Cost Accounting Methods: Absorption vs Marginal

This assignment delves into the core concepts of cost accounting, specifically focusing on the contrasting approaches of absorption costing and marginal costing. Students are tasked with analyzing income statements generated under both methods, highlighting the implications for profitability reporting and managerial decision-making. The assignment emphasizes understanding the nuances of product costing and its influence on a company's financial position.

MANAGEMENT
ACCOUUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................4
TASK 1............................................................................................................................................4
P1Explaining management accounting and essential requirement for different types of
accounting system........................................................................................................................4
P2 Different methods used for management accounting reporting.............................................6
TASK 2............................................................................................................................................8
P3 Calculating cost using appropriate techniques of cost analysis for preparing income
statement of marginal and absorption costing.............................................................................8
Difference between marginal and absorption costing................................................................11
TASK 3..........................................................................................................................................12
P4 Explaining advantages and disadvantages of different types of planning tools for budgetary
control of Williams Performance Tenders................................................................................12
P5 Comparing how organizations are adapting the management accounting system to respond
the financial problems................................................................................................................17
CONCLUSION..............................................................................................................................19
REFERENCES..............................................................................................................................20

INTRODUCTION
The management accounting is developed to meet the specific internal management need
for taking quick decision, allocation of resources and capacity utilization. Along with that,
customer value and internal business processes are used under management accounting through
which business objectives can be accomplished. The present report is based on Williams
Performance Tenders which deals in boat manufacturing. This organization is operating with 36
workforce in financial year 2011. It applies several concept of management accounting and
varied methods applied for reporting of the same. In addition to this, advantages and
disadvantages of different types of planning tools applied under the budgetary control have been
explained. Moreover, ways to determine the success of the business by responding the financial
problem has been explained.
TASK 1
P1Explaining management accounting and essential requirement for different types of
accounting system
The management accounting refers tot he process of preparing management report so as
to fulfill the short ass well as long term objectives of the business. It is helpful for corporation to
take the financial and statistical decision whereby firm can identify, measure and internal as well
as communicate the information among respective parties to meet the set objectives. Williams
Performance Tenders applied management accounting to fulfill the below mentioned objectives- Forecasting the future-With the help of management accounting report, company
forecast related to investment activities and diversification as well as expansion in
another country. This proves to be effective to cater the requirement of all related parties
and support business to accomplish long as well as short term objectives (Kaplan and
Atkinson, 2015). Forecasting cash flows-The management accounting report of Williams Performance
Tenders aids to take the decision related to future cash flow on the basis of budgets, and
trend chart. This proves to be effective to allocate the financial resources on right
business activities and gather profitability to meet specific objectives of the business.

 Analyzing rate of return-Every company has to analyze the internal performance in term
of resources for the purpose of getting expected rate of return out of the operational
activities. This can be made possible only with the help of estimating the requirement of
finance of business project (DRURY, 2013).
 Performance variance-Use of management accounting makes it possible for Williams
Performance Tenders to understand the negative and positive variance exist in the
financial figures and accordingly reach to the valid decision. This contributes towards
determining the success of firm and deliver good quality of services to large number of
buyers effectively (What is Management Accounting and its Importance, 2017)
There are several kind of accounting system applied under Williams Performance
Tenders so as to meet the essential requirement. It has been explained as follows- Cost accounting system-The cost accounting management system is applied under
Williams Performance Tenders in order to track the process and job cost associated with
each product and services. For this purpose, data are recorded effectively with the help of
appropriate record keeping standard (Renz, 2016). Job costing system-It is another accounting system under which cost is allocated on
labour, material and overhead so as to find the input provided for each single product or
service. This proves to be effective for catering requirement of all related parties and
determining the long run success of the business in the marketplace. Inventory management system-There are different approaches used for the purpose of
inventory management with the application of tools such as Jit in Time and LIFO or
FIFO so as to manage the stock effectively and produce valid outcome in the direction of
growhr and success of the business (Brierley, 2016). In addition to this, tools or
application of management accounting is applied for effective management of inventory.
 Price optimization-It is another management accounting system which is required by
Williams Performance Tenders to take the appropriate decision related to price of the
product or services in order to determine the rate of return. It facilitates to integrate all
business activities and meet the expectations of parties associated with the firm.
Therefore, price optimization is based on cost of inventory and other input used for
production of goods.

