Management Accounting Systems: Importance, Types, and Application

This study evaluates the importance and application of management accounting systems in organizations. It discusses different types of management accounting systems, such as cost accounting, budgeting, transfer pricing, and inventory management. The study also explores the benefits of using management accounting systems and how they are integrated with reporting. Additionally, it examines the preparation of income statements using marginal costing and absorption costing. Finally, it analyzes the use of planning tools in management accounting and compares different ways organizations adapt to management accounting systems.

UNIT 5 MANAGEMENT ACCOUNTING
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Executive summary
The study has evaluated the importance of management accounting in an organisation.
The study has evaluated the benefits and different types of management accounting
system used by Morrison. Advantages and disadvantages of planning tools have also
been discussed in the study. Application and integration of management accounting
techniques along with systems in the organisation has been assessed. The study has
outlined features and usage of various management accounting methods like budgetary
cost, marginal cost and many more in the study. Income statements have been
prepared based on marginal and absorption costing. Comparisons based on
management accounting system s adapted by Morrison have been also discussed in
detail.
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Table of Contents
Introduction........................................................................................................................4
LO1: Management accounting systems............................................................................4
Brief description of organization.....................................................................................4
Explanation of Management accounting and types of management accounting system
(P1).................................................................................................................................4
Different Methods of management accounting reporting [P2].......................................6
Benefits of management accounting system and its application (M1)...........................6
Integration of management accounting system and reporting (D1)...............................7
LO2 Range of Management accounting techniques.........................................................7
Preparation of income statements using (P3)................................................................7
a) Marginal costing [Refer to appendix 1]..................................................................7
b) Absorption costing [Refer to appendix 2]................................................................7
Application of range of management accounting techniques and production of
financial reports (M2)......................................................................................................8
Financial reports (D2).....................................................................................................8
LO3 use of planning tools in management accounting.....................................................9
Advantages and disadvantages of planning tools that are used for budgetary control
(P4).................................................................................................................................9
Analysis of planning tools usage and application (M3)...................................................11
LO4 Using management accounting to respond financial problems...............................11
Comparison of the ways in which organization adapt to management accounting
system (P5)..................................................................................................................11
Analysis of management accounting leading to sustainable success (M4).................13
Evaluation of planning tools usage to solve financial problems and lead to
sustainable success (D3).............................................................................................14
Recommendation and Conclusion...................................................................................14
Reference list...................................................................................................................15
Appendices......................................................................................................................16
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Introduction
Management accounting provides the managers of an organization with relevant and
important information which helps them in decision making process. The study has
evaluated different types of management accounting systems has provided an
explanation of its usage and application to achieve sustainable success. Preparation of
income statements using marginal costing and absorption costing has been done in the
study. In this study the management accounting system adopted by Morrisons have
been discussed. The problem statement of the study is to analyse the importance and
application of management accounting techniques.
LO1: Management accounting systems
Brief description of organization
Morrisons is one of the leading companies of the food retail sector and has its
headquarters in Bradford, UK. It is one the biggest and the fourth largest supermarket
established and made a revenue of 1631.7 crores GBP in the financial year of 2017
(morrisons.com, 2018). The Morrison Company belongs to the retail industry and is
headquartered at Bradford within province of England. It is taken as a public
limited company. The company has in present around 498 stores spread globally
(morrisons.com, 2018). The company has products differentiations in form of
clothing, magazines, books, DVDs and CDs and food and beverages. The
company is with favourable employee strength of 132,000 employees. Apart from
that, there company has a revenue generation in around GBP 16317 million
(morrisons.com, 2018). The company on other hand is having an operational
income in GBP 468 millions.
Explanation of Management accounting and types of management
accounting system (P1)
The origin of management accounting can be traced back to 300 years ago. It first
emerged during the industrial revolution period. It was used in the European merchant
trading ventures and it was looked at from two perspectives (businessperspectives.org,
2018). One was economic perspective and the other was non-economic perspective.
From the economic viewpoint it was assumed that management accounting originated
from the private sector. Whereas the non-economic approach suggests that it originated
from the public sector. Management accounting is the system of identifying, measuring
and analysing the financial as well as non financial information. It utilises different
techniques like cost accounting, break even analysis, standard costing and many others
to analyse expenses and revenues. As per the opinion of Kaplan & Atkinson (2015:23-
29), it plays a significant role in the decision making process since managers are able to
identify variances by comparing actual with expected costs. Moreover it also helps in
setting budgets and choosing the most profitable orders.
