Absorption vs. Marginal Costing

This assignment delves into the concepts of absorption and marginal costing, two key methods used in management accounting. It requires students to analyze the income statements generated under both methods, comparing their results and implications for businesses. Students will also utilize working notes to demonstrate their understanding of the calculations involved. The assignment emphasizes the practical application of these accounting techniques and their impact on decision-making.

MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1 Evaluation of management accounting and significant needs of different kinds of this
system..........................................................................................................................................1
P2 Analysis of methods that are for reporting of management accounting ...............................3
TASK 2............................................................................................................................................4
P3 Preparation of statement of income of absorption and marginal costing and analyse the
difference.....................................................................................................................................4
Difference between both the management accounting methods.................................................8
TASK 3............................................................................................................................................9
P4 Analysis of pros and cons of various tools used in budgetary control...................................9
TASK 4..........................................................................................................................................10
P5 Use of management accounting system for the resolution of financial problems...............10
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13
Illustration Index
Illustration 1: Income statement on the basis of absorption costing................................................5
Illustration 2: Income statement on the basis of marginal costing...................................................6
Illustration 3: Working notes...........................................................................................................7

INTRODUCTION
Accounting is the process which help organization company to make the reports and
different type of statement of financial transaction by using various standards. We can easily
measure its performance and find out the problems in the relation to the profit and expenses. In
this report we are analysing the management accounting of RL Maynard which is one of the
leading organization operating in the manufacturing industry. In this report we have taken
different approaches to identify the managing the financial problem. Income statement is most
significant and effective statement that is created to determine the firms' financial profitability
situation at end of particular year or specific period that is being mentioned in the report.
TASK 1
P1 Evaluation of management accounting and significant needs of different kinds of this system.
It is considered as an system of accounting that involves a continuous process of
analysing the costs and business data for the preparation of various financial reports, journals and
accounts in order to provide assistance to managers in decisions making (Cinquini and Tenucci,
2010). It is also recognised as evaluation of financial data of business for converting in to useful
information by preparing multiple reports that helps the management to analyse the actual
financial position of enterprise. In the context, analysis of RL Maynard limited is done as
accounting officer to analyse the financial position of firms in the construction industry. Various
types of systems and approaches of management accounting are considered that must be utilized
by the cited firm to manage the business operations and achieve a continuous growth in industry.
Following are the essential needs of management accounting system which are followed by the
cited firm such as:
 Traditional cost accounting: Most essential system that used is by the management for
the allocation of manufacturing cost of products that are to be developed. It is also
considered as conventional method designed to analyse the direct and indirect expenses
on the work which has to be accomplished by the firm (Nandan, 2010). In this system,
allocation of production overhead cost of the products that has to be developed by firm in
their premises. In this context, it has been recognised that the most of the firms operating
in manufacturing sector used this system of analysing the cost, like RL Maynard. Mainly
it includes the distribution of indirect cost in production unit over the manufactured
units. It involves two other system of accounting that such as job costing and process
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costing that helps the firm to analyse the expenses that are to be done made on
development of particular unit.
 Transfer pricing: It is also significant process that is used to allocate the cost of
transferring the goods from the holding firm to the subsidiary enterprise. It also
recognised as the expenses that are incurred by the parent company on the transfer of
goods to other host company (Angelakis, Theriou, and Floropoulos, 2010). In present
context, cost of variables and opportunity cost mainly incurred by cited firm on transfer
of particular product or services. Firms use this method of pricing to reduce the cost of
raw material is to be utilized in process of manufacturing the units. Cost of variable is
depended on the unit of production and the opportunity is that amount which the firm has
to bear at the time of outsourcing of goods to the subsidiary company.
 Accounting of cost: It is also considered as a suitable frame work that is utilized by the
firms to analyse the overall cots of manufacturing a unit. It is most suitable method of
accounting that should be considered to analyse the data of cost to be incurred by the
cited business entity at level of operations. Along with this, it can also consider as
suitable for them to reduce the high expenses on the manufacturing of units.
