Managerial Accounting Report - SleepEase Ltd

Added on - 21 Jul 2020

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MANAGERIALACCOUNTING
Table of ContentsINTRODUCTION...........................................................................................................................1TASK 1............................................................................................................................................1TASK 2............................................................................................................................................3TASK 3............................................................................................................................................5TASK 4............................................................................................................................................6CONCLUSION................................................................................................................................8REFERENCES................................................................................................................................9.........................................................................................................................................................9
INTRODUCTIONManagement accounting is of utmost importance for administration of businessorganisation. This form of accounting provides various reports to administration. Such reportsare helpful in decision making of business concern. There are two approaches followed by anorganisation i.e. Marginal costing and absorption costing. These approaches are very necessaryin decision making of inventory valuation and pricing. Every company spend massive amount oftime in deciding pricing of products and services being offered to customers. If prices areappropriate as per quality, customers will be attracted towards products and vice-versa.SleepEase Ltd. is one of the British well known manufacturer of mattresses. They providevariety of mattresses to customers. They produces specialised bed named Max-ease. It is one ofthe product designed to ease back pains for orthopaedic patients. The company SleepEase usesperformance management tool balanced scorecard to evaluate different aspects of theirbusinesses.TASK 1Marginal and Absorption costingThere are two methods by which organisation can value its inventory i.e. Absorption andmarginal costing method. These are the approaches that SleepEase uses to deal with fixedoverheads of production. This is based on the fact that whether to use fixed overheads in decisionmaking of administration i.e. inventory valuation and pricing of product and offerings. The maindifference between two methods is how they are using fixed overheads in costing techniques.The elaboration of both techniques of costing are as follows-Marginal costing-Such method of costing can be defined as variable costing. To makeright decision of production, both fixed and variable cost are computed. The marginal cost is onethe main consideration under such approach. This also determines impact on profitability forchange in output. under such costing technique, fixed overheads cost are not distributed toproducts and offerings. when an additional unit of a product and offerings is manufactured, theadditional cost incurred will be termed as marginal cost. fixed cost remain same and unaffected.More fixed cost are not incurred when the output is increased. The marginal cost is generallyvariable cost of production that involves direct material, direct labour, direct expenses andvariable overheads. This shows the impact of variable cost on volume of production/output. This1
technique is also known as variable or direct costing method. This can be referred as changes intotal cost of production by producing one additional unit of output. Fixed cost are of lessimportance than variable cost of production. It overall contributes to changes occurring becauseof variable cost of production. It is one of the accounting system in which marginal cost arecharged to products and offerings while fixed cost is called as periodic cost. Fixed cost arewritten off against contribution. Marginal costing are of utmost importance for takingappropriate decision regarding pricing decisions of SleepEase Ltd. A firm is more concernedabout additional cost required in extra unit of output (Salehi, Rostami and Mogadam, 2010).Contribution concept in marginal costing is also important in decision making aspect of business.The main advantages and disadvantages of marginal costing techniques are as follows-AdvantagesMarginal costing technique of inventory valuation is one of the easier and simplermethod.The fixed cost are not considered hence it helps in avoiding complicated statement.The issue with under absorption and over absorption will not arise.Contribution details will provide benefits in decision making aspects of SleepEase.DisadvantagesThe total cost cannot be segregated easily into different variable and fixed costs.It is not easy to determine the variability degree of semi variable cost incurred inproduction of products and offerings.Tax authorities are not accepting such statements which excludes fixed manufacturingoverheads.The administration cannot take quality decision based on contribution aspect ofproduction.Absorption costing-Absorption costing is one of the cost technique where both fixedand variable cost are considered. Here cost are grouped into centres to find out total cost ofproduction. Both fixed and variable cost are of equal importance in such technique of costing.Hence also termed as full absorption costing. Various expenses in production of products andofferings are grouped under different overheads such as production, distribution, selling anddistribution overhead. Such techniques of costing is basically used for the purpose of reporting.The overall cost of production are affected by involvement of fixed manufacturing overheads. It2
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