[SOLVED] Costing and Profit Calculation

This assignment requires students to calculate the profit or loss of a company using different costing methods, such as absorption costing and marginal costing. The student is provided with data on sales value, cost of sales, opening inventory, production, and closing inventory. They are asked to calculate the gross profit, expenses, selling and administration costs, and finally, the profit. The assignment is divided into two quarters, each with its own set of calculations. Students must carefully analyze the given data and apply the correct costing method to arrive at the correct profit or loss figure.

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1: Management accounting system and their essential requirements........................................1
P2: Different types of management accounting reporting system...............................................3
M1: Benefits of using various types of accounting system.........................................................4
D1: Critical evaluation of using accounting and reporting system integration...........................5
TASK 2............................................................................................................................................5
P3: Use of various costing method in order to calculate net profit.............................................5
M2: Analysis of using various accounting techniques................................................................6
D2: Evaluation of various data that are collected for the net profit.............................................6
TASK 3............................................................................................................................................6
P4: Advantage and disadvantage of using planning tools...........................................................6
M3: Evaluation of using effective planning tool.........................................................................7
D3: Critical evaluation of the financial issues.............................................................................8
TASK 4............................................................................................................................................8
P5: Comparison with other organisation about use of management accounting in resolving
financial issues.............................................................................................................................8
M4: Evaluation of financial issues..............................................................................................9
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................11

INTRODUCTION
Management accounting is one of the crucial process and tool that aimed on the effective
and efficient utilisation of organisational resources in order to support managers in managing
task of enhancing their customer value and shareholder interest. The primary motive behind
using various types of management accounting system to record, summarise and analysis all the
essential financial transactions that are done by the company during an accounting period of
time. Generally, it will be more easy for Airdir company to keep regular entries of the journals
transactions that are occurred while production process so that chances of taking effective
decision can increase (Hilton and Platt, 2013).
This project report is based on discussing various types of accounting and reporting
system that are helpful for an organisation. Apart from this, utilisation of costing methods that
can be taken into account for evaluating net profitability of the company. Along with that
advantage and disadvantage of planning tools are covered in this report. At the end of the project
comparison with various organisation about the use of accounting system in resolving financial
issues is being done effectively.
TASK 1
P1: Management accounting system and their essential requirements
In accordance with some other business organisation, it has been determining the most of
the manager can have to take into account reduce all kind of issues those are associated with an
organisation. Manager required to examine all kind of drives client value and shareholder interest
so that they can make valuable outcome for Airdri. They used to examine and make effective
decision regarding all kind of activities that are helpful for increasing customer value.
Management accounting system is one of the essential process of measuring as well as
reporting data about economic activity within organisation. It would be helpful for the manager
in planning, performance evaluation and overall operational control (Parker, 2012). According to
the nature of resources managers uses financial information so that effective decision can be
made by taking certain responsibility. It is an essential tool that provides accounting information
in order to carry out management activities such as planning, formulating strategy and
optimizing the proper use of resources.
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Definition: According to ICWA: Management accounting is valuable system of
collecting and presenting of relevant information those are associated with the enterprises for
planning and making effective decision. The data provided through using management
accounting is basically used for the internal operation of the management and distributed to
outside parties. It can be helpful for an organisation to examine and selected various issues that
are related with Airdri.
Types of management accounting system:
Cost accounting system: It is known as one of the effective design that is used by
company in order to estimate the overall cost of their producing any product or services. The
primary purpose of using this system to evaluate profitability, stock valuation and maintaining
cost up to a definite level. It is having been that it is much more tough task for any manager to
predict accurately the cost of producing on unit. The main aim of managers is to take essential
action that can help in reducing total cost for Airdri. There are certain types of costing system
that are required to be analysed while examine the production cost such as normal, standard and
actual costing.
Inventory management system: It is said to be one of the reliable accounting system
that is used by Airdri in order to evaluate the entire management inventories those are stored
during the period of time. Similarly, it happens to be more vital process that is looking after the
maintenance of inventory products whether these are valuable of Airdri Company. It is related
with the production process in which accountant need to keep record through using stock bills,
work orders and other invoices (Burritt, Schaltegger and Zvezdov, 2011). There are carious tools
that are needed to be taken into account while keeping record of stock such as FIFO, LIFO and
AVCO.
