ABC Ltd: Budgeting, Costing Methods & Management Accounting-AF705

This report provides an analysis of corporate reporting, focusing on budgeting and costing methods applied to ABC Ltd. It includes a preparation of budgeted profit and loss statements using both marginal costing and absorption costing methods, highlighting the differences in profit calculation between the two. The report further explains the principles of management accounting, its role, and the techniques used within organizations. It also details how management accounting is integrated within a company and the benefits it provides. The analysis includes discussions on margin analysis, communication, and various cost control techniques, offering a comprehensive overview of management accounting practices.

CORPORATE
REPORTING

Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
PART A: Preparation of Budgeting Profit and Loss Statement of ABC Ltd using different
costing methods...............................................................................................................................3
a) Marginal Costing:...............................................................................................................3
b) Absorption Costing:...........................................................................................................5
PART B: Importance of accounting and corporate reporting in modern business..........................8
An explanation on principles of management accounting:....................................................8
Role of management accounting and management accounting system:................................9
Methods and techniques used in management accounting:..................................................10
Explanation on how management accounting is integrated within the organisation:..........11
Benefits of functions to the organisation:.............................................................................12
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
Corporate reporting deals with presentation and disclosure aspects of reporting made by the
organisation. It mainly consists of integrated reporting, financial reporting, corporate
governance, corporate responsibility etc. The main objective of corporate reporting is to ensure
that the information which is provided by the corporation to their investors and other
stakeholders so that they could make rational decision regarding the investment they have made
in the company. In this statement the profit and loss statements are being prepared of ABC Ltd
by application of absorption costing method and marginal costing methods and then the
suggestion has been given to the entity that which method they need to apply in their
organisational structure. At the end of this statement the management accounting principles are
being explained in a depth manner. Further methods or techniques that are being used in
management accounting are explained. At last how management accounting is being combined
with organisation has been explained (Morrison and Lowe, 2021).
MAIN BODY
PART A: Preparation of Budgeting Profit and Loss Statement of ABC Ltd
using different costing methods
a) Marginal Costing:
It is the additional cost which is required to prepare an additional unit of output. It refers to
increase or decrease in the total cost due to the production of an additional unit of output. It is
calculated by accumulated all variable cost. Variable costs include direct material, direct labour,
direct expense. Fixed costs are excluded in marginal costing. It is known as incremental cost.
The formula for marginal costing has been laid down below:
Marginal cost = ∆C
∆Q
where,
MC = Marginal cost
∆C = Change in cost of production
∆Q = Change in quantity
Elements of marginal costing:

1. Direct material: It refers to those materials which is directly used in the production
process of goods and services.
2. Direct Labour: It refers to the employees and temporary staff who work directly on
manufactured a product.
3. Direct expense: It denotes those expenses that businesses incurred and directly
associated with cost object.
Advantages of marginal costing:
1. It is simple to understand and easy to operate because it avoids the complexities of fixed
costs.
2. This technique is used to determine the price of the product.
3. It helps in controlling the cost of the product.
4. It helps the management for taking crucial decisions (Buck, 2018)
5. It is the best method because under absorption or over absorption of overhead is not
arises in this method.
Disadvantage of marginal costing
1. This method does not include fixed cost so it provides less information to externals for
judging the efficiency.
2. This method is not applicable in all type of businesses where full cost is charged.
3. Semi variable cost or Semi fixed cost is not considered so it is difficult to evaluate
overhead.
4. There is undervaluation of stock in this method so it is not accepted by higher authorities
5. In short run fixed costs are constant but in long run all the costs become variable cost.
The profits are being calculated of ABC Ltd using marginal costing method is being mentioned
below:
Particulars Amount (£)
Sales
Less: Variable manufacturing cost:
Direct material consumed
Direct Labour
10,832,000
1,976,000
3,458,000

Variable manufacturing overhead
Variable Cost of goods produced
Add: Opening stock of finished goods
Less: Closing stock of finished goods
Variable Cost of goods sold
Add: Variable administration, selling and distribution overhead
Variable cost of sales
Contribution
Fixed overheads:
Fixed production overhead
Fixed administration overhead
Fixed selling and distribution overhead
Profit under marginal costing:
1,482,000
6,916,000
Nil
1,092,000
5,824,000
Nil
5,824,000
5,008,000
9,75,000
Nil
Nil
4,033,000
b) Absorption Costing:
Absorption costing: It is also known as full costing. It is a managerial accounting method that
includes all cost which incurred at the time of manufacturing a particular product (Maroun,
Usher and Mansoor, 2018). The cost refers to direct cost and indirect cost. Direct cost involves
material, direct rent, labour used in production. Indirect cost refers to factory rent, administration
costs, compliance and insurance.
Components of absorption Cost: -
 Direct labour
 Direct material
 variable manufacturing overhead
 Fixed manufacturing overhead
 variable selling and administrative (Period cost/ Expenses)
 fixed selling and administrative (Period cost/ Expenses)
Advantages of Absorption Cost: -
 It is GAAP compliant.
 It helps to prepare reports for financial statements and stock valuation process.

