Costing Methods and Business Growth

The assignment analyzes a business scenario using both absorption and marginal costing methods. It calculates unit costs, COGS, and income statements to demonstrate how these methods impact decision-making for resolving business issues and promoting sustainable growth. The document also references relevant academic literature on management accounting and its role in business strategy.

Management accounting
System and its application

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Explaining the concept of management accounting and the significance of various systems....1
Presenting various methods of management accounting reporting............................................2
Evaluation of the advantages and disadvantage of the management accounting systems and
their application in KEF..............................................................................................................3
Integration of the management accounting reporting and management accounting systems...5
TASK 2............................................................................................................................................5
Calculations under Absorption costing and marginal costing ....................................................5
TASK 3............................................................................................................................................7

Presenting benefits and drawbacks of various types of planning tools under budgetary control
.....................................................................................................................................................7
Analysing the usage and application of planning tools by KEF in preparation and forecasting
of budgets....................................................................................................................................8
TASK 4............................................................................................................................................9
Comparing the adopting management accounting system for responding to financial problem
by KEF .......................................................................................................................................9
Presenting the fact that dealing with financial problem through management accounting
system leads KEF to sustainable growth...................................................................................10
Use of planning tools for resolving financial issues and heading towards sustainable growth 10
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Management accounting is a provision of financial and statistical data of an organisation
which is used by the business in decision making process and development of the company.
This scope of management accounting revolve around the management decision making,
devising planning and performance management systems along with providing expertise in
financial reporting. In the present report different sections under management accounting are
discussed. This includes presenting management amounting systems, their advantages with
presenting different methods of accounting reporting to KDF Ltd. For the new product launching
calculation are presented by using absorption as well as marginal method of costing. The
application of various planning tool in the management accounting is done explaining their use.
In the lase section of the report the ways in which KEF can use the management accounting in
for responding to financial problem of the business are presented.
TASK 1
Explaining the concept of management accounting and the significance of various systems
Management accounting is the application of the professional knowledge and the skill in
preparing accounting information in a manner that enables the management of the KEF Ltd in
formulating its policies and strategies. It also helps in effective planning and the controlling of
operations within an organization. In management accounting, both financial and the non
financial information is been presented in a regular interval of time such as weekly reports,
monthly etc. It includes the forecast, in-depth analysis and the budgets. Management accounting
ensure preparation of various charts for the performance and the forecast analysis which in turn
helps the managers of the company in making the best possible decisions (Novas, Alves, C. G.
and Sousa, 2017). Management accounting is not been regulated by law so at the time of making
the analysis no standards had to be followed as like in financial accounting. In other words
management accounting refers to the process for framing the management reports and the
accounts which facilitates accurate statistical and financial information which in turn helps
managers in making long and short term decisions.
There are various systems of the management accounting that are important for the company to
adopt as follows-
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Inventory management system- It refers to the management of the current assets which
relates in maintaining the optimum level of the inventory and ensuring effective control in order
to minimize the cost of the total inventory. It is the system which plays a vital role in the KEF
Ltd as it helps in maintaining the adequate inventory so that smooth functioning of the
production and the selling activities can be attained. It enables the firm in minimizing the
investments in its inventory so that higher profitability can be gained (Hoozée and Mitchell,
2018). As the company deals in the manufacturing activity, this system helps in avoiding the
problem of the stock out and also helps in producing the proper level of inventory.
Job costing system- It is the method of recording cost that involved in the manufacturing
activity of the firm. Through the job costing system, managers can keep the track record
regarding the cost incurred in each job and maintains the data which is essential or relevant for
the operations of business. The information provided by this system is essential as to determine
the accuracy in the estimating system of the enterprise and also in assigning the correct cost in
manufacturing the goods.
Price optimization system- It is the method that defines the preferred set of the prices in
relation to the products offered. KEF Ltd by using this can create sales model and the cost model
that helps it in knowing the true demand for the product (Chenhall and Moers, 2015). This in
turn assist the firm in evaluating the cost spending and the sales target that need to be met for
gaining higher margins.
Cost accounting system- It is the system of management accounting that accumulates and
assigns the cost to each activity within the organization. Cost accounting system helps in
improving the allocation and the planning of the resources as to attain efficiency in the cost.
Presenting various methods of management accounting reporting
Under the management accounting a major section is related with preparation and presentation
of the reports for various activities and task undertake by the company. These reports are crucial
parts of the business organisation KEF to make sure that a complete picture how the business is
operating (Shields, 2015). There are various reports that are produced in KEF for protecting the
business, and managerial accounting reports assist the management of the KEF to analyses the
business performance in context of different activities and jobs undertaken by the company.
