Management Accounting Techniques: Cost Analysis and Application Report

This report provides an overview of management accounting systems, focusing on cost analysis techniques and their application in preparing income statements using marginal and absorption costing methods. It explains the essential requirements of different management accounting systems, including cost accounting, job costing, price optimizing, and inventory management systems. The report also details various methods used for management accounting reporting, such as financial statement analysis, cash flow analysis, standard costing, marginal costing, and budgetary costing. Furthermore, it includes a practical example of overhead allocation to departments and the calculation of hourly overhead absorption rates, demonstrating the application of these techniques in a real-world scenario. Desklib offers a platform for students to access this solved assignment and other study resources to enhance their understanding of management accounting principles and practices.

Management Accounting

Introduction
There are over hundreds and thousands of company situated in all over the world. Organization’s
main aim to achieve success through different techniques and gain profit is being achieved. Since
the revolution of industrialization the world has seen a rapid change in the field of management
accounting. They have managed to come up with scientific approaches to every situation. High
level of experiments has been done and some strategical answer to important question has been
found. Finding the theory and its application in the business has been conducted. People are
enjoying not just a country’s economy but the world’s economy.
In the following discussion a brief idea about the business management and the tools that they
use to get the cost efficiency is being mentioned. Some examples are solved so that a better
understanding of the cost margin, job costing and many more aspects of costing can be
understand.

LO1 Demonstrate an understanding of management accounting systems
P1 Explain management accounting and give the essential requirements of different types
of management accounting systems.
Management accounting helps the manager of an organization to take proper decision regarding
the future plains. It is nothing but a tool that manager or the management team use to get
statistical data of their own organization and their competitor’s organization that helps taking
decision regarding the future of the company. Management accounting can provide information
regarding operational costing, single costing, process costing, cost-volume profit analysis and
many more. Financial accounting and managerial accounting go side by side most of the time
financial accounting provides information regarding public regulator, lander, stakeholder and
many more. Financial accounting can be called as information whereas the managerial
accounting can be called as the data because financial data provides the information on external
factors and managerial data make use of such information (Hall, 2016).
It is very much important for the organization to integrate such because it helps the manager and
the entire management team to understand the situation of the market, sales figure, Production
cost, sales cost and many more. The origin of management accounting can be dated back to the
industrial revaluation ever since the knowledge regarding this has grown significantly. It has
been noticed that two industry specifically textile and railroad had a very big role on
management accounting development. During the old days of making rail road a huge amount of
monetary support for a very long period of time was required. After the completion of the rail
road a good amount of monetary support came in from different sources. Those people have to
analyze the financial measures and the efficiency for moving of passenger, goods, freight
(O'connor, 2017).
In textile industry the requirement of raw materials and labor was constantly very high for the
production of fabric and other associated products. The mills were able to develop a method to
track the efficiency of the production. (Hill, et al 2014) This made the pillars for the modern day
managerial accounting. In early 20th century the industrial engineering and management
accounting team managed to come up with scientific approach to the management accounting

system.Before that double entry book keeping methods has been used. It took 300 years in the
field of commerce to adopt to the management accounting system. Like every other discipline,
managerial accounting has some principals and these principals help the management team to
improve their decision regarding the future of the company, help providing goals through proper
capacity utilization, internal business process and customer values. To make it simple these are
the few principles that management accounting uses for its function designing and compiling,
control at source accounting, accounting for inflation, use of return on investment, utility,
integrity, absorption of overhead costs and many more (Laudon, and Laudon, 2016).
 Designing and compiling- records, reports, accounting information and statement should
be kept in order to satisfy the needs of a business and its problems. These information can
be customized, modified, and adopted to satisfy the requirements of the management.
 Management by exception- it means that the use of standard costing techniques and
budgetary control system is followed in the management accounting system to come up
with results. This compares the actual performance with the pre-determined once. This
helps the management to determine what went worn and help come up with strategic
ideas to counter such.
 Control at source accounting- this helps the management team to control the cost from
the very beginning. Details of materials issues, utilization and usage of machinery and
man power repair and maintains of machinery and vehicles and many more. Are formed
for qualitative and quantitative information. In such sector a proper control can be
gripped on the employees and other aspects.
 Utility- the utilization ofall the related forma and management accounting systems
should be as long as they have a purpose in the field (Akers, 2016)
 Integrity- it means that the accounting services should be provided at a very minimum
cost and at the same time, all the necessary information regarding the management is
integrated.
 Absorption of overhead cost- the combination of indirect labor, indirect expenses and
the indirect materials are the very essence of overhead costing. It gets absorbed on
predetermined basis.

