Comparative Analysis of Costing Methods

This assignment provides a comprehensive analysis of management accounting practices, focusing on the comparison of marginal costing and absorption costing methods. It discusses the importance of profit and loss statements in financial management, as well as different budgeting approaches such as zero-based, activity-based, and incremental-based budgeting. The document also highlights the benefits and drawbacks of each method, with a specific emphasis on how zero-based budgeting addresses weaknesses inherent in incremental budgeting.

MANAGEMENT ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
P1 Management Accounting, types and its requirement.............................................................1
P2. Various methods of Management Accounting Report..........................................................3
P3 Calculating cost by using appropriate methods.....................................................................4
P4 Advantages and disadvantages of various planning tools used for budgetary control .........6
P5 Management accounting system for responding financial problems.....................................8
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Management accounting is very necessary for each entity with its various principles and
techniques. The main aim of this report is to highlight fundamentals of management accounting
which can be applicable for business environment and for firms who are operating in certain
environment. It has been applied in all financial data for determining and monitoring the
financial; performance of organization. The present report is about a manufacturing organization
that is Swain & Jones who is operating with 45 employees and there decision making process has
been analysed by using several accounting techniques such as job costing, inventory
management etc. in this report there is brief discussion about income statement according to both
methods, absorption and marginal costing with there key differences. There is explanation about
various planning tools for management accounting with its limitations and merits. In the last part
of this report, adaptability of management accounting systems in context of responding several
financial problems has been addressed.
P1 Management Accounting, types and its requirement
Managerial decisions are undertaken by considering management accounting in very
effective manner (Fullerton, Kennedy and Widener, 2014). All business managers who are
contributing in decision making for short term or even day to day operation are using
management accounting for preparing statistical and financial information. The financial
information is classified, analysed, recorded, identified, delivered and interpreted with
perspective of objectives of an organization that has been termed as Cost Accounting. As they
both sound similar but they have different variations as management accounting assist managers
of organization for decision making and financial accounting gives information for external
parties of entity.
When management accounts reports are prepared, gives very specific, accurate and timely
statistical and financial information which are considered as very important aspect for decision
making of short term and day to day decisions. The management requirements are also
accomplished in these reports.
The information of management accounting is directly used for the purpose of internal
users and it creates a difference from financial accounting systems as it is publicly reported. The
managerial accounting has been applicable which always varies as system is customised for
providing information which is essential for management for decision-making. Management
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accounting has various kinds which are price optimisation, cost accounting system, inventory
management and job costing system. Every kind has their role and functions in management
accounting which is elaborated as follows:
Price Optimisation: It is considered as a basic method for applying different
mathematical analysis of Swain & Jones for identifying customer reaction for different cost of
goods and services via various channels. Generally prices are identified which Swain & Jones
might attain objectives such as rising operating profit. For achieving performance or cost, it can
be discovered by taking alternatives and it will be very effective for constraints, by increasing the
aspects which are desired and vice versa (Messner, 2016).
Cost Accounting System: It is a basic framework which is undertaken by various
corporations for determining product's cost, profitability analysis, and cost control and inventory
valuation. The cost allocation will be according to activity based costing or traditional costing
system. The production cost of different corporation has to be captured is considered as main aim
and along with this input cost has been weighted for every step of production and fixed cost like
capital equipment and depreciation. This system is known as special concept of management
accounting as it provides particular analytical tools like budgetary control, marginal costing,
inventory control and standard costing who are applicable with perspective of management by
replacing their reproducibility in very efficient manner.
Inventory Management: Generally, it has been referred for tracing and recording of
application, ordering and storing component of different production of goods which are sold by
them. The desktop software, barcode printers, barcode scanners and mobile devices are
combined for streamlining inventory system like consumables, goods and stock.
In this system finished goods which ready for sale are also tracked as their main aim is to
signify present level of inventory. In this context they identify stocks for minimising or
maximising for Swain & Jones. Their main role is to constitute purchasing orders, disposing,
relocating, receiving and adjusting the inventory. Sales order, shipping, picking and packaging
has been created by them for production and physical count of inventory is performed here. It
directly reflects in bottom line of company by enhancing accuracy of inventory, workflow of
organization and in same series it is improved.