The several kinds of managerial accounting reports that are prepared by KEF includes:
Budget reports:
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The budget reports are the fundamental report under management accounting which
assist the owners and managers of KEF in understanding the cost which is spread through out
entity (Ax and Greve, 2017). The cost identification is regarding each of the department and for
every job of KEF. The company evaluates the expenses of the previous years and then makes
the estimated budgets for the following years and find out the places of cost cutting.
Account receivable reports:
This report is prepared by KEF for determining the extent of credits given to the
consumers and how much is still due to be received (Bromwich and Scapens, 2016). This report
provide an overview of the credit balances as per the level of business and amount of due to be
received. This assist the management of KEF to adjust the credit policies to make them align
with the repayment capabilities of the consumers.
Job cost reports:
The Job cost report is prepared by KEF to determine the expenses and cost incurred on
each of the job undertaken by the business. This present a side by side view of the total cost
accrued on a single job as compared to the expected revenues yielded by that job (Hopper and
Bui, 2016). This reports aid the management of KEF to evaluate the contribution made by each
particular activity in the profits of the company. The reports lead the management to evaluate the
profitably of each specific job or activity and optimise their operation by putting focus on those
job which are more profitable.
Inventory and manufacturing report:
KEF produces a physical products and is indulged in manufacturing activities
primarily. This type of organisation have a low tolerance regarding any fault in the inventory as
this can lead to major losses and fall back in the productions (.Messner, 2016). For this the
inventory and manufacturing reports are of high value. This also assist in centralising the data
related with inventory cost, labour and other overhead which are incurred in the production
process with presenting a raw data for optimizing the cost.
Evaluation of the advantages and disadvantage of the management accounting systems and their
application in KEF
Inventory management system:
The advantage of the inventory management system is that is tracks the supplies and
present the information related with inquiry , work orders inputs and outputs, bills and others to
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management of KEF. This system directly assist the business is controlling the cost by cutting
down the extra cost by not stuffing up the storage space with unnecessary supplies. It also
enhance the efficiency in operating performance leading to higher productivity (Quattrone,
2016). The disadvantage associated with this system is that the this system requires specific
software which are high in cost and being a medium size enterprise the cost is high for KEF.
Also this system in time consuming and requires a skilled person to operate the system. The
application of inventory management system can be be seen in KEF as keeping the record of all
the units manufactures. This includes maintaining records of opening and closing stock, along
with production and sales units.
Job costing system:
The benefit of job costing system is that costs are ascertained at any stage of completion
of a job. This gives scope for control of costs by taking suitable steps to KEF. The profits earned
from each job is known separately (Maas, Schaltegger and Crutzen, 2016). The actual costs of
previous job can be compared with present job executed. Drawbacks related with this system is
that there is no standardization of this system and more clerical work is required to maintain the
detailed information. Also this is expensive for KEF.
The application of this system in KEF is that for a each of job related with the
productions of goods in KEF separate details are maintained with keeping a track of expenses
incurred, unit manufactured and issued to sales.
Price optimisation system:
The pros related with price optimisation system for KEF are that with optimizing the
prices the organisation can significantly reduce the internal manual resources devoted to price
setting. It is that strategy where KEF arrive to a decision on how much business they can obtain
within defined profitability levels after understanding how sensitive their existing clients are to
changes in product prices (Otley, 2016). The cons of this system for KEF is that there is huge
possibility that the demands and trends can be identified not to the optimal level which can lead
to set the wrong prices. It is time consuming and required indulgence of more human resources
of KEF.
The application of this system in KEF can be seen through as determining the actual
prices of each of the product manufactured in KEF which is desirable to consumer to pay. The
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price is set such which is affordable to consumers and also gives profits to the company while
considering trends and demand of customer.
Cost accounting system:
The advantages of the cost accounting system can be outlined as the the cost pertaining
to each job can be easily identified. This gives a opportunity to management of KEF to conduct
a comparison of the current cost with the past records to establish a controlling measure for cost
control (Kaplan and Atkinson, 2015). The disadvantages of this system is that it is time
consuming as to determine the cost for each activity is cumbersome as there are lots of processes
for production of a single units only. A wrong detection of the cost can lead to misallocation of
the resources and can hamper the performance efficiency.
The application of this system in KEF can be stated as cost related with each activity of
manufacturing of different product is determined. This is done by identifying the expenses done
both direct and indirect and then sales prices is decided after adding the profit margin required by
KEF.
Integration of the management accounting reporting and management accounting systems
The management accounting system are related with presenting a full system to manage
the activity of the business rather the reports under management accounting are prepared to
detect the performance of the business and its related activities (Key Advantages &
Disadvantages of Using a Static Budget, 2019). The integration can be seen as both falls under
the scope of management accounting one is related with stating system to conduct the operation
of the business of KEF and the other is related with detecting and evaluation of the performance
and each setting the goals fro each of the activity of the business.
