Comparative Study of Costing Techniques

This assignment requires a comparative study of different costing techniques, such as marginal costing and absorption costing, to determine the cost of a product. It also involves adopting planning tools like budgetary control, benchmarking, and KPIs to respond to financial problems. The assignment aims to understand the application of management accounting practices in pharmaceutical companies and other industries, highlighting the importance of effective cost management and performance measurement.

Management accounting

Table of Contents
Introduction......................................................................................................................................1
LO 1- ...............................................................................................................................................1
Management accounting and its essential type of management accounting system and
different methods used in management accounting report .......................................................1
Lo 2..................................................................................................................................................6
calculate cost using appropriate techniques of cost analysis for preparing income statement. . .6
Project y.........................................................................................................................................11
Explaining advantages and disadvantage of different types of planning tools of budgetary
control.......................................................................................................................................11
LO 4 ..............................................................................................................................................14
Analysing how management accounting system helps in responding to financial problems.. 14
Conclusion.....................................................................................................................................15
References......................................................................................................................................17

Introduction
Management accounting is the significant part of accounting which usually used for
internal purpose of the organisation. This accounting provides necessary information to manager
which used to determine the aim of the company . Managerial accounting essential to prepare
planning , strategies which used to accomplish the goals and objectives of the company within
the specified time. Manager need not to be follow rules and regulation to prepare managerial
accounting .It use to take decision making and increase efficiency that helps to increase
profitability and growth of the company. manager need not require any audit process because it
prepare for accomplish the internal purpose (Maas, Schaltegger and Crutzen, 2016). Manger
focus on risk management , strategic management , performance management that helps to
accomplish the goals.
Present report based on Unicorn company is the privately held which provide financial
services to people. This report will define management accounting and essential types of
management accounting system . It also explaining about the managerial accounting report
prepare by company. Further , company adopt marginal costing and absorption costing for
preparing income statement. Company adopt essential planning tools of budgetary control and
its advantage and disadvantages. This report will also explain that organisation adopt
management accounting system to respond financial problems.
LO 1-
Management accounting and its essential type of management accounting system and different
methods used in management accounting report
Management accounting- It is the integral part of the accounting which provide necessary
information to manager for formulate strategies and planning that helps to determine long term
goals. Managerial accounting focus on monetary and non monetary data which use to take
decision for achieving the long term goals and short term goals of the company. Unicorn
company adopt this accounting because it is mandatory to analyse break even point , forecasting
the business profitability and sales, new product analysis and capital requirement that leads to
increase profitability , sustainable growth of the company. manager can solve the problem with
the effective manner with the help of management accounting (Adler, 2018). It focuses on three
area such as-
1

Performance management - manager of the Unicorn can develop and manage business
practices which used as to improve performance of the company that helps to reduce unnecessary
cost and achieve goals. Performance management also helps to increase efficiency , morale of
the employees.
Strategic management - management accounting is significant to formulating rational
strategies that ultimately helps to accomplish the overall goals and objective of the company at
the point of time.
Risk management- Management accounting useful for identifying ,measuring and
controlling the risk. Manager can determine capital structure also determine the amount
investment that need to eliminate the future risk . it helps to accomplish the goals and objective
of the company.
management accounting is differ from financial accounting because management accounting
provide information to manager for internal purpose but financial accounting provide necessary
information to shareholders. Further management accounting helps to prepare strategy for
achieving the goals and objective whereas financial accounting represent the financial position of
the company.
Essential requirement of management accounting system
Unicorn company adopt various types of management accounting system such as job
costing , cost accounting , price optimisation and inventory management which play crucial role
in management accounting because it helps to determine the cost and quality of the product
(Messner,2016). Company can providing quality goods and services to the customer at the
affordable price that helps to increase profitability , reputation and sustainable growth of the
company.
Job costing - It is the fundamental costing of management account which track records
of cost and revenues associated with particular job. This accounting system ascertain the labour
cost , material cost , overheads to determine cost of the job. It also provides useful cost
information to customers under the contract. unicorn company can adopt job costing because it
helps to quote price and profits in the separate job specification which receive from customers
order. job costing use as to comparing previous year job costing and recent cost costing that
helps to take corrective action to reducing the cost on the suitable job. This costing system is
required for Company because can eliminate the excessive cost on job which need to provide
2