Financial accounting Management accounting
Definition Financial accounting system’s main focus is on
the preparation of financial statement. It is
mainly done after a year but some organization
makes this statement in quarterly or half
yearly basis to stay up-to date
This system mainly focus on
providing information to the
managers and the
management teams to come
up with better polices for the
organization.
Requiremen
t
It is very much compulsory to prepare because
sometimes the government does auditing to the
organization to understand the behavior of the
company
As this statement is only
required by the management
team it is not so necessary for
the organization to prepare
Function It provides only the monetary information of
the organization
It provides both the
monetary and non-monetary
information to the
organization.
P2 Explain different methods used for management accounting reporting
There are different types of accounting systems for example, Cost-accounting systems,job-
costing systems and price-optimizing systems, inventory management systems and many
more.These accounting system has one thing to do that is to provide the management team with
the necessary information to take important decision regarding the future policy of the
organization. These information always helps the organization to have strategic advantage over
the competitors. There are many company who adopted these strategies and able to come up
with brilliant ideas which helped them to stay in the business with greater advantages. There are
many more methods that management uses for its advantages for example, financial statement
analysis, cash flow analysis, standard costing, marginal costing, budgetary costing and many
more.

 Cost accounting systems- This accounting system also called the product costing system
or costing system. It helps the management team to analyze the cost so that the future
profit from sale can be understand, inventory valuation and cost control can also be
understood from this. Understanding the exact amount of cost for the product is very
important for the company this helps the company to understand how much profit they
can actually make so that the needs of the stake holders can be satisfied. There are two
methods to determine the cost accounting systems, they are job costing and process
costing.
 Job costing-Every job is different from one another for this reason one job cannot
be mixed with other. It accumulates manufacturing cost separately for each cost in
hand. It provides data on how much money is spent on the employees who is
doing a particular work in the organization based on their nature of work (Javed,
2015)
 Process costing- it provides manufacturing costs of a product or services for each
process. It is appropriate for those goods that are being prepared from different
sections for example, manufacturing of a car, pen or even a smart phone.
 Prize optimizing system-Itis a system that a helps a company to determine, understand
and make the profit margin of their product and services. The data that are being used in
price optimization of a company involves inventory costing, operating costing, historic
prices, sales and many more. It helps the organization to analyze what set of input will
result in maximum out. In simpler terms it helps the organization to find out what amount
of money is required to put as the price tag of the goods and services. It manages to
minimize the risk of having low profit margin dramatically. The scientific approach to the
data which is very much needed to make price optimization does exist. From the data the
consumer can be segmented into small groups who has similar price response and it can
also help finding the price elasticity for every segmented groups (McNeil, et al 2015)
 Inventory management system- This system allows the company to make better
decision regarding movement of its operation of the inventory. It keeps an eye on the
production to retail, movements of all its stocks parts and many more. It is very costly to
maintain in an organization. Due to the introduction of 21st century’s technology into the