TASK 2
Calculations under Absorption costing and marginal costing
Marginal costing:
Given details
Sales prices 60
Direct material 12
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Direct labour 20
Variables production o/h 8
Fixed production o/h 120000
Production units 18000
Sales units 16000
Closing stock 2000
Unit cost
Marginal costing
Direct material 12
Direct labour 20
Variables production o/h 8
Cost per unit 40
Absorption costing
Direct material 12
Direct labour 20
Variables production o/h 8
Fixed production o/h 6.67
Cost per unit 46.67
Budgeted Marginal Income statement
Sales 16000*60 960000
add: closing stock 2000*40 80000
less: variable cost 40*16000 640000
Contribution 400000
Less fixed cost 120000 120000
Gross profits 280000
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Budgeted Absorption Income statement
Sales 16000*60 960000
add: closing stock 2000*46.67 93340
Gross profits
less: cost of production 18000*46.67 840060
net operating profits 213280
Actual Marginal Income statement
Sales 16000*60 960000
add: closing stock 2000*40 80000
less: variable cost 40*16000 640000
Contribution 400000
Less fixed cost 120000 120000
Gross profits 280000
Actual Absorption Income statement
Sales 16000*60 960000
add: closing stock 3000*46.67 140010
Gross profits
less: cost of production 19000*46.67 886730
net operating profits 213280
TASK 3
Budget and its purpose:
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A budget is the forecast of the spending and revenue for a business for a specific time
period. The forecast is related with income and expenditure and there by the profitability and
this is a tool for decision making and this monitor a business (Maas, Schaltegger and Crutzen,
2016). The purpose of budget is to present a estimated expenses to the business where the
activities are to be undertaken under allocated funds and resources.
Presenting benefits and drawbacks of various types of planning tools under budgetary control
Zero based budget:
The advantage of preparing this type of budget is that it ensures the mangers of KEF
think about how everts penny of the organisation is spent (Quattrone, 2016). All the operating
expenses are justified and its considers all those areas of the KEF which are generating revenues.
The disadvantages of this type of budget is that its takes lots of time in preparation as all
the expenses are required to be justified for each budging period. This budget rewards short term
thinking were the resources are shifted to those areas of KEF which generated more revenues.
Fixed budget:
The benefits of the fixed budget are that once after its establishment KEF follows it and
keeps the record of actual spending. This is easy to implement and does not require any updates
through out the budgeting period. This allowed KEF to see whether it might be overestimating or
underestimating the expenses.
The drawbacks related to fixed budget is that it lacks flexibility. Once established no changes are
made in the budget by KEF with changes in sales volume or other changes. KEF can not allocate
additional resources to keep up with the changes as well. Also, KEF, static budgets are based on
previous data of KEF, newer businesses may have more difficulty establishing and implementing
them.
Operating budget:
Pros of the operation budget for KEF are related with keeping a track of all the activities
of the business (Messner, 2016). This indicates both money that is spend and the revenues that
can be generated.
Another benefit is that by showing this to the potential investors the operating cost of the KEF
the investors can make a informed decision to invest in KEF.
The cons of operating budget is that its is rigid in nature and does not allow any changes
in it during the financial year. This budget do not assist the management in reduction of the
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debts of the KEF. This also do not used through out the years without any assumptions and
charges in consideration.
Analysing the usage and application of planning tools by KEF in preparation and forecasting of
budgets
Zero based budget:
This is the budget which is made under accounting practices where concept of tradition
budget overruled. Under this budget KEF prepare the budgets from the base zero for every
expenses which means no refereed from past budgets are taken (Hopper and Bui, 2016). Each
new budget is made from a zero base and the management of KEF is required to justify each
expense before it to new budget.
Fixed budget:
It is also termed as static budget. The fixed budget is used by KEF as an essential tool for
measuring the success of the business. This assist business in taking both long term and short
term goal (Bromwich and Scapens, 2015). The fixed budget is prepared for certain expenses
where no changes are made in the budgets and used by the KEF to operate activities in
specified budget.
Operating budget:
The operating budgets are prepared by KEF to plan the day to day expenses and
operation of the business in order to prevent a financial ditch (Ax and Greve, 2017). The
management of KEF uses this budget to track as well as charting growth and addressing any of
the issues of the business. The operating budget possess a potential to to attract investment into
the company.
TASK 4
Comparing the adopting management accounting system for responding to financial problem by
KEF
The decision making process of a business is related with making choices by
identification of a decision with getting information and assessing alternate resolution . This is
process of making decisions step by steps that help KEF to make more deliberate, thoughtful
decisions by organizing relevant information and defining alternatives. A business faces various
issues and for this a decisions are required to be taken. The following tables depicts the same:
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Problem Method 1 Method 2 Conclusion
Sales of KEF is
declining and
therefore company
is deciding
whether to
manufacture
certain products or
to buy them from
outside
contractors.
