Management Accounting: Meaning, Significance, and Systems
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This document provides an overview of management accounting, including its meaning, significance, and systems. It explains the various methods used for reporting under management accounting and includes calculations for marginal and absorption costing. The case of CORUS Company in the steel manufacturing industry is used as an example.
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TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK...............................................................................................................................................1
LO1..................................................................................................................................................1
P1. Explaining meaning of management accounting and significance of its systems...........1
P2. Explaining various methods that is been used for the reporting under MA.....................3
LO2..................................................................................................................................................4
P3 Calculation of marginal and absorption costing................................................................4
LO3................................................................................................................................................12
P4-Advantages and disadvantage of budgeting control planning tools................................12
P5. Evaluating the ways in which organization adopts systems of MA in responding to the
financial problems................................................................................................................15
CONCLUSION..............................................................................................................................16
REFERENCES..............................................................................................................................17
INTRODUCTION...........................................................................................................................1
TASK...............................................................................................................................................1
LO1..................................................................................................................................................1
P1. Explaining meaning of management accounting and significance of its systems...........1
P2. Explaining various methods that is been used for the reporting under MA.....................3
LO2..................................................................................................................................................4
P3 Calculation of marginal and absorption costing................................................................4
LO3................................................................................................................................................12
P4-Advantages and disadvantage of budgeting control planning tools................................12
P5. Evaluating the ways in which organization adopts systems of MA in responding to the
financial problems................................................................................................................15
CONCLUSION..............................................................................................................................16
REFERENCES..............................................................................................................................17
INTRODUCTION
Management accounting is a process of preparing financial report and accounting of the
company. It is usually used for internal management and it is not regulated by any law. It is
significant tool that supports managers of company to make correct decision. Present report is
based on CORUS Company which is engaged in steel manufacturing and the business is running
for several years. Report will explain budgeting control tools which are very useful for evaluate
actual performance of firm. This report also includes marginal costing and absorption costing
calculations and interpretation of net operating income is added in study (Chi and Ho, 2017).
TASK
LO1.
P1. Explaining meaning of management accounting and significance of its systems
Management accounting refers to the profession that includes participating in the
decision making of management, devising for planning, system of performance management. It
provides for facilitating expertise in the financial reporting and also controlling for enabling the
management in formulating strategy of an enterprise.
MA is the presentation of the accounting information in a way that helps the internal
management in creating policy and routine operation of an organization.
MA means concepts and the methods that are essential for developing an effective plan
for selecting among the alternative action course and controlling through interpretation and
performance evaluation.
The 4 major principles of MA are as follows-
Influence- Effective communication of the crucial information ensures possibility for the
MA in cutting across the silos and encourages for an integrated process.
Relevance- MA seeks for best possible availability of the resources for the information
that is pertinent to decision that is to be taken (Alaeddin and et.al., 2019). By getting grips with
needs of the shareholders, it accounts for the most useful and relevant information in respect of
making decisions is been determined, arranged and gathered for an evaluation.
Value- It entails for assessing an information along with generating value pathway,
concentrating on risks, gauging for the possible opportunities, expenses and possibility of value
Management accounting is a process of preparing financial report and accounting of the
company. It is usually used for internal management and it is not regulated by any law. It is
significant tool that supports managers of company to make correct decision. Present report is
based on CORUS Company which is engaged in steel manufacturing and the business is running
for several years. Report will explain budgeting control tools which are very useful for evaluate
actual performance of firm. This report also includes marginal costing and absorption costing
calculations and interpretation of net operating income is added in study (Chi and Ho, 2017).
TASK
LO1.
P1. Explaining meaning of management accounting and significance of its systems
Management accounting refers to the profession that includes participating in the
decision making of management, devising for planning, system of performance management. It
provides for facilitating expertise in the financial reporting and also controlling for enabling the
management in formulating strategy of an enterprise.
MA is the presentation of the accounting information in a way that helps the internal
management in creating policy and routine operation of an organization.
MA means concepts and the methods that are essential for developing an effective plan
for selecting among the alternative action course and controlling through interpretation and
performance evaluation.
The 4 major principles of MA are as follows-
Influence- Effective communication of the crucial information ensures possibility for the
MA in cutting across the silos and encourages for an integrated process.
Relevance- MA seeks for best possible availability of the resources for the information
that is pertinent to decision that is to be taken (Alaeddin and et.al., 2019). By getting grips with
needs of the shareholders, it accounts for the most useful and relevant information in respect of
making decisions is been determined, arranged and gathered for an evaluation.
Value- It entails for assessing an information along with generating value pathway,
concentrating on risks, gauging for the possible opportunities, expenses and possibility of value
generation opportunities in the business. It links the process of an organization to its core entity
model and demand for an intensive knowledge regarding macroeconomic atmosphere.
Credibility- Stewardship forms a credibility where responsibility and the scrutiny assist
in making the decisions more and more purposeful. Experts under MA are been known to be
responsible, aware of an enterprise ideals and ethical (Sinaga and et.al., 2019). This leads to
improvement in the credibility, authenticity and the reputation of an organization with
strengthening the authority and the processes.
The 4 main MA systems are as follows-
Job costing system- It referred as the practice of collecting an information regarding the
cost attached with the particular production or the job. This system is vital for CORUS in
submitting the appropriate information in relation to the cost to customer under the contract
where the cost are been reimbursed (Quinn and et.al., 2018). It provides a useful information in
order to determine an accuracy of the estimating system of the firm, that in turn helps in quoting
the prices which allows for the reasonable profit.
Cost accounting system- It means the framework that is been used by CORUS in
estimating their product cost for analysing the profits, valuing inventory and controlling cost.
This MA system is critical for anticipating accurate cost that would be incurred in manufacturing
product for gaining profitable operations.
Inventory management system- It is the system that combines technology, procedures
and the processes for overseeing, maintaining and monitoring stocked products (Maas,
Schaltegger and Crutzen, 2016). Inventory management systems are important for keeping the
tabs on the present stock level and in understanding the items that are moving fast and slowly
that in turn enables CORUS in reordering with high level of accuracy.
Price optimization system- It present mathematical analysis for an enterprise that reflects
the response of the customers at different price level of an entity's products and the services
through the use of different channels. It acts as the most significant system of MA because it
helps CORUS in setting up the suitable prices for the product so that larger profits could be
generated.