 This costing takes all costs of production like fixed cost, factory rent, utility cost, direct
cost and indirect cost as well.
 It helps in determining the suitable selling price of products.
Disadvantages of Absorption Cost: -
 As this costing involves allocating the fixed overhead so for decision making it is not
reliable with the products (Pistoni, Songini and Bavagnoli, 2018).
 It gives a miserable valuation of the actual cost a product.
 This costing mainly used to help management instead of decision making.
 It is not useful for examine to financial efficiency or comparing product lines.
Objectives of Absorption costing: -
 To determine the direct cost and indirect cost
 Assists to know the participation cost by department wise.
 Overall cost of product can be identified.
 To examine the data related production and sustain which resources are properly working
or not.
The income statement of ABC Ltd using absorption costing has been mentioned below:
Particular Amount (£)

Sales
Less: Variable production cost
Direct materials
Direct wages
Variable production overhead
Fixed production overhead
Total production cost
Add: Opening stock of finished goods
Less: Closing stock of finished goods
Cost of goods sold
Gross profit (Sales – cost of goods sold)
Less: Under absorbed fixed production overhead
Add: Over absorbed fixed production overhead
Less: Expenses
Variable selling and distribution expenses
Fixed selling and distribution expenses
Fixed administration
10,832,000
1,976,000
3,458,000
1,482,000
975,000
7,891,000
Nil
1,245,950
6,645,050
4,186,950
Nil
Nil
Nil
Nil
Nil
Net profit under Absorption costing 4,186,950
Comments:
The profit as per budgeted profit statement of ABC Ltd. for the month of January is prepared
using Marginal costing method and Absorption costing method. As per the above calculations
the profit as per absorption costing is £4,186,950 which is higher than the profit calculated under
marginal costing of £4,033,000. The income statement that has been prepared using marginal
costing method is used by the management for the purpose of decision making. Whereas the
absorption costing method is used for making the profit statement which is laid down in front of
users of financial statements (Busco and Sofra, 2021).
Note: The closing stock of finished goods under absorption costing is rounded from £1,245,947
to £1,245,950 for representation purpose.
to £1,245,950 for representation purpose.

PART B: Importance of accounting and corporate reporting in modern
business
An explanation on principles of management accounting:
Managerial accounting: It is a procedure of accounting that makes reports, statements,
documents and is used by the manager for taking rational decisions in the company. It is an
internal analysis of the company. It provides the financial information to managers for making
future plans.
Principles of managerial accounting
 Designing and compiling: Every accounting information whether it is related to past,
present, future from reports, statements should be collected, designed and compiled to
furnish the information to users and clients. This system should be designed in such a
way to present the relevant data. This principle can be altered according to the needs of
users (Ferracuti and Stubben, 2019).
 Management by exception: This principle is followed for presenting the information to
management. Management accounting system should be followed by using standard
costing and budget control system. In this actual performance is measured with standard
performance to find out the deviations. If there are any deviations it should be corrected.
 Control at source accounting: Cost should be controlled at each and every point when
they incurred. Every data should be recorded such as performance of employees, cost of
material and labour and machine powers repairs and maintenance which provides both
qualitative and quantitative information. This way control can be exercised in best
manner.
 Use of Return on Investment: It is called return on capital employed. It shows how
company is managing its owners’ equity and long term debt. It is measured in terms of
real money value.
 Utility: This principle relates that it serves the purpose not only in short run but also in
long run.

 Integration: It shows that there should be proper integration of the information and it
should be used effectively at the maximum to reduce the cost.
 Utilization of resources: It denotes that there should be optimum utilization of
resources. There are some resources which is available in plenty and some other
resources which have scarcity. All the resources should be effectively and efficiently
utilized (Kannenberg and Schreck, 2019).
 Absorption of overhead costs: It is absorbed on predetermining basis. It is measured by
the constituents of indirect material, indirect labour, indirect costs. This method shows
the fair and transparency of the results.
 Controllable and Uncontrollable cost: Controllable cost are those cost which can be
altered on businesses products and services. Uncontrollable cost is those cost that cannot
be changed based on personal businesses decision.
 Appropriate means: It means to select the most important methods of presenting,
recording and presenting the information. In simple words, small company used ordinary
computer while large company used new software and new technology computer.
 Personal contacts: It shows that every employee should maintain good terms and
relations with their seniors, managers and foremen. It helps to avoid the conflicts between
management and employees.
 Forward looking approach: It means to predict the future problems by using standard
costing techniques. It helps in prevention of problem which can be occurred in future
Role of management accounting and management accounting system:
The role of management accounting to an organisation are being mentioned below:
 Stewardship accounting: The management of the organisation use the financial data so
that they could prepare books of accounts that helps in decision making of the entity
(Khan, 2018).
 Long term and short-term planning: It play a vital role in defining the future business
prospects of an organisation with the help of making future business plans. The example
could be developing the strategy for the corporate, market research analysis etc.
 Development of management information system: With the help of management
accounting the regular reports that are being used by the management for decision