Job costing system: It is more reliable process that is taken into account for evaluating
total cost they are incurring on the production of a particular job. This seems to be larger term
that is used globally in construction sector. In case Aridri wants to use this system they need to
analyse what amount of product they are producing during a financial period. This is associated
with the help of using certain costing methods such as standard, process and product.
Price optimisation system: This management system is simply used by the Airdri to
determine proper utilisation of resources that can lead to generation of maximum outcome for the
company. The manager tends to use this system to analyses the perception of customer regarding
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the price for the products those are produce by the company by the help of using essential
resources. It is simply use as numerical system through which Airdri company can easily able to
determine customer thinking ability toward the cost they are going to pay for the products.
P2: Different types of management accounting reporting system
In context to record various financial as well as non-financial transactions company is
liable to make use of various system that can help them to analyse total outcome they are getting
during the period of time. reporting is the process of delivering information to different level of
management so that it can enable in judging the effectiveness of their responsibility position and
become base for taking crucial measure in case of any urgency (Van der Stede, 2011). In order to
deal with certain implication those are affecting the entire growth of the company is taken into
account. It would be valuable chances of gaining opportunity to every department that can be
held accountable for distributing particular information about the internal as well as external
factors. Reporting is the primary document that can be helpful to record financial data that are
collected from various sources into different format.
TYPES OF MANAGEMENT ACCOUNTING REPORT
Performance report is a report on performance of organization a whole or a particular
segment of company. This report represents some indicators on basis of which performance is to
be evaluated to see whether money spends provides desired or there is some deviation. In last
few years Airdri is performing more than its set benchmarks as overall company is growing well
together with that its subsidiaries are growing well. Performance of every individual is also
considered as human resource is greatest resource a company. It can be analyzing by the help of
using financial reports that are made by the company through taking information from various
departments. It can lead to overall growth and efficiency and assist in building strong reputation
in the market.
Account receivables report reflects list of unpaid consumer invoices and unused credit
memos. This report is a primary tool to determine which invoices are overdue for payments.
Summary of accounts receivable due in every financial year is determine by this and also reasons
for time leg in receiving amount on time can be determine and respective measures are taken to
overcome this issue as late payments will lead to poor finances for company (Banerjee, 2012).
Airdri manages its account receivable very efficiently as it follows a good accounting system and
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fund management team who recalls their creditors on time to make payments. By the help of this
report company can easily be able to take information about all those customers that are
Inventory management report helps to analyses how much inventory company have as
row material, work in progress, finished goods. This information helps stock department to
always be available with sufficient stocks and also ample amount of finished stock so that
organization do not suffer extra cost because of extra inventory or any loss due to non-
availability of finished inventory. Airdri had a very efficient inventory management team but in
spite of this sometimes due do some false information extra inventory cost is beard. There are
various techniques that can used to analyze the inventory position such as EOQ, Inventory
turnover ratio and ABC costing.
Job cost report lists each job an organization is working on and list total cost that is
incurred on a job previous year. Different type costs are included in a job such as materials cost,
labor cost, field overhead, subcontractor cost, liquidated damages. Cost which is not directly
attributed to job is main office expense and this report shows cost accrued not paid. Airdri is an
organization having various segments and different jobs as, it is very beneficial to determine cost
for every job to conclude that whether a particular job is generating any amount above its cost
(Lavia López and Hiebl, 2014).
M1: Benefits of using various types of accounting system
From the above mentioned various management system Airdri can used it in evaluating the
overall growth and financial condition of the company. They all are equally beneficial for an
organisation. Some of them are:
 Cost accounting system is related with overall collection in respect to provide
information to management to ascertain profitability of each areas of activity.
 Inventory management system can help manager of Airdri to determine total use of
inventory in the production process.
 Price optimisation can assist in analyse perception of the customer regarding the product
price which is fix by Airdri.
 Job costing system is being beneficial in analysing the total cost involve in each job of
Airdri that are performed by an organisation.