Systems Benefits
model and demand for an intensive knowledge regarding macroeconomic atmosphere.
Credibility- Stewardship forms a credibility where responsibility and the scrutiny assist
in making the decisions more and more purposeful. Experts under MA are been known to be
responsible, aware of an enterprise ideals and ethical (Sinaga and et.al., 2019). This leads to
improvement in the credibility, authenticity and the reputation of an organization with
strengthening the authority and the processes.
The 4 main MA systems are as follows-
Job costing system- It referred as the practice of collecting an information regarding the
cost attached with the particular production or the job. This system is vital for CORUS in
submitting the appropriate information in relation to the cost to customer under the contract
where the cost are been reimbursed (Quinn and et.al., 2018). It provides a useful information in
order to determine an accuracy of the estimating system of the firm, that in turn helps in quoting
the prices which allows for the reasonable profit.
Cost accounting system- It means the framework that is been used by CORUS in
estimating their product cost for analysing the profits, valuing inventory and controlling cost.
This MA system is critical for anticipating accurate cost that would be incurred in manufacturing
product for gaining profitable operations.
Inventory management system- It is the system that combines technology, procedures
and the processes for overseeing, maintaining and monitoring stocked products (Maas,
Schaltegger and Crutzen, 2016). Inventory management systems are important for keeping the
tabs on the present stock level and in understanding the items that are moving fast and slowly
that in turn enables CORUS in reordering with high level of accuracy.
Price optimization system- It present mathematical analysis for an enterprise that reflects
the response of the customers at different price level of an entity's products and the services
through the use of different channels. It acts as the most significant system of MA because it
helps CORUS in setting up the suitable prices for the product so that larger profits could be
generated.
Systems Benefits
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Cost accounting system It helps in determining an unprofitable
activities, inefficiencies and losses in any of
the form.
Job costing system This systems helps in monitoring the cost
throughout the process of producing the
product.
Inventory management software It acts as the most useful system for CORUS as
it provides for better cash flow reporting and
the forecasting capabilities.
Price optimization It helps the company in determining the best
prices in accordance with the expectation of
the customers.
P2. Explaining various methods that is been used for the reporting under MA
Budget report- This report represents the estimated figures regarding the income and the expense
for the particular period on the basis of the actual expenses in the prior periods (Schaltegger,
Etxeberria and Ortas, 2017). The purpose of preparing this report is to analyse performance of
CORUS and the managers in assessing performance of their department and to ensure proper
controlling over the cost.
Accounts receivable report- It is the mA report that breaks down the balances of the
customer that are been owed and due on part of them to CORUS. The main purpose of framing
this report is to manage the cash of an enterprise in case credit to the customers is been extended.
This report is used by the managers in finding the problems present in the collection process of
the company. Assessing the accounts receivable report helps the firm in keeping a collection
department from overlooking the old debts.
Job cost report- This report is been prepared for showing an expenses for the specific
project that is financed by CORUS. Under this the expenses are been matched with estimate of
the revenue for evaluating the profitability of the job. The major objective of this report is
activities, inefficiencies and losses in any of
the form.
Job costing system This systems helps in monitoring the cost
throughout the process of producing the
product.
Inventory management software It acts as the most useful system for CORUS as
it provides for better cash flow reporting and
the forecasting capabilities.
Price optimization It helps the company in determining the best
prices in accordance with the expectation of
the customers.
P2. Explaining various methods that is been used for the reporting under MA
Budget report- This report represents the estimated figures regarding the income and the expense
for the particular period on the basis of the actual expenses in the prior periods (Schaltegger,
Etxeberria and Ortas, 2017). The purpose of preparing this report is to analyse performance of
CORUS and the managers in assessing performance of their department and to ensure proper
controlling over the cost.
Accounts receivable report- It is the mA report that breaks down the balances of the
customer that are been owed and due on part of them to CORUS. The main purpose of framing
this report is to manage the cash of an enterprise in case credit to the customers is been extended.
This report is used by the managers in finding the problems present in the collection process of
the company. Assessing the accounts receivable report helps the firm in keeping a collection
department from overlooking the old debts.
Job cost report- This report is been prepared for showing an expenses for the specific
project that is financed by CORUS. Under this the expenses are been matched with estimate of
the revenue for evaluating the profitability of the job. The major objective of this report is
helping the managers in determining the areas that are high earning so that additional efforts can
be made in such areas rather than wasting the time on the jobs that ascertain lower profitability.
Inventory report- It is been prepared for maintaining the record of the physical inventory
so that optimum use of the resources can be attained as it helps in identifying the need of the
resources and its availability in manufacturing the product efficiently and effectively
(Stacchezzini, Melloni and Lai, 2016). It includes the items like waste inventory, labour cost per
hour, overhead cost per unit etc. The purpose of preparing such report is highlighting the
improvement areas for the purpose of offering incentives and bonuses to best performing
function within the business.
Performance report – It is the MA report that shows analysis about the performance of
an entire CORUS and its employees at year end. Managers creates this report for making
strategic decisions in relation to the future of an entity. Through reviewing this report,
Individuals in the organization are been awarded for committing to the firm and the under
performers are been laid off. In order to keep the accurate measure of the strategy company
needs to make performance report which in turn helps in reaching to the mission in an efficient
manner.
Other reports- It involves the major reports that are been prepared by the managers such
as project reports, information reports, competitors analysis report which are tended to be vital
for CORUS. Such reports are been framed internally and outsourced through the experts or the
professionals (Methods of management accounting reporting, 2018). For the purpose of attaining
most, managers need to have access over these reports to achieve credible and authenticity in the
performance within the work environment.
LO2.
P3 Calculation of marginal and absorption costing
INCOME STATEMENT FOR YEAR 1
(using marginal costing approach)
ITEMS Units P.U Amount Amount
Sales 36000 70 2520000
Marginal cost of sales
be made in such areas rather than wasting the time on the jobs that ascertain lower profitability.
Inventory report- It is been prepared for maintaining the record of the physical inventory
so that optimum use of the resources can be attained as it helps in identifying the need of the
resources and its availability in manufacturing the product efficiently and effectively
(Stacchezzini, Melloni and Lai, 2016). It includes the items like waste inventory, labour cost per
hour, overhead cost per unit etc. The purpose of preparing such report is highlighting the
improvement areas for the purpose of offering incentives and bonuses to best performing
function within the business.
