Management Accounting and Costing Techniques

This study material provides an in-depth understanding of management accounting systems, costing techniques, and planning tools. It covers topics like management accounting reports, absorption costing, marginal costing, zero-based budgeting, capital budgeting, and cash budgeting. The material is suitable for students studying financial management or related courses.

FINANCIAL MANAGEMENT

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
LO1..................................................................................................................................................1
Management accounting reporting methods................................................................................3
LO2 .................................................................................................................................................4
Management accounting costing techniques...............................................................................4
LO3..................................................................................................................................................8
Different types of planning tools.................................................................................................8
LO4..................................................................................................................................................9
Comparing ways organization can use management accounting system....................................9
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Management accounting can be defined as the process in which the reports of business
operations are prepared, these reports helps the business manager in making the short term or
long term decisions of company. It have the task of identifying, analysing, measuring,
communicating and interpreting the financial information to the users. Report is about GSQ and
it will be revealing the importance of management accounting systems, management accounting
reports, the different types of management accounting techniques. It will also be providing about
the planning tools in budgetary control. The study will also be revealing about the different
management accounting methods for responding to financial issues.
LO1
Management accounting
This is also known as cost accounting or managerial accounting. This is also defined as
the process used for analysing cost and operations for preparation of financial reports and
records. Management accounting is used by managers for translating the financial and costing
information into useful information for the effective decision making in the organisation.
Management accounting is for internal use by the managers and executives for achieving higher
efficiency and productivity at minimal costs (Maas, Schaltegger and Crutzen, 2016).
Management accounting systems
Management accounting systems are used by the organisation for keeping the business
over a defined structural path. This refers to the management techniques used in management
accounting for having proper record of all the financial data and information.
Cost Accounting
Cost accounting systems refers to the accounting system used for having proper record of
all the cost of company. This helps the business in analysing the incomes and expenditures of
the company that it will be earning in the given year. It involves applying range of costing
concepts and techniques over the business operation with the motive of keeping the costs under
control and achieving maximum productivity. It is used by GSQ in the production process for
calculating the costs of manufacturing a product.
Benefits
 Cost accounting helps in keeping record of all the costs incurred by business.
 This involves various tools and techniques for keeping the costs under control.
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 This helps business in assessing the variations between actual and budgeted outputs.
Inventory Management
Inventory management can be defined as combination of technology and software that is
helping organisations in keeping track of all the movements of inventory. Inventory management
is used for having record of company assets, raw materials and finished goods. Using this
management is able to analyse the consumption of raw materials frequency of movement in
finished goods. It provides important information for decision-making to management(Ameen,
Ahmed and Abd Hafez, 2018). Inventory management system is applied in warehouse and
production house of company for having a proper record over the inflow and outflow of
inventory.
Benefits
 Inventory management is a useful that enable GSQ in having proper record of all the
movements of stocks.
 This used by management in decision making and forecasting.
 It also helps in placing purchase order on time so that the production process is not
interrupted.
Price Optimisation System
The management accounting system involves measuring the fluctuations in demand at
different price levels. This method is used by organisations for defining optimum prices for its
product that will be most favourable for it. Businesses uses this model as powerful lever for
earning profits by pricing its products. Companies decide prices depending how customers will
be responding to them at different prices. It also takes into considerations other factors
influencing the pricing models. GSQ applies this model for forecasting the demand of its
products at different price levels including the inflation factors.
Benefits
 This is an efficient method involving mathematical programs that helps in accurate
forecasting.
 Prices that will be most beneficial and acceptable are decided using the optimisation
model.
 This is an effective tool used in decision-making by management.
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Job Costing System
It is a accounting concept used for tracking the expenditures and revenues from a
particular job. This involves complete detail of all the costs incurred by organisation over a job
like raw materials, labour and overhead. Job could also be defined as specific job done for single
customer or related to single product line or batch of units with all the same products (Nitzl,
2016). The profitability of job is decided after properlyh assessing the costs of each operation.
This is applied by GSQ for assessing the costs on a particular order by customers.
