Preparation of Income Statements with Different Costing Scheme

This article explains the preparation of income statements using different costing schemes such as absorption costing and marginal costing. It discusses the differences between the two methods and their benefits. The article also provides expert guidance and study material on Desklib for further understanding.

Management Accounting
Table of Contents
INTRODUCTION ..........................................................................................................................1
TASK 1............................................................................................................................................1

P1 MA and essential requirement of 4 MA system....................................................................1
P2. Various method of management accounting reporting.........................................................3
TASK 2............................................................................................................................................4
P3. Preparation of income statements with different costing scheme.........................................4
TASK 3............................................................................................................................................7
P4 Advantages and disadvantages of different planning tools used for budgetary control .......7
TASK 4............................................................................................................................................9
P5. Comparison between organisations regarding using of MA system to solve problems. .....9
CONCLUSION..............................................................................................................................10
REFERENCES .............................................................................................................................12

INTRODUCTION
The methodology related with determining the important and useful financial and non
financial information into proper record to make valuable decisions is known as Management
accounting (Carlsson-Wall, Kraus and Karlsson, 2017). It is a detailed process in which different
types of MA system are applied by the manager of company to prepare important report which
help in assessing the main information at different business situation. The report in based on
Katie Walker Furniture that use to produce designer furniture in UK.
In this report, different sort of MA system and their effective benefits are defined which
are used to prepare several important reports which are also discussed in this report. Report also
cover different costing techniques which is used to prepare income statements and most
importantly various planning tool is used within organisation to prepare budgets. In addition,
MA system are used detect and overcome several financial problems faced by company.
TASK 1
P1 MA and essential requirement of 4 MA system.
“Management accounting inform the elaborated and regular financial strength and status
of company to leading parties” (Management accounting, 2020).
“Management accounting is a procedure of setting up management accounts and reports
that give faithful and punctual non-financial and statistical data to administrator to form short
and long term decisions”.
From the above two definition, it has been clearly started that MA is a method which is
related with forming of crucial report that hold detail information about monetary and non
monetary aspect of business in order to make better decision (Goh and Scerri, 2016). There are 6
important function of MA that are discussed underneath:
 Financial management: The finance manager must organize and adjust the necessary
elements of the P&L report, income statement. Of instance the information are provided
to finance manager in a most comprehensible manner, which simplifies in managing the
financial information throughout the year.
 Auditing: The data presented is needed to be modified by the manager according to the
expectation which help in auditing. In order to complete the audit process manager use to
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modify the data according to accounting principle and standards which help in making
useful decision.
 Planning: The business advisor provides sufficient information to help determine the
company's future. Including administrators of all company prediction details for business
purposes.
 Cost accounting: Comparative and can size statements are structured to make effective
representation results. Such as executives of organization use the ratio to predict the
patterns in cost and make certain polices to reduce and lower the cost to increase
profitability.
 Controlling: This is the main function of MA is related with controlling the company
resources and performance of employees and worker. Like manager use to control and
manage the valuable resources which support in better functioning of operations. Decision making: In last the useful data and relevant information is communicated and
distributed to employees to maximise the results and make valuable decision for
increasing the overall efficiency and affectivity (West, 2018). In respective firm modified
data is given to each member at different level in order to increase the total profit and
make judgement to improve customer base.
Difference between Management accounting and financial accounting.
Financial accounting Management accounting
In this process reports are formulated which
are used by external parties like stakeholders,
investors etc.
It is related to preparation of reports which are
used by internal manager to make better and
sound decision.
Financial accounting is primarily concerned
with reporting for the company as a whole.
Managerial accounting forces much more on
the parts, or segments, of a company.
Management accounting consists of multiple systems that help fulfil multiple
management and accounting standards for successful decision-making purposes. These are
detailed discussed underneath:
Cost Accounting system: It is also regarded as a commodity pricing method which is
utilizes by company for estimating cost of their products that help in cost regulation, profitability
assessment and product assessment. In Katie Walker Furniture, this system can be used to
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estimate the total cost involved in different activities and processes. It can be also useful for
company to minimise the additional cost and make better distribution of funds in profitable
operation.
Inventory Management System: In this MA system, company inventory is effectively
managed. The most benefited use of this system to company can be balance demand and supply
throughout the year. This method can be used by respective company in order to meet the total
demand of customer as they can maintain the detail information about total finished goods, raw
material and goods in transit.