serveries at the lower cost that helps to increase profitability , customer loyalty and growth of the
company.
Pros-
 Management of the company can analysis the material , labour cost and overhead cost on
the particular job that helps to accomplish the profitability target.
 Manager can use job costing for preparing future budgets which helps to achieve goals
and objective of the company.
cons-
 Job costing is more expensive because it required supervisor to determine the cost.
 It is more critical work and includes historical data so there is lot of chance of errors.
Cost accounting - Unicorn adopting this system of management accounting which deals
in collection, analysing, organising and controlling the cost. Cost accountant of the company
adopt cost accounting system which represent the revenue and cost of the process . cost
accounting includes direct cost such as direct material, direct labour and direct expenses & also
includes indirect cost such as selling and administration expanses , advertisement expanses and
all overheads which helps to ascertain the cost. Cost accounting is required for company because
it provide all cost information that helps to controlling the cost and also check the accuracy of
financial account. Company can compare the cost with historical data that helps to reducing the
cost of production , increase profitability and improve financial position.
Pros -
 Cost accountant eliminate the non profitable activities and enhance the profitable
activities that helps to achieve goals of the company.
 Unicorn can control the cost by comparing previous year data and current year data.
cons -
 Unicorn company can't analysis the futuristic situation of the company that limpact on
increasing cost due to changing in external factors.
Price optimisation - Unicorn adopt this accounting system which used to determine such
price which customer willing to pay against the product (Kastberg and Siverbo, 2016).
Customers demand varies at different price level so company use this system for calculating the
price. It is required because it helps to provide quality product at the reasonable price that helps
3

to increase loyal customers, increase profitability of the company. price optimisation use to
ascertain the cost of the product so company can gain attractive profits .
Pros -
 Company can enhancing their selling growth by providing goods and services at the
reasonable price.
 Price optimisation helps to take decision regarding controlling the cost that helps to
increase profitability and sustainable growth of the company.
cons-
 Unicorn not able to accurate price of product because customers needs and preference
changes.
Inventory management - Unicorn adopt this management accounting system because it is
essential to manage the flow of the goods and services which helps meet out the customer
demand. inventory management focus on balancing among the replenishment lead time ,
carrying cost , shortage cost , inventory forecasting which is helpful to reducing the unnecessary
cost. Company can manage the production level which provides quality product at the
reasonable price that helps to increase customer satisfaction. Inventory management is important
to reducing the cost such as carrying cost , handling cost , shortage cost. It is require for
achieving efficiency and productivity level and reducing the cost that helps to accomplish the
target like sales target , profit target , customer target (Messner, 2016).
Pros-
 Unicorn company can meet out the customer needs and preference at the time of demand
that helps to achieve the profitability of the company.
 It is significant system of management accounting which use to reduce the unnecessary
cost like handing cost , shortage cost. company can deliver product to customers at the
reasonable price that helps to maximising the profits.
Cons-
 Unicorn can't determine the production level and cost because customers needs and
preferences changes according to trends.
Organisation adopts different type of management accounting report -
Unicorn company prepare management accounting report which helps to formulate
effective strategy for enhancing the performance. Management accounting report rep[rent the
4

