Managerial Accounting Report: Costing Methods and System Improvement

This managerial accounting report examines the core principles of managerial accounting, focusing on the application of absorption and marginal costing methods for Swipe 50 Limited, a laptop screen protector manufacturer. The report includes profit statements prepared using both costing methods, detailed calculations of closing inventory, and a reconciliation of the statements. It highlights the key differences between absorption and marginal costing, emphasizing their impact on profit measurement and decision-making. Furthermore, the report identifies three ways to improve accounting systems and underscores the importance of managerial accountants in manufacturing companies. The analysis covers the implications of each costing method, the advantages of marginal costing for decision-making, and the importance of both methods for financial reporting and internal management. The report concludes with a comprehensive overview of the benefits of each approach and its relevance in business.

Managerial
Accounting
Report

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
A. Profit Statement......................................................................................................................1
B. Reconciliation of statements ..................................................................................................4
C. Difference between absorption costing and marginal costing ...............................................4
D. Three Ways to improve accounting system...........................................................................7
E. Importance of managerial accountant jobs for manufacturing company...............................8
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................11

INTRODUCTION
Managerial accounting is the procedure to recognizing, measuring, analysing, interpreting
and communicating information to managers for the pursuit of an organizational goals and
objectives (Achleitner and et.al., 2014) . On the basis of these information a manager take
appropriate decision and arrange all the company's operations. The management accountant of
the company need to determine several events and operational metrics in reference to interpret
the data for using as useful information that can be advantage by the management of company.
There are including some managerial topic like calculation of a producing products costs which
is important for the external financial statements which is essential to follow with US GAAP.
The purpose of the report to develop understanding of the managerial accounting processes and
learn several types of accounting methods. The report based on the Swipe 50 limited, which
manufactures unique screen protector for laptops computers. The presented report base on the
case study where produce profit statement for Swipe 50 Limited through using marginal and
absorption costing method. Define both methods in detail and how to different from each other.
Apart from the report, define different accounting system in three ways and importance of
managerial accountants jobs for manufacturing company.
MAIN BODY
A. Profit Statement
Absorption Costing – It is a costing method where consist of all expenses and costs are
connected with manufacturing a particular product. This method essential for generally accepted
accounting principles (GAAP) as external reporting. To calculate cost of finished products
through absorption costing method consist of different cost such as
 Direct materials – These types of material are using to calculate of finish products cost.
 Direct Labour – The factory labour cost important to construct a product.
 Variable manufacturing overhead – It is operating to provide facility of manufacturing
company in effective manner. For example – supplies and electricity for production
equipment (Ahrens and Khalifa, 2015) .
 Fixed manufacturing overhead – The particular cost to conduct a manufacturing facility
which do not vary with production volume. For instance – Rent and insurance.
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It is possible to apply activity based costing to circulate overhead costs for stock
assessment in reference to absorption costing methodology.
Income statements as per absorption costing:
Particulars Per unit rate February March
Sales revenue 22 253000 341000
Less: cost of goods sold
Opening stock - 6710
Direct material cost 2.32,2.29 29000 33250
Direct labour 1.52,1.52 19000 22000
Variable production overhead 0.58,0.59 7300 8500
Fixed production overhead 2.288,1.97 28600 28600
Closing inventory 6.71 (6710) -
Total cost of goods sold 77190 99060
Gross profit 175810 241940
Less: selling and administrative
cost
44500 57100
Net profit 131310 184840
Calculation of closing inventory cost per unit:
Particulars February
Direct material cost 2.32
Direct labour cost 1.52
Variable production overhead 0.58
Fixed production overhead 2.288
Closing inventory per unit 6.71
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Interpretation – As per the above table it has been analysed that there are calculating net
profit through absorption costing method in February and March. Through this method firstly
calculate cost of goods sold where includes opening stock, direct material cost, variable
production overhead, fixed production overhead and closing inventory. These amounts are less
into selling amount than get amount of gross profit. From the amount of gross profit less amount
of selling and administrative cost which is 44500 in February and 57100 in March. After these
all calculation get the amount of Net profit of Swipes 50 limited which is 131310 in February
and 184840 in March. There are calculating cost of closing stock and with the help of direct
material cost, direct labour cost, variable production overhead. In the end of calculation get
amount 6.71 of closing inventory per unit.