Job Costing Systems: This accounting system is important for those businesses where
the range of products is broader and more and more job are required within different department
(Golyagina and Valuckas, 2016). By using this system manager of Katie Walker Furniture can
determine the actual cost involved on various operation and make certain plan to reduce these
cost if results are not appropriate.
Price accounting system: This MA system is engaged with determining the faithful rates
of service and product in response to feedback received from customers on different price points.
By using this method manager of Katie Walker Furniture can fix the best and appropriate price
of furniture which can easily increase the customer base and grow profit as a whole.
P2. Various method of management accounting reporting.
MA reports is described as a process for providing information about specific types of
activities occurring within an entity (.Rodriguez-Ariza, Martínez-Ferrero and Bermejo-Sánchez,
2016). It is necessary for every report to be prepared in the current period as per the latest
operation and business task which help to describe the actual functioning. All report must be
relevant which do not confuse manager while analysing gathering to determine the key finding of
business. Some of important reports are discussed underneath:
Inventory management report: A specific information concerning the amount of
storage material is included in this report that allows to project future needs. Likewise in Katie
Walker Furniture, this report can be prepared on regular basis to record the total raw material is
being used to produce different designer furniture. Furthermore, to record total product which are
in production cycle and total furniture which are ready for sales.
Account receivable ageing report: This report includes details information about those
borrowers who have not repay the outstanding amount after the deadline. With the aid of this
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businesses can determine whether or not they should allow card facility to consumers. In
respective firm manager can use this report to record the total amount outstanding with customer
and find out which customer have not have payment after last date (Mizikovsky and et.al, 2016).
This can also help in strengthening the credit policy for company so that only those customer
whose payment record s are better can get the advantage.
Performance report: It is identified as a report that involves expected revenue &
expenditures that are contrasted with current revenue & spending. It also help in assessing the
performance of different individual engaged on various job roles so that any dispensaries can be
removed. Such in above mention company, manager can prepare this report to record the
performance of every worker and current income and expenses on different operation.
Furthermore, they can analyse the performance and determine the lacking factors and prepared
strategies to reduce disparities within income and expense for a period.
Benefits of MA system
Name of management
accounting system
Benefits
Inventory management
system
It help in balancing the demand and supply within company.
It also support in maintaining sufficient quantity of finished good
stored in ware house to meet the requirement of customers.
Price optimisation system This system is implemented to make the most suitable price of
good that can be used to increase customer base and maintain
enough profit for company.
Cost accounting system By using this system company can eliminate the operation which
involve higher cost and results are not favourable.
Job costing system This is consistent with the measurement of the expense, profit and
loss performance of each work. In the above selected entity's
company they can analyse each job and cost linked in different
tasks.
Management accounting system and reporting integrated with organisational process.
Essential forms of MA systems like cost, job, inventory and price management system
are associated with the operating framework of company and are integrated to develop valuable
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reports. Such as in Katie Walker Furniture, cost accounting system is used to determine the total
cost utilised in various business task and these information are recorded in within cost
accounting reports. Thus it help manager in assessing the information about cost and make
decision either to minimise cost or remove unprofitable activity.
TASK 2
P3. Preparation of income statements with different costing scheme.
Income statement: This could be described a kind of disclosure statement compiled by
corporations for the purpose of obtaining information relating to gross profit and net profit
throughout they year. It is prepared using different types of costing strategies which are
described underneath:
 Absorption costing: It is a form of system in which fixed and variable expenses are
known as product or service costs. It mainly shows that each production cost which is
included in manufacturing different kind of designer furniture.
 Marginal costing: This is treated as an additional cost which is being utilised by the
company in producing an extra unit of output.