clear picture or health of the company. This report use to monetary and non monetary benefit
to good performer what helps to boost the employee's morale and motivation. managerial
accounting report need to take decision regarding invest money into the goods and services that
helps to increase profitability. Manager prepare budgetary report , account receivable report ,
job costing report , inventory and manufacturing report, performance report etc that can be
prepare on monthly , quarterly and annually basis.
Budget report - Unicorn prepare budget report which analyse the performance of the
company. manager can compare previous year budget report and current year budget. If , any
deviation found then corrective action taken for accomplish the goals and objective of the
company. Unicorn can enhance the efficiency of the business by improving the cost and
controlling the cost. Manager can provide monetary benefits to employees for boost the morale
and motivation that helps to increase productivity level. manager can take appropriate decision
without any delay that help[s to achieve goals and objective of the company . It is essential
because company can take competitive advantage and grab future opportunities which improve
business performance. It also contributes to build image by improving performance that helps to
maximise the profitability and growth of the company (Van der Stede, 2015).
Account receivable ageing report - Unicorn prepare this report because it represents the
cash inflow and outflow within the year. If company deliver goods and services on credit then
they have to include separate column for invoice that are thirty days , sixty days and ninety days.
This report helps to find out the collection of the company . This report understand their ability .
if company's ability is strong they can provide goods and services on credit that helps to increase
loyal customers and profitability. If company ability is weakness they not able to provide
services on the credit which effect to customer base. Unicorn can take corrective action when
customers not able to pay their amount so they can recover the amount. If cash flow inflow is
higher than outflow that repent that company able to pay debt. Account receivable account use to
manage cash flow that helps to improve financial position and build image in the market .
ultimately it helps to accomplish the goals and objective of the company such as profit
maximization , sustainable growth etc.
Job cost report - This report represent the cost or expenses occur for particular project. it
helps to determine the cost should be charge on particular job that helps to formulate strategy for
increase the profitability of the company. This management report to enhance the profitability
5

activities that helps to achieve the goals and objective . manager can eliminate the non
profitability activities that helps to reduce wastage of material , cost and time which leads to
increase profit margins of the company. Thy can providing services at the lower cost that leads to
increase customer base, profitability and growth of the company (Messner, 2016).
Inventory and manufacturing report- it is the part of management accounting report
which would increase efficiency of manufacturing activities. this report use to analysis the
quantity of production and cost of the product. Inventory and manufacturing report helps to
reduce the carrying cost , handing cost , cost of the particular product. Company can provide
goods and services to customers at the suitable price and meet out their need on the time of
demand . It is useful for increasing the sales growth . profitability and image of the company.
Performance report - manager of the Unicorn company prepare performance report which
represent the performance of the functional department and employee's performance. This report
is important which use to prepare effective strategies for improving the performance of the
company that helps to achieve goals and objective of the company. Manager can plan , organise
and controlling the activities that helps to increase efficiency of the employees . main objective
of prepare this report that is formulated the accurate strategy for achieving the mission and vision
of the company. This report helps to reduce labour turnover coast and increase profitability .
Other report - Unicorn company also prepare project report , production report and other
information report which also work for achieving the goals and objective of the company.
manager must have assess to authenticate accounting report which is essential to take appropriate
decision to accomplish the mission of the company at the specific time .
Lo 2
calculate cost using appropriate techniques of cost analysis for preparing income statement
Appendix A
Question 2
Calculation of cost of production for marginal costing for quarter 1
Particular Marginal Absorption
6

Direct material 18 18
Direct labour 15 15
Variable overhead 9 9
Variable selling and distribution overhead 9 9
Fixed production overhead 1.1
Total cost of production 51 52.1
Income statement using marginal costing system for quarter 1
Amount
Particular Amount 475000
Less Sales
Marginal cost
Direct material 81000
Direct labour 67500
Variable overhead 40500 236500
Variable overhead 47500
Less: Contribution 238500
Fixed overheads 75000
Fixed production overhead 5500 80500
Net profit 158000
Income statement using absorption costing system for quarter 1
Particular Amount Amount
Less Sales 475000
Cost of production
Direct material 81000
Direct labour 67500
Variable overhead 40500
Variable selling and distribution 47500
7