 System of price optimization: Another system that is considered as essential for cited to
analyse the response of potential buyers towards different possible cost of units
manufactured ( Bebbington and Thomson, 2013). In this context, this system of
accounting is mainly used by RL Maynard for the optimization of cost that must be
suitable for customer.
 Accounting for inventory: Essential system of accounting utilised by the managers to
analyse the raw material that is available at the factory premises in order to meet the
requirement in the future. Further, it can be said that it is beneficial for authorities to
manage the inventory and provide the information about the future needs.
P2 Analysis of methods that are for reporting of management accounting
In the competitive business environment, is essential for the firms manage theeir funds
appropriately in order to meet the future requirements (DRURY, 2013). For the generation of
funds, they have determined the actual position of business to its stakeholders and they will
provide information by using various accounting reports. Following are the essential reports that
are to be formulated and combined with the financial statements by R.L Maynard such as:
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 Reports of production: In this particular report, the firms has to keep the records and
data which is related to the development of goods and services. In this context, the cited
firm also use this method to determine the cost of manufacturing the units to its
stakeholders.
 Reports of budget: It helps the owners of small business enterprise to analyse their
performance of their company and managers will also measure the performance of its
departments and control the cost (Abdel-Kader, 2011). Firms expected budget for a
particular time is always supported on the actual expenses from the preceding year.
 Payroll report: In the organization, this reports mainly consists of the cost that is
incurred by the firms on its workforce. This accounting report allocates the information
of employee's compensation that clearly describes the current financial position to the RL
Maynard. Further, with this managers will able to recognise the firm's ability to pay the
compensation to its employees in the future. Information this report mainly utilized by
the firms to reduce the expenditure of company on its employees and evaluate the
employee performance at workplace.
 Job costing report: In the manufacturing sector, there are different stages that is used by
firms to develop the products and services ( Cuganesan, Dunford and Palmer, 2012). In
this context, there are various types of cost that are associated with the manufacturing of
units that are considered as expenditure. With this report, managers of the cited SME
will analyse the expenses that are incurred to develop a single unit and paid to different
personnel for development. It helps the firm to identify the profitability so that they can
focus on the development of that unit.
 Report of sales: Another significant reports which is formulated to analyse the variations
in the sales of enterprise and analyse the profitability that is to be earned by business. In
this context, this report will help the managers of the enterprise to analyse the revenue
that generated after the construction of various units.
 Account receivable report: It is considered as critical tool that is utilised to manage the
cash flow for the firms that provides credit to their customers. In this context, this report
is developed to keep the data and record of amount on invoices that are received from the
customers. It will provide information to authorities about the amount which they have to
take from the client's.
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M1
Below given are the benefits of management accounting system:
Reduce cost: It enables to reduce operational expenses for companies like R.L. Maynard.
Managers make use of accounting information to review cost of economic resources and other
operations related to business. Management accounting reduces various direct and indirect
expanses of the organisation in effective and efficient way. These expenses include sales
expenses, production expenses, raw materials expanses, etc.
Improves flow of funds: Budget is used by business owners of R.L. Maynard Ltd. to have
financial road map for the business expenditure in the future. Management accounting helps to
improve the flow of cash in organisation. By implementing effective accounting technique and
cost budgeting, cash flow improves in the organisation.
TASK 2
P3 Preparation of statement of income of absorption and marginal costing and analyse the
difference.
Income statement is most significant and effective statement that is created to determine
the firms' financial profitability situation at end of particular year or specific period that is being
mentioned in the report (Burritt and Schaltegger, 2010). In this context, this statement has been
created to analyse the situations of profitability of RL Maynard to understand the competency of
the firm to manage its expenses.
There are various methods that must be utilized by firm to manage its revenues and expenses.