MARGINAL COSTING
Notes Year 1 Year 2 Year 3
£ £ £ £ £ £
Sales
2,52,0
00
3,33,0
00
3,06,00
0
Marginal cost of sales:
Opening Stock - 4,086 5,655
Add variable production
costs:
Direct materials 59,200 64,000 60,800
Direct labour 37,000 40,000 38,000
Variable overheads 14,800 16,000 15,200
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Less closing stock 1, 2 4,086 5,655 1,968
Marginal cost of sales
1,06,9
14
1,18,4
31
1,17,68
7
Fixed manufacturing costs 91,000 91,000 91,000
Gross profit 54,086
1,23,5
69 97,313
Selling and distribution
expenses 5,600 7,400 7,000
Administration expenses 10,100 10,100 10,100
Profit /(Loss) from
operations before interest
and tax 38,386
1,06,0
69 80,213
Interest expense 1,100 1,350 1,600
Profit /(Loss) from
operations before tax 37,286
1,04,7
19 78,613
Notes
1. Closing stock in units =
Opening stock + Production - Sales
Year 1 = 0 + 3700 - 2800 = 900 units
Year 2 = 900 + 4000 - 3700 = 1200 units
Year 3 = 1200 + 3800 - 3400 = 1600 units
2. Closing stock in £ =
(Units unsold/ Units produced) * Total variable costs
Year 1 = (900/3700)* (£5600 + £10100 + £1100) 4086.49
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Year 2 = (1200/4000)* (£7400 + £10100 + £1350) 5655
Year 3 = (400/3800)* (£7000 +£10100 + £1600) 1968.42
ABSORPTION
COSTING
Notes Year 1 Year 2 Year 3
£ £ £ £ £ £
Sales
2,52,0
00
3,33,0
00
3,06,0
00
Cost of sales:
Opening Stock* - 49,135
Add total production costs:
Direct materials 59,200 64,000 60,800
Direct labour 37,000 40,000 38,000
Variable overheads 14,800 16,000 15,200
Fixed manufacturing costs 91,000 91,000 91,000
Less closing stock** 1,2 49,135 63,300 21,579
Cost of sales
1,52,8
65
1,96,8
35
1,83,4
21
Gross profit
99,13
5
1,36,1
65
1,22,5
79
Distribution expenses 5,600 7,400 7,000
Administration expenses
10,10
0
10,10
0 10,100
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Profit /(Loss) from
operations before interest
and tax
83,43
5
1,18,6
65
1,05,4
79
Interest 1,100 1,350 1,600
Profit /(Loss) from
operations before tax
82,33
5
1,17,3
15
1,03,8
79
Notes
1. Closing stock in units =
Opening stock + Production - Sales
Year 1 = 0 + 3700 - 2800 = 900 units
Year 2 = 900 + 4000 - 3700 = 1200 units
Year 3 = 1200 + 3800 - 3400 = 1600 units
2. Closing stock in £ =
(Units unsold/ Units produced) * Total production costs
Year 1 = (900/3700)* (£5600 + £10100 + £1100 + £91000)
Year 2 = (1200/4000)* (£7400 + £10100 + £1350 +£91000)
Year 3 = (400/3800)* (£7000 +£10100 + £1600 + £91000)
TASK 3
P4 Advantages and disadvantages of different planning tools used for budgetary control
Planning tool is a process and strategies applied by a manufacturing company to facilitate
with budgetary oversight in their function (Qian, Hörisch and Schaltegger, 2018.). There are
many types of budgets that are specifically connected to budgetary control mechanism within
planning tools. This is also defined as a procedure for managers to set performance goals and a
substantial budget, performance based alteration as per criteria, and actual comparison findings.
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Some description of these references together with some benefits and drawbacks are provided
below:-
Zero based Budgeting – It is planning tool that, while designing budget, takes zero as a
basis. In zero-based approach, it ensures that no prior data will be considered by the management
planning the budget when preparing the budget. This method of budgeting allows organization
manager to take decisions quickly without any prior data being involved. Based on current case
manager, often find fresh assumptions which do not include any previous theories or
information.
 Advantages: It is a effective tool which is beneficial in making short term valuable
decision. This also help manager to set a new budget every time easily as they do not
have to consider previous budget information. Disadvantages: As the budget is prepared on yearly basis so many time create
difficulties for the team member to make decision (Saleem Salem Alzoubi, 2016).
Operating budget: This is a beneficial planning tool since all the small detail about
companies operation and activity are included in operating budget. This can be said in short that
the respective budget provides the facility to carry out all significant business task in one spot. In
addition, all sub- or divisional should prepare during preparation of the operation budget.
 Advantages: This budget help the manager of respective company to make a decision in
more cosine manner about business task and activity as detail information is included in
operating budget.
 Disadvantages: Expertise is needed to plan operating budget that essentially means
manager require proper ability and capability to plan spending.