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D1: Critical evaluation of using accounting and reporting system integration
Management accounting system and reports are interrelated with each other as they guide
managers to evaluate organisational position and performance. Cost accounting system is used to
analyse the cost which is involved in each process of Airdri. Inventory management system is
used to keep a track record of stocks that are used by the organisation in manufacturing process.
All the management reports are used by the managers to analyse total amount which is owed by
the customers. Performance reports are used to evaluate performance of all the employees of
Airdri to provide them benefits accordingly.
TASK 2
P3: Use of various costing method in order to calculate net profit
In case of any production process, cost is playing an eminent role in entire arrangement of
resources which will be used by Airdri in manufacturing their products. It is an amount of value
that is paid or given in order to get something in return. Cost is mainly associated with monetary
valuation of material, resources, time and risk incurred during the period of time. It is basically
said that singular form that consists of overall sum of total team that is related with all of the
pieces within an organisation. Like, cost of delivering any kind of services that consists of
material value and labour costs (Albelda, 2011). In accordance with the legal contract to make
evaluation of budgets that are made by the company during the period of time. In the production
situation, a cost is the considered as value that has been used up to deliver something and hence
not present for anymore use. There are various types of costs that are related with production
process some of them are mentioned below:
Absorption costing: It is said to be that cost which are used during the manufacturing
process. It consists of both variable and fixed costs at the time of calculating gross profit in order
to get net profit. It is called as full costing that lead to impacts the overall decision making of an
organisation. At the time of evaluating the cost of goods sold fixed cost can get absorbed. It is
managerial accounting cost techniques that are expensing all costs that are related with
production of a specific product that are needed for GAAP as external reporting.
Marginal costing: It refers as those cost which are used in the production process
additional with the product and services. It consist of variables cost and fixed cost get written off.
Marginal cost is valuable change in the total cost when the quantity that is produced is related
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with incremented by one another. It is basically related with those cost which is incurred on the
producing one more units of products (Herzig and et. al., 2012).
M2: Analysis of using various accounting techniques
There are various types of techniques which are valuable for the company while
calculating net profit of an organisation such as Airdri. Some of them are Standard costing which
will be more effectively use by manager that is exactly planned by the production in-charged.
Whereas marginal cost is another techniques which will be used by the accountant to make
future decision regarding whether to make investments in different project of the company.
D2: Evaluation of various data that are collected for the net profit
From the calculation of net profit by the help of using both the costing method it has been
found that marginal costing is much more effective in accordance with the absorption costing.
With the help of standard costing they are going to get a profit of 4700, whereas the profit which
is collected with the use of absorption costing is 5700. The overall decision is based on using
absorption that can lead on effective formulation of actions that are helpful in attaining overall
decision of the company.
TASK 3
P4: Advantage and disadvantage of using planning tools
Budget is basically related with the estimation that is made by Airdri for the production of
product and services. It can help them in analysing total expenses and cost they are going to
incurred. It can be related with total sales, production and raw material budgets. There are
various kind of risks that are associated with the production which can only be control with the
use of effective planning tools. Some of them are mentioned underneath:
Forecasting tools: It is specifically refers as that tool which airdri can uses in analysing
future risks those are going to impact their business more badly. It is more valuable in
developing vital ideas and taking decision for upcoming activities on continuous basis. It is
mostly begin with the certain assumption those are being associated with management
assumption and effective judgement (Richardson, 2012).
Advantage: The primary benefit of using this particular tool is to deliver the business with
more effective decision in relation to future growth of an organisation. It is entirely based on the
qualitative nature of information’s.
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Disadvantage: It is basically not crucial to estimate accurately the future. Because of
nature of forecasting that cannot be able to come up with innovative variation because of which
decision cannot be made effective.
Scenario tools: It refers as the more thinking analysis. These planning tools assist Airdri to
make use of more flexible plans those are used in more critical situations. Operations Company
used to adopt these tools to necessary actions (DRURY, 2013).
Advantage: By the help of this planning tools that is establish with proper thinking in
relation to various alternatives. It is more valuable in better understanding and objective of
employees and managers. This can lead to deal with any critical condition as per determining
their final results.
