Cost Estimation and Analysis of Financial Statements through Marginal and Absorption Process

This document discusses the concept of management accounting and its use in preparing financial statements. It covers cost estimation and analysis through marginal and absorption processes. It also explores the limitations of budget management techniques in planning and how management accounting systems can be used to resolve financial issues. The document focuses on Prime Furniture Limited as a case study.

MANAGEMENT
ACCOUNTING

Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
P3. Cost estimation and analysis of financial statements through marginal and absorption
process....................................................................................................................................3
TASK 3............................................................................................................................................7
P4. Limitations and drawbacks of budget management techniques in planning....................7
TASK 4............................................................................................................................................9
P5.MAS use to resolve and overcome financial issues..........................................................9
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
The concept MA is described with the aid of non - financial and financial information as a
means of simply making documents. There is a variety of techniques, like absorption,
marginal for making financial statements to define the net profit (Arroyo, 2012). The study
contains extensive details relating to different accounting methods, preparation strategies as well
as MAS to solve monetary problems. Prime Furniture Limited is the company chosen for this
particular report.
TASK 2
P3. Cost estimation and analysis of financial statements through marginal and absorption
process.
Micro economic techniques:
Cost: This could be described as the total sum of expenditures that exist to accomplish various
kinds of companies operations and services. There are various costs to consider like fixed cost
which remains with the changes in the level of input whereas variable costs use to change as per
the changes in level of production. Direct costs are directly related with execution of business
activities and vice versa with indirect cost.
Cost volume analysis: Cost-benefit management is a systematic process to the concept of
strengths and limitations of alternatives used to assess the best strategy for obtaining benefits
while retaining costs, often called cost / benefit evaluation or cost-benefit analysis.
Variance in cost: It can be described as a method of determining the variation amount among
actual cost and expected cost over a specific operation within company during a specific time
frame. It is viewed in ways which are disadvantageous and advantageous for company.
The summary following of these costing methods is defined as follows:
Method of absorption costing: This is a type of costing methodology that determines and
commonly distributes the costs of various management tools and techniques. The object’s value
is viewed as constant and non-fixed expenses (Chenhall and Moers, 2015).
Calculation of net profit as per absorption costing.
Quarter 1
Particulars Amount
Sales 66000
Less: Cost of sales

Production Cost (78000* 0.65) 50700
Semi variable (78000 * 0.20) 15600
Total variable cost 66300
Less: Closing stock 10200 56100
Gross Profit 9900
Less: Expenses 400
9500
Selling and distribution as fixed 5200
Net Profit 4300
Quarter 2
Particular
Amoun
t
Sales 74000
Less: Cost of sales
Opening stock 10200
COGS (66000*.20) 13200
Production cost (66000*0.20) 42900
Total variable cost 66300
Less: Closing stock 3400 62900
Gross Profit 11100
Less: Selling expenses 2800
8300
Fixed expenses 5200
Net profit 3100
Working notes
Fixed costs 16000
Budgeted cost of production
80000 per
unit
Budgeted fixed cost 0.2
Variable cost per unit 0.65
Marginal costing process: This approach can be interpreted as a means of determining
the costs related to various activities. The fixed values are incurred as time costs, as well as
variable costs are regarded unit expenses during an accounting period.
Quarter 1
Particulars
Amoun
t
Sales 66000
Less: Cost of sales
Opening inventory 0
Production cost
(780000*0.65) 50700