This statement has been prepared on the basis of two methods i.e. marginal and absorption
costing which is determined below:
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5
Illustration 1: Income statement on the basis of absorption costing

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Illustration 2: Income statement on the basis of marginal costing

After the analysis of above mentioned statement of income it has been analysed that the
company is capable to achieve better profitability at the end of month. Moreover, it has been
recognised that there are different measures of profitability that are considered in these two
statements such as marginal and absorption methods. According to the method of marginal
costing the net profit is earned by the cited organization is £9600. While on the basis of
absorption costing net profit is worth of £9300. Very main cause of arising such difference is that
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Illustration 3: Working notes

both the methods consider different types of costs. In the profit and loss account of marginal
costing total expenses are worth of £1900 because it considers only variable costs of production
which are incurred in production process. On the other side in the absorption profit and loss
account total expenditures are £3900. The reason is that it considers variable as well as fixed
both type of expenses.
With reference to this, large number of small business enterprise depends on second
method i.e. absorption costing as it includes all the expenses that is incurred by the firm such as
fixed and variables. When the company depends on first method then it able to understand only
variables costs of manufacturing. Absorption method provides clear and appropriate financial
performance of the cited business entity in terms of profitability at the end of specific period.
Difference between both the management accounting methods
The techniques of analysing and measurement the profitability is different in both the
methods which is described below:
Absorption method Marginal costing method
Methods of cost accounting in which overall
expenses and cost that is to be incurred by
enterprise is showed and calculated to
determine the profitability.
This is also an important method in which the
calculation direct cost and variables is used
that is determined from the process of
manufacturing to calculate the profitability.
In this, for calculation of cost of product, the
variable expenses are added to fixed cost.
Whereas only variable cost is analysed as cost
of products or units which is manufactured by
firm.
Most significant method that is used by firms
as a system of external reporting (Merchant,
2012).
Costing method is utilized by the business
entity as an internal system of reporting.
Stock or inventory at the end of current
financial year is transferred to the next
accounting year. The purpose of carrying
forward is that the inventory is also considered
as cost of production at the end accounting
In this system of cost accounting, the amount
of closing inventory is not carried forward in
the next year as it is treated as variable
expenses in the manufacturing cost.
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year.
Net probability is usually low in comparison to
the other as all the cost of fixed and variable
expenses are considered in this system.
As compared to other, the amount of profit is
high as all the expenses are not considered for
the calculation.
M2
There are different type of management accounting system some of them are as follows:
Capital fund: This can be determined to be the techniques or the process through which
business plans for their long term investment. Business entity is able to plan their future so that
they will be able to make investment for their business. Capital budgets are maintained and
documented by the finance and account manager of the organization efficiently.
Ratio analysis: It is beneficial for Cited firm to make evaluation of various aspects of
financial performance and operations. In this context, it includes liquidity, solvency, etc.
There are financial reporting documents that are helpful for the firm to determine the
business position. In this context it consists of profit and loss account, balance sheet in which
assets and liability are determined.
TASK 3
P4 Analysis of pros and cons of various tools used in budgetary control.
In the present competitive scenario, there are various ways that are used by the firms to
reduce their different expenses of manufacturing through raising the sales revenue and
probability by controlling the budget (Jansen, 2011). It is also analysed as one of the most
significant aspects that will helps the firm to develop control the cost that is to be incurred on
production of various units. In this context, there are various techniques and tools have been
analysed that is utilized by the RL Maynard such as:
 Ratio analysis: Most significant tool that is utilized by various SMEs for the calculation
and interpretation of their financial statements (Tools and techniques of Management
Accounting, 2017). In this technique, different types of ratios have been calculated and
used to analysed the sales and revenue generated by firm. Various information and data
has been gathered from the accounting statements such as cash flow, balance sheet and
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profit and loss statement etc. These ratios will help the managers to determine the amount
of the debtors and equity for the analysis in order to calculate the profitability.
