Comparing Absorption and Marginal Costing Techniques

This assignment compares the absorption and marginal costing techniques, highlighting their differences and similarities. It suggests that Ovation should use the absorption costing technique due to its pertinence to margin. The assignment references various studies and articles related to management accounting and variance analysis, providing a comprehensive overview of the topic.

MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
REFERENCES................................................................................................................................2

INTRODUCTION
Managerial accounting is also refereed as management accounting and it is considered as
a process of framing management accounting reports which will helps the managers for
justifying the daily short term decisions by giving very perfect and accurate data with the context
of statistical and financial information related to activities of organizations. In the present report
there is brief discussion about management accounting system with its method. Further income
statement has been elaborated by the two techniques of costing
TASK 1
P1. Justifying management accounting system with respect to its type and requirement
Introduction
Management accounting has been referred as a managerial tool which gives all
information which is relevant to internal users and managers who are involved in process of
economic decision for company. In the present scenario, there are various kinds of management
accounting systems which give the entire information related to various segments and role of
business like system which manages inventory (Abrahamson, Berkowitz and Dumez, 2016). The
various management accounting systems function on the basis of objectives and goals within
organization. The Ovation system is using different kinds of management accounting systems
such as:
Job costing system
Inventory management system Types of management
accounting Price optimizing system
Cost accounting system
 Job costing system: Usually, this system of management accounting is applied in
concern of manufacturing which helps in assigning the cost to every batch of individual
goods. The specific aim of this system is to gather the information which is purely
associated with the cost of particular service and production job. It helps in measuring the
level of efficiency and accuracy of the company i.e. it monitors each and every expense
or known as expense monitoring system which traces all expenses associated with
various services and products. In the same series, The Ovation system identifies each and
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every expense with job costing system such as home delivery services, servicing each
product, replacing the machinery, etc.
 Cost accounting system: It is also referred as product costing system and its main
objective is to perform profitability analysis, cost control and inventory valuation by
identifying the cost of various services and products with respect to organization. In the
same series, the operations which are giving advantages as well as determining the actual
cost of each service and product is captious. It is typically used by company which are in
manufacturing to keep record of inventory at different stages. The Ovation system is an
electronic design and manufacturing company and so, it can trace the inventory flow
during production such as recording raw material when they are transforming in finished
goods. It is very essential to identify that which products are contributing more in margin
so that they can be given with special focus (Narasimhan, 2017).
 Price optimizing system: It is very essential as management accounting through which
statistical and mathematical analysis is been performed to collect the response of
consumer at various level of price of all goods and services. With this technique, the best
price can be identified of each product and services according to its objective. Its
example can be, if the aim of organization is to increase the sales, then it will adopt the
price where consumers are more attracted to their company and in the same series, if
company wants to raise profit, price will set according to the maximum amount of margin
to the business.
 Inventory management system: The overall inventory has been managed by inventory
management system of business organization. For managing and controlling, there are
various traditional methods such as weighted average method, FIFO and LIFO as
improving the level of technology, different software are available in the present scenario
which makes easy for all mangers in process of managing and controlling inventory. In a
manufacturing business, The Ovation system determines inventory which has been
required by them such as magnets, wires and cables, etc. It is very difficult to manage the
inventory flow manually so for resolving this issue various inventory management
software are used by them and for controlling the application of raw material in very
efficient way.
Conclusion
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The above kinds of management accounting systems are used for increasing the level of
efficiency of the organization.
P2. Various methods of management accounting reporting
Introduction
Managers and owners of every business whether it is large or small prepare the
management accounting report which helps in identifying the performance of business. Financial
and management accounting reports sound similar but they are not as financial reports are
prepared for the external users and accounting reports are framed by organization's internal users.
These are not made yearly like financial reports as these reports are framed frequently on
monthly or weekly basis with the requirement.
Management accounting report gives information which is relevant according to different
segments and role of business (Brown-Liburd, Issa and Lombardi, 2015). The outcomes of these
reports help the organization's internal users for setting the future economic decisions.
Accounts receivable Aging report
Budget report Types of management
accounting system reports Job cost report
Inventory and Manufacturing report
 Inventory and Manufacturing Report: The business can use this report along with the
physical inventory to create efficiency in the processes. The main article of this report is
referred as unit overhead cost, waste of inventory and hourly labour cost. Inventory
management system has been supported by this report. The various assembly lines of
organization have been compared to analyse the variations and its ways to improvement
with the bonuses to department who are deserves. There are many organizations that do
not afford any fault in the inventory production. So, this report is applicable. The dead
stock can be identified and fewer prices of that same stock so rotation of dead stock can
be implied in market.