Marginal Costing – The managerial cost of manufacturing is the change in total cost that
comes from developing and producing one extra unit. The main purpose to determining the
marginal cost and what point a business accomplish through economic system of scale. To
calculate extra unit of calculation apply the formula by dividing the change in the total cost by
the change in the product result (Boyns, Anderson and Edwards, 2014). It defines that the rate at
which the total cost of a product changes as the manufacturing improve by one unit.
Furthermore, due to fixed costs do not change on the basis of number of products manufactured,
the variable cost is effected only by the alternations in the marginal cost.
Marginal costing cost categorised into variable cost as well as fixed cost and it is mainly
depend on the behaviour of costs with volume of results. As per the particular approach, it is
getting that to recognise the amount of contribution regarding to per product towards fixed
overhead and profits. The contribution departure among sales volume and the marginal cost of
sales.
Income statements as per marginal costing:
Particulars Per unit rate February March
Sales revenue 22 253000 341000
Less: Marginal cost of goods
sold
Opening stock - 4420
Direct material cost 2.32,2.29 29000 33250
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Direct labour 1.52,1.52 19000 22000
Variable production overhead 0.58,0.59 7300 8500
Closing inventory 4.42 (4420) -
Total cost of goods sold 50880 68170
Gross profit 202120 272830
Less: fixed production overhead
cost
28600 28600
Less: selling and administrative
cost
44500 57100
Net profit 129020 187130
Calculation of closing inventory cost per unit:
Particulars February
direct material cost 2.32
Direct material cost 1.52
Variable production overhead 0.58
Closing inventory per unit 4.42
Interpretation – From the above table it has been analysed that sales revenue of the
company in February, 253000 and in March, 341000. From the amount of Sales revenues less
cost of marginal cost of goods sold where does not consist of fixed overhead production
overhead. After getting total cost of goods sold less amount than get gross profit which 202120
in February and 272830 in March. The amount of fixed production overhead less from gross
profit and also amount of selling and administrative cost than get amount of net profit.
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B. Reconciliation of statements
February March
Profit Using absorption costing 131310 184840
Less – Fixed overhead in closing inventory (2290) (1970)
Add - Fixed overhead in opening inventory - 4260
Profit According to marginal costing 129020 187130
C. Difference between absorption costing and marginal costing
Basis Absorption Costing Marginal costing
Classification In this method cost has been
categorised into different cost like
administrative, selling and
distribution.
Marginal costing costs are
categorised into fixed and variable
cost.
Element of cost To calculate cost of production
included cost of fixed overhead.
To compute cost of production there
are not including fixed cost.
Manufacturing
overhead rates
In this method manufacturing rate
consist of both marginal and fixed
manufacturing overhead (Carcello
and et.al., 2018).
There are rates are consisting of
variable manufacturing overhead.
Valuation of stock To analysis valuation of stock
through this method on this product
using prime cost + applied fixed and
variable manufacturing overhead
Through this method conduct
assessment of inventory utilise of
Prime cost + applied variable
producing overheads.
Suitability of
decision making
The particular decision can not
suitable for decision making.
This method is appropriating for
decision making process.
Gross profit or
operating profit
To calculate gross profit from this
method apply particular formula
Gross Profit = Net Sales –
This system apply the formula to
compute gross profit of the company
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manufacturing cost of goods sold.
Manufacturing cost = Prime cost +
Fixed and variable manufacturing
overhead.
Marginal income or contribution =
Net Sales – Manufacturing cost of
sales – Variable administrative,
selling and distribution overhead.
Profitability Due to the situation of fixed cost,
influence to profitability.
There are profitability measure
through profit volume ratio.