Benefits
 This is used by organisations for the business enterprise for assessing cost of each job
separately.
 It enables company in deciding the profit margins for each job done by company.
Management accounting reporting methods
Management accounting reports provide important information to the users of financial
information in decision making processes. There are various accounting reports used by GSQ in
effective decisions
Performance Report
This report contains information related to the performance of activities and operations of
business. This provides management with analysis about the level of targets achieved by the
organisation in given time period. This contains details about the targets and the achievements.
This is essential for assessing the efficiency of its management in achieving the targets.
Performance report not only includes the operational performance but all also the performance of
individuals and employees of company. This helps the managers in identifying the employees
who are performing well so that they can be motivated with rewards and incentives for
maintaining their efforts.
Budget reports
These reports can be termed as the spending plan of the business. Budgets are prepared
by making forecasts about the future income and revenues. These forecasts are made by
companies after analysing both internal and external forces affecting the budgets. These are
prepared analysing the budgets of previous year and making adjustment according to the current
scenarios like demand and inflations. Budgets are very useful for organisations for having a
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proper structure for its expenses. This helps GSQ in allocating its resources most appropriately
so that the costs decided do not go out of the budgeted levels (Averinа, Kolesnik and Makarova,
2016). Budgets are used by organisations for keeping the costs under control and taking
corrective measures for achieving the desired level of outputs.
Cost Accounting Report
Cost accounting reports contain the detailed analysis about the costs occurred for
manufacturing a product. It present all the variable and fixed cost separately that helps the
business in deciding the cost of product. Costing technique also involves making forecasts using
the information available with the business. Costing involves making comparisons about the
budgeted and actual level of outputs. This helps business in assessing the variances for which
company takes effective policies and procedures for reducing the variances and achieving the
required targeted objectives. Cost reports helps company in deciding the adequate profits
margins for the product so that it may attain the profitability and desired business objectives.
LO2
Management accounting costing techniques.
GSQ is a manufacturing concern that will be using different management accounting
techniques for reporting the business transactions. The different management accounting
techniques that will be used by the management accountants are marginal costing and absorption
costing. These are used for carrying out the profits from business operations.
Absorption Costing
Absorption costing is also known as full costing method that are acceptable under the
accounting standards. The costing method is used for calculating the net income and for valuing
inventory. It is used by organisations for absorbing the manufacturing costs including both the
variable and fixed costs. The costing method includes both variable and fixed costs for
calculating the cost of product. Absorption costing is considered for analysing the accurate and
more comprehensive view for the business. As compared with the marginal costing method it
includes the fixed costs and variable costs in pricing the product.
Advantages
 The methods is acceptable as per accounting standards for valuing the inventory.
 It takes into account fixed costs incurred for manufacturing the product.
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 The disclosure of under and over absorption helps in analysing the inefficiency in
production methods.
Disadvantages
 The method is not useful in making comparisons of two products.
 The costing method is not used in decision-making.
Marginal Costing
The marginal costing method is used by company to measure the products cost. It is used
in calculating the costs of products incurred in manufacturing them. In this costing method
variable costs are charged on per unit basis. The concept is based on behaviours of costs with
change in volume of output. This is also known as variable costing method as it only considers
variable costs for pricing the product and fixed costs are considered as period costs in marginal
costing technique. The marginal costing is different from absorption costing that covers the
variable as well as fixed cost for pricing the product.
Advantages
 Marginal costing method is easy to understand and interpret the results.
 The fixed costs are eliminated which makes the comparison of products easier. The system helps in assessing the break even points for forecasting the sales level.
Disadvantages
 The segregation of cost between the variable and fixed costs is difficult.