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Different types of management accounting system are discussed as follows;
Cost accounting
Cost accounting deals with recording and managing costs. It refers to the system of
recording costs and comparison of inputs and outputs from the production process. As
suggested by Kihn & Ihantola (2015:230-255), it helps in comparing results against
standards set with the application of standard costing and also helps in choosing
between different projects. Marginal costing and activity based costing are one of its
subtypes. In case of Morrisons, marginal costing and standard costing is used to control
different types of cost. The efficiency of this system lies in the fact that cost allocation is
done appropriately, moreover it also helps in indentifying the drivers and cost pools.
Difference between management accounting and financial accounting:
Financial accounting is made to show the appropriate and fair picture of financial affairs.
On the other hand, management accounting is helpful to develop meaningful steps and
strategies. Scope is much broader in management accounting than financial
accounting. Measurement grid for management accounting is qualitative and
quantitative both. Financial accounting is mainly for the potential investors and stake
holders whereas; purpose of management accounting is limited to accounting.
Budgeting
It comes to use in the preparation of budgets. It helps in assessing the departmental
needs and budgets and then prepares an overall budget for the organization. Expenses
are allocated on the basis of units to be produced and also department or function wise.
Preparation of budgets in Morrisons is done on quarterly basis so that cost control is
done effectively. It’s essential requirement is that it helps in controlling costs related to
an organisation and keeps helps in removing unnecessary expenses.
Transfer pricing
According to the definition given by Mittendorf (2015:121-122), it helps in setting prices
for the goods or raw material transferred within an organisation. It also helps in
comparing the costs of accepting orders from outside and producing it internally.
Morrison practices this method in order to determine minimum transfer prices. The
essential requirement of this system is that it helps in choosing between selling goods
outside and transferring between different departments within a company.
Inventory management system
It is the system which is useful in managing large amount of inventory in an entity. The
efficiency of this system is defined by the way it helps in evaluating the amount of
inventory required to meet the production or sales process. It also creates a balance
between demands and supplies. Morrisons uses this type of management accounting in
order to manage its large and varied range of inventories (morrisons.com, 2018). LIFO
method assumes that last stock which has entered is sold out first. Whereas, FIFO
method assumes that first stock which has entered is sold out first. AVCO on the other
hand, measures cost of closing stock at weighted average cost of purchases.
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Figure 1: Management accounting system
(Source: learner)
Essential elements related to Management accounting system:
Government and risk management are associated with management accounting
system. Additionally, it is necessary to develop a strategic planning and execution with
the help of balanced scorecard, operational dashboard. Measuring performance
management is another necessary aspect that has to be based on the performance of
the management accounting system. Planning, forecasting, service delivery and value
recognition are among the other essential elements in management accounting system.
Different Methods of management accounting reporting [P2]
Budget report
As opined by Cooper et al. (2017:991-1025), it is a form of an internal report which is
prepared in order to show the different types of budgets prepared. It provides with
information which help managers compare between the estimated costs and the actual
costs incurred. The management of Morrisons prepare reports on a quarterly basis. Its
importance lies in the fact that it helps in controlling costs and highlighting cost items
which are required to be managed.
Capital appraisal methods
This method helps in evaluating the best investment opportunity that could be
undertaken by the company and involves measures like IRR, ARR, and NPV. It
provides the managers with range of times period within which initial investment done
could return. The project which takes the least amount of time is selected by the
managers.
Inventory valuation method
Inventory valuation is done on the basis of two or three methods such as LIFO and
FIFO. It provides the managers with information related to closing inventory and
opening inventory as well as the amount of raw materials required to meet the demands
of customers. A FIFO method assumes that the first stock that has entered would be
used first and under LIFO method last time which enters is used first. Morrisons has
adopted LIFO method and values stock on the assumption that last items entered is
used first. The importance of this system is that it leads to reporting of fewer profits
which allows them to pay less tax.
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CostaccountingBudgetingTransferpricingInventorymanagementsystem

Benefits of management accounting system and its application (M1)
Cost accounting
● It helps in setting standards and also provides a benchmark to compare against.
This in turn helps in analysing the variances and costs are controlled (Hague,
2018:6-9).
● It is significant in calculation of contributions made by different machines or
project. Therefore it helps in making decisions related to buying or manufacturing
and accepting or rejecting orders.