Fixed production overhead 5500 242000
Gross profit 233000
Less: Fixed overheads 75000
Fixed selling and distribution 45000 120000
Net profit 113000
Calculation of cost of production for marginal costing for quarter 2
Particular Marginal Absorption
Direct material 18 18
Direct labour 15 15
Variable overhead 9 9
Variable selling and distribution overhead 9 9
Fixed production overhead 1.1
Total cost of production 51 52.1
Income statement using marginal costing system for quarter 2
Amount
Particular Amount 560500
Less Sales
Marginal cost
Direct material 106200
Direct labour 88500
Variable overhead 53100
Variable selling and distribution 56050 303850
Less: Contribution 256650
Fixed overheads 75000
Fixed production overhead 5500 80500
Net profit 176150
Income statement using absorption costing system for quarter 2
Amount
8

Particular Amount 560500
Less Sales
Cost of production
Direct material 106200
Direct labour 88500
Variable overhead 53100
Variable selling and distribution 56050
Fixed production overhead 5500 309350
Gross profit 251150
Less: Fixed overheads 75000
Fixed selling and distribution 45000
Net profit 251150
Marginal costing - marginal costing is the cost analysis technique where variable cost is
to be charged on production of product and fixed cost for the period is fully written off against
the contribution per unit (Aleem,., Khan and Hamad, 2016). marginal costing use to determine
the price of the product and also analysis the profitability. marginal costing includes only
variable cost and focus on fixed cost .
Absorption costing - Unicorn company also adopt absorption cost. it includes variable
cost (selling and administration expenses , advertisement expenses etc) and direct cost ( direct
material, direct labour , direct expenses). company use this costing for measuring the cost per
unit and net profitability of the company (Christian, 2018).
Reason behind the change in amount of profit from both techniques
From the above analysis it can be interpret that both marginal and absorption costing
technique provides different amount of profit for the company. The major reason behind this
difference is calculation of cost of production. In marginal costing technique, all the varible cost
incurred by the company while producing the goods are taken into account. On the other hand,
each cost incurred by business while producing the product are being taken into account at the
time of calculating cost of production for the absorption costing method.
9

Further, the difference between profit in these techniques also incurs because in the
marginal costing, the fixed administration and selling overheads are not taken into account.
Whereas, in the absorption costing method, each cost are being taken into account by the firm.
Appendix B
1. A) calculating conventional absorption costing using labour hour absorption rate
Particular X Y
Direct labour 6000 16000
Machine expenses 24000 16000
Total cost 30000 32000
Unit produced 6000 8000
Cost per unit 5 4
B) ABC analysis using suitable cost drivers
Particular X Y
Direct labour 6000 16000
Machine expenses 24000 16000
Set up cost (working 1) 447500 1342500
Ordering cost (working 2) 5000 25000
Total cost 482500 1399500
Unit produced 6000 8000
Cost per unit 80.416 174.93
Calculation of total running cost and total number of orders
Total running hours = machine hours of x + machine hours of y = 4 + 2 = 6
Total orders = order of x + order of y = 12 + 60 = 72
Working notes
1 Calculation of set up cost
Total running hours 6
Set up price 179000
10

Set up cost per set up 29833.33
2 Calculation of ordering cost per unit
Order cost 30000
Total orders 72
Order cost per order 416.67
ABC Analysis: This analysis makes the company to categorise its inventory into three
category i.e. A B and C. the category should be decided on the basis of cost to be incured by the
business and their profitability for the firm as well (ABC Analysis . 2019).
Interpretation
From the above calculation, it can be interpret that the product X is costing 80.416 to the
company. On the other hand the product Y is costing 174.93 to company. The company should
categorise both the products after analysing their profit generation capacity.
Product having higher profitability should be categorised in category A, whereas, product
with lower amount of profitability should be put in the B category.
Appendix C
Question 3
Calculation of payback period and Net present value of project x and project y using
discounting factor 12%
project x
Year Project x Discounting factor @12% Present value
0 -5,000
1 2,500 0.893 2232.14
2 1,000 0.797 797.19
3 1,000 0.712 711.78
4 500 0.636 317.76
5 1,500 0.567 851.14
6 1,000 0.507 506.63
Total pv 5416.65
11