Performance report – It is the MA report that shows analysis about the performance of
an entire CORUS and its employees at year end. Managers creates this report for making
strategic decisions in relation to the future of an entity. Through reviewing this report,
Individuals in the organization are been awarded for committing to the firm and the under
performers are been laid off. In order to keep the accurate measure of the strategy company
needs to make performance report which in turn helps in reaching to the mission in an efficient
manner.
Other reports- It involves the major reports that are been prepared by the managers such
as project reports, information reports, competitors analysis report which are tended to be vital
for CORUS. Such reports are been framed internally and outsourced through the experts or the
professionals (Methods of management accounting reporting, 2018). For the purpose of attaining
most, managers need to have access over these reports to achieve credible and authenticity in the
performance within the work environment.
LO2.
P3 Calculation of marginal and absorption costing
INCOME STATEMENT FOR YEAR 1
(using marginal costing approach)
ITEMS Units P.U Amount Amount
Sales 36000 70 2520000
Marginal cost of sales
Opening stock
Add: variable production cost
direct material 40000 12 480000
direct labour 40000 16 640000
variable expenses 40000 20 800000
total variable cost A 40000 48 1920000
Less: closing stock end of the year B
(opening stock units + units produce -unit sold) 4000 48 192000
Marginal cost of sales(A-B) 1728000
fixed indirect production cost (B) 64000
Gross profit sales: (MCOS-fixed production cost) 728000
Selling and distribution overhead 10000
Admin overhead 15000 25000
Profit before interest & Tax (PBIT) 703000
Interest expenses 1000 1000
profit before tax (PBIT- interest) 702000
Tax @19% 133380
net profit 568620
Interpretation for first year:
From the above solution it is found that the number of unit sold is 36000 thus, sales
amount is 2520000 pound. Closing stock amount 4000 pound deducted from all variable cost in
order to get marginal cost amount. Gross profit sales are 1728000. After getting gross profit
company has to calculate profit before interest and tax by deducting selling and admin
overheads. Thereafter interest amount and tax @19% then finally net profit of the first year was
598620 pound. From the above table it can be interpreted that expenses are very high thus net
profit is low.
Income statement for Year 2
Using Marginal Costing Approach
ITEM Number £ AMOUNT AMOUNT
Add: variable production cost
direct material 40000 12 480000
direct labour 40000 16 640000
variable expenses 40000 20 800000
total variable cost A 40000 48 1920000
Less: closing stock end of the year B
(opening stock units + units produce -unit sold) 4000 48 192000
Marginal cost of sales(A-B) 1728000
fixed indirect production cost (B) 64000
Gross profit sales: (MCOS-fixed production cost) 728000
Selling and distribution overhead 10000
Admin overhead 15000 25000
Profit before interest & Tax (PBIT) 703000
Interest expenses 1000 1000
profit before tax (PBIT- interest) 702000
Tax @19% 133380
net profit 568620
Interpretation for first year:
From the above solution it is found that the number of unit sold is 36000 thus, sales
amount is 2520000 pound. Closing stock amount 4000 pound deducted from all variable cost in
order to get marginal cost amount. Gross profit sales are 1728000. After getting gross profit
company has to calculate profit before interest and tax by deducting selling and admin
overheads. Thereafter interest amount and tax @19% then finally net profit of the first year was
598620 pound. From the above table it can be interpreted that expenses are very high thus net
profit is low.
Income statement for Year 2
Using Marginal Costing Approach
ITEM Number £ AMOUNT AMOUNT
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of units P.U. £ £
SALES 40,000 70 2,800,000
MARGINAL COST OF SALES .. .. .. ..
OPENING STOCK 4000 48 192000
ADD: VARIABLE PRODUCTION
COST: .. .. .. ..
Direct Material 48000 12 576000
Direct Labour 48000 16 768000
Variable Expenses 48000 20 960000
Total Variable Cost A 2496000
Less: Closing stock - end of year 2. B.
[Opening stock units+ units produced -
units sold]
12000 48 576000
Marginal Cost of SALES A-B 1920000
Fixed indirect production cost 64000
Gross Profit: sales - MCOS -FIXED
PRODUCTION COST 816,000
Selling and Distribution Overheads 10500
Admin Overheads 15000 25500
Profit Before Interest & Tax (PBIT) 790,500
Interest Expenses 1250 1250
Profit Before Tax [PBIT-interest] 789,250
Tax @19% 149,958
Net Profit [PAT - TAX] 639,293
Interpretation for second year -
From the above solution it is found that sales are 40000 units @ 70 pound. As first year
closing stock was 4000 so it had become second year opening stock. After that, all variable cost
was added and then deduction of opening stock was done, then closing stock amount realised
that was 12000. Gross profit amount was 816000 then deducting all selling and admin overhead
SALES 40,000 70 2,800,000
MARGINAL COST OF SALES .. .. .. ..
OPENING STOCK 4000 48 192000
ADD: VARIABLE PRODUCTION
COST: .. .. .. ..
Direct Material 48000 12 576000
Direct Labour 48000 16 768000
Variable Expenses 48000 20 960000
Total Variable Cost A 2496000
Less: Closing stock - end of year 2. B.
[Opening stock units+ units produced -
units sold]
12000 48 576000
Marginal Cost of SALES A-B 1920000
Fixed indirect production cost 64000
Gross Profit: sales - MCOS -FIXED
PRODUCTION COST 816,000
Selling and Distribution Overheads 10500
Admin Overheads 15000 25500
Profit Before Interest & Tax (PBIT) 790,500
Interest Expenses 1250 1250
Profit Before Tax [PBIT-interest] 789,250
Tax @19% 149,958
Net Profit [PAT - TAX] 639,293
Interpretation for second year -
From the above solution it is found that sales are 40000 units @ 70 pound. As first year
closing stock was 4000 so it had become second year opening stock. After that, all variable cost
was added and then deduction of opening stock was done, then closing stock amount realised
that was 12000. Gross profit amount was 816000 then deducting all selling and admin overhead
and received PBIT amount that was 790500. Finally, net profit amount was calculated for second
year that is 639293 pound which was higher than the previous year due to low expenditure.
Income statement for Year 3
Using Marginal Costing Approach
ITEM
Number of
units
£
P.U.