Morrisons uses standard costing and marginal costing in order to manage costs
effectively.
Budgeting
● It also helps in cost control process.
● It helps in allocating different costs as per their importance and functions.
Morrisons prepares budgets quarterly and uses it as an effective tool to control
expenses.
Transfer pricing
● Transfer pricing helps in comparing situations of transferring raw material
internally and selling it outside the organisations.
● Minimum transfer prices can also be calculated with the application of transfer
pricing and it makes the internal process smooth (Van der Stede, 2016:100-102).
Inventory management system
● It provides with different measures to determine the level and direction of using
stocks in an organization.
Inventory management system is used by Morrisons to analyse the level of inventory so
that the organization does not suffer from lack resources.
Integration of management accounting system and reporting (D1)
Since the management of Morrison uses budgeting, cost accounting and inventory
management system hence the managers are required to prepare reports related to
these. Budgeting reports preparation is integrated well with the budgeting system of
management accounting. Budgeting reports are prepared as part of budgeting system
and it is prepared on a quarterly basis by Morrisons. Managers report on facts outlining
the estimated expenses and revenues to be received. On the other hand, expenses and
revenues are compared with the actual performance of the company on a quarterly
term. As a part of cost accounting system cost reports are prepared which helps in
outlining cost related to specific activities. Standard costing is used by Morrisons, which
helps in evaluating the performances of the company based on costs saved or incurred.
This is reported with the help of standard cost income statements. Moreover inventory
control system has been applied within the organization and it uses LIFO method. In
order to report about the quantities used through inventory valuation summary reports.
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LO2 Range of Management accounting techniques
Preparation of income statements using (P3)
a) Marginal costing [Refer to appendix 1]
Marginal costing is one of the most effective cost accounting methods which can be
used under different situations. Income statements prepared under this shows the
amount of sales deducted by variable cost to give contribution amount. Machines or
projects are compared in terms of contribution (Armitage et al. 2016:31-69). Project or
order is ranked on the basis of contribution and the least one is rejected. In this case
fixed expenses are deducted at last from the contribution amount in order to calculate
net profit. The method is usually applied in situations where decisions related to make
or buy are required to be taken. It is also applied in situations of accepting or rejecting
export order. According to the view of Otley (2016:45-62), marginal costing is more
accurate than absorption costing as it does not allocate fixed expenses in terms of units
produced.
b) Absorption costing [Refer to appendix 2]
This method takes into account all directs costs such direct material costs, direct labour
cost and variable overheads. It does not take fixed expenses and it assumes full costing
method. Sales are deducted with all forms of direct costs and fixed cost is also divided
in terms of number of units produced. After this the over or under absorbed costs is
deducted with all forms of administrative expenses or selling expenses to determine net
profit. It is of more realistic approach as it assumes that all inventories are not sold out
and that some are left as closing stock in the organisation (Hall, 2016:63-74).
The net profit as calculated under both the methods is £ 794230. The reason for same
profits obtained under both absorption costing and marginal costing is that there have
been no changes in the levels of inventory. Furthermore there was no inventory at the
beginning of the period as well as at the end of the period.
Application of range of management accounting techniques and
production of financial reports (M2)
Cost volume analysis
It measures the amount of impact variable cost; sales and fixed expense have on the
amount of profits. It helps the organisation to reduce costs effectively since the level of
impact is known. On the other hand it also helps in evaluating the level of profits
required to cover all variable expenses incurred by an organization.
Budgeting
Morrisons uses the technique of budgeting to control costs and prepares budget reports
quarterly to help it analyse the variances. Budgets are prepared for all departments
present in the organisation. The expected level of expenses makes the management
measure all pros and cons. Effective steps are taken to prevent losses in the future.
Budget reports are useful if this technique is applied by an organization.
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Capital appraisal techniques
Capital appraising techniques such NPV, IRR and ARR are used by Morrisons. NPV
provide the managers with present value of all future returns from the investment. IRR
on the other hand, ranks the projects in terms of profitability that can be derived from it.
The project which returns higher profits from the investment and takes the least time tin
cover initial investment is chosen. ARR id the average rate of return earned and time
me value of money is ignored by the method hence it is used less.
Financial reports (D2)
Financial reports that are required to be produced in case of inventory valuation and
standard costing are discussed as follows;
Variance report
It is the report which helps in compared planned or estimated outcomes against the
actual outcomes. The results are compared so that variances can be found out. The
variances are differences or deviations in the expected results (Weygandt et al.