Less: initial investment 5000
Net present value 416.65
Payback
Initial investment
0.92Present value
Project y
Year Project y Discounting factor
@12% Present value
0 -8,000
1 1,500 0.893 1339.29
2 2,000 0.797 1594.39
3 2,500 0.712 1779.45
4 1,000 0.636 635.52
5 1,000 0.567 567.43
6 2,500 0.507 1266.58
Total pv 7182.65
Less: initial investment 8000
Net present value -817.35
Payback
Initial investment
1.11Present value
Interpretation
From the above solution of net present value calculation, it can be interpret that if the
company selects project X, it will get the return in terms of present value of 416.5. further, the
payback period of the project is 0.92 years. Further, if the company decides to select the project
y, the company would suffer a loss of 817.35. further, it would have a payback period of 1.11
years.
12

Therefore, the company should decide to invest in the project X. as it will provide a gain
to the company. Payback period of the project is also less than project Y. in this regard, deciding
to invest in project X would be better for the business.
Explaining advantages and disadvantage of different types of planning tools of budgetary control
Budgetary control
Budgetary control means a technique of management accounting that helps the managers
predicts various future activities of the business. In this technique, managers gather numerous
information through which they can analyses actual condition of firm. In this regard, they
become able to develop strategies and plans for Unicorn company through which it could be
closer to its set goals and objectives.
Planning tools of budgetary control: Cash budget: As the cash is major part of financial resources, this tool can be termed as
the most important planning tool of budgetary control. This report includes information
about various sources through which the company can receive the cash and various
sources on which cash would be used by Unicorn company (Guo and Yang, 2018). This
report helps the managers in predetermining the need of cash by the business within a
specific period.
Advantages
▪ Cash is the major resource required by the business in its smooth running. As this
planning tool helps the managers in predetermining the need of cash, it also helps
the managers in maintaining sufficiency of cash and running the business
smoothly as well.
▪ Cash budget contains each detail about the inflows and outflows of the cash.
Therefore, with the help of it, managers of Unicorn company can easily detect the
wastage of cash and develop the most effective strategies in this regard.
Disadvantage
▪ prediction of cash is the most uncertain. Therefore, it may provide negative results
to the Unicorn company.
▪ It requires the high level of predictions of managers. Operating budget: This reports includes predicted information about each operation of
the business (Cools, Stouthuysen and Van den Abbeele, 2017). These reports are
13

prepared by the business by analysing the past performance of the company and
comparing it with company's future gaols. With the help of these reports, managers of
Unicorn company can develop effective policies and plans through which the firm could
become able to achieve the goals and objectives of business organisation.
Advantages
▪ It helps the managers in developing strategies and taking decisions relating to
each activity of business organisation.
▪ With the help of this planning tool, business can effectively achieve its set goals
and objectives.
Disadvantage
▪ It makes the Unicorn company rigid about performing various business
operations.
▪ In case, the business decides to choose any other project apart from the operation
budget, this planning tool would be failed. Financial budgets: Financial budgets are also one of the most important planning tool of
budgetary control. This planning tools predicts various financial activities of the business
organisation (Guo and Yang, 2018).. Further, this report also provides information about
use of numerous financial resources of Unicorn company. In this regard, the managers
effectively manage each financial resource of business.
Advantages
▪ This planning tool makes the management developing better understanding about
the flow of finance within or outside the firm.
▪ It also helps managers in maintaining sufficiency of numerous financial resources
as managers can analyse the requirement of resources in the business within the
specific period of time.
Disadvantage
▪ Preparation of this reports, needs a financial professional knowledge of managers.
▪ It would provide negative result in case the company fails to grasp any decided
project.
In this regard, it can be analysed that tools of budgetary control can be termed as the
planning tools of management, as they help managers in developing effective strategies and
14