Absorption costing
would allow KEF to
spread the fixed cost
to the individual units
cost . This will render
the higher profits.
With the but option
KEF can save money
over investing in fixed
assets and expensive
machine.
Marginal costing
method will focus on
variable cost and not
fixed cost will be
charged to unit cost of
products of KEF.
With make decision
the company can
control its operating
cost can reduce the
lead time.
Therefore, the
decision of
absorption
costing and to
but the product
is better. Under
this the
investment cost
will be saved
ans well higher
profits are
ensured.
KEF is facing a
major challenge
regarding control
over its expenses
KEF can use Fixed
budget where all the
expenses remain same
irrespective of
production volume.
This will keep the
allocates funds and set
expenses intact
without any change.
Zero-based budget is
another method that
can be use by KEF
where each cost will
be justified for each
new period.
Under zero
based
budgeting
requires the
manager of
KEF to justify
every cost, so
this budgeting
could be a ideal
tool.
Presenting the fact that dealing with financial problem through management accounting system
leads KEF to sustainable growth
As shown in the above table it can be seen that different aspect of the management
accounting system are used by the business KEF in responding to the various problem within
company. With the use of systems such as variance analysis, job costing, absorption and
marginal costing KEF have effectively answered all the issues without hampering its operations.
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All these techniques are used by the KEF to face the issues and solving them before time without
affecting the smooth flow of business and ensure the growth and survival of business in long run.
Use of planning tools for resolving financial issues and heading towards sustainable growth
The planning tools under budgetary controls are the various budget prepared by KEF.
Theses budgets directly assist the business in cost control. KEF with the help of all the budgets
forecast for spendings and compare them with the actual cost incurred and revenues generated.
This lead KEF to determine the variance in spending and it take effective measures to control it.
Buy this KEF ensures attainment of its goals and objectives under the allocated funds and
resources only. This makes sure smooth operating of the KEF leading towards sustainability and
success.
CONCLUSION
From the above report it can be concluded that management accounting is that branch of
account that deals with both financial as well as statistical data to assist the management in
decision making process. The different types of management accounting system of KEF have
been identifies as price optimisation, job costing , inventory management and cost accounting
system. The various budgeting reports have by KEF are budget, inventory and manufacturing,
account receivable and job cost report. The planning tools used for budgeting control are fixed,
zero based and operating budgets. Furthermore it have been articulated that both planning tools
and different aspects of management accounting are used by KEF to resolve business issues and
lead it to sustainable growth. Calculations of unit cost, COGS and income statements have been
presented by applying both absorption and marginal costing.
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REFERENCES
Books and journals
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Hoozée, S. and Mitchell, F., 2018. Who Influences the Design of Management Accounting
Systems? An Exploratory Study. Australian Accounting Review. 28(3). pp.374-390.
Novas, J. C., Alves, M. D. C. G. and Sousa, A., 2017. The role of management accounting
systems in the development of intellectual capital. Journal of Intellectual Capital. 18(2).
pp.286-315.
Kaplan, R. S. and Atkinson, A. A., 2015. Advanced management accounting. PHI Learning.
Otley, D., 2016. The contingency theory of management accounting and control: 1980–
2014. Management accounting research. 31. pp.45-62.
Maas, K., Schaltegger, S. and Crutzen, N., 2016. Integrating corporate sustainability assessment,
management accounting, control, and reporting. Journal of Cleaner Production.136.
pp.237-248.
Quattrone, P., 2016. Management accounting goes digital: Will the move make it
wiser?. Management Accounting Research.31. pp.118-122.
Messner, M., 2016. Does industry matter? How industry context shapes management accounting
practice. Management Accounting Research. 31. pp.103-111.
Hopper, T. and Bui, B., 2016. Has management accounting research been critical?. Management
Accounting Research.31. pp.10-30.
Bromwich, M. and Scapens, R.W., 2016. Management accounting research: 25 years
on. Management Accounting Research.31. pp.1-9.
Ax, C. and Greve, J., 2017. Adoption of management accounting innovations: Organizational
culture compatibility and perceived outcomes. Management Accounting Research. 34.
pp.59-74.
Shields, M. D., 2015. Established management accounting knowledge. Journal of Management
Accounting Research. 27(1). pp.123-132.
Online
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Key Advantages & Disadvantages of Using a Static Budget. 2019. [Online]. Available
through :<https://budgeting.thenest.com/key-advantages-disadvantages-using-static-
budget-22387.html>.
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