Less: Closing stock
(12000*0.65) 7800
42900 42900
Contributon 23100
Less:
Fixed overhead 16000
Fixed selling expenses 5200 21200
Net profit 1900
Quarter 2
Marginal
Sales
Less: Cost of sales
Opening inventory
(12000*0.65) 7800
Production cost (66000*0.65) 42900
Less: Closing stock
(4000*0.65) 2600
48100
Contribution 25900
Less:
Fixed overhead 16000
Fixed selling expenses 5200 21200
4700
Variable costing profit 1900 4700
opening profit 0 7800
Closing stock 7800 2600
Absorption costing profit 4300 3100
Opening inventory 0 10200
Closing stock 10200 3400
Variable costing profit 1900 4700
Opening inventory 0 7800
Closing stock 7800 2600
Absorption costing profit 4300 3100
Opening inventory 0 10200
Closing stock 10200 3400
In regard to the financial statements generated herein, it can be seen that the net profit
amount is 1900 pounds underneath the cost of absorbing. Net income is of 4700 pounds and also
under marginal costing. Under both methods, the reason of the profit variability is cost

consideration in diverse situations. As well as treatment of fixed cost under absorption as it gets
observed with the level of production.
Product costing:
Fixed cost: This is a form of expense that could not be altered or modified caused by a change in
the amount of production.
Variable cost: It really is a form of expense which can be altered or impacted because of a
variation in the amount of production.
Standard or Normal costing: This costing compares the estimated cost throughout the
accounting reports with the real cost. The differences between the expected as well as the true
cost are then reported and reasons for variation are determined.
ABC costing method: This is a form of costing that identifies operating activities and measures
expenses for each process as per the actual usage of every other product / service. The
methodology relates more actual expenses to indirect costs than standard costs.
Costing position in setting prices: Costing really plays a significant function in setting costs, as
firms adjust rates on the grounds of the same. That is so that if rates are greater than forecasts
then businesses set low prices which help them to sell higher unit of goods by making attention
of large number of customer and vice versa.
Cost of inventory:
Inventory or Product cost: Inventory costs are the expenses which are related with purchasing,
storing, and improving inventory control for a company during an accounting year. There have
been various types of expense of inventories which are as described in the following:
• Prices to order
• Cost to carry
• Retail Prices
• Cost to recruit
Inventory Assessment Methods:
• FIFO: It is indeed a type of system that is connected to the manufacturing of stock that
arrives first in the warehouses must be used at very first in any business scenario.
• LIFO: This is really a methodology which would be connected to taking inventory from
the storage facilities for the final production on the basis of last in first out.

• Weighted average costing method: The approach help in valuing the company's stock
levels which computes the overall price of a commercial product based on the location of
every other component whose quantity.
Many income reports are organized in the financial accounting sector as per the
marginal and absorption cost scheme. Like in the Prime Furniture, income statements were
produced using absorption approaches and marginal expense approaches (DRURY, 2013). In the
case of standard pricing, it can be said to be connected to the calculation of potential costs used
for calculations. Operational-based costing is allocated and measured by rising actions for
various types of operations.
TASK 3.
P4. Limitations and drawbacks of budget management techniques in planning.
Budgetary control: This can be understood as a kind of strategy and attempts to regulate
financial as well as pro-financial outcomes with the help of many separate budget kinds. In this
aspect of budget function is essential because corporate management takes appropriate action to
establish further results with the assistance of these corporate planning. It takes a variety of
budgets and they are as described in the following:
• Operating budget: This is a type of budget that requires manager to decide the amount
of goods required to complete the various activities for a stated amount of time-
frame (Tucker and Lowe, 2014). Throughout the Prime Furniture Limited, the
accountants using thing budget plan the approximation of different operations and
activities which further enables managers to make effective decision. s In this plan, the
managers are taking disciplinary action on the achievement of goals by executing
specified activities. The main advantages and disadvantages are discussed underneath:
Benefits: This structure is beneficial to businesses when measuring the availability of new forms
of services used in prime furniture to reach the desired target in appropriate time.
Drawbacks: The main problems with this proposal are that it takes much more time and also
charges for money distribution and increase overall cost for company.
• Capital spending plan: All departments or lower units shall include a company's entire
spending plan for a year. It discovers that a complex and expensive business strategy is to
track sales revenue, production capacity etc. The financial report and the financial