 The method is not accepted by accounting standards as inventory is undervalued
Reports under Marginal and Absorption Costing
Absorption Costing
Cost card using Absorption Costing
Particulars Cost per unit
Direct Material 8
Direct Labour 3
Variable production overhead 2
Fixed production overhead 3.2
Absorption Cost of the product 16.2
Selling Price 30
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Total Cost 16.2
Profit 13.8
Profit or loss statements using Absorption costing
Amount
Sales Revenue 50000*30 1500000
Marginal cost of sales
Direct materials (50000*8) 400000
Direct Labour (16667*9) 150000
Variable production overhead (50000*2) 100000
Fixed production overhead 160000 810000
Gross Profit 690000
Selling expenses variable (50000*4) 200000
Fixed admin and distribution 60000 260000
Net Income 430000
Marginal Costing
Cost card using Marginal costing
Particulars Cost per unit
Direct Material 8
Direct Labour hour 3
Variable production overhead 2
Marginal Cost 13
Selling Price 30
Marginal Cost 13
Contribution Profit Margin 17
Profit or loss statements using Marginal costing
Amount
Sales Revenue 50000*30 1500000
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Marginal cost of sales
Direct materials (50000*8) 400000
Direct Labour hours (16667*9) 150000
Variable production overhead (50000*2) 100000 650000
Contribution 850000
Fixed production overhead 160000
Selling expenses variable (50000*4) 200000
Fixed admin and distribution 60000 420000
Net Income 430000
Working Note :
Wages per hour £9.00
Labour per unit 20 (Minutes)
Number of units 50000
Time for 50000 units (minutes) 1000000
(50000 units * 20 minutes)
Total Hours for production 16666.67
(1000000/60)
Direct wages £150,000.00
(16667 hours * 9)
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LO3
Different types of planning tools
There are different types of planning tools available for budgetary control. A detailed
description is given below.
Zero based budgeting: It is a method of budgeting in which budget is prepared from the zero.
Every function or department within an organization is analysed based on its needs and cost. All
expenses are justified for each new period (Miller, 2018). It involves re-evaluating each item of
cash flow and justifying the expenditure that are required to be incurred by the department.
Advantages:
 It justifies all operating expenses. It scraps the obsolete processes which helps in better costing and better profitability.
Disadvantages:
 Process can be manipulated by managers to get more resources to their department.
 It requires lot of time and efforts.
Capital budgeting: It is the formal business process for evaluating whether to invest in a
particular project and asset or not (Abor, 2017). It refers to the decision in relation to the
investment of the funds in addition, modification or replacement of fixed asset.
Advantages:
 It helps in identifying the risk.
 It provides complete report with respect to different projects. Helps in placing adequate control over expenditure.
Disadvantages:
 Mostly decisions are taken for long term.
 It requires professionals with high skills.
 Introspective in nature due risk and discounting factor.
Cash budgeting: It is an estimation of cash flow for a specific period which includes expected
cash receipts and disbursements (DeFranco and Schmidgall, 2017). These cash inflows and
outflows include revenue collected, expenses paid, repayment of loan etc. This budget is usually
made after preparing sales, purchase and capital expenditure budget. It is prepared to assess
whether company is having sufficient cash to operate its business or not.
Advantages:
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 It prevents over spending by the organization.
 It helps in analysing the resources available to meet the operational needs. It also helps in analysing minimum liquidity and cash balance requirement.
Disadvantages:
 It limits the spending power.
 It does not reflect correct profit as it is based on assumptions and also it considers cash
flows from security deposits etc.
 It is prepared based on the previous year cash allocation so there is no guarantee cash
flow will be similar in the future.
So, it can be said that planning tools are very essential for the GSQ Ltd. All these tools
have its own advantages and disadvantages. The application of these methods in an organization
will lead to increase its profitability and reduce risk and efficient management of the business.
LO4
Comparing ways organization can use management accounting system
Benchmarking: It is the process which helps in measuring the performance of the organization,
its products and processes. It is measured by comparing the company's performance to its
competitors. It helps in identifying the internal opportunities available to the organization for
further improvement (John and Eeckhout, 2018). For example by comparing the superior
performance and breaking down it to analyse what makes it superior and then comparing those
processes with the organization and then implement the changes as per the requirement. It helps
in improving the performance, productivity and profitability of the organization.
