Management Accounting: Cost Analysis, Financial Reporting, Planning Tools

Management
Accounting
(Project-2)

Contents
TASK 1.......................................................................................................................................................3
1.1: Application of cost analysis techniques for formulation of income statement.................................3
1.2: Application of management accounting techniques regarding financial reporting..........................5
1.3: Merits and demerits of Marginal and Absorption costing................................................................5
TASK 2.......................................................................................................................................................6
2.1: Merits and demerits of different planning tools used for budgetary control...................................6
2.2: Estimation of expenses if change in number of hours......................................................................8
2.3 Preparation of cash budget...............................................................................................................8
TASK 3.......................................................................................................................................................9
3.1: Application of different management accounting systems to respond financial issues...................9
3.2: Contribution of management accounting to improve financial performance................................10
3.3: Application of planning tools to reduce financial issues to achieve success...................................10
CONCLUSION.........................................................................................................................................10
REFERENCES..........................................................................................................................................12

INTRODUCTION
Management accounting is the process of preparing financial statements and reports
which help in identifying the actual financial position of company. The management needs to
make an effective decision regarding ascertainment of cost of manufactured product through
adopting marginal and absorption costing. Absorption cost methods help in determining the total
manufacturing cost including fixed and variable. It is a profession which managers need to use
their skills and knowledge to make an effective decision and suitable planning related with
managing and controlling all business activities performed in future. UCK furniture deals in
manufacturing table and drawer related furniture products (Abdel-Maksoud, 2011).
The project covers the various planning tools which are used to control budget along with
their merits and demerits. Adoption of marginal and absorption costing method while
ascertaining cost of product are also explained under this report. The project also summarizes the
various accounting systems to resolve financial problems.
TASK 1
1.1: Application of cost analysis techniques for formulation of income statement
Cost: It may define as the amount of value which is incurred by an organization to produce
something. It includes the materials cost, labor cost, overhead expenses, risk, time etc. after
determining all such aspects the manager can able to decide to set an effective price for their
product. Cost can be of two types which are as follows:
Fixed and variable cost: Fixed cost refers to such cost which never changes with changes
in level of output thus remain constant. Rent and depreciation are such two example of fixed
cost. Whereas Variable cost refers to such cost which changes with the changes in level of
output. Such cost has direct relationship with production. Raw material, labor are the examples
of variable cost (Akbar, 2010).
Opportunity and outlay cost: Opportunity cost refers to the benefit the company can attain
but sacrificed due to implementing another course of action. Whereas outlay cost refers to the
cost which are incurred in the purchasing of machinery and its installation in an organization.
Difference between Marginal and Absorption costing
Marginal costing: It refers to an accounting system in which the total cost of product has
been increased due to variations in the level of output by one unit. It includes variable cost but
ignore fixed cost at the time of calculating cost of production.
Characteristics of marginal costing:
 Classification of cost into fixed and variable

 Valuation of stock
 Determination of stock
 Determination of price
 Profitability
Absorption costing: It refers to the cost which included both variable and fixed cost at the
time of calculating total cost of production. Adoption of cost decreases the profitability of
company due to addition of fixed cost in the total cost of product. Thus, mostly company is
adopted absorption costing methods rather than marginal costing method.
Difference between marginal and absorption costing method:
Marginal costing Absorption costing
It is a technique which is helpful in making an
effective decision regarding determination of
total cost of production.
It is also considered as techniques which are
helpful in allotment of total costs to the cost
centre which help management to determine
actual cost of production.
Variable is determined as product cost whereas
fixed cost has been determined as period costs.
Fixed as well as variable cost has considered as
product cost.
Cost per unit of output cannot be influenced
due to the changes in the opening and closing
stock.
Changes in the opening and closing stock may
influence the cost per unit.
PARTICULARS January February
Sales (35 per unit) 315000 402500
less:
Cost of Production (12+8+5) 275000 237500
variable selling overheads (1 per unit) 11000 9500
variable cost 286000 247000
Contribution 29000 155500
less:
fixed manufacturing overheads 20000 20000
Fixed Admin & selling cost 2000 2000
total fixed costs 22000 22000
NET INCOME AS PER MARGINAL COST 7000 133500