 Accounts Receivable Aging Report: The organizations that buy and sell the goods and
services on credit mostly frame this report. It is referred as a critical tool which has been
used by managers for the purpose of cash flow of customers who are on credit. Basically,
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it helps in identifying the customer's balance that from what time they have been owned.
This report extracts the information of the customers who are 30, 60 and 90 days late.
The problems have been identified regarding the collection policy and organization's
process. Each and every business has the requirement to tighten the policy of credit if
most of the people are not able to pay their liability within ninety days.
 Budget report : For analysing the performance of business, managers and owners of the
organizations prepare this report. For framing this report, primarily budgets are prepared
on the various roles according to expenses which have been incurred in previous year.
The expenses which are incurred in previous year exceeds the average expenses then to
trim the cost has been identified to perform in budget of current year. If the budgets are
prepared and actual outcome are matched with budgeted outcomes or actual performance.
The reasons are identified of all the variances and if any corrective action can be taken
for attaining the specific desired objectives of the organization (Shojaeezand,
Mohammad-Khani and Azmi, 2018).
 Job cost report : Job costing system has been supported by this report under the
management accounting system. All the expenses are drawn in this report for some
particular project or job. Expense are been matched with revenue which is estimated from
those particular jobs or projects so that margin can be evaluated. It helps in identifying
the functions of high earning of the organization so that all resource and efforts will be
more focused on the functions which are giving advantage instead of areas which are
wasting resources and giving fewer earnings. This report gives brief analysis of those
expenses when project is on the mode of work in process so that some more costs can be
step up and areas can be determined where something is happening wrong and can be
rectified.
Conclusion
The above report will help Ovation system group for identifying the information which is
relevant and actual performance of the organization has been determined. The variance and its
alterations will be determined by budget report, inventory can be managed efficiently by
inventory and manufacturing report and for determining the huge earnings services so resources
will be utilised properly through job cost report.
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M1 Benefits of management accounting system with its uses
Each and every organisations need management accounting system and management
accounting report for analysing the financial performance and stability of their organization. It
plays very important role in process of decision making for assisting the management team. It
has been focused on internal operations and issues which are reported are not focused on the
compliance requirements.
 All the information related to rational financial and managerial decisions are been
provided to the executive team by management accounting.
 It helps in operational planning as each and every department consist of their own budget
which will be incorporated for whole corporate budget.
 Management accounting helps in strategic planning as it applies similar techniques as
process of budgeting.
 It is also referred for evaluating the outcome of business as going concern and it
determines that organization is feasible to stay in operations within the future business
periods.
 It will help Ovation system by giving all the important information related to activities of
future (Bakker and Obuoforibo, 2009).
 Cost management i.e. better understanding has been provided to managers regarding
amount of fund is required for running the company effective and efficiently.
 All these advantages will be directly impacting raise in financial return of the
organization.
D1 Integrating management accounting within the company
Management accounting system should be implemented and integrated and it is very
important by observing various benefits above. The Ovation system requires determining the
particular area of business where is presence of requirement of integration. It can be evaluated as
follows:
 For facilitating the process of decision making, information has been provided.
 Budgets has been prepared for different segments and it is compared with actual outcome
and reasons of variances has been identified.
 For allocating the several resources budget has been centralised to the company as a
whole.
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 The value of integration of management accounting system of Ovation group has been
given by conducting personal interviews and meetings with major personnel.
Task 2
P3 Drafting income statement by using both cost techniques
Introduction
Each and every organization prepares the income statement by applying various
techniques. The techniques are absorption costing technique and marginal costing technique,
both are applicable very differently with different outcome. It is very essential for organization
for selecting the best one of drafting the financial statement so this will create best image in
industry (Shojaeezand, Mohammad-Khani, and Azmi, 2018).
Marginal Costing Techniques
This technique will always consider the variable cost as a cost of goods. For getting
margin it only considers variable cost which are directly linked to goods and fixed cost has been
ignored.