Job Costing System: The manufacturing cost is allocated here for individual item of
product or some specific batch. Generally it is applicable where goods are processes from one to
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another. The information is very essential for submitting price data to individuals who are
involved in contract and even it has been refunded. It is very essential for identifying accuracy
and system of Swain & Jones who is capable for price quoting.
P2. Various methods of Management Accounting Report
Management accounting gives special emphasis on information which is originated
internally via financial accounting. It has been applied very essentially fpr the objective of
controlling, planning and decision making. Managerial accounts are dependent on financial
statements like balance sheet, income statement and statement of cash flow. In this context, these
are not only sourcing for evaluating financial information as it can also be evaluated from
performance report, cost report, budget report and product report (Moshchenko and et. al.,
2018).
Performance Report: This report is formed for the purpose of reviewing performance of
Swain & Jones for every employee or even whole organization report. In many large
organizations that have huge turnover, performance report is generated according to each
department. The strategic decision of future is taken with perspective of these reports. There are
various individuals who are praised because of their commitment and motivation towards
organization and even lay off are because of vice versa situation. Deep insights related to
organization's operations has been given by performance of managerial accounting.
In these reports, accountants usually observe the performance is according to expected
outcome or not and if any variations are there then it should be rectified. In the end of every year,
performance report has been formed but financial information has been quantified for framing
report of performance, it may be quarterly or monthly as well (Quattrone, 2016).
Cost Report: The cost of manufacturing items is calculated in management accounting.
In this report, all raw production overheads, labour, cost and any extra cost is considered for
calculating manufacturing cost and its aggregate is divided into produced goods. All the
information with context of business of Swain & Jones in summarized format in this specific
report. The cost price of particular item while comparing with selling price has provided by
manager. The cost managerial accounting report estimate and monitor the profit margin. All the
expenses are depicting clear picture for optimum utilisation of resources of every department.
Usually they are matched with estimation of revenue so Swain & Jones gives proper evaluation
of profit which will be giving high earning are of business and its special focus will be given on
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efforts rather than wasting resources and time who are giving less profit margin. The income
limit has been also planned and managed via cost reports.
Budget Report: The most fundamental report in managerial accounting has been
considered as budget report. It has been drawn by every organization whether it is small or big as
it provides appropriate understanding of schemes which are very popular in context of business.
Generally budgets are prepared by taking base as previous year budget and it has been adjusted
for future forecast on context of circumstances which might arise. The budget of Swain & Jones
provides all sources of expenses and revenue. For attaining goal in budgeted amount, all efforts
are put by Swain & Jones. For staying in budget manager always finds new vendor for
purchasing raw material in less price and they also keep record of sales and expenses which are
increased or decreased. These reports helps in providing employee incentives, cutting cost and
negotiation for raw material. To every industry and business budget report is explanatory (Smith,
2017).
P3 Calculating cost by using appropriate methods
Marginal costing
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Absorption costing
Key differences between marginal costing and absorption costing
Serial number Absorption costing Marginal costing
1
It has assumption that both variable
and fixed cost are considered as
product cost.
It has assumption that only variable
cost is considered as product cost.
2
Overheads are different in this,
production, selling, administration
and distribution (Marginal costing
vs Absorption costing, 2018). Fixed cost are only variable costs.
3 Profit gets decreased because of Profit has been calculated by applying
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considering fixed cost. profit volume ratio.
4 It identifies cost of every unit. It determines cost of next unit.
5
Opening and closing stock impacts
cost per unit.
Opening and closing stock does not
affect cost per unit.
6
Net profit per unit is considered as
most important aspect.
Contribution per unit is considered as
most important aspect.
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Its main objective is to give
accurate and fair treatment to
product cost.
Its main objective is to give special
emphasis of contribution is product
cost.
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It is replicated in very conventional
aspect for financial and tax
reporting.
It is replicated by outlining the sum of
contribution.
P4 Advantages and disadvantages of various planning tools used for budgetary control
For budgetary control there are different planning tools which are as follows :
 Zero based budgeting
 Incremental budgeting
 Activity based budgeting
Zero based budgeting : In this planning tool, budget has been prepared by considering
zero as base. There is re-evaluation of every line of statement of cash flow and it has been
justified by every expenditure that has been incurred by each department of entity.