2015:96-101). The reports prepared to show variances help the managers know in
which respect or department costs control is required to be applied. It shows all material
items and their expected as well as actual costs for a quarter. It will be helpful for
Morrison to identify the factors that are affecting on the cost controlling system.
Additionally, the managers can access idea about the company expenses and division
according to the department.
Inventory valuation reports
Inventory valuation reports as asserted by Malmi (2016:31-44), shoes or depicts the
quantity of raw material of stock used or sold for a given accounting period. Iis is
essential for the determination of cost of goods sold by the entity and is also used as
collateral by any organization. Since it deals with the most important current asset of an
organization hence the preparation of it report becomes essential and should be
manage it properly. Morrison can use reports for its current planning in the future
purposes.
Budgetary reports
Budgetary reports show the budget of all departments present in an organization. It
assists in analysing trends of revenues and projection of expenses. Preparation of
budget reports enables the management to know about the expenses which have gone
out of control and which are under the control of an organisation. With the help of
budgetary reports, Morrison can make its strategy for future expenses. The firm can be
focused on the money goals in order to avoid unnecessary spending. It will be beneficial
to attain the financial goals of the company.
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LO3 use of planning tools in management accounting
Advantages and disadvantages of planning tools that are used for
budgetary control (P4)
Budgeting is the process of determining forecasted expenses, revenues and profits. it is
of different types for example there are sales budget, expenditure budget cash budget
and master budget. The steps in the budgeting process are discussed as follows;
Using different departmental budgets and reconciling them. Based on the departmental
budgets an overall organisational budget is prepared. Allocation of costs and expenses
are done after analysis of the liquidity position of the company.
Concerning to that of planning tools used for budgetary controls, there are present
majorly three of their types namely zero budget cash budget and product budget;
Zero budgets, product budgets and cash budget work as budgetary planning tools
because these budgets help in outlining the expected level of expenses in particular
financial period. Zero budgets helps in calculating expense from the base level and this
helps in removing the gaps in determination of overall expenditures (Cooper et al.
2017:991). On the other hand, cash budgets help in outlining the liquidity level of the
organisations. Product budgets determine the amount or units of good that would be
produced or sold by the company.
Zero budget
Advantages Disadvantages
● It follows up budgeting procedures
in a flexible way
● It is effective to give better results
in terms of systems of accounting
management (Hall, 2016:63)
● Overcomes the issue of
incremental budgeting through
inflation of budgets
● Enhance communication and
motivation by involving the
employees into decision making
procedures
● It is effective for proper allocation
of resources and does not prefers
historic rather it prefers actual
numbers
● Inefficient for organizations
especially the governmental ones
as the budget is prepared on
annual basis starting from base
level
● According to Kihn (2015:230), it
has huge requirement of
manpower that triggers
implementation of more training to
deal with the complex procedures
● The process is also a time
consuming one as it is considered
to be one of time-intensive
exercise against the incremental
budgeting procedure
Cash budget
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Advantages Disadvantages
● Debt avoidance can be a major
advantages giving the freedom to
spend all the cash without any
pressure
● Presents reflection on the overall
cash present with the user
● Effective for catering necessities
on shorter terms concerning
business house utilization (Malmi,
2016:31)
● Effective to breakdown the cash
into a fixed period basis from
incoming and outgoing forms
● Simple procedures with use of
cash receipts
● Manipulation disadvantages
featuring underestimating of
expenses of customers concerning
budgetary period while making
decisions to be impacted on cash
budget
● Lack of flexibility featuring no
change of the data once entered
into the report management
● Reliance on future expenses
estimates that are expected to be
incurred by the company
● Estimates limiting the cash
budgeting effectiveness due to
having non-availability of factual
knowledge (Malmi, 2016:31)
Product budget
Advantages Disadvantages
● It is efficient for achievement of
sales target
● Gives permissions for the tracking
of costs being important for
keeping a larger number of
products, with the target of meeting
inventory requirements
● Considers the excessive accounts
in some cases which sometimes
are not with viability in real case
scenarios
● A very time consuming process
that is evident to involve a vast
number of managers for being
divided through department wise
(Cooper et al. 2017:991)
● Open to any sort of manipulation
risking to forecasted values
misinterpretations having
information’s that are important
Table 1: Advantages and disadvantages of budget planning tools
(Source: Learner)
Budgetary control tools:
Morrison requires developing budgetary control tools including setting of objectives,
assign proper responsibility, planning different activities. Based on these factors, the
company requires planning the activities and bringing corrective actions in the system.