Disadvantage: This particular tool seems to be tougher to get in some critical condition.
They are in early planning that cannot have certain right scenario to deal with hard matter in an
organisation (Advantages and Disadvantages of Scenario, 2011).
Contingency tools: It is said to be an effective planning that can derive for a positive
results that is often reliable in strategic formulation. It is basically valuable in analysing the total
risk factors those are present within Airdri. These are mainly associated with the local
government as well as competitive business organisation.
Advantage: By the help of this planning tools company can easily be able to determine
business risks that are arises without making any alarming. It has been seen the company always
be ready to resolve those issues by formulating early plans (Bennett, Schaltegger and Zvezdov,
2013).
Disadvantage: It is much tougher to deal with certain critical situation because risks are
sometime more ascertain to tackle. It can affect directly the overall profitability and efficiency
level of the company.
M3: Evaluation of using effective planning tool
In accordance with the more effective outcome as the future of the company that need to be
make use of planning tools that can help in better examination of budgetary control for an
organisation. There are various planning tools that can be valuable in predicating positive results
in faster manner. Few of them are forecasting technique tools which will be used to make
evaluation of future sustainability and growth for Airdri Company. There are certain other
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planning tools that are more effectively valuable for the minimising the risks those are associated
with the company.
D3: Critical evaluation of the financial issues
It has been analyse that there are various other financial issues those are related with the
department that can affect the overall growth and profitability position of the company. Because
of this, company have to face internal as well as external implication of an organisation. Some of
them issues are profit level, cash flow issues and other issues those are related with the
manufacturing sectors. In order to deal with all those issues management required to make vital
decision through implementing key measure such as key performance indicators, financial
governance and other tools.
TASK 4
P5: Comparison with other organisation about use of management accounting in resolving
financial issues
In most of the business organisation, it has been seen the plenty of financial issues are
arises because of various reason. It can directly or indirectly can impact the operational activity
of the department. This seems to be basically crucial for Airdri to analyse all the resource more
effectively so that chances of getting better outcomes in near future time. Some of the issues that
are basically faced by various organisation such as, charity or non-profit organisation or others
companies are essential to analyse. Some of the crucial issues that are faced by these
organisations are:
Cash flow statement: Most of the cases, it has been seen that plenty of financial issues are
associated with the various activities such as operating as well as investing activity. In case of
excess revenue generated by the company can lead to huge problem for the company. with the
less investment made by the investors can also create various issues (Boyns and Edwards, 2013).
Profitability issues: This seems to be most effective financial problem that are directly
impact the overall profitability of an organisation. Most of the time, company have to incurred
maximum cost while producing various products and services. In case that are amount is not
attain during the time can lead to huge loss to the company.
There are various management accounting system that can respond to various financial
issues. Some of them are mentioned below:
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Benchmarking: It is an set standard which is made by Airdri company in comparison to
other company and act accordingly to face their internal issues related with the finance
department.
KPI: It is basically associated with the financial performance of the company by taking
information about their financial stability from last year report. It can resolve through comparing
them with the present year report.
Balance score card: This is simply is a strategy performance management tool which
semi-standard structured. It can be used by the manager to keep track of the execution of
activities those are performed within an organisation.
Financial governance: It is related with rules and regulations that are made from the legal
bodies in order to regulate their business operations effectively. The motive behind this is to
control impacts on profitability.
ABC costing: It is simply related with the stock valuation. As most of the time company
have to face inventory related issues that can create financial weakness for longer period of time.
Airdri Unicorn grocery
This is one of the great manufacturing
companies that can resolve their financial
issues by the help of using situational analysis.
Or by the help of using KPI measures and
benchmarking.
This seems to be another production related
company which is working with the motive of
earning profitability. It can be resolve their
financial issues which is related with stock is
Just-in-time. Or can be resolve through using
ABC costing and separate the stock according
to the nature of stock kept by the company.
M4: Evaluation of financial issues
There are various financial problems that can affect the overall efficiency and growth of
the company. It can be related with cash flow and profitability position of the company which is
primary impact the internal department of the company. It can be resolve through using various
accounting system such as financial governance and benchmarking.
