afterwards, for evaluating net profit, gained gross profit
is to deducted with expenses incurred on variable business operation under marginal costing
method. It is observed that 3900 of additional expenditures is incurred on business operations as
administration and selling costs. Therefore, net profit of the company is determined as 9300
which is effective and appropriate for small scale entity's further implementations. Thus,
adequate decisions can make regarding future business operations and improving its efficiency.
Income statement using absorption costing: Under this method of preparing income
statement, net profit is calculated by deducting gross profit of the entity with both fixed and
variable expenses. However, it is suitable for long time decision making process influences
marketability and competitiveness of Nisa Ltd. Including this, variety of ideas are obtained for
further implementations and increasing entity's effectiveness at higher level (Azudin and
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Mansor, 2017). As income statement using absorption costing method for the small scale entity
is evaluated as follows:
Illustration 2: Income statement using absorption costing method
Interpretation: It is analysed that expenses incurred on business operations of Nisa Ltd is
of 9500 on which it achieves sales revenue of 21000. However, gross profit of the company is
determined as 11500 that can be maintained and increased in the future time. Further, for
evaluating net profit of the company, gross profit is deducted with cost incurred in both fixed and
variable business operations. However, entity incurred 1900 on additional overhead for its
production and marketing of goods processes. Therefore, net profit is evaluated as 9600 which is
quite effective and favourable of the enterprise and for achieving its effectiveness. Hence,
entity's good performance is evaluated on which long term decisions can make regarding further
implementations and maintaining its market position in the future time as well.
Comparison between marginal and absorption costing:
There are some differences in marginal and absorption costing methods in terms of
evaluating net profit, decision making, time periodicity etc. However, some essential differences
between both costing methods are discussed below:
Table 1: Marginal vs absorption costing methods
Bases Marginal costing Absorption costing
Meaning A decision making tool A portion of the total cost to
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ascertain total cost of
production
determine total cost of the
production
Profitability It is measured by profit
volume ratio (Bennett,
Schaltegger and Zvezdov,
2013).
Affected because of inclusion
of fixed cost on business
operations
Cost recognition for evaluating
net profit
Variable cost is considered as
product cost while fixed cost is
as period cost.
Both variable and fixed costs
are used for determining net
profit (Corona, Nan and
Zhang, 2014).
Emphasis on Short term decision making Appropriate for long term
decision making.
M2) Range of management accounting techniques and financial reporting
As it is recognised that management accounting techniques and financial reporting are
suitable for appropriate decision making regarding business operations of Nisa Ltd. In this
regard, actual business performance is identified on which ideas are generated to improve its
efficiencies and improving quality services (Germak and et.al., 2014). Including this,
management of entire business operations is identified which influences on productivity and
profitability of the small scale enterprise effectively.
D2) Financial reports for applying and interpreting data for Nisa Ltd
Prepared management accounting reports are effective for analysing actual business
operations and making decisions for their growth. Therefore, economic position of entity can be
enhanced on large scale also impacts on its profitability and competitiveness. Including this,
ideas are generated in terms of reducing expenditures and increasing sales revenue of the
organisation (Pettersen and Solstad, 2014). In addition to this, reports are suitable for managing
entire business operations and implementing operations efficiently. Thus, it is good for
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development of a small scale enterprise and appropriate decision making regarding its future
operations.
TASK 3
LO 3
P4) Critical evaluation on budgetary control tools
Budgetary control systems are useful for managing cash, fund and resources of the
organisation. It impacts on production and distribution system and control over excess of
production for the entity (Holden and Lunduka, 2014). However, critical evaluation on different
budgetary control tools are discussed below:
Cash budget: In this budgetary control system, difference between cash inflow and
outflow is recognised for which decisions are made regarding managing cash. Its positive and
negative aspects are as follows:
Positive aspects:
 It is helpful for reducing excess of fund and increasing economic position of the entity.
 It is appropriate for taking right decision and creating balance between cash inflow and
outflow adequately (Quinn and Jackson, 2014).
Negative aspects:
 Due to changes in market prices, prepared plan in terms of incurring cost for purchasing
products have to change. Wrong predictions on further business operations and incurring cash may in effective for
the entity and its management as well.
Sales budget: This budgeting tool is most suitably prepared for managing sales and
planning for maximizing revenue of Nisa Ltd (Khan, 2017). However, critical evaluation on
sales budget is to be identified as follows:
Advantages:
 It is effective for cost effectiveness and reducing expenses on business operations of Nisa
Ltd.
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 Variety of ideas are generated for maximizing sales and creating balance between
expenses and income of the entity.