making purpose being prepared which are being used by the management personnel to
take the corrective action on timely manner.
 Optimum capital structure to be maintained: With the help of management accounting the
decision will be taken in an adequate manner by the management regarding the optimum
mix between debt and equity. Funds raised with the help of debt is cheaper but it will
generate interest liability on the organisation due to which the entity will become risky
(Konings, 2020).
Methods and techniques used in management accounting:
 Techniques of management accounting: - It uses several different techniques to achieve
an organization goal. There are variety of techniques that discussed below:
 Margin analysis: - It helps to optimizing the benefits of production. This technique uses
for the marginal costing. It refers to the breakeven analysis for profit maximization that
examines the sale of the business product.
 Communicating: - This technique plays an important role of any organization to
determine the functions of controlling, planning and making the decisions. By
communicating the actual facts and data the management accountant prepares the reports
of the different level of direction through correct selection of data and selects the suitable
method of reporting.
 Analysis of financial statements: - This analysis is used to examine the significance of
financial statements through which the managing accountant can prepare forecast of the
prospects for profitability, future earnings, debt maturities and ability to pay interest. This
technique refers to ratio analysis, trend analysis, cash flow statements and financial
statements. This analysis presents the information of business executive, creditors and
investors.
 Standard costing: - This technique is essential to have cost control. The establishment of
this costing is under the most efficient operative conditions. It helps to compare the actual
data with the standard data, analysis of variances and calculation, in order to meet the
reasons and to precise the responsibilities (Miras‐Rodríguez, M.D.M., Bravo‐Urquiza,
2020).
 Budgetary control: - This analysis uses for controlling and planning of the several
activities of an organization. The management accountant will prepare the report with the

help of the budgetary control. This is an essential technique of directing organization
operations and succeed an adequate return on investment.
 Financial planning: - It refers to act of determining in advance about the business
financial activities. It helps to achieve the primary objectives of an organization. It
decides the both short term and long term financial features of the business. It involves
developing financial policies and procedure to attain the objectives.
 Funds flow statements: - This technique is used to examine the changes in business's
financial position between two dates. It assists to control, analysis the financial reports
according to future guidance.
 Cash flow statement: - This statement is more useful than fund flow statement. It helps
to gather detailed data of cash inflows and outflows of business enterprise. It is an
essential substance of cash control because it assists to summarises of cash inflow and
uses of cash outflows.
 Historical cost accounting: - It helps to collect the past data of the management which is
relating to the cost of process, job and department so that with the standard costs
comparison may be made.
 Decision making: - It is essential to choose the best out of all the existing factors and
alternatives where are a lot of alternatives of doing a particular work. This technique
helps to manage all the marginal costing, differential costing and capital budgeting to
choose out the best option which will assist to maximise the profits of the enterprise.
Explanation on how management accounting is integrated within the organisation:
The following are the reason due to which management accounting has been integrated within
the entity:
 Understanding the profitability of business:
When the management team has been reviewing their products range they offer to their
consumer, the management accounting helps the organisation by providing them relevant
statistics in order to get complete details that which products are generating profits for
them. It also supports the organisation in development of valuable Metrix regarding the
decisions that are being made by various individual could affect the profitability of
various product that are being offered by the corporate.
 Planning with respect to product launching:

At the time of planning for the new product, the importance of management accounting
enhances. It supports the business from the very beginning at the time of validation till
the execution of the project under process by proving the breakup of various levels of
production capacity as well as complete picture of the market as well.
 The staffing requirement of the entity would be sorted out:
Management accounting also helps the business to deal with the staffing requirement they
are facing in their business. As hiring of staff and their wages computation is the difficult
task for the business. Management accounting could help the business in taking right
decision with respect to hiring of the staff at right cost so that the investment made by the
entity on hiring of new employees would gain them sufficient returns.
Benefits of functions to the organisation:
The benefits of functional structure within the organisation are being mentioned below:
 Higher productiveness ranges: Most personnel in a purposeful company shape have
precise capabilities that permit them to paintings extra efficiently, which could cause
improved productiveness throughout the agency. Their excessive self-belief ranges allow
them to perform duties accurately, with little supervision. Employees below this machine
who exhibit more productiveness regularly acquire promotions to better positions
withinside the agency's hierarchy.
 Skill Growth: Companies the usage of a purposeful organizational shape have numerous
departments made from small groups. In every group, skilled managers have the
possibility to increase understanding of the capabilities they own to their group
individuals. The end result of that is an more advantageous ability set for all of the
individuals involved. Their difficult capabilities and tender capabilities can also
additionally enhance over the years as groups paintings collectively to discover precise
answers and conquer paintings-associated challenges.
 Clarity: When groups convey humans of the identical ability set or area of expertise
collectively, it establishes clarity. When someone withinside the agency calls for
excessive-degree statistics concerning human resources, marketing, customer support or
operations, it is clean who they are able to touch to get the proper statistics. The identical
applies to outside stakeholders, clients, or clients who can also additionally touch the
agency with a unique request. Also, the hierarchical nature of the purposeful shape