Advantages
 The arbitrary alterations with respect to budget of previous year is directly involved in
this method and it will tend to re look all items of cash flow extracting operating cost. It
will be a major contribution for cutting cost and reflecting clear picture of cost which will
be against the performance (Lavia López and Hiebl, 2014).
 Historical number are ignored, only actual numbers are evaluated in budgeting technique
and it will help in allocating resources in very efficient manner.
 Activities which are unproductive and redundant are substituted and it determines
different opportunities in cost effective manner.
Disadvantages
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 There is very huge requirement of man power.
 It consumes too much time or it has been elaborated as very time consuming method.
 It shows deficiency in expertise.
Incremental budgeting : It is considered as most important part of management
accounting which usually signifies minor change from budget of previous year to new year
budget. The fiscal year has been elaborated as base of next year for budgetary allocation. The
main assumption has been undertaken in this method that all previous year expenses will be
continuing in next year and additional amount will be added as well.
Advantages
 Implementation is very easy as it has absence of complexity in different calculations
which are obtained by various departments if there is lack of any problem due to detailed
analysis is not required.
 There is not requirement of justification of funding as it has ensured about continuation
of funding for every department.
 This method easily determines variations and impact.
 This method eliminates rivalry as it is most popular method among various organizations
and it creates value of equality in every department because everyone gets similar
increment over past year (Gooneratne and Hoque, 2016).
Disadvantages
 It affects net income as it encourages spending and it will be aggregated in expenses as
this budget will be maintained in coming year.
 Its main assumption is that year requirement will be marginally different from past year
but in reality there are various alterations in context of economy or industry as well
which might reflect in budget.
 It will be creating lack of creativity, innovation and absence of incentives for cutting cost
to certain managers.
 It will be creating budgetary slack, as it is expensive method because of ease availability.
Activity based budgeting : Generally it considers cost of overhead in preparing budgets.
It totally ignores budget of past year for framing budget of current year. In the context of
outcome, allocation of resources are according to activity. It is known as activity oriented budget
not a function oriented budget.
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Advantages
 In this method every cost driver is evaluated along with every step which is considered
and it eliminates all irrelevant activities.
 While eliminating irrelevant activities it reduces cost and with its outcome production of
goods and services are performing at its best as compared to competitors.
 It will be treating whole business as single unit as it cannot be in department aspect.
 Relationship has been improved in this technique in every department and customer as
well.
Disadvantage
 All the functional areas must be understood of business, if there will be lack in
understanding of manager then it will directly reflect negative in budget and various
discrepancies.
 It is replicated as very complex process as in this method different factor has to be
researched and analysed properly because of accurate estimation of demand according to
different activities (Cools, Stouthuysen and Van den Abbeele, 2017).
 It consumes so many resources, all the top officials get best training and proper numeric
analysis. It is also a time consuming method. If there is presence of optimum utilisation
of resources in operational activities then it will be giving best returns.
 It gives special consideration to short term goals as it usually ignores goals in context of
long term.
P5 Management accounting system for responding financial problems.
Concepts Swain & Jones Ford
Benchmarking: Usually it
compares the performance
standards by business practices
of organization to other firms
who are of same industry.
It has performed proper
financial analysis and
compared the outcome for
identifying overall efficiency,
productivity and
competitiveness of their own.
They have measured common
value with respect to time and
cost. The strategic
In the case of Ford, they have
measure there common value
by quality in their own auto
mobile industry. For running
there business in very efficient
manner, they have identified
various requirements for
improvements which will be
an end from learnings with
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management has applied this
method and created high
turnover of there industry.
outcome of benchmarking.
The strategic management has
applied this method and it
created efficiency in increasing
sales and revenue as well.
Key performance indicator :
It elaborates the success of
organisation or progress in
perspective of specific
objective. There are two types
of KPI which are Financial
KPIs and non financial KPI
(Ax and Greve, 2017).
By tracking progress of
attaining strategic objective is
delivered in strategic map. It is
indicated in reporting
scorecard and dashboard and
provides top management and
other stakeholders for focusing
on success of organisation.
Financial KPI is on basis of
balance sheet or profit and loss
statement which is justifying
in this organisation with
alterations of sales growth or
expenses category. In this
organisation both KPIs are
combined and they achieved
great success in context of
long term.
In this organization, non
financial KPIs are indicating
for assessment of activities
which gives significance in
attaining strategic objectives.