Morrison can track the costs with developing large number of products. It can meet the
inventory requirements within the time.
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Analysis of planning tools usage and application (M3)
The planning tools that are used by Morrisons to forecast and plan budgets are
discussed as follows;
Trend analysis, cash flow analysis and forecasting are considered to be an effective
planning tool. This is because these tools help in analysing, the forecasted expenses
which in turn help in reducing the risk of incurring future losses.
Trend analysis
This planning tools help in predicting the pattern of cost structure and expenses that
may be incurred in future. Thus it is considered an effective planning tool. It works as a
budgetary planning tool by providing the management with an expected level of
incomes, costs and expenses. This is used in preparing budgets. It analyses the past
expenses made and revenues earned by the company. Based on the past 10 or 5 years
analysis of pattern future expenses or revenues receipt is predicted. This helps in
making the company more proactive and prevents future losses (Jack, 2016:89). It
helps to plan actions and budgets are also prepared accordingly. The estimation of
expenses takes into account uncertainties and thus cost appears to be more enhanced.
Cash flow analysis
Cash flow analysis works as a budgetary planning tool since it provides the
management with the information related to required amount of funds. Budgets are then
prepared according to the level of cash available with the firm. Cash flow analysis help
in understanding and evaluating the liquidity position of the company. The first step in
the preparation of budgets is determining the amount of cash or funds available. The
amount of available cash is then evaluated to analyse whether funds is able to cover
expenses.
Forecasting
Forecasting also works like that of trend analysis and helps the management in
preparing the budgets according to the forecasted level of expenses. It is the most
scientific method of predicting trends and forecasting the amount of expenses that a
company would require to be incurred. It takes into account the historical data and
applies the current changes that are inherent in the market. Forecasted amount is then
used to prepare budgets.
LO4 Using management accounting to respond financial problems
Comparison of the ways in which organization adapt to management
accounting system (P5)
Adapting to management accounting system has been compared against the types of
management accounting system Asda stores uses which is also a supermarket giant in
UK.
Morrisons Asda Stores
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Benchmarking Morrisons compares its
actual expenses based on
industry standards. The
benchmarking technique it
has used is more relevant
and useful (morrisons.com,
2018). Since comparison
made as per industry
standards make the
company more competitive
(springer.com, 2018).
Asda stores evaluates cost
of all it activities based on
the costs it has estimated.
Comparing internal
activities make the overall
functioning of the
organization smooth
(asda.com, 2018).
However as per the view of
Kihn & Ihantola (2015:230-
255), since activities are of
different nature hence
comparisons are
ineffective.
Key performance
indicators
Key performance
indicators used by
Morrisons are sales
achieved and inventory
turnover rate. Sales
achievement is useful to
assess the performance of
employees and since it a
supermarket the sales
achievement is measured
in terms of volume of
goods sold
(morrisons.com, 2018).
Inventory turnover rate
measure the amount of
stock used and the fewer
the amount the better the
performance of the
company. If seen from the
perspective of the nature of
organization it is not these
performance indicators are
best
On the contrary, Asda
stores uses key
performance indicators
such as sales turnover rate
and sales generated per
employee. Sales turnover
rate refers to the amount of
sales or revenue
generated in a given period
of time (asda.com, 2018).
On the other hand in order
to assess the performance
of employees it uses sales
generated per number of
employee. However if seen
from the competition level
these indicators are not
that relevant.
Balance score card Balanced scorecard used
by Morrisons is innovative
and is one of its kinds. The
scorecard used by
Morrisons is called HOLE
scorecard which applies
the golf course theory
Balanced scorecard used
by Asda is in contrast to
that of Morrison. This is
because the company
uses generalised form of
scorecard which is not that
helpful (springer.com,
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(morrisons.com, 2018). It
helps the company apply
best practices and
measure performance of
employee on non financial
terms.
2018). It focuses more on
internal process and
assesses performance of
employees in financial
terms such as the rate of
contribution of employees
in sales volume.
Activity based costing
(ABC)
Activity based costing
adopted by Morrison has
identified various cost
drivers such as
transportation cost,
warehouse cost, cost
related to customer service
and storage cost.
Asda Stores uses activity
based costing however the
range of cost drivers is not
more than that of Morrison.