AMOUNT
£
AMOUNT
£
SALES 60,000 70 4,200,000
MARGINAL COST OF SALES .. .. .. ..
OPENING STOCK 12000 48 576000
ADD: VARIABLE PRODUCTION COST: .. .. .. ..
Direct Material 51000 12 612000
Direct Labour 51000 16 816000
Variable Expenses 51000 20 1020000
Total Variable Cost A 3024000
Less: Closing stock - end of year 2. B.
[Opening stock units+ units produced - units
sold]
3000 48 144000
Marginal Cost of SALES A-B 2880000
Fixed indirect production cost 64000
Gross Profit: sales - MCOS -FIXED
PRODUCTION COST 1,256,000
Selling and Distribution Overheads 11000
Admin Overheads 15000 26000
Profit Before Interest & Tax (PBIT) 1,230,000
Interest Expenses 1500 1500
Profit Before Tax [PBIT-interest] 1,228,500
Tax @19% 233415
Net Profit [PAT - TAX] 995,085
year that is 639293 pound which was higher than the previous year due to low expenditure.
Income statement for Year 3
Using Marginal Costing Approach
ITEM
Number of
units
£
P.U.
AMOUNT
£
AMOUNT
£
SALES 60,000 70 4,200,000
MARGINAL COST OF SALES .. .. .. ..
OPENING STOCK 12000 48 576000
ADD: VARIABLE PRODUCTION COST: .. .. .. ..
Direct Material 51000 12 612000
Direct Labour 51000 16 816000
Variable Expenses 51000 20 1020000
Total Variable Cost A 3024000
Less: Closing stock - end of year 2. B.
[Opening stock units+ units produced - units
sold]
3000 48 144000
Marginal Cost of SALES A-B 2880000
Fixed indirect production cost 64000
Gross Profit: sales - MCOS -FIXED
PRODUCTION COST 1,256,000
Selling and Distribution Overheads 11000
Admin Overheads 15000 26000
Profit Before Interest & Tax (PBIT) 1,230,000
Interest Expenses 1500 1500
Profit Before Tax [PBIT-interest] 1,228,500
Tax @19% 233415
Net Profit [PAT - TAX] 995,085
Interpretation-
From the above table it can be interpreted that, firstly sales were given at the 70 pound
per unit. Last year closing stock become next year opening stock then closing stock deduct from
the all variable cost so realised marginal cost of the sales. Fixed indirect production cost
deducted from the marginal cost and gross profit is calculated. Thereafter selling overhead and
admin overhead deducted then PBIT is received then interest and tax rate @19% deducted from
the profit before interest and tax. After all these calculations it has been observed that net profit
which is realised is 995085 which is maximum due to higher sales in this year.
Income statement for Year 1
Using Absorption Costing Approach
ITEM
Number
of units
£
P.U.
AMOUNT
£
AMOUNT
£
SALES 36,000 70 2,520,000
MARGINAL COST OF SALES .…….. ………. ………..
OPENING STOCK 0 0
ADD: VARIABLE PRODUCTION
COST: ………… ……… ………..
Direct Material 40000 12 480000
Direct Labour 40000 16 640000
Variable Expenses 40000 20 800000
Fixed indirect production cost 64000 64000
Total Production Cost A 1984000
Less: Closing stock - end of year 1.
B. [Opening stock units+ units
produced - units sold] use formula to
calculate amount
4000 198400
Cost of SALES : A-B: 1,785,600
Gross Profit: Sales - Cost of Sales : 734,400
Selling and Distribution Overheads 10000
From the above table it can be interpreted that, firstly sales were given at the 70 pound
per unit. Last year closing stock become next year opening stock then closing stock deduct from
the all variable cost so realised marginal cost of the sales. Fixed indirect production cost
deducted from the marginal cost and gross profit is calculated. Thereafter selling overhead and
admin overhead deducted then PBIT is received then interest and tax rate @19% deducted from
the profit before interest and tax. After all these calculations it has been observed that net profit
which is realised is 995085 which is maximum due to higher sales in this year.
Income statement for Year 1
Using Absorption Costing Approach
ITEM
Number
of units
£
P.U.
AMOUNT
£
AMOUNT
£
SALES 36,000 70 2,520,000
MARGINAL COST OF SALES .…….. ………. ………..
OPENING STOCK 0 0
ADD: VARIABLE PRODUCTION
COST: ………… ……… ………..
Direct Material 40000 12 480000
Direct Labour 40000 16 640000
Variable Expenses 40000 20 800000
Fixed indirect production cost 64000 64000
Total Production Cost A 1984000
Less: Closing stock - end of year 1.
B. [Opening stock units+ units
produced - units sold] use formula to
calculate amount
4000 198400
Cost of SALES : A-B: 1,785,600
Gross Profit: Sales - Cost of Sales : 734,400
Selling and Distribution Overheads 10000
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Admin Overheads 15000 25000
Profit from operations Before
Interest & Tax (PBIT) 709,400
Interest Expenses 1000 1000
Profit Before Tax [PBIT-interest] 708,400
Tax @19% 134596
Net Profit 573,804
Interpretation-
From the above solution it is identified that sales of the year are 2520000 pounds. Gross
profit is calculated by deducting COGS amount from the sales. Gross profit for the year is found
to be 734400 which further deduct S&D expenses and the net profit which is realised is 573804.
Income statement for Year 2
Using Absorption Costing Approach
ITEM
Number of
units
£
P.U.
AMOUNT
£
AMOUNT
£
SALES 40,000 70 2,800,000
MARGINAL COST OF SALES .…….. ………. ………..
OPENING STOCK 4000 198400
ADD: VARIABLE PRODUCTION
COST: ………… ……… ………..
Direct Material 48000 12 576000
Direct Labour 48000 16 768000
Variable Expenses 48000 20 960000
Fixed indirect production cost 64000 64000
Total Production Cost A 2566400
Less: Closing stock - end of year 1. B.
[Opening stock units+ units produced -
12000 592000
Profit from operations Before
Interest & Tax (PBIT) 709,400
Interest Expenses 1000 1000
Profit Before Tax [PBIT-interest] 708,400
Tax @19% 134596
Net Profit 573,804
Interpretation-
From the above solution it is identified that sales of the year are 2520000 pounds. Gross
profit is calculated by deducting COGS amount from the sales. Gross profit for the year is found
to be 734400 which further deduct S&D expenses and the net profit which is realised is 573804.