Disadvantages:
 Wrong estimation on incurred business operations affect business performance adversely. Fluctuations in prices affect cost incurred on business operations for instance; increasing
costs on advertisements and purchasing resources for production system of the entity
(Smith and Driscoll, 2017).
Labour budget: Management accountant of Nisa Ltd prepares budget in related to
managing costs incurred in providing salary to its workers (Senftlechner and Hiebl, 2015). It is
also impacted on entity and its employees' performance as well. Its positive and negative aspects
are as follows:
Positive aspects:
 It is effective to create systematic planning also impacts on economic position of the
entity.
 Different ideas are generated to encourage workers towards good contribution in
achieving entity's effectiveness.
Negative aspects:
 Workers may dissatisfied with their salary affect business' performance adversely.
 Lack of coordination among employees of Nisa Ltd emerges conflicts and disputes
among them.
M3) Usefulness of analysing budgetary planning tools
It is recognised that budgetary planning tools are effective for appropriate decision
making regarding business operations of Nisa Ltd. Including this, it is helpful for optimum
utilization of resources and fund impacts on entity's productivity and profitability at maximum
level. Including this, various ideas are generated for further implementations and improving
quality services of the company (Zandi and Abdullah, 2015). However, it remains good for
managing entire business operations and enhancing effectiveness of the small scale enterprise
efficiently.
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TASK 4
LO 4
P5) Importance of using management accounting systems to reduce financial problems of Nisa
Ltd
Management accounting tools play crucial role in reducing issues occurred during
business operations of a company (Management Accounting, 2017). It is helpful for financial
development and managing business operations of Nisa Ltd impacted on further
implementations. However, financial issues occurred at workplace can overcome by using
following tools: Financial accounting system (Balance score card approach): It will be suitable to
reduce economic issues through analysing monetary position of Nisa Ltd using
statements and notes (Corona, Nan and Zhang, 2014). Therefore, reasons behind
occurrence of the issue can obtain by which appropriate decisions are made to enhance
profit earning level of the entity. Key performance indicators: Through analysing performances and key approaches of the
organisation, different ideas are generated to increase economic position of Nisa Ltd
(Carey, Potter and Tanewski, 2014). Therefore, production and distribution system can
manage as well financial issues will be reduced efficiently. Benchmarking: It is a competitive tool by which market position of Nisa Ltd is analysed
on which decisions are made regarding further implementations (Azudin and Mansor,
2017). However, comparison of business performance with its competitive entities is
created for which different ideas are made to maintain and sustain its effective market
position for long time period. It influences economic position and profitability of the
small scale enterprise.
 Governance: Financial issue of Nisa Ltd can also be reduced through taking financial aid
from governance and other financial institutions (Smith and Driscoll, 2017). It will be
effective for its appropriate growth and decision making to enhance economic position of
the entity.
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M4) Method in which management accounting tools are used for responding on financial
problems of the enterprise
It is observed that using management accounting tools are appropriate for reducing
financial issues of Nisa Ltd. In this regard, different tools are used such as; critically analysing its
economic position, benchmarking, financial accounting systems and so on (Bennett, Schaltegger
and Zvezdov, 2013). Therefore, appropriate decisions can make regarding its further business
operations and increasing income level. However, actual business performance can be identified
on which different ideas are generated for implementations in business operations and sustaining
its position in market for longer time period. Thus, using management accounting tools will be
effective for decreasing financial issues and increasing its business performance at higher level.
D2) Importance of planning tools and management accounting systems for Nisa Ltd
Using budgetary tools are effective for appropriate planning and decision making to
manage business operations. Including this, different ideas are generated to manage business
operations and improving efficiencies of Nisa Ltd. Including this, several ideas are generated for
planning and economic growth of the entity at maximum level (Holden and Lunduka, 2014).
Moreover, it is suitable for appropriate decision making and implementing business operations
effectively. Thus, budgetary planning tools and management accounting systems are beneficial
for implementations and enhancing efficiency of small scale enterprise.
CONCLUSION
It is concluded that using management accounting systems are crucial for appropriate
decision making regarding improving business performance of Nisa Ltd. In this regard,
management accounting tools are identified for effective decision making and managing
business operations. Including this, budgetary control tools are identified for planning and
managing entire business operations of the small scale enterprise. Along with this, income
statement usimg marginal and absorption costing methods are determined in this assignment.
However, significance of management accounting and its tools has been understood for the entity
in this report.
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Online
Costing methods. 2016. [Online]. Available through:
<http://icmai.in/upload/Students/Syllabus2016/Inter/Paper-8.pdf>.
Management Accounting. 2017. [Online]. Available through:
<http://www.ddegjust.ac.in/studymaterial/mcom/mc-105.pdf>.
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