Cash budget: It is a budget that plans as per a company's financial needs and give detail
predicted information related with cash inflows and outflows. In Katie Walker Furniture, this
budget can be used to estimate the total cash requirement to run production function and
manager can record the total cash inflows form selling process.
 Advantages : This budget can support for respective company by providing actual
liquidity and cash detail from various operation (.Höglund and Sundvik, 2016). Disadvantages: The major limitation was that the calculation resulting in loss can not be
extended due to firms.
Different planning tools used in preparing and forecasting of budget.
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Budgetary control planning techniques comprise of various types of budgets like cash
operating and ZBB budget and many more. Such as cash budget provide the information about
total cash inflows and outflows, operational budget gives detail about actual business process and
task in a period. That's because such planning instruments comprise of financial data which can
be a reliable structure for future earnings and expenditure prediction.
TASK 4
P5. Comparison between organisations regarding using of MA system to solve problems.
A kind of issue that comes up because of lack of sufficient financial means which can
reduce the overall functioning and profitability of business activity is knows as financial
problems (Jefrey, 2018). Through there is no particular reason why the financial problem occurs
but some reason specific this like increasing operating cost, more spending than earning, lack of
money management etc. There are different MA tool which can be effectively used by the Katie
Walker Furniture to detect the financial problems. Some of these are discussed underneath:
 KPI: Key performance measurement was the tool that helps the market company to
assess both financial and non-financial results. In respective firm this tool can be
implemented to analyse the performance of staff and operation at different level so that
problem of weak performance can be determined.
 Benchmarking: It was described as a technique of attributing the practices, techniques
and financial results of an organization with that of another same industry company. With
the help of this tool real problem of businesses are figuring out in different aspects. In
Katie Walker Furniture manager can use this tool to detect the issues of increasing cost
with other company dealing in furniture business in a year (Aouni, McGillis and
Abdulkarim, 2017).
Financial governance: This method acts as a surveillance approach for firms in
overcoming financial problems. It was defined as a sort of tool that systematically gathers and
manages all business transactions of corporations. Such as in above mention company financial
governance can be used to improve the performance of weak member by putting additional
training support. Similarly it can be used to increase productivity of operation by making smaller
projects so that each activity is monitored in well manner.
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Example of Comparison between companies using MA system and Tool to resolve financial
issues.
Basis Fashion enter limited company Continental clothing limited
company
Financial issue This company is facing the financial
problem of inconsistency in sales.
The firm is having issue of less income
and higher expenses.
Technique Manager use KPI to detect the
problem as they cab find out the
exact reason for lower sales.
In this company benchmarking is used
to make comparison with competitive
firm which is spending on
advertisement in a decent manner and
return are higher.
Management
accounting
system
“Price optimisation system” can
used in company to set the most
suitable and faithful price of good
which would increase sales and
increase overall customer
percentage.
“Cost accounting system” can be used
to analyse the total cost which is used
in different promotional activities. This
can help to find the activity which is
not providing better result to the
company (Tracy, 2016).
Management accounting to solve the financial issues.
As in the sense of the above company to resolve the financial problem various MA
system can be implemented for better results. By using inventory MA system the financial issue
of higher inventory turnover can be reduced, price optimisation system is used make decent price
that increase sales etc.
Planning tools to solve the financial issues
In terms of resolving financial difficulties, planning techniques are essential as the
management accounting systems. The forecasting methods make it easier as these are related to
future earnings and cost projections (Arunruangsirilert and Chonglerttham, 2017). Such as in
Katie Walker Furniture, uses various kind of planning tools like cash, ZBB and operating budget.
All these budgets are helping to solving the financial issues as they contain detail information
about total financial and non financial dealing.
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CONCLUSION
In conclusion it is founded that management accounting is often referred as managerial
accounting which is the practices for decision-making purposes by internal manager. Report is
based on Katie Walker Furniture that is a business in the manufacturing sector that can use MA
system, report, techniques and tools to make better and effective decision in future. MA system
and report are essential and integrated together that support administrators when making
decisions. Within project study, specific measurements are performed on the grounds of data
given, like income statements per absorption and marginal costing system.
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REFERENCES
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Qian, W., Hörisch, J. and Schaltegger, S., 2018. Environmental management accounting and its
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Saleem Salem Alzoubi, E., 2016. Ownership structure and earnings management: evidence from
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Online
Management accounting. 2020. [Online] Available Through:
<https://strategiccfo.com/management-accounting/>.
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