All these mentioned management account system are essential to use in the business
through which cost of each product or service can be recorded effectively and valid outcome can
be derived in the right manner. This contributes towards improving the business performance and
assists management to reduce the cost of production (Fisher and Krumwiede, 2015). For
example, price optimization is used to track the inventory applied in the production of boat by
Williams Performance Tenders.
Moreover, job costing system will be beneficial to find the cost of product in the right
manner. Apart from this, several benefits are associated with management account as it increase
the efficiency of the business and maximize overall rate of return. In addition to this, business-
critical decisions are taken with the help of management account whereby all activities can be
integrated and higher rate of return can be derived so as to ensure better utilization of the
resource. This leads to create goodwill of the business and support the managerial activities
effectively (Rojas, Leiva, Wanke and Marchant, 2015). Thus, Williams Performance Tenders
applies all concept of management accounting effectively through which it becomes easy to
recover the cost of production and set the price of products and services effectively for
accomplishing the set objectives.
P2 Different methods used for management accounting reporting
The management accounting report is presentation of financial data in term of findings or
recording for the department of accounting. It helps management to understand the actual
performance of the business and accordingly take the corrective action for the issues which are
being faced by the business. The major reason behind preparing the management accounting
report is to keep the management informed regarding the performance of company and track the
performance in the light of stated objectives. For this purpose, accounting report is prepared in
accordance with specific period. This aids to meet the specific objectives of the firm and cater
requirement of all related parties in the right direction (Lawless, 2013). Basically, period of
management accounting report is weekly, monthly, daily or quarterly as per the requirement or
request of the management. On the other hand, management accounting report is prepared to
assess the that whether to employed resources are deriving valid outcome or not. This also
provide information regarding the efficiency of corporation that how effectively resources can be
utilized for increasing the rate of return and support the managerial activities. Moreover, with the

use of management accounting report it becomes easy to ensure the all resources are utilized in
an optimum manner and supporting corporation to accomplish the objectives set by the business.
Williams Performance Tenders adopts the following management reporting system for assessing
the business performance effectively. All of these report are used with the basic purpose to
increase the efficiency and encouraging workforce to contribute their best towards achieving
long as well as short term objectives in the marketplace (Ueckerdt and et. al., 2013). Budget report-This report is used to assess the current performance of the business in
accordance with set standards. For example, a business find itself unable to cut the cost
then management revise their future budget by allocating more financial resources so as
to recover the cost of production and maintain the higher performance in the marketplace.
Furthermore, management and owners of the business refer the budget report for
encouraging employees and offering them incentives so as to determine the optimum
utilization of limited resources (DRURY, 2013.). For example, in case financial
performance of the business is good then workforce are provided monetary benefits.
Therefore, budget report facilitates to control the current as well as future performance of
corporation so as to cater requirement of all internals external parties in the right manner. Job cost report-This report is prepared by organizations like Williams Performance
Tenders to ascertain the cost of specific project. It is used for matching with estimation of
revenue in order to evaluate the profitability associated with that particular job. IN this
manner, business come to know about the higher earning or lower areas and then
accordingly form suitable strategies to meet the organization objectives in the right way
(Darghouth, Barbose and Wiser, 2014). For example, Williams Performance Tenders
might cancel to take the external contract for making small boats in case it does not
generate higher profit. This bring operational efficiency and ensure long term success of
the company in the marketplace. Not only this but job cost is also helpful to evaluate the
expenses incurred from project which provides an opportunity to correct those lacking
areas on right time. Inventory management report-The inventory management report is prepared by the
business for controlling the physical inventory and save the storage cost in the right
direction. The inventory management report basically covers, hourly labor cost, inventory