Merits of ratio analysis:
 Helps the firm to analyse the variations in the performance and profitability of present
year in the manufacturing industry of UK.
 Beneficial toward the formulation of budget in the organisation as it is based on the
previous analysis of performance.
 Provides an assistance to the firm in taking various financial and business decisions in
order to achieve growth in profitability and market position.
 Also, considered as beneficial towards the reduction of expenses in production.
 Allows the cited firm to compare the financial position from its competitors regulating in
the same industry (Sánchez-Rodríguez and Spraakman, 2012).
Demerits of ratio analysis:
 Lack of financial data and information is the main drawback of ratio analysis.
 Various tools and techniques are not considered in this method to analyse the market
performance of enterprise.
 The standards that are analysed by the management in this are different in each ratio
therefore actual performance is not calculated every time.
Budget: It is also a financial similar as other that is commonly used by various firms to manage
their revenues and cost. It is also determined as one of the most important toll that is taken in
consideration to calculate the performance of previous years and the budget for the maximization
of profits (Parker, 2012). In this context, various different methods have utilized by the RL
Maynard to formulate the statement of budget. There are various types of budgets have been
calculated and made with the help of financial statement.
Merits of budget:
 Helps in achievement of financial goal as the organization will formulate various long
term and short term objectives and analyse accurate financial statement.
 It also helps the RL Maynard in to allocate the funds and resources for every functional
activity in effective manner (DRURY, 2013).
 Helps the firm to develop effective strategies and take decisions to raise their customers.
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 Provides an understanding of future requirement of resources.
Demerits:
 Most significant process but its lacks due to more time consuming and require more
details.
 Critical task that require more experienced person (Parker, 2012).
 In provides data and information of future but not provide exact values.
 Difficult for the managers to interpret the information.
M3
Each and every tool that are helpful for planning for the R.L. Maynard Ltd. are helpful in
many ways. In this context, it enables to determine the total investment that has to be made by
the business in each of its operations. Further, there are both short and long term requirements,
this are identified that the total cost that will be incurred can be forecasted by the firm. Planning
tools like cost and capital budgeting helps the management to make estimation of future
investment and prevent management from any uncertainties.
TASK 4
P5 Use of management accounting system for the resolution of financial problems.
In the market, small business enterprise face various problems related to the financial
calculation and they utilize various methods of management accounting to resolve the issues and
analyse the profitability. In present context, some important methods that beneficial for RL
Maynard and should be recognised b y managers to resolve various financial issues such as:
Systems of management
accounting
Explanation
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Process costing System or approach that is utilized by cited firm to manage
accounts to meet the estimated cost and expenses at the time
operational activities. RL Maynard is the firm that utilize this
method to identify the stage at which there expenses will
increase and also various steps that has to be taken by them to
in order to reduce those expenses (Nandan, 2010).
Transfers pricing As discussed earlier, it is the cost that has to be incurred by
the current holding company at time of outsourcing of goods
and services for production (Ward, 2012). In this there are
some rules and regulations that has to be followed by cited
firm for transfer of raw material across the boarders. It is
considered as beneficial as it resolves the problems by
reducing the expenses of production through decrease in the
prices of raw material. It also helps in analysing the cost and
determines accuracy and fairness of through application of
various rules and regulations.
M4
In order to attain success, it is important for the cited firm to respond towards the
financial problems like production levels, Growth levels, etc. When the production done by the
firms is not favourable, then it has negative impact to meet the demand of customers. Further,
growth of the firm can be determined with the growth made. When the profitability is low, then
it can be stated that growth rate is low. Organisation in recession times faced various issues
regarding liquidation of cash. With the help of effective management accounting methods and
techniques like ratio and trend analysis, company manages its cash flow in times of recession.