commerce field keeping a track became easy. Every industry uses its own and unique
ways of keeping a record some may chose barcoding and other may chose inventory
alerts. Here are some of the methods that are adopted by the organization by the 21st
century approach to keeping inventory management system, reporting tools, inventory
forecasting, Radio Frequency Identity Chip or (RFID) chips and many more. There are
various types of inventory management systems in the market inventory management
software features being one of them. Here are some of the other inventory management
system which has different features for example, manufacturing inventory management,
warehouse inventory management and many more ((Maas, et al 2016)
 Manufacturing inventory system- most of the time it has been noticed
thatmanufacturing process mostly make its work on orders and bills of materials.
At this point of functioning process of it deals with the work order and bills of
those products that are already existing. Management finds only material tracking,
inventory levels for parts and finish products. Automatic recording and many
more.
 Warehouse inventory management- Managing a warehouse can be very
difficult for the warehouse owner. He or she always have to keep a record of
everything in the warehouse but that is not the real challenge the real challenge is
knowing what is where and getting an item in times of need is very important.
The features that are involved in this in this system is advanced barcode or QR
supporting systems, multiple location support, order picking support and many
more (Higham, et al 2018)

LO2 Apply a range of management accounting techniques
P3 Calculate costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costs.
Example 1: Overhead allocation to departments and calculation of hourly overhead
absorption rates
CD Bakers produces cakes in its factory. The factory has two departments, baking and packing,
and incurs the following annual overhead costs which require allocating between the two
departments:
£
Machinery insurance 40,000
Supervisory salaries 180,000
Factory rent, rates and insurance 100,000
Factory lighting 20,000
Machinery depreciation 60,000
Factory heating 30,000
The following additional information is available:

Baking Packing
Floor area (square metres) 1,375 1,125
Machinery cost (£) 225,000 75,000
Volume (cubic metres) 16,500 13,500
Number of employees 10 20
Number of machine hours 72,500 6,000
Number of labour hours 21,250 42,500
Required:
Using the table below, allocate the factory overheads to the two departments using any
systematic basis for the allocation and calculate the most suitable hourly overhead absorption
rate for each department.
Overhead Basis Baking £ Packing £
Machinery insurance 40000 225000 75000
Supervisory salaries 180000 10 20
Rent, rates and insurance 100000 1375 1125
Factory lighting 20000 1375 1125

Machinery depreciation 60000 18750 6250
Factory heating 30000 1375 1125
Total 677885 762530
Baking: hourly overhead absorption rate: 677885
Packing: hourly overhead absorption rate: 762530
Example 2: Service department costs reallocation
FE Manufacturing has two production departments, manufacturing and finishing, and two
service departments, maintenance and stores. Details of the costs and usage made of each service
department by the other departments are given below.
Required:
Reallocate the service department overheads and calculate the total overheads for the two
manufacturing departments.
Manufacturing Finishing Maintenance Stores
£ £ £ £
Overheads 250,000 200,000 100,000 120,000
% Usage of Maintenance 45 35 20
% Usage of Stores 70 30

Manufacturing Finishing Maintenance Stores
£ £ £ £
Overheads 250,000 200,000 100,000 120,000
Maint’ reallocated 112500 7000 24000
Stores reallocated 175000 60000
Total overheads 5375000 267000 100000 144000

Example 3: Activity based costing
Alphabet Manufacturing produces two different speaker sets, the Alpha and the Beta. 10,000
Alpha and 10,000 Beta speaker sets are produced and sold each year. The company has fixed
overheads of £480,000. Currently, fixed overhead is allocated to each product at the rate of £24
per product (£480,000 ÷ 20,000 products). Selling price is calculated as total cost + 25%. The
cost structure of each product is as follows:
Alpha Beta
£ £
Variable product costs 16 28
Fixed overhead allocated 24 24
Total cost 40 52
Selling price (total cost + 25%) 50 65
At current selling prices, Alphabet Manufacturing is finding that all of its Beta production is
easily saleable while buyers of Alpha speaker sets require discounts to the current selling price.
Total overhead costs have been reviewed and have been found to consist of the following:
£