Focus on In this method mainly focus on net
profit per unit
In this method focus on the
contribution per unit.
Cost Data According to this absorption costing
method cost data presented into
conventional way.
The marginal costing method
presented data to outline total
contribution of each product.
Importance of Absorption costing method
 The absorption costing method utilise by mostly companies to show correct profit
calculation in the context where manufacturing is completed when they have sales in
future as compare to variable costing.
 This method has been identified by several bodies like FASB (USA), ASG (UK), ASB
(India) due to producing external reports and assessment of stock.
 It ignores the alteration into cost like fixed and variable cost factors which can not be
done easily and accurately.
 With the help of this method discloses ineffective and effective uses of production
resources by showing under absorption or over absorption of factory overhead.
 This method can help to manager to become more responsible regarding to cost and
services to circulate to its sections for the correct allocation and distribution of fixed
factory overheads (Crabtree, Maher and Wan, 2014).
 The advantage of this method to compute gross profit and net profit individually in
income statement. It is defining as best way of costing in the context to smaller
companies. After following of absorption costing easily calculate cost for small business
and it is unlikely that these entities have a lot of products.
 It is best method for business which have a constant demand for products.
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Importance of Marginal costing method
 The concept of marginal costing essential for individual to manufacturing or consuming
extra units.
 It is very important for company because it is easy to understand and can be concerted
with standard costing and budgetary control. Due to control it makes more effectual of
mechanism.
 Decision making – It is helping into decision making process because contribution is
used as a tool which provides reliable measures for decision making.
 This method is highly utilise for public utility undertakings. It helps them in increasing
result as well as better capacity commute. It is possible when lowest possible price is
charged. In the company through marginal cost set lower limit of their products that time
public utility interest to follow marginal cost pricing and it will help to maximizing social
welfare.
 The particular method change the face of competition in reference to organisation. It is a
reason why export prices which is depended on the marginal costs since international
market is highly competitive (Hampton, 2015).
 It is also important for consumers looking to buy extra units of a good or services. Stores
often take benefits of this offering deals and sales. It is not only motivate to shoppers to
buy extra units. It generates income for the company as well . Most of the consumers are
much more likely to purchase a second item at half price due to the marginal cost is half
of the original cost.
D. Three Ways to improve accounting system
There are discussing of three ways which can help to Swipes 50 Limited to improve their
accounting system in effective manner. After improving it provides best result and understand
where is need to improving. So there are applying three ways which can help to improve
accounting system - Training & Development – To improve accounting system need to provide training
regarding to accounts department as a result their performance will be increase and
perform in effective manner. Cross train team members so that at no point in time faced
of personnel shortages. It is not important to keep information with top management
while need to share with whole team. Otherwise it will create knowledge gap and
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employees of Swipes 50 Limited can not understand of all terms easily (Ionescu, 2017).
To ignore these types of situation by directing continuous process training. Assuring back
ups for all roles and assuring for all important functions are well documented. The
accounting system apply by different members who is working into accounting
department and they are Streamline preparation of financial statements – To improve accounting system there is
required to time creation of financial statements change the areas of concern before they
intensify. When company effectively focus on every transaction and effectively apply all
accounting system that time get optimal results. It can help to analysis the performance of
the company. To improve accounting system for Swipes 50 Limited need to developed
financial statements in proper way. Record every transactions as per the guideline of
GAAP. It can help to remove errors and effectively prepare all financial statements. Increase collaboration with other departments – The accountants and finance
department focus on other departments and maintain relation in effective manner. The
function of accounting department in separation and they often depend on their division
for relating data (Murthy and Rooney 2018) . There are finding several ways in which the
data can be submitted on certain period of time. If in Swipes 50 Limited find an friction
among several sections and the team finance. Fine structure to sort out the issue of
improper accounting system. The manager of company define concerns to the other
managers and let them explain theirs. The company assure about the flow of data in
smoothly manner in several division.