waste and overhead unit cost etc. This aids to compare the present performance of the
business in the light of set standard and accordingly derive valid outcome for entire
business. At this juncture, departmental performance can be assessed by Williams
Performance Tenders in order to get the information related to best performing
department and provide them timely bonus (Kaplan and Atkinson, 2015).
 Debtor/accounts receivable aging reports-This report is prepared by the business in case
it offers credit base services or products to customers. This report is prepared by showing
the break down structure related to customer balances and then is used for assess the
performance of the business for certain time span. Further, aging report provide
appropriate information in term of presenting the data or separate invoice columns for
late payment for 30, 90 or 60 days. This aids to management to improve the credit
collection policy and reduce the ratio of bad debts to a great extent. This is considered as
the effective approach to control the expenses and promote the higher rate of return of the
business for longer time span.
TASK 2
P3 Calculating cost using appropriate techniques of cost analysis for preparing income statement
of marginal and absorption costing
Cost analysis is considered as the important aspect to assess the internal performance of
the business and contribute towards its success in the marketplace with the increased rate of
return. It facilitates to support operational activities of firm and accordingly create its
competitive edge in the marketplace. The cost report is prepared in accordance with the report
derived from the financial and management accounting. Generally, cost analysis is used for
estimated on the basis of cost and volume analysis through which corporation can effectively
find the valid information regarding the business and follow the specific guidelines of the firm. It
proves to be effective in managing the cost related data (Ismail and King, 2014).

Illustration 1: Income statement according to marginal costing
Illustration 2: Income statement according to absorption costing

Difference between marginal and absorption costing
Majorly, two approaches are there that are being used named Marginal Costing and Absorption
Costing for the valuation of inventory. Under marginal costing, by segregating the fixed and
variable cost marginal cost, determination of marginal costing is done. In this costing method,
only variable costs are charged for the operations done. However, in these operations, fixed cost
is excluded as it is already involved. But, fixed cost is charged to profit and loss account for the
particular period of time in which the operations are conducted (Fullerton Kennedy and Widener,
2014).
On the other hand. Absorption costing can be termed as full costing as under this method, the
total units produced engrosses all costs whether they are fixed or variable. It can be said that
these costs are mainly used for the purpose of reporting which means for the financial and tax
reporting. According to many, marginal costing is better than absorption but in order to
understand the same, it is important for one that he/she should have enough knowledge about the
difference between marginal and absorption costing for the purpose of reaching at final and
appropriate conclusion with regard to decide the better and preferred cost.
Marginal costing can be termed as the technique which is used by businesses for their decision
making process in order to ascertain the total cost of production. While, absorption costing is
nothing but the apportionment of total costs to cost center with the help of which total cost
involved in the production process is determined. Along with that, under marginal costing, the
variable cost is taken as the product cost by firms however, for calculating the period cost, fixed
cost is considered (Armstrong, 2014). On the other hand, under absorption costing, variable as
well as fixed; both the costs are considered as product cost.
In addition to this, for the classification of overheads, marginal costing involves fixed and
variable costs both but for absorption costing, overheads considered are production,
administration, selling as well as distribution. Marginal costing plays a significant role in
measuring the profitability through profit volume ratio whereas, under absorption costing,
profitability gets affected because of the inclusion of fixed cost. Apart from that, cost per unit
under marginal costing refers to the variances that are there in the opening and closing stock by
which cost per unit of output does not get impacted. On the contrary, if cost per unit is taken into