plans for the business. Further, there are various pros and cons of each planning tools. Therefore,
the Unicorn company should carefully prepare and use these tools.
LO 4
Analysing how management accounting system helps in responding to financial problems.
Key performance indicators:
Key performance indicators helps in effectively measuring tools to demonstrate and
determine effectiveness of the company in achieving key goals and objectives of the company.
Unicorn uses key performance indicator at multiple level of the organization to evaluate the
operational efficiency, performance and productivity of the organization which helps in meeting
organization targets effectively and efficiently (Using Key Performance Indicators to Increase
Productivity and Profitability, 2019). High level KPI's mainly focus on evaluating the overall
performance of the Unicorn company, whereas low level KPI's mainly focus on particular
department like sales, marketing, finance, production within the organization. This measurable
tools helps in effectively evaluating the performance of the company and in case of any financial
problem necessary practices can be applied for long term sustainable growth and success of
Unicorn company.
KPI's helps in measuring financial metrics, process metrics, people metrics and customer
metrics like profit, cost, revenue, day sales outstanding, expenses, cost of goods sold, employee
turnover rate, employee satisfaction, retirement rate, salary competitiveness ratio, cash flow
activities, innovation spending. KPI helps in improved revenue and cost reduction, which leads
to higher customer satisfaction. KPI helps in evaluating financial problems of the company
effectively by translating organizational goals into measurable operational goals which leads to
effective and strategic decision making for higher operational efficiency. On the contrary, setting
performance target pose a major disadvantage on the company which affect their operational
efficiency and progress.
Benchmarking:
Benchmarking is the process of effectively measuring the performance of the company. It
also helps in setting standards for meeting targets of Unicorn company which leads to long term
sustainability growth of the business which leads to higher operational efficiency, performance
and productivity. In case of any deviation, benchmarking helps company in finding the actual
cause of the problem, and also helps in taking necessary measures to reduce the financial
15

problem and helps meet goals and objectives of the company effectively and efficiently to reach
desired benchmark (Pavlatos and Kostakis, 2015). Benchmarking helps company to achieve
economies of scale and perform activities more cost effectively. Benchmarking helps in
identifying the gaps which helps Unicorn in maintaining its competitive advantage in the
company. Benchmarking helps in identifying internal, competitive, functional and generic
problems for long term sustainability growth of business.
Balance scorecard:
Balance scorecard is a performance measurement model which is used to identify the
performance of the company. Balance scorecard helps in measuring financial perspective,
customer perspective, business perspective and growth perspective of the company. This method
helps Unicorn company in adding value to the operations of business. The major objective of
using such measures helps in attaining major objectives of the company (Maas, Schaltegger and
Crutzen, 2016).
Unicorn company mainly focus on evaluating performance of the company using KPI's,
balance scorecard and benchmarking which leads to effectively solve financial problems of the
company. The major competitor of Unicorn is Millennium printing & Graphics which mainly
focus on benchmarking the products and find deviation accordingly for effective results and
outcomes.
Conclusion
Above report summarised that management accounting is significant part of the
accounting which provide necessary information to manager that helps to formulate effective
and efficiently strategy for improve the performance of the company. Manger can identify and
interpreted to information which use to take planing , monitoring and controlling the activities .
managerial accounting need to take decision making for accomplish the goals and objective of
the company. Unicorn adopt management accounting system such as job costing , cost
accounting , inventory management and price optimisation which use to reduce the cost on per
unit and increase productivity level . This report also consist that company prepare various
report such as job report, Budget report, Inventory and manufacturing report etc which helps to
manage all activities that helps to improve financial position of the company . managerial report
provide information to shareholders that helps to take investment decisions. It also explained
about that company using cost techniques like marginal costing and absorption costing to
16

determine the cost of the product. Further, they adopt planning tool of budgetary control which
helps to take appropriate decision. company adopt various tools like benchmarking , KPI to
respond financial problems such as improve cash flow , profitability etc.
17