 Recognised failure system – In every organisation each system can not working properly
as per the requirement so they are required to identify those systems. Many companies
does not realise that their accounting system which is not running in correct manner.
There are need to continue to direct these imperfect systems. In the context to Swipes 50
limited identify those systems which are not working in perfect manner (Lam, 2014).
As per the above ways it is understand that every organisation apply different accounting
system as per the requirement. So there is need to understand of those systems and effectively
apply in swipes 50 limited.
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E. Importance of managerial accountant jobs for manufacturing company
Role of managerial accountant in a manufacturing company: The role of a
management accountant is to track internal cost for any business process that can help an
organisation to achieve its desired goals & objectives. Major part of the managerial accountant is
to analyse the records prepared, analyse non-financial information, preparing budgets and
comparing standard & actual data by identifying any improvements that can be made in the
process. Swipes 50 Limited has hired a well efficient management accountant whose roles &
responsibilities include preparing forecasts for the upcoming year which will include a brief idea
of all the income as well as expenditure relating to the period. Some of them are explained
below:
Manage records: In a manufacturing company, major role of a management accountant
is to determine costs associated with different products & services. Further this can comprise of
estimation cost of raw materials, labour, sales, advertising, social media networking etc. In order
to ensure Swipes 50 Limited's financial security as well as strategy implied by mangers, it is
necessary for a managerial accountant to maintain reports & follow various accounting systems.
This can consist of preparing different types of managerial accounting reports that relate to
producing budgets, keeping a track of inventory count. It can further include identifying the
defaulters in Swipes 50 Limited by calculating debtor collection period which states the number
of days a supplier or customer has to repay the due amount (Lee, Bishop and Parker, 2014).
Analysing non-financial information: The crucial role of a management accountant in
Swipes 50 Limited is to analyse and measure the non-financial information. It can be
improvement in decision making process by the members, better stakeholder relationships, lower
risk of problems, increased credibility, greater access to capital etc. In order to achieve growth &
success, a manufacturing company should produce such goods or services that caters to the needs
& requirements of a customer (Mio,Venturelli and Leopizzi, 2015). Since, these will be offered
to the market participants so it is important to attain customer satisfaction by making high quality
products. The managerial accountant is also responsible for getting best efforts out of employees
working in an organisation by providing them with additional incentives like bonus,
performance-based appraisal etc. that will help the company in attaining efficient & effective
results
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Preparation of budgets: The main role of a management accountant in Swipes 50
Limited is to prepare budgets. Since these record all the details about the income & expenses
during an accounting year so it is very important to analyse previous statements before preparing
a budget. A review of historical data is also required in order to produce a forecast for the future.
Proper allocation of funds and resources should be done by the managerial accountant in Swipes
50 Limited as any misappropriation can lead to a downfall in profitability situation of the
company (Machado and Alves, 2017).
Comparison of standard and actual budget & identifying improvements: The major
role of a management accountant in Swipes 50 Limited is of forecasting. In relation to that,
comparison of standard and actual budget is essential in order to get an idea about the industry
average for a specific product or service. In a manufacturing company, examination of different
raw material used in production of goods, allocating expenses to separate departments within a
company etc. plays a crucial role when defining organisational goals & objectives. If any
improvements are required in the process so in that case the managerial accountant identifies the
issue and resolves it with the use of various techniques. It can include various measures to
evaluate performance of Swipes 50 Limited like key performance indicator, benchmarking,
balanced scorecard, financial governance etc.
CONCLUSION
As per the above report it has been concluded that managerial accounting essential to
conduct different types of business activities in effective manner. It is used for various activities
and help to get optimal result in the context of an organisation. There are calculate net profit
through absorption costing and marginal costing and get different results from both method.
Both methods are different from each other because it is applying in different styles and
important for organisation. They have their own value which is helping to achieve results of a
company. To improve accounting system apply ways on the basis of company such as training &
development, prepare financial statement in effective manner respectively. The job of managerial
accountant important for manufacturing company because they are aware for their roles and
responsibilities.
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