Advantages and Disadvantages of Budgeting Control Techniques

Management accounting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK...............................................................................................................................................1
P3. Advantages and disadvantages of budgeting control techniques.....................................1
P4. income statement for 3 years using marginal and absorption cost approach...................3
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Management accounting is the process of assessing the business activities of the internal
management so that better decision making can be done. Management and accounting reports are
prepared so that company could analyse its profits and can compare it with past year's data.
Present study is based on XYZ ltd., a chair manufacturing company and will explain the
advantage and disadvantage of budgeting control tools. Furthermore, it will calculate net profit
by using marginal and absorption costing approach for 3 years’ business of XYZ ltd.
TASK
P3. Income statement for 3 years using marginal and absorption cost approach
USING MARGINAL COST APPROACH-
Income statement for the year ended 1
( using marginal approach)
ITEMS
NO. OF
UNITS
PER
UNIT
AMT.(in
pounds)
TOTAL AMT.
(in pounds)
sales 36000 70 2520000
Marginal cost of sales (MCOS)
Stock at beginning(opening stock)
add: variable production cost:-
direct material(DMC) 40000 12 480000
direct labour(DLC) 40000 16 640000
variable expenses(VC) 40000 20 800000
Total variable cost A 40000 48 1920000
less:closing stock at the end of the year B
(opening stock units+units produced-
units sold) 4000 48 192000
Marginal cost of sales(MCOS) A-B 1728000
Fixed indirect production cost 64000
Gross profit: (sales- marginal cost of
sales- Fixed production cost) 728000
1

selling and distribution overheads(S&D) 10000
admin overheads(Admin O/H) 15000 25000
profit before interest and tax(PBIT) 703000
Interest expenses 1000 1000
profit before tax(PBIT-interest) 702000
Tax @ 19% 133380
net profit 568620
Interpretation- From the above table it is interpreted that the no. of units sold in the first
year are 36000 @ pound 70 per unit so the total amount got is pound 2520000. After the sales
calculation, marginal cost of sales is calculated by deducting closing stock from total variable
cost where total variable cost is defined as A and closing stock is defined as B. Thus marginal
cost of sales after subtracting is pound 1728000 then for calculating gross profit, marginal cost
and fixed production cost is deducted from sales so the amount got pound 728000. Thereafter, all
the indirect overheads are reduced that are selling and distribution and administration overhead
from gross profit for getting profit before interest and tax and amount of PBIT is pound 703000
then the interest expenses are deducted and profit before tax of pound 702000 is evaluated and
lastly after deducting tax rate from PBT, net profit is aroused of pound 568620 (Raka, 2017).
Income statement for the year ended 2
(using marginal approach)
ITEMS
NO.
OF
UNITS
PER
UNIT
AMT.(in
pounds)
TOTAL AMT.
(in pounds)
sales 40000 70 2800000
Marginal cost of sales (MCOS)
2