Given:
Selling price 35
Unit cost
Direct materials 6
Direct labour 5
Variable production overhead 2
variable sales overhead 1
Budgeted production for the
period 600
Fixed cost Budgeted cost Actual cost
Production overhead 1800 2000
Administration cost 800 700
Selling cost 400 600
Units
Budgeted sales 450
Actual sales 600
Actual production 700
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The income statement of Ovation system on the basis of marginal costing technique is as
follows:
Particulars Amount Amount
Revenue 21000 21000
Cost 9100
Closing stock -1300
Variable cost on production 7800
Contribution per unit 13200
Variable overhead on sales -600
Fixed cost
Production overhead 2000
Selling cost 600
Administrative cost 700 -3900
Net income 9300
Absorption Costing Techniques
It is referred as costing system which considers the production cost comprises variable
cost and fixed cost as cost of product. While calculating margin, cost which is associated with
product has been absorbed and actual margin have been earned by the organization (Srinivasa,
Kaura and Gilman, 2017). The income statement of Ovation system according to absorption
costing technique is as follows:
Particulars Amount Amount
Revenue 21000 21000
Cost 11200
Closing stock -1600
Fixed overheads -100
Cost of production 9500
Contribution (unit) 11500
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Variable overheads 600
Fixed costs
Selling cost 600
Administrative cost 700 1900
Net income 9600
Absorption costing vs Marginal costing
Marginal costing Absorption costing
Variable cost has been included for valuation of
inventory and costing of product.
Variable cost and even fixed cost has been
considered for valuation of inventory and
costing of product.
Fixed cost has been referred as period cost. P/V
ratio is used for measuring profitability.
Fixed cost is referred as cost of production as
every product has reasonable contribution of
fixed cost and profitability has been measured
by appointing fixed costs.
Cost data has been represented as total
contribution of every good. Cost data is in form of conventional pattern.
The variations between opening and closing
stock did not give any impact on production's
unit cost.
The variations between opening and closing
stock give impact on production's unit cost.
Cost per unit remains constant. Cost per unit reduces.
Conclusion
It has been clearly viewed that both the techniques are reflecting different outcomes due
to variation in expenses which are undertaken in both techniques. The marginal costing
techniques is giving net income of 9300 and absorption costing techniques is representing net
income of 9600.
M2 Uses of various management accounting techniques
There are more techniques which can be applied by Ovation System which are discussed
below:
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 Activity based costing : The manufacturing overhead cost has been assigned in this
system for different units of the organization. The cost has been assigned according to the
resource's level which are absorbed by activities. While, comparing it with conventional
costing, indirect cost are purely associated with direct cost.
 Standard costing : Different activities of the business are created as standard cost.
Variations are recorded in this technique by comparing expected and actual cost by
eliminating cost which is expected for actual cost in report (Nuhu, Baird and Bala
Appuhamilage, 2017). Huge amount of data has been maintained of historical cost for the
elements which are part of inventory.
D2 Drafting Financial report with justifying the activities related to business.
To : GM
(The Ovation System Group)
From : Management Accounting Officer
(The Ovation System Group)
Subject : Justifying the activities with the prospective of business
Respected Sir,
This report has been drafted for justifying the information which has been identified while
preparing income statement of the organization by applying both the costing techniques such as
Marginal costing and absorption costing technique. It has been viewed that if company goes
with absorption technique then it will be giving net income of 9600 and on its contrary marginal
costing technique will be representing net income of 9300. There is minimal variation which is
because of different expenses which are considered. The application of method will be
identified according to dependency on type of organization's image for pertaining in front of all
stakeholders. For earning more margin absorption costing technique is better in this scenario
and for actual results marginal costing will be given more preference.
Thanks and regards
Task 3
P4 Application of various planning tools in the organisation
Introduction
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There are various planning tools in management accounting system like budgeting is very
essential for managers for determining the future events and plans and decision should be
undertaken according to it. With the perspective of budgetary control, various kinds of planning
tools can be implied by The Ovation System for drafting budget for its different aspect.
Activity Based Budgeting : It is method of budgeting where overhead cost has been considered
for framing budget. Past year expenses are not undertaken in this method for drafting budget of
present year. All the activities are analysed properly and even it has been researched that it
occurs high cost and all resources are purely allocated according to the results (Pratheepkanth,
2018).
Merits
 All the unnecessary activities are substituted which be giving advantage for saving cost.
 Each cost driver has been undertaken for evaluation.
Demerits
 It is very complex method and there is requirement of deep understanding of various
functional areas of organization.
 There is requirement of high professionals to be employed and it will consume more
resources.
Zero Based Budgeting : It is method of budgeting in which zero is taken as base and in this
method also past year expenses are not considered. The items are re-evaluated in cash flow and
they are interpreted in the budget.
Merits
 Resources are allocated efficiently and actual numbers are undertaken instead of
historical numbers.
 All the expenses are re-evaluated and accuracy has been determined while preparing
budgets.
Demerits
 It is very time consuming as each and every item has been considered.
 It also blocks huge number of employees.