In this strategic execution is
improved by aligning activities
of Ford and individual actions
along with strategic objectives.
KPI are framed very well in
this organization so it leads to
medium for management and
board has monitored along
with core activities rather than
simply measure of financial
success of different outcome.
In this combination of both
KPI had improved quality of
service, efficiency and they
achieved long term success in
terms of financial
performance.
Variance analysis : It
elaborates the differences
between planned numbers and
In this context, company has
assessed its favour-ability by
comparing its actual cost and
The organization has
performed variance analysis
and it determined by standard
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actual performance (Fisher and
Krumwiede, 2015). The
strategic management work on
deviations and tries to improve
there performance. The sum of
aggregate of different variance
provides overall picture of
performance of organization.
standard cost. The deviations
were giving very negative
aspect so it improved its
quantity and cost of material as
well. They managed there raw
material at right point which
tends to improve there
financial performance of
coming year and it leads to
bring more efficient operation
in business. Along with this,
organization has created more
revenue and sales by variance
analysis (Ekwue, 2014).
and actual cost that there is
issue in labour and variable
overhead and it is directly
reported to management. It
created deep understanding of
reason of fluctuations and
ways for reducing variance. By
cutting cost of these specified
overhead had created
efficiency in management by
its specific justification. The
managers of Ford were able to
justify performance is good or
not in specific duration.
CONCLUSION
From the above report it has been concluded that management accounting is very
important concept in this present era. It has essential role in each and every organization whether
it is of any industry such as hospitality, retail, manufacturing etc. The financial performance of
Swain & Jones has been elaborated in this report which depicts that management accounting
gives information in very reliable and accurate manner. It has been cleared that practically
accounting must be very easy to understand as it has disciples all details of transaction ion
context of finance and organization. The above report has shown importance of profit and loss
statement according to marginal costing and absorption costing, as more net income is justified
by absorption costing method because of various overheads. Further it has been summed up by
different concept of budgeting such as zero based, activity based and incremental based
budgeting with there merits and demerits. It had clearly that, weakness of increment budgeting
has been overcome by zero based budgeting. Last but not least, benchmarking, key performance
indicator and variance analysis are best possible way for tackling problems.
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REFERENCES
Books and Journals
Ax, C. and Greve, J., 2017. Adoption of management accounting innovations: Organizational
culture compatibility and perceived outcomes. Management Accounting Research. 34.
pp.59-74.
Cools, M., Stouthuysen, K. and Van den Abbeele, A., 2017. Management control for stimulating
different types of creativity: The role of budgets. Journal of Management Accounting
Research. 29(3). pp.1-21.
Ekwue, A. O., 2014. Assessment of Long-Run Marginal Costing of Transmission and
Distribution Expansion. Nigerian Journal of Technology. 33(3). pp.245-251.
Fisher, J. G. and Krumwiede, K., 2015. Product costing systems: finding the right
approach. Journal of Corporate Accounting & Finance. 26(4). pp.13-21.
Fullerton, R. R., Kennedy, F. A. and Widener, S. K., 2014. Lean manufacturing and firm
performance: The incremental contribution of lean management accounting
practices. Journal of Operations Management. 32(7-8). pp.414-428.
Gooneratne, T. N. and Hoque, Z., 2016. Institutions, agency and the institutionalization of
budgetary control in a hybrid state-owned entity. Critical Perspectives on Accounting. 36.
pp.58-70.
Lavia López, O. and Hiebl, M. R., 2014. Management accounting in small and medium-sized
enterprises: current knowledge and avenues for further research. Journal of Management
Accounting Research. 27(1). pp.81-119.
Messner, M., 2016. Does industry matter? How industry context shapes management accounting
practice. Management Accounting Research. 31. pp.103-111.
Moshchenko, O. V. And et. al., 2018. Main Areas of Improvement In Losses Accounting and
Cost Calculation in Agricultural Production. Revista Publicando. 5(15). pp.261-273.
Quattrone, P., 2016. Management accounting goes digital: Will the move make it
wiser?. Management Accounting Research. 31. pp.118-122.
Smith, M., 2017. Research methods in accounting. Sage.
ONLINE
Marginal costing vs Absorption costing. 2018. [Online]. Available through
:<https://www.wallstreetmojo.com/marginal-costing-vs-absorption-costing/>.
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