The cost drivers identified
by Asda are warehouse
costs and service costs
(asda.com, 2018).
However the service costs
include all sorts of services
hence it is not that useful.
Financial governance The company presents all
its financial or material
information in a true and
fair format. The
governance of Morrisons is
good and looks after the
interests of its
shareholders as well as
other investors.
Asda Stores has also
equally looked after its
shareholders interest and
provides all the material
facts to them. It practices
good governance and no
material facts has been
kept hidden
Table 2: Comparison of management accounting system adoption
(Source: learner)
Approaches that are benefitting the company in solving problems:
The above factors are helpful to benefit the company in developing its working
performance. On the other hand, activity based costing is helpful to achieve the key
factors to develop different cost driving situation and financial condition. With the help of
financial governance, Morrison can produce a transparent material based on the
financial situation of this company.
Analysis of management accounting leading to sustainable success (M4)
Management accounting system provides the management with relevant financial
information which enable them to take important decisions for the growth of the
company. In case of Morrisons, a varied range of management accounting system and
techniques have been utilised this has helped it in achieving sustainable profitability. It
uses inventory management system under which LIFO method is applied. This method
helps to keep a track of the level of inventory at different time periods. Whenever the
14

stock goes below the margin of safety level, the manager add inventory so that supplies
can match the amount of demand. It helps in maintaining an equilibrium level of demand
and supply. If the demands are met at time and when required then sustainable profit is
achieved. As per the view of Mittendorf (2015:121-122), budgetary control application
help the company to prepare budgets on a quarterly basis and a timely evaluation of
deviations in the expenses. With the help of this financial problem are prevented and
the organization achieves sustainable success. Moreover applying the system of cost
accounting makes the company achieve economies of scale. Marginal costing enables
the company choose between two or more orders or machines however in case of
Morrison it would be applicable for orders. Marginal cost helps to analyse the
contribution level of each projects and this in turn help the manager to make decisions
related to buying or manufacturing and accepting or rejecting. Thus it recognises
profitable opportunities and sustainable achievement is therefore guaranteed.
Evaluation of planning tools usage to solve financial problems and lead to
sustainable success (D3)
Planning tools such as that of trend analysis, forecasting and cash flow analysis are
efficiently integrated in an organisation like that of Morrisons. Trend analysis and
forecasting predict changes in the pattern of costs, revenues and sales therefore
financial issue are prevented beforehand (Cooper et al. 2017:991-1025). While
analysing past results it also takes into account the future uncertainties hence
sustainable profitability is achieved. Cash flow analysis helps to identify the liquidity
strength of the company thus it is instrumental in avoiding financial risks associated.
Recommendation and Conclusion
Based on the above evaluation, comparison and analysis it can be recommended that
the Morrisons should use fund flow analysis and transfer pricing techniques. It would
help the company to be more effective in identifying financial issue before hand.
Sustainable success and profitability would be observed for a long term. Cost reports
and variance analysis report should also be prepared by the company since it would
help in analysing the amount of deviations incurred. This would further help in
preventing similar type of deviations in future and profitability would thus be guaranteed.
The benchmarking system of Morrisons is good however it needs to adopt departmental
benchmarking too as this would enhance the internal processes.
The study has provided an in depth understanding of management accounting
procedures. The difference between marginal costing and absorption costing has been
outlined with the help of income statements. It has discussed about the benefits and
application of management accounting system in Morrisons Company. It can be
concluded that management accounting is crucial and essential to be undertaken at
every step of decision making process. Morrisons uses varied range or type of
management accounting technique as well as planning tools effectively.
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Appendices
Appendix 1: Marginal costing
Figure 1: Marginal costing
(Source: learner)
Workings:
Sales unit = 50000 units
Sales price = £35.89
Therefore; Total sales = £1794500
Variable cost = £818214
Therefore; contribution margin = Total sales – variable cost = £976286
Selling expenses + Administrative expenses = £102056
Total contribution amount = contribution margin – variable non manufacturing expenses
= £102056
Fixed expenses = £80000
Therefore net profit = £794230
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Appendix 2: Absorption costing
Figure 2: Absorption costing
(Source: learner)
Workings:
Sales unit = 50000 units
Sales price = £35.89
Therefore; Total sales = £1794500
Cost of goods sold = £898214
Therefore; gross profit = £896286
Less expenses = £102056
Net profit = £794230 (gross profit - expenses)
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