Incremental Budgeting : It is method of budgeting which alters fewer alterations for
accomplishing new budget. Budgets are drafted by considering past year budget for the current
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year or for succeeding year. It has been taken assumption that every department will be operating
at present level and amount will be increment and will be aggregated in any requirement.
Merits
 Implementation is very easy and it does not pertain any complicated calculations.
 Continuity of financing has been ensured when it is required for every department
without any justification.
Demerits
 It will be main cause of budgetary slack.
 Incentives are not provided to managers and there is absence of innovation.
Conclusion
The above tools of planning are used by The Ovation system group for preparing budget
for each and every segment of the organization which will be creating ability for the organization
for utilising the resources properly (Saliterer, Sicilia and Steccolini, 2018).
M3 Uses of various planning tools for forecasting and drafting budget
The various planning tools are explained for forecasting the information which is relevant
and for preparing the budget for different segments of the business. For identifying the impact on
the operations related to business, future activities should be forecasted and it is considered as a
most essential aspect. The Ovation system Group can perform forecasting by various planning
tools which are as follows:
 Process costing : it helps in identifying the cost and it is used when goods and services
are not identical to each other.
 Competitive pricing : It is method for pricing the products and all these prices are
identified according to competitors price in the market.
 Markup pricing: it is a pricing method which has been used by both management and
owners of small business for identifying the cost of goods and services. It has been
performed by taking aggregate of percentage of margin to total price of services and
goods. It has ensured that particular amount or percentage of margin on sale of products
and services.
 Operational costing : In this method cost of different goods and services have been
identified and especially when the goods and services are similar or identical to each
other.
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D3 Determinant of planning tools for solving the financial problems
Planning is considered as very essential component is solving all the financial problems
which appears in daily operations of the organization. From the above discussion of planning
tools like activity based budgeting, zero based budgeting, incremental based budgeting, markup
pricing, process costing, competitive pricing etc. gives major contribution for solving the
financial problems which are related to business. By using all these planning tools, Ovation
system group can code best prices to its own goods and services for determining the actual cost
and on its contrary side it will also help in accomplishing the goals and objectives of business.
Under budgetary control, planning tools will play leading role for predicting the future events
with its implications on operations and activities of business. While, implications have been
determined Ovation system can move towards corrective measure for substituting error and for
function the business very smoothly (Syahrir and et.al., 2017).
Task 4
P5 Adapting management accounting system with respect to financial problems
Introduction
The process of decision making is pertained by management accounting system which
will be directly helping for resolving the financial problems which are faced by organisation in
its daily operations. By undertaking different systems of management various system like
budgetary control, benchmarking etc. will help Ovation system for overcoming the problems in
an economical aspect.
Benchmarking : It is method for setting up standard performance and outcome, the result of
organization and its performance has been compared from the standard performance. All the
roles and purpose can be determined by applying different techniques of benchmarking where
various improvements are required and objective of technique is to perform the performance on
the aspect of benchmark. For accomplishing the level of high performance is also been identified
for benchmarking.
Key Performance Indicators : The efficiency of business has been evaluated by KPI with the
perspective of goals and objectives of organization. The main objective is to justify the success
for achieving the targets which are desired. The multiple level of organization uses key
performance indicators as there are two types of KPI that is high level and low level.
Conclusion
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The above management accounting system which has been discussed and can be used by
Ovation system for achieving efficiency and great success with respect to financial problems and
its solutions.
M4 Financial problems has been responded via sustainable success
The Ovation system can achieve sustainable success in the below mentioned manner :
 Determining the social and environmental trends which will be giving huge impact and
enables organization for creating value (Wandee, Sirisuthi and Leamvijarn, 2017).
 Key performance indicator gives support to development of organization with the
perspective of sustainability and strategic.
 Relevant data has been included in the reports which are prepared and helps in
undertaking decision of budgeting and pricing.
CONCLUSION
The above report has been concluded that every business has need of financial accounting
and even management accounting with the functions of internal organization. The management
accounting system plays very major role with its application and uses and it also raises the level
of efficiency. Different management accounting has been applied by Ovation system group and
benefited the organization in different manner such as solving financial problems etc. The
income statement has been prepared by both the costing technique so in this context net income
on the basis of absorption and marginal technique is of 9600 and 9300 respectively. Thus, it has
been suggested that Ovation should use the absorption costing technique as it pertains more
margin.
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ONLINE
Management Accounting. 2018. [Online]. Available through :<https://bizfluent.com/about-
5549234-uses-management-accounting.html>.
Ovation systems. 2018. [Online]. Available through
:<https://www.ovation.co.uk/Company/Company.html>.
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