There are various financial problems that which are faced by the RL Maynard that needs to be
resolved in order to continue the business operation smoothly and increasing the expansion of
business in manufacturing industry. These problems will eliminate the ability of firm to achieve
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success or targeted performance. In this context, there are various accounting tools have
established by the organization to remove such issues that reduces the profitability of firm. In
this analysis, there various systems of accounting are identified that are used by the cited to
increase its financial position and resolve the problems like loss of financial resources, improper
use of accounting systems, increase in expenses etc.
Key performance indicator: It is the most important measurable values that clearly defines
effectiveness of firm in achievement of key business objectives. RL Maynard has used the
method at various levels for the evaluation of accomplished of objectives like reducing the cost
of resources, effective allocation of financial resources and reduce the expenses etc. It is
analysed that high level of KPI may focus on overall performance of cited which is considered as
positive. KPI of firm has determined it will achieve its objectives as it has a strong financial
strength in market.
Budgetary targeting: It is the important financial methods that must be used by firm in which
they will target a budget for each and every activity that are to be accomplished like purchase of
raw material, cost of labour, variable expenses, fixed expenses etc. Through appropriate
budgeting the cited firm will be able to improve its financial position and reduce the financial
problems like increase in expenses and cost of labour. Without effective targeting of busdget
firm will not be able to remove its problems and achieve its performance target of increase its
market share as compared to rivals.
Further, there are various financial problems like liquidity level or return on investment,
profits levels, productivity levels and product and quality of services and units produced. By
appropriate budgetary control firm will be able to reduce its expenses of raw material and cost of
labours and delivers quality of services.
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CONCLUSION
From this report, it is summarized as the management accounting is the most appropriate
system that helps the small medium enterprises in managing its critical business transactions and
operations in appropriate manner. Further there are various reports which need to make to
manage the employees and finance of an organization. To manage all the expenses and increase
the income of the company budget is the main part of it. With the help of investment appraisal
techniques organization can easily make selection of the project for investment which ever is
beneficial. There are different type of investment appraisal techniques such as net present value
average rate of return etc. are very effective for an organization.
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REFERENCES
Books and Journals
Abdel-Kader, M.G. ed., 2011. Review of management accounting research. Springer.
Angelakis, G., Theriou, N. and Floropoulos, I., 2010. Adoption and benefits of management
accounting practices: Evidence from Greece and Finland. Advances in accounting.
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Bebbington, J. and Thomson, I., 2013. Sustainable development, management and accounting:
Boundary crossing. Management Accounting Research. 4(24). pp.277-283.
Burritt, R.L. and Schaltegger, S., 2010. Sustainability accounting and reporting: fad or trend?.
Accounting, Auditing & Accountability Journal. 23(7). pp.829-846.
Cinquini, L. and Tenucci, A., 2010. Strategic management accounting and business strategy: a
loose coupling?. Journal of Accounting & organizational change. 6(2). pp.228-259.
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practices within a public sector agency. Management Accounting Research. 23(4).
pp.245-260.
DRURY, C.M., 2013. Management and cost accounting. Springer.
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Parker, L.D., 2012. Qualitative management accounting research: Assessing deliverables and
relevance. Critical perspectives on accounting. 23(1). pp.54-70.
Sánchez-Rodríguez, C. and Spraakman, G., 2012. ERP systems and management accounting: A
multiple case study. Qualitative Research in Accounting & Management. 9(4). pp.398-
414.
Shah, H., Malik, A. and Malik, M.S., 2011. Strategic Management Accounting-A Messiah For
Management Accounting?. Australian Journal of Business and Management Research.
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Van der Stede, W.A., 2011. Management accounting research in the wake of the crisis: some
reflections. European Accounting Review. 20(4). pp.605-623.
Ward, K., 2012. Strategic management accounting. Routledge.
Online
Tools and techniques of Management Accounting, 2017. [Online] Available
through:<https://accountlearning.com/tools-and-techniques-of-management-
accounting/> [Accessed on 29 September 2017].
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