consideration, cost per unit gets highly affected because of the variances present in opening and
closing stock. Further, contribution that per unit makes is the most highlighted aspect in marginal
costing however, in absorption costing, the major area to be focused is net profit per unit. Under
marginal costing, cost data is calculated in accordance with the contribution of each product
whereas, cost data in absorption costing is presented by the way of conventional way (Speklé and
Verbeeten, 2014).
For product costing and inventory valuation, marginal costing plays the significant role as for the
same only variable cost is considered. However, under absorption costing; in order to do
valuation of product costing and inventory valuation, the method considers both; fixed cost as
well as variable cost. Furthermore under marginal costing, fixed overhead are treated in a
different manner. Along with that, here, profitability of different products is judged through
period cost as well as by Profit/Volume ratio (P/V ratio). On the other hand, under absorption
costing system, from the cost of production, business charges the fixed cost which is borne by
each product but with reasonable share.
It can be said that there are differences in the profits generated in income statement by the
two costing system. It is because; fixed cost of production to the output is engrossed by the
absorption costing procedure. However, the fact is ignored by marginal costing system. In
addition to this, the absorption costing is done by the firms on the basis of budgeted levels of
output. However, the fact cannot be ignored that because of the reason; fixed overheads remain
same irrespective of the levels of output, actual and budgeted levels result in makes the to make
variances at the time of its recovery (Carmona, Ezzamel and Gutiérrez, 2016).
TASK 3
P4 Explaining advantages and disadvantages of different types of planning tools for budgetary
control of Williams Performance Tenders
Budgetary control refers to the process of allocation of financial resources on investing
activities with the estimation of certain ratio of profitability. It enables corporation to integrate
the current business activities effectively so as to derive valid outcome and create competitive
edge of the corporation. The planning tools consists of varied kind of budgets and techniques
such as capital budgeting. This proves to be effective to reduce the cost of operation or
production for deriving higher rate of return. The budgetary control procedure refers to the

process of making budget or allocating the financial resources on different major business
activities and then comparing the same with the actual results (Kaplan and Atkinson, 2015). This
in turn business get to know about the variances and apply suitable strategies to overcome such
kind of situation.
Capital budgeting
Capital planning is also used as the budgeting control under which varied techniques are
applied by the business. The first technique of net present value method under which
management understand the requirement of finance for investment in the specific project. This
project is evaluated in accordance with net present value and then comparison is made to
understand the ratio of profitability derived to business from the same project. Apart from this,
payback period method as another technique is applied so as to get the information related to
time period required to recover the cost or initial cost of project (DRURY, 2013). For this
purpose, business expected cash flow is evaluated in term of initial investment and then
comparison is made for better decision. For this purpose, a project taking less time to complete to
cover the initial investment is selected and other is rejected. It leads to support all managerial
activities of firm and cater requirement of all related parties in the right direction. Moreover,
internal rate of return is also covered under the capital budgeting method through which return
generated from each project is considered for the selection of the most suitable one. It shows that
capital budgeting is the most effective method for calculating the rate of return for the business.

The capital budgeting
 The technique of capital budgeting ensure optimum utilization of limited resources for
the purpose of increasing profitability of the business
 By using capital budgeting Williams Performance Tenders can effectively select the most
suitable project which reduces the cost and determine the long run success of business.
 The application of capital budgeting method is very easy to understand and apply by the
corporation or workforce associated with the same technique.
 It proves benefit in term of less cost and most cost saving approach for the propose of
selecting the right kind of project (Brierley, 2016)
 This is helpful to understand the real value of money and ensure to application of right
kind of approach for utilization of limited resources in the right direction.
Disadvantage
 The use of selected technique might not be effective due to association of less skilled
personnel
 The application of net present value and internal rate of return require the better
understanding related to work . Capital budgeting techniques do not include the impact of external factors under the
decision making procedure (Fisher and Krumwiede, 2015).
Cash budget
It is another planning tool under which corporation gather the information related to
future income and expenses so as to control the expenses incurred in the particular financial year.
This leads to cater requirement of different parties and accomplish the related activities of the
business in the right direction. Furthermore, cash budget is prepared with the planning of
financial experts so as to collect important data from them and use the information in order to
produce valid outcome in the direction of growht and success of the business. Moreover, cash
budget make it possible for corporation to anticipate the future performance and control the
current business activities (Rojas, Leiva, Wanke and Marchant, 2015). This also serves as the
lesson for upcoming financial years of corporation.
 It is helpful to concentrate on important working areas of the business rather focusing
upon the plan