CONCLUSION
From the above project report, it has been concluded that management accounting is one of
the primary aspect that are help an organisation to plan or record their financial transaction into
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their respective format. For this purpose, various types of accounting and reporting system are
needed to be taken into account. Budgets can be controlled through using planning tools that can
lead to increase the overall growth and sustainability of the company. Further, company need to
analyse their financial issues by the help of using management accounting so the changes of
growth can be attain in near future time.
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REFERENCES
Books and Journals:
Hilton, R. W. and Platt, D. E., 2013. Managerial accounting: creating value in a dynamic
business environment. McGraw-Hill Education.
Parker, L. D., 2012. Qualitative management accounting research: Assessing deliverables and
relevance. Critical perspectives on accounting. 23(1), pp.54-70.
Burritt, R.L., Schaltegger, S. and Zvezdov, D., 2011. Carbon management accounting:
explaining practice in leading German companies. Australian Accounting Review, 21(1),
pp.80-98.
Van der Stede, W.A., 2011. Management accounting research in the wake of the crisis: some
reflections. European Accounting Review, 20(4), pp.605-623.
Banerjee, B., 2012. Financial policy and management accounting. PHI Learning Pvt. Ltd..
Lavia López, O. and Hiebl, M.R., 2014. Management accounting in small and medium-sized
enterprises: current knowledge and avenues for further research. Journal of Management
Accounting Research, 27(1), pp.81-119.
Albelda, E., 2011. The role of management accounting practices as facilitators of the
environmental management: Evidence from EMAS organisations. Sustainability
Accounting, Management and Policy Journal, 2(1), pp.76-100.
Herzig, C and et. al., 2012. Environmental management accounting: case studies of South-East
Asian companies. Routledge.
Richardson, A.J., 2012. Paradigms, theory and management accounting practice: A comment on
Parker (forthcoming)“Qualitative management accounting research: Assessing
deliverables and relevance”. Critical Perspectives on Accounting, 23(1), pp.83-88.
DRURY, C.M., 2013. Management and cost accounting. Springer.
Bennett, M.D., Schaltegger, S. and Zvezdov, D., 2013. Exploring corporate practices in
management accounting for sustainability (pp. 1-56). London: ICAEW.
Boyns, T. and Edwards, J.R., 2013. A history of management accounting: The British
experience (Vol. 12). Routledge.
Online
Advantages and Disadvantages of Scenario. 2011.[Online]Available through: <
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1736110>.
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APPENDIX:
Income statements by using absorption and marginal costing
Statement of profit and loss using absorption
costing
Quarter 1
No. Of
units ￡/unit ￡ ￡
Sales value 66000 1 66000
Less: Cost of sales
Less: Opening inventory 0 0.85 0
Add: Production 78000 0.85 66300
Less: closing inventory -12000 0.85
-
10200 -56100
Gross profit 9900
Expenses
Selling &Administration costs -5200
Profit 4700
Less: Under absorption -2800
Profit reconciled 1900
Quarter2
No. Of
units ￡/unit ￡ ￡
Sales value 74000 1 74000
Cost of sales
Opening inventory 12000 0.85 10200
Add: Production 66000 0.85 56100
66300
Less: closing inventory -4000 0.85 -3400 -62900
Gross profit 11100
Expenses
Selling &Administration costs -5200
Profit 5900
Statement of profit and loss using marginal costing
Quarter 1
No. Of units ￡/unit ￡ ￡
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Sales value 66000 1 66000
Cost of sales
Opening inventory 0 0.65 0
Add: Production 78000 0.65 50700
50700
Less: closing inventory 12000 0.65 -7800 -42900
Contribution 23100
Less: fixed costs -16000
Less: selling &administration -5200
Profit 1900
Quarter 2
No. Of units ￡/unit ￡ ￡
Sales 74000 1 74000
Cost of sales
Opening inventory 12000 0.65 7800
Add: Production 66000 0.65 42900
50700
Less: closing inventory 4000 0.65 2600 -48100
Contribution 25900
Less: Fixed costs -1600
Less: selling &administration -5200
Profit 4700
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