Key performance indicators: It is a performance measurement indicator which evaluates the
success of the organization based on certain indicators. It demonstrates how effectively
organization is achieving its objectives and goals. KPIs differ from organization to organization
and it is implemented at different levels to evaluate the success. Mostly, low KPIs are set for
processes in departments such as sales, marketing, HR etc. The high KPIs are focussed on the
overall performance of the organization. KPIs can be of different types such increase in sales
level, achieving the targeted outcome etc.
Balanced scorecard: It is a performance management metrics used by the organization to
identify and improve the business functions and their performance based on outcome. It allows
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businesses to look at its business from different perspectives which includes financial and
customer perspective, internal business perspective and innovation and learning perspective. It is
used to measure and provide feedback to the organization. It links vision to strategic objectives,
targets and initiatives. It is a business performance measurement tool.
Variance analysis: It is analytical tool which is used for the analysis of difference between
actual performance and the standard performance. This analysis is used for exercising control
over the business. For example, budgeted sales is £10000 and the actual sales is £8000, in this
situation variance analysis will give a difference of £2000. It also helps in analysing the reason
for such difference and corrective actions are taken (Marzlin Marzuki and Ismail, 2019). The
detailed analysis of this allows management to identify the reason of fluctuation in its business
and the steps that can be taken. The variance analysis is of different types which includes
purchase price variance, selling price variance, labour efficiency variance, fixed and variable
overhead spending variance etc.
GSQ limited Sun Mark Limited
The GSQ limited uses variance analysis and
balanced scorecard system for measuring its
performance. The balanced score card help
GSQ Ltd in strategic planning, better analysing
management information accompanied with
improved and relevant performance reports.
Variance analysis helps the organization in
efficient and forward looking budgetary
decisions. It also acts as a control mechanism
in respect to cost.
Sun Mark Limited uses benchmarking and key
performance indicators. Benchmarking helps in
gaining perspective about the performance in
comparison to its competitors. It also helps in
setting performance expectations, monitor the
performance of the company and implement
changes. The key performance indicators
provides right information which helps in
informed decision making, allows users and
managers to measure target, establishes
transparency in the organization.
CONCLUSION
It can be concluded from the above that management accounting is very beneficial to
business organization. It helps in proper and complete analysis of the financial and non-financial
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aspects of the organization and helps in taking better decisions. The benefits and techniques of
management accounting that is very useful for the business if implemented properly. It also
included advantages of different planning tools for budgetary control and also a comparison has
been drawn with another company with respect to the management accounting technique used.
Thus, management accounting is important for every organization.
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REFERENCES
Books and Journals
Abor, J. Y., 2017. Evaluating Capital Investment Decisions: Capital Budgeting.
In Entrepreneurial Finance for MSMEs (pp. 293-320). Palgrave Macmillan, Cham.
Ameen, A.M., Ahmed, M.F. and Abd Hafez, M.A., 2018. The Impact of Management
Accounting and How It Can Be Implemented into the Organizational Culture. Dutch
Journal of Finance and Management, 2(1), p.02.
Averinа, O.I., Kolesnik, N.F. and Makarova, L.M., 2016. The integration of the accounting
system for implementing world class manufacturing (wcm) principles.
DeFranco, A. L. and Schmidgall, R. S., 2017. Cash Budgets, Controls, and Management in
Clubs. The Journal of Hospitality Financial Management. 25(2). pp.112-122.
John, L. K. and Eeckhout, L., 2018. Performance evaluation and benchmarking. CRC Press.
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.
Marzlin Marzuki, N. A. R. and Ismail, J., 2019. Benefits and limitations of variance analysis in
management accounting. ACCOUNTING BULLETIN. p.15.
Miller, G., 2018. Performance based budgeting. Routledge.
Nitzl, C., 2016. The use of partial least squares structural equation modelling (PLS-SEM) in
management accounting research: Directions for future theory development. Journal of
Accounting Literature, 37, pp.19-35.
Nitzl, C., 2016. The use of partial least squares structural equation modelling (PLS-SEM) in
management accounting research: Directions for future theory development. Journal of
Accounting Literature. 37.pp.19-35.
Otley, D., 2016. The contingency theory of management accounting and control: 1980–
2014. Management accounting research.31.pp.45-62.
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