Income statement for Year 2
Using Absorption Costing Approach
ITEM
Number of
units
£
P.U.
AMOUNT
£
AMOUNT
£
SALES 40,000 70 2,800,000
MARGINAL COST OF SALES .…….. ………. ………..
OPENING STOCK 4000 198400
ADD: VARIABLE PRODUCTION
COST: ………… ……… ………..
Direct Material 48000 12 576000
Direct Labour 48000 16 768000
Variable Expenses 48000 20 960000
Fixed indirect production cost 64000 64000
Total Production Cost A 2566400
Less: Closing stock - end of year 1. B.
[Opening stock units+ units produced -
12000 592000
units sold] use formula to calculate
amount
Cost of SALES : A-B: 1974400
Gross Profit: Sales - Cost of Sales : 825,600
Selling and Distribution Overheads 10500
Admin Overheads 15000 25500
Profit from operations Before Interest
& Tax (PBIT) 800,100
Interest Expenses 1250 1250
Profit Before Tax [PBIT-interest] 798,850
Tax @19% 151782
Net Profit 647,069
Interpretation-
From the above solution, it is found that sale of the third year is 40000 @ 70£ total
amount of the sale is 2800000. Cost of good sold deducted from the sale for calculating gross
profit it is 825600. Thereafter all selling expense, admin expenses and interest expenses less
from the gross profit so net operating income is found to be 647069 which is lower than the
previous year even after low production cost.
Income statement for Year 3
Using Absorption Costing Approach
ITEM
Number
of units
£
P.U.
AMOUNT
£
AMOUNT
£
SALES 60,000 70 4,200,000
MARGINAL COST OF SALES .…….. ………. ………..
OPENING STOCK 12000 592000
ADD: VARIABLE PRODUCTION ………… ……… ………..
amount
Cost of SALES : A-B: 1974400
Gross Profit: Sales - Cost of Sales : 825,600
Selling and Distribution Overheads 10500
Admin Overheads 15000 25500
Profit from operations Before Interest
& Tax (PBIT) 800,100
Interest Expenses 1250 1250
Profit Before Tax [PBIT-interest] 798,850
Tax @19% 151782
Net Profit 647,069
Interpretation-
From the above solution, it is found that sale of the third year is 40000 @ 70£ total
amount of the sale is 2800000. Cost of good sold deducted from the sale for calculating gross
profit it is 825600. Thereafter all selling expense, admin expenses and interest expenses less
from the gross profit so net operating income is found to be 647069 which is lower than the
previous year even after low production cost.
Income statement for Year 3
Using Absorption Costing Approach
ITEM
Number
of units
£
P.U.
AMOUNT
£
AMOUNT
£
SALES 60,000 70 4,200,000
MARGINAL COST OF SALES .…….. ………. ………..
OPENING STOCK 12000 592000
ADD: VARIABLE PRODUCTION ………… ……… ………..
COST:
Direct Material 51000 12 612000
Direct Labour 51000 16 816000
Variable Expenses 51000 20 1020000
Fixed indirect production cost 64000 64000
Total Production Cost A 3104000
Less: Closing stock - end of year 1. B.
[Opening stock units+ units produced -
units sold] use formula to calculate
amount
3000 147765
Cost of SALES : A-B: 2956235
Gross Profit: Sales - Cost of Sales : 1,243,765
Selling and Distribution Overheads 11000
Admin Overheads 15000 26000
Profit from operations Before Interest
& Tax (PBIT) 1,217,765
Interest Expenses 1500 1500
Profit Before Tax [PBIT-interest] 1,216,265
Tax @19% 231090
Net Profit 985,175
Interpretation -
From the above table sales was made in the third year of 4200000 pound. For calculating
gross profit cost of goods sold deducted from the sale. After getting gross profit, deduct selling
expenses 11000, admin expenses 15000 and interest expenses 1500 then net operating income
was realised as 985175 which is highest among all the years due to high sales and low
production cost.
Use of marginal cost
Direct Material 51000 12 612000
Direct Labour 51000 16 816000
Variable Expenses 51000 20 1020000
Fixed indirect production cost 64000 64000
Total Production Cost A 3104000
Less: Closing stock - end of year 1. B.
[Opening stock units+ units produced -
units sold] use formula to calculate
amount
3000 147765
Cost of SALES : A-B: 2956235
Gross Profit: Sales - Cost of Sales : 1,243,765
Selling and Distribution Overheads 11000
Admin Overheads 15000 26000
Profit from operations Before Interest
& Tax (PBIT) 1,217,765
Interest Expenses 1500 1500
Profit Before Tax [PBIT-interest] 1,216,265
Tax @19% 231090
Net Profit 985,175
Interpretation -
From the above table sales was made in the third year of 4200000 pound. For calculating
gross profit cost of goods sold deducted from the sale. After getting gross profit, deduct selling
expenses 11000, admin expenses 15000 and interest expenses 1500 then net operating income
was realised as 985175 which is highest among all the years due to high sales and low
production cost.
Use of marginal cost
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Marginal cost is used to ascertain net profit which an organisation earns without
including any fixed cost so that a reliable contribution or gross profit can be ascertained.
Comparison between absorption costing and marginal costing
In marginal costing only variable cost is to be considered for calculating product cost but
in absorption costing method fixed cost and variable both cost is considered while calculating
product cost (Pratiwi, Malisan and Lahaya, 2018). Thus, there is difference in net profit in both
these methods.
Reason of difference in profit using marginal and absorption costing methods
From the above report net operating income due to changing approaches that was in the
first year- marginal costing profit was 568620 pound while through absorption costing profit was
51000. on the second year net operating profit marginal costing was 794812.5 while absorption
costing profit was 405410 and in the end third year net profit was 1461645 by using marginal
costing and 1660750 pounds’ net profit by using absorption costing due to variation in
production cost in both the methods which occurred as fixed cost is not included in marginal
costing method. So CORUS company should use marginal costing because of higher net profit.
LO3.
P4-Advantages and disadvantage of budgeting control planning tools
Budgeting control is a process in which actual performance is compared with predefine
budget (standard budget), it helps to find out variance so that corrective actions can be taken
without any delay (Saha, 2017).