statement are calculated as per the timetable, in compliance with Prime Furniture
Limited.
• Benefits: The financial position of Prime furniture limited is evaluated with a specific
budget evaluation summary (Kokubu and Kitada, 2015).
• Drawback: This budget's biggest concern is that changes under it are expensive to
replicate which makes burden over the manager of respective company impacting the
productivity level for that specific time frame.
Alternative budgeting method
Cash budget: A declaration defining all cash revenues and expenses as well as focusing
on perceptions for a specific time period in the financial reporting. After making plans of all
expenditures like operating budget, capital budget, master budget and purchasing budget the
actual cash budget are generated (Hiebl, 2014). Financial instruments and transactions and
spending must therefore be recorded in this budget. It is a text that is designed specifically for
external players and can't be readily modified after release. This budget is planned in the context
of the above business which has certain advantages and disadvantages such as:
Benefits: This is helpful for Prime furniture to handle the cash costs and profits on a regular
basis and make specific reserve that can be used to meet any sort of contingencies arising and
impacting business performances.
Drawbacks: This proposal is depended upon projections and companies can't totally depend on
it for future financial planning. Thus manager of respective company have to closely review each
operation and mark the cash used within operation that can be a hectic and time consuming job.
Pricing:
Pricing strategies:
• Penetration pricing strategy: Essentially, the penetration revenue model lowers the cost
of goods and services to easily hit a significant share of the marketplace. The strategy
works with customers who switch into the new business available of goods at affordable
price.
• Skimming pricing strategy: Price skimming is really a useful pricing tactic by which a
marketing company originally establishes a relatively high price per unit or service and
afterward lowers the price over moment. The company, when demand of first consumers
becomes met then reduces the price to attract more commodity-sensitive party.

How competitors determine prices?
Businesses use to fix the most suitable prices by keeping in mind the actual competitive
market trends and exercises of rivals firms in same industry. They evaluate major functions that
are now being conducted by other companies and establish strategies which focus to lower the
operating cost and set decent rate of goods and services that help to earn faithful profit and
increase customer share.
Consideration of supply-demand: Supply and demand is an economic principle of
setting prices within any sector. It suggests that, till the quantity required (on current prices) for a
particular product, like labour and liquid capital instruments, is fixed at a rate equivalent to the
total offered (to current prices), which would be equivalents to structured economic demand and
supply.
Strategic planning:
SWOT Analysis: This is a method of assessment of the strength, vulnerability, possibilities and
risks of the organization over a given time period. The following advantages and weaknesses
such as:
Benefits: An entity, organizational unit, individual or team can be included in the SWOT study.
For example, the SWOT method may be used to assess a product or brand, acquisition or
relationship, or to outsource an operating business. It also helps in determining a specific supply
source, economic cycle as well as the demand of products or application of technology for Prime
furniture.
Drawbacks: This approach doesn't have a framework for ranking one element’s value above
another. Nonetheless, the true impact of each factor on the goal is hard to determine.
TASK 4
P5.MAS use to resolve and overcome financial issues.
In general, the lack of income channels creates financial problems, which arises problems
for companies to perform profitable functions (Otley and Emmanuel, 2013). Some of the
major financial challenges faced by prime furniture are:
• Errors in the accounting records: It can be characterized as a financial issue related to
intentional or unintentional geometric forms manipulation that leads to inaccurate