 This technique facilitates to forecast the future business activities and bring certainties in
the operation by allocating financial resources in a more effective manner.
 Cash budget facilitate to ensure optimum utilization of all resources effective for
generating higher rate of return.
 This assists corporation to access cost effective sources of finance and enable firm to
increase its product range or creating competitive edge of the business
 Better understanding among personnel related to forecasting leads valid outcome for the
business.
Disadvantage
 This might be illusory for the business due to susceptible to manipulation.
 The major demerit of this method is reliance of management on estimation or forecasting
 It does not consider the non-financial factors of the business which might bring forth the
negative cash flow and affect the performance of the business to a great extent
P5 Comparing how organizations are adapting the management accounting system to respond the
financial problems
In the firm, Williams Performance Tenders, many issues are there in relation with finance that it
faces. These issues many a times lead business to bear problems like hampered profits and
goodwill in the market. Therefore, in order to make business able to sustain and get protected
from these issues, there are some planning tools by which financial problems can be reduced to a
high extent. Some of the planning tools that Williams Performance Tenders may use are like: Budgeting- In businesses, this tool is taken as one of the most effective techniques with
the help of which firm can effectually do forecasting with respect to the proposed
expenses as well as income. It proves to be highly helpful for the firm to have proper
control on the flow of funds among activities conducted to run business (Lawless, 2013).
In accordance with the same, firm comes in position to manage the all business activities
effectually. Standard costing and variance analysis – In order to calculate the cost of each product
or process, method of standard costing proves to be highly effective. Here, if standard
costing is applied by the firm, to find the ratio of profitability will become easier for the
business. Apart from that, it can be said that variance analysis is used by the firm with an

aim to know variable between the actual and expected cost. By the help of same,
management can keep record in relation with the cost and benefit analysis. This will
ultimately help Williams Performance Tenders to bring changes in business that are
necessary to reduce issue of finance as well as to earn higher profits (Ueckerdt and et. al.,
2013). Project appraisal or evaluation- This planning tool is all about assessing the viability of
project with reference to the specified criteria. It plays a crucial role in making proper
allocation of cost in such a way that overall rate of return in business can be enhanced to
a high extent. In accordance with this, for gaining the period of recovery for the initial
investment, tools like payback period method, internal rate of return and average
accounting rate of return can be applied by Williams Performance Tenders.
 Ratio analysis- It is known to be one of the common and effective methods to be applied
in business for having control on costs and for ultimately reducing the financial problems.
It is considered to be an effective method as with the use of same, management of a
company comes in position to have a clear idea about its liquidity, profitability and
solvency. For example, if Williams Performance Tenders will have less liquidity then it
would reflect the position where company will be having active access to the cost
effective sources of funds (Darghouth, Barbose and Wiser, 2014).
 Bench marking- It is another tools to address the financial issues of corporation under
which business work on the basis of set standard and compare the actual performance
accordingly. This aids to deliver good quality of services to large number of buyers.
Furthermore, bench marking consists of smart objectives of the business and each
department such as marketing, production and finance follow the same for maintaining its
good performance in the marketplace.
CONCLUSION
The aforementioned report concludes that cost analysis should be used properly in order
to manage the operation activities of the business effectively and ensure the optimum utilization
of limited resources. This in turn firm can integrate all activities in the right direction for
achieving the long as well as short term objectives. It can also be concluded that, ratio analysis,
cash budget and capital budgeting can be applied for selection of right kind of project and taking

decision related to investment activities of the business. In addition to this, marginal and
absorption costing can be applied effective for preparing report of each department which aids to
take the right decision for long term success of the business.

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Online
What is Management Accounting and its Importance. 2017. [Online]. Availauble through:
<https://www.invensis.net/blog/finance-and-accounting/what-is-management-accounting-
and-its-importance/>. [Accessed on 21st April 2017].