BUDGETING CONTROL TOOLS OF CORUSCOMPANY-
ZERO BASE BUDGET
Zero base budget is budgeting controlling tool in which all expenses are approved for
new year. Zero base budging starts from new base at the beginning of every financial year.
Company analysis cost of every function and accordingly funds are allocated within departments
(Wilhelm and Sydow, 2018). This budget is also known as DE NOVA budgeting.
ADVANTAGES
CORUScompany able to efficiently allocate resources because zero base budget prepare
on the basis of needs and cost of every function department.
including any fixed cost so that a reliable contribution or gross profit can be ascertained.
Comparison between absorption costing and marginal costing
In marginal costing only variable cost is to be considered for calculating product cost but
in absorption costing method fixed cost and variable both cost is considered while calculating
product cost (Pratiwi, Malisan and Lahaya, 2018). Thus, there is difference in net profit in both
these methods.
Reason of difference in profit using marginal and absorption costing methods
From the above report net operating income due to changing approaches that was in the
first year- marginal costing profit was 568620 pound while through absorption costing profit was
51000. on the second year net operating profit marginal costing was 794812.5 while absorption
costing profit was 405410 and in the end third year net profit was 1461645 by using marginal
costing and 1660750 pounds’ net profit by using absorption costing due to variation in
production cost in both the methods which occurred as fixed cost is not included in marginal
costing method. So CORUS company should use marginal costing because of higher net profit.
LO3.
P4-Advantages and disadvantage of budgeting control planning tools
Budgeting control is a process in which actual performance is compared with predefine
budget (standard budget), it helps to find out variance so that corrective actions can be taken
without any delay (Saha, 2017).
BUDGETING CONTROL TOOLS OF CORUSCOMPANY-
ZERO BASE BUDGET
Zero base budget is budgeting controlling tool in which all expenses are approved for
new year. Zero base budging starts from new base at the beginning of every financial year.
Company analysis cost of every function and accordingly funds are allocated within departments
(Wilhelm and Sydow, 2018). This budget is also known as DE NOVA budgeting.
ADVANTAGES
CORUScompany able to efficiently allocate resources because zero base budget prepare
on the basis of needs and cost of every function department.
This budget helps in enhance coordination and effective communication within the
company because all member wants to involve to take decision (Pratiwi, Malisan and
Lahaya, 2018).
It can be prepared with accuracy because budget is prepared by current scenario instead
of past figures or past scenario.
DISADVANTAGE
In large scale organization it will become threat for manager because it is required large
number of decision and data are also large so calculation become also complex (Saha,
2017).
It is time consuming process because company have to analysis expenditure for the new
year so sometimes managers are not able to define necessary expenditure for particular
function then it will create complexity.
Fixed budget
Fixed budget doesn't change or vary due to changes in sales volume and other activity.
This budget also called static budget because company prepare set static data which helps for
comparing actual performance (Pratiwi, Malisan and Lahaya, 2018).
ADVANTAGES
Through static budget CORUScompany easy to track budget in every month and time
saving budget because it doesn't change due to changes in sales volume (The fixed
budget, 2018).
Fixed budget helps in reduce cost because manger needs not to make budget all over the
business period (Dereje,2015).
DISADVANTAGE
Fixed budget has no significantly use because every moment company's activities and
sales volume are unpredictable so there is no use of static budget because it will not able
to give accurate profit of the company.
Unfavourable variances may impact on overall predicted budget thus; entity may fail to
run operations successfully.
Flexible budget
Flexible budget is a budget which changes with the change in the level of activity. It is
also called as variance budget (Chi and Ho, 2017).
company because all member wants to involve to take decision (Pratiwi, Malisan and
Lahaya, 2018).
It can be prepared with accuracy because budget is prepared by current scenario instead
of past figures or past scenario.
DISADVANTAGE
In large scale organization it will become threat for manager because it is required large
number of decision and data are also large so calculation become also complex (Saha,
2017).
It is time consuming process because company have to analysis expenditure for the new
year so sometimes managers are not able to define necessary expenditure for particular
function then it will create complexity.
Fixed budget
Fixed budget doesn't change or vary due to changes in sales volume and other activity.
This budget also called static budget because company prepare set static data which helps for
comparing actual performance (Pratiwi, Malisan and Lahaya, 2018).
ADVANTAGES
Through static budget CORUScompany easy to track budget in every month and time
saving budget because it doesn't change due to changes in sales volume (The fixed
budget, 2018).
Fixed budget helps in reduce cost because manger needs not to make budget all over the
business period (Dereje,2015).
DISADVANTAGE
Fixed budget has no significantly use because every moment company's activities and
sales volume are unpredictable so there is no use of static budget because it will not able
to give accurate profit of the company.
Unfavourable variances may impact on overall predicted budget thus; entity may fail to
run operations successfully.
Flexible budget
Flexible budget is a budget which changes with the change in the level of activity. It is
also called as variance budget (Chi and Ho, 2017).
ADVANTAGES
Through Flexible budget CORUScompany can be done effectively forecasting that will
help in maximization of the profit.
DISADVANTAGES
Flexible budget is more confusing budget because CORUScompany need more planning
to track expenses and more adjustment to be required within a business period (Abdallah,
2017).
Variance analysis- it is quantitative investigation of the difference between actual and planned
behaviour. The variance analysis is used by the organization to maintain and control the
operation of business. Variance analysis uses numerical in the evaluation of the progress of
company.
Advantages
It is useful for identifying the deviation in the performance.
This helps the company in assisting in deciding and assigning the responsibility to both
individual and department and teams.
Disadvantages
It takes long time to examine the effect of variance.
Under this the unrealistic standard can give outcome of huge deviation.
Cash budgeting-
Cash budget is a budget or plan which refers to the estimation of future cash receipts and
disbursements during the period. The cash budget depicts the company's cash position in the
future. The cash inflow and outflow includes revenues collected, expenses paid, and loans
receipts and payments.
Advantages :
It assists in identifying the future needs of the cash for [performing the different
operations of organisation.
This helps the management of company in deciding the current cash position and then
takes effective decision for the management of cash.
Disadvantages
It is very expensive to operate a budget
This type of budget is lacking the flexibility which is not good for its functioning.
Through Flexible budget CORUScompany can be done effectively forecasting that will
help in maximization of the profit.
DISADVANTAGES
Flexible budget is more confusing budget because CORUScompany need more planning
to track expenses and more adjustment to be required within a business period (Abdallah,
2017).