accounts planning. Thus in prime furniture manager are confronted with the issue that has
implications for their financial statements (Suomala and Lyly-Yrjänäinen, 2012).
• Inadequate financial asset security: The possibility of losing assets is a sort of
investment problem. This dilemma occurs due to a lack of fixed and unfixed asset
control. o prime furniture experience other problems as a result of this issue, such as lack
of mention of raw materials, over expenses on purchase, spoilage of material etc.
MA methods for reacting to financial problems:
• Benchmarking: This approach compares the organization's financial dimensions to rival
companies with the intention of detecting adverse variances (Sánchez-Rodríguez and
Spraakman, 2012). In the above-mentioned business, they use that criterion to evaluate
their specific monetary problem. Manager use to compare the financial elements with the
other firms dealing
• Key performance indicator: This technique is linked to the reasonable assumption of
financial and non-financial elements could be characterized as. The financial element
involves business performance, costs and etc. while non-financially; employee stress
levels, relations, etc. are included.
• Financial governance: This is a strategy wherein the entire financial behaviour of a
business entity is actually reported over even a particular amount of time can be
identified (Schaltegger and Burritt, 2017). True monetary problems are identified using
this approach and theoretical strategies are employed to address the problem. By using
this manager of prime furniture use to make ways to prevent above issues and take
prevention steps to avoid these situations in future.
Expertise’s of management Accountant:
• Improved communication skills: Good accountants would have improved
communication ability to communicate financial data within the group working of
different operations.
• Good understanding of accounting principles: Accountant must have full accounting
information in order to be able to generate financial statements.
Such management capabilities should be used to fix financial problems. It is because
undertakings can resolve any form of issue mostly on foundation of this and can direct company
executives to solve problems.

Comparison of companies in order to solve financial issues by help of MAS:
Basis of
difference
Tesco Mark & Spencer’s
Monetary
issue
The company faces issues related to
lack of monetary resources.
The major issue faced by company is
over expenses over different jobs.
Techniques to
solve issues
To address the financial issue this
company used benchmarking
technologies which discover mistakes,
within financial statements as
compared by another organization.
In order to element the financial issue
manage uses KPI financial elements
which help to set the indicators at
different job so that higher expense
can be controlled.
MAS In order to resolve the issue company
implement cost accounting system to
record the overall cost transaction and
manage these costs.
Manager use to record the total cost
involved on total cost and make
proper budgets for next period to
remove over spending.
CONCLUSION
In the end, it is concluded that MA is crucial for making crucial internal decision and
increase overall profit margin of company. Within the measurement of business statements
preparation, there seem to be a critical variety of strategies, like absorption and incremental
processes. It leads to incomprehension many times as company do not have proper records
regarding the pricing policies. The weighted average is used by businesses to calculate the
quantity and the price of the goods produced.

REFERENCES
Books and journal:
Arroyo, P., 2012. Management accounting change and sustainability: an institutional approach.
Journal of Accounting & Organizational Change. 8(3). pp.286-309.
Chenhall, R. H. and Moers, F., 2015. The role of innovation in the evolution of management
accounting and its integration into management control. Accounting, organizations and
society. 47. pp.1-13.
DRURY, C. M., 2013. Management and cost accounting. Springer.
Hiebl, M. R., 2014. Upper echelons theory in management accounting and control
research. Journal of Management Control. 24(3). pp.223-240.
Kokubu, K. and Kitada, H., 2015. Material flow cost accounting and existing management
perspectives. Journal of Cleaner Production. 108. pp.1279-1288.
Kotas, R., 2014. Management accounting for hotels and restaurants. Routledge.
Otley, D. and Emmanuel, K. M. C., 2013. Readings in accounting for management control.
Springer.
Sánchez-Rodríguez, C. and Spraakman, G., 2012. ERP systems and management accounting: A
multiple case study. Qualitative Research in Accounting & Management. 9(4). pp.398-
414.
Schaltegger, S. and Burritt, R., 2017. Contemporary environmental accounting: issues, concepts
and practice. Routledge.
Suomala, P. and Lyly-Yrjänäinen, J., 2012. Management accounting research in practice:
Lessons learned from an interventionist approach. Routledge.
Tucker, B. P. and Lowe, A. D., 2014. Practitioners are from Mars; academics are from Venus?:
An investigation of the research-practice gap in management accounting. Accounting,
Auditing & Accountability Journal. 27(3). pp.394-425.