Variance analysis- it is quantitative investigation of the difference between actual and planned
behaviour. The variance analysis is used by the organization to maintain and control the
operation of business. Variance analysis uses numerical in the evaluation of the progress of
company.
Advantages
It is useful for identifying the deviation in the performance.
This helps the company in assisting in deciding and assigning the responsibility to both
individual and department and teams.
Disadvantages
It takes long time to examine the effect of variance.
Under this the unrealistic standard can give outcome of huge deviation.
Cash budgeting-
Cash budget is a budget or plan which refers to the estimation of future cash receipts and
disbursements during the period. The cash budget depicts the company's cash position in the
future. The cash inflow and outflow includes revenues collected, expenses paid, and loans
receipts and payments.
Advantages :
It assists in identifying the future needs of the cash for [performing the different
operations of organisation.
This helps the management of company in deciding the current cash position and then
takes effective decision for the management of cash.
Disadvantages
It is very expensive to operate a budget
This type of budget is lacking the flexibility which is not good for its functioning.
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Pricing strategies
This is defined to as the strategy which assists the company in managing and fixing the price.
The price is referred to as the amount of money which the person has to pay if they have to take
anything from the company. The two major strategy of pricing is penetrating pricing in which the
company charges low price to penetrate in the market and then increases the price. Another
method is competitive pricing method in which the company first analyses the pricing strategy of
other competitors and then fixes their own pricing strategy.
P5. Evaluating the ways in which organization adopts systems of MA in responding to the
financial problems
It has been observed by IMA that management accounting has been evolved since an
issued raised regarding the supply chain (Alaeddin and et.al., 2019). During the 1980s, MA
functions were been located at lower end of supply chain and currently it is perceived to be at
highest end. It has been moved from the transaction orientation to the strategic partner of
business.
Ratio analysis- It is the quantitative method that gain insights into the liquidity,
operational efficiency and the profitability performance of CORUS. Through this tool, an
organization could develop a better understanding of their reports with regards to determining
the trends over the time in order to measure financial health of the business. It is the most useful
tool that helps CORUS in resolving their financial problems regarding lower profitability, more
debts, high interest obligation etc.
Key performance indicator- It is the technique that demonstrates the ways in which the
company could achieve its objectives and the goals in effective manner. CORUS make use of
KPIs at the multiple levels for evaluating the success in reaching to the targets (Sinaga and et.al.,
2019). It helps the organization in resolving the financial problems faced by it relating to the
performance gap, meeting targets etc.
Benchmarking- It is the systematic improvement process that is been followed by an
enterprise for developing efficiency in their processes, services and the products by making
comparison with that of their competitors or rivalry in the overall market. CORUS uses this
technique for overcoming the financial problems in relation to ineffective strategies, high
production cost, differentiation etc.
CORUS XYZ Ltd.
This is defined to as the strategy which assists the company in managing and fixing the price.
The price is referred to as the amount of money which the person has to pay if they have to take
anything from the company. The two major strategy of pricing is penetrating pricing in which the
company charges low price to penetrate in the market and then increases the price. Another
method is competitive pricing method in which the company first analyses the pricing strategy of
other competitors and then fixes their own pricing strategy.
P5. Evaluating the ways in which organization adopts systems of MA in responding to the
financial problems
It has been observed by IMA that management accounting has been evolved since an
issued raised regarding the supply chain (Alaeddin and et.al., 2019). During the 1980s, MA
functions were been located at lower end of supply chain and currently it is perceived to be at
highest end. It has been moved from the transaction orientation to the strategic partner of
business.
Ratio analysis- It is the quantitative method that gain insights into the liquidity,
operational efficiency and the profitability performance of CORUS. Through this tool, an
organization could develop a better understanding of their reports with regards to determining
the trends over the time in order to measure financial health of the business. It is the most useful
tool that helps CORUS in resolving their financial problems regarding lower profitability, more
debts, high interest obligation etc.
Key performance indicator- It is the technique that demonstrates the ways in which the
company could achieve its objectives and the goals in effective manner. CORUS make use of
KPIs at the multiple levels for evaluating the success in reaching to the targets (Sinaga and et.al.,
2019). It helps the organization in resolving the financial problems faced by it relating to the
performance gap, meeting targets etc.
Benchmarking- It is the systematic improvement process that is been followed by an
enterprise for developing efficiency in their processes, services and the products by making
comparison with that of their competitors or rivalry in the overall market. CORUS uses this
technique for overcoming the financial problems in relation to ineffective strategies, high
production cost, differentiation etc.
CORUS XYZ Ltd.
This organization adapts various MA systems
such as inventory management software, cost
control, Ratio analysis, KPIs etc. at its
workplace for avoiding the financial problems.
Inventory managing software helps the
company in tracing the flow of inventory from
premises to the ultimate consumer so that delay
in delivery of the goods can be avoided.
Similarly other tools also helps the firm in
taking appropriate measures to resolve the
financial problems and ensure adequate
controlling over the cost.
This company makes use of benchmarking and
price optimization system which helps in
adopting best strategies and in setting up the
best possible prices that generates higher profit
margins and is affordable to the customers.
CONCLUSION
Management accounting report summarised that CORUScompany adapt budgeting
control tools because it helps to compare actual performance with standard performance and
company able to found variance and corrective action can be taken. These report also concluded
that net operating profit of the company vary by using different costing approaches. Total net
profit of the 3 years using marginal costing is higher than absorption costing. So, it can be
concluded that CORUScompany should follow marginal costing as company can report high net
operating income as compare to absorption costing.
such as inventory management software, cost
control, Ratio analysis, KPIs etc. at its
workplace for avoiding the financial problems.
Inventory managing software helps the
company in tracing the flow of inventory from
premises to the ultimate consumer so that delay
in delivery of the goods can be avoided.
Similarly other tools also helps the firm in
taking appropriate measures to resolve the
financial problems and ensure adequate
controlling over the cost.
This company makes use of benchmarking and
price optimization system which helps in
adopting best strategies and in setting up the
best possible prices that generates higher profit
margins and is affordable to the customers.
CONCLUSION
Management accounting report summarised that CORUScompany adapt budgeting
control tools because it helps to compare actual performance with standard performance and
company able to found variance and corrective action can be taken. These report also concluded
that net operating profit of the company vary by using different costing approaches. Total net
profit of the 3 years using marginal costing is higher than absorption costing. So, it can be
concluded that CORUScompany should follow marginal costing as company can report high net
operating income as compare to absorption costing.
REFERENCES
Books and journals
Abdallah, A. A. J., 2017. The Conformity Level of Income Tax Accounting In Jordan with the
Requirements of the International Accounting Standard IAS (12) in Terms of Taxable
Temporary Differences’ Recognition.
Alaeddin, O. and et.al., 2019. The Effect of Management Accounting Systems in Influencing
Environmental Uncertainty, Energy Efficiency and Environmental
Performance. International Journal of Energy Economics and Policy. 9(5). p.346.
Chi, C. H. and Ho, J. C., 2017, July. Profit Sharing Strategy, Employee Commitment and
Intention of Stay. In 2017 Portland International Conference on Management of
Engineering and Technology (PICMET) (pp. 1-11). IEEE.
Danaiata, D., Negovan, A. M. and Hurbean, L., 2016, June. Accepting Information Technology
Changes in Universities-A Research Framework. In International Conference on
Informatics in Economy (pp. 55-69). Springer, Cham.
Dereje, Z. A., 2015. Assesment of Rural Households Perception of Soil Deradation and Land
Managemnt Practices in Selected Kebeles of Duna Woreda, Hadiya Zone, SNNPR,
Ethiopia (Doctoral dissertation, Harmaya University).
Maas, K., Schaltegger, S. and Crutzen, N., 2016. Integrating corporate sustainability assessment,
management accounting, control, and reporting. Journal of Cleaner Production. 136.
pp.237-248.
Pratiwi, N., Malisan, L. and Lahaya, I.A., 2018. Pengaruh regulasi dan ketersediaan anggaran
terhadap kualitas pelayanan kesehatan. Jurnal Ilmu Akuntansi Mulawarman (JIAM). 2(3).
Quinn, M. and et.al., 2018. Future research on management accounting and control in family
firms: suggestions linked to architecture, governance, entrepreneurship and
stewardship. Journal of Management Control. 28(4). pp.529-546.
Saha, A., 2017. Accounting system of Edotco Bangladesh co. Ltd.
Schaltegger, S., Etxeberria, I. Á. and Ortas, E., 2017. Innovating corporate accounting and
reporting for sustainability–attributes and challenges. Sustainable Development. 25(2).
pp.113-122.
Books and journals
Abdallah, A. A. J., 2017. The Conformity Level of Income Tax Accounting In Jordan with the
Requirements of the International Accounting Standard IAS (12) in Terms of Taxable
Temporary Differences’ Recognition.
Alaeddin, O. and et.al., 2019. The Effect of Management Accounting Systems in Influencing
Environmental Uncertainty, Energy Efficiency and Environmental
Performance. International Journal of Energy Economics and Policy. 9(5). p.346.
Chi, C. H. and Ho, J. C., 2017, July. Profit Sharing Strategy, Employee Commitment and
Intention of Stay. In 2017 Portland International Conference on Management of
Engineering and Technology (PICMET) (pp. 1-11). IEEE.
Danaiata, D., Negovan, A. M. and Hurbean, L., 2016, June. Accepting Information Technology
Changes in Universities-A Research Framework. In International Conference on
Informatics in Economy (pp. 55-69). Springer, Cham.
Dereje, Z. A., 2015. Assesment of Rural Households Perception of Soil Deradation and Land
Managemnt Practices in Selected Kebeles of Duna Woreda, Hadiya Zone, SNNPR,
Ethiopia (Doctoral dissertation, Harmaya University).
Maas, K., Schaltegger, S. and Crutzen, N., 2016. Integrating corporate sustainability assessment,
management accounting, control, and reporting. Journal of Cleaner Production. 136.
pp.237-248.
Pratiwi, N., Malisan, L. and Lahaya, I.A., 2018. Pengaruh regulasi dan ketersediaan anggaran
terhadap kualitas pelayanan kesehatan. Jurnal Ilmu Akuntansi Mulawarman (JIAM). 2(3).
Quinn, M. and et.al., 2018. Future research on management accounting and control in family
firms: suggestions linked to architecture, governance, entrepreneurship and
stewardship. Journal of Management Control. 28(4). pp.529-546.
Saha, A., 2017. Accounting system of Edotco Bangladesh co. Ltd.
Schaltegger, S., Etxeberria, I. Á. and Ortas, E., 2017. Innovating corporate accounting and
reporting for sustainability–attributes and challenges. Sustainable Development. 25(2).
pp.113-122.
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Sinaga, O. and et.al., 2019. The Role of Management Accounting Systems, Energy Efficiency
and Organizational Innovation in driving Competitive Advantage and Firm
Performance. International Journal of Energy Economics and Policy. 9(3). pp.395-402.
Stacchezzini, R., Melloni, G. and Lai, A., 2016. Sustainability management and reporting: the
role of integrated reporting for communicating corporate sustainability
management. Journal of Cleaner Production. 136. pp.102-110.
Wilhelm, M. and Sydow, J., 2018. Managing coopetition in supplier networks–a paradox
perspective. Journal of Supply Chain Management. 54(3). pp.22-41.
Online
Methods of management accounting reporting. 2018. [Online]. Available
through:<https://www.completecontroller.com/types-of-managerial-accounting-reports/>
The fixed budget. 2018.[Online]. Available through
<https://www.accountingtools.com/articles/what-is-a-fixed-budget.html>
and Organizational Innovation in driving Competitive Advantage and Firm
Performance. International Journal of Energy Economics and Policy. 9(3). pp.395-402.
Stacchezzini, R., Melloni, G. and Lai, A., 2016. Sustainability management and reporting: the
role of integrated reporting for communicating corporate sustainability
management. Journal of Cleaner Production. 136. pp.102-110.
Wilhelm, M. and Sydow, J., 2018. Managing coopetition in supplier networks–a paradox
perspective. Journal of Supply Chain Management. 54(3). pp.22-41.
Online
Methods of management accounting reporting. 2018. [Online]. Available
through:<https://www.completecontroller.com/types-of-managerial-accounting-reports/>
The fixed budget. 2018.[Online]. Available through
<https://www.accountingtools.com/articles/what-is-a-fixed-budget.html>
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