Management Accounting Report: Cost Analysis and Relevance

This report delves into the core concepts of management accounting, focusing on cost analysis within a manufacturing context, specifically using John Lewis as a case study. It explores various cost classifications, including manufacturing, product, and period costs, as well as direct and indirect costs. Th...Read More

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1 ..........................................................................................................................................1
1.1 Various management accounting cost...................................................................................1
2. Relevance of costs: .................................................................................................................3
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Management accounting system is the process which is used by the company in order to
assist the business for gaining sustainable development. Managerial accounting concerned to the
provision of an adequate information for decision- making, planning, cost control and
performance assessment. This report is based on the John Lewis which is the ready-made
clothing manufacturing company. In Managerial accounting, the various kinds of cost,
manufacturing costs, product costs and period costs (Bennett and James, 2017).
TASK 1
1.1 Various management accounting cost
The key advantages of management accounting are:
1. Reporting to management: This is the main role of management accounting for informing
and advise management about the latest position of the organisation. This includes
information about the performance of diverse departments on a consistent basis to the
management that is helpful in forming an adequate decision. A management accountant
likewise works as an expert in order t overcome any current financial or other diverse
issues of a company.
2. Assist in decision making: Success of any company relies upon an adequate decision
making, which is in turn relied upon the informational networks which is rendered by the
management accounting.
3. Planning and formulating policies: A management accountant renders essential and
relevant information to attain targets of the organisation. Management accounting applied
regression analysis and time series analysis as estimating tools.
There are various kinds of management accounting system which are as follows:
Manufacturing costs: This costs are broken down into three main parts. direct material,
direct labour and manufacturing overhead. Direct material costs are those costs which are
directly connected to the production costs and it can be vary as per the quantity.
Managerial cost – It is that cost which consist of worker and material cost. Also with this
it includes a fixed portion of fixed expenditure like of sales. It helps accountants of the referred
institute to keep record over every expense that is taking place so that accordingly future
decisions are taken.
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Product and period costs: Production costs are known as the product costs. But there
are non-production costs, too, which are experienced for operating a business. These managerial
accounting kinds of costs which are known as the period costs these managerial accounting kinds
of costs are required to be known as the period costs and covers sales commissions and the cost
in order to operate office space for administrative personnel which work for the organisation.
Figure 1Product costs and period costs, 2017
Direct and indirect costs: Direct costs are those which are directly linked to the per unit
cost of production. However, this is the most effective tool which ultimately help out the
company to calculate the cost of the goods. While on the other hand, this can be said that the
costs can not directly connected to the cost of production (Kouvelis and Yu,2013).
There are basically three kinds of costs by behaviour: Cost behaviour means to the
way of diverse production costs vary at the time of change in level of production. There are
basically three kinds of costs as per their behaviour:
Variable costs: This is the cost which can very according to the quantity change.
Variable costs, on the other hand, are those business costs which could assist be budgeted in
order to their changing amounts per amount. Costs which falls into this category which covers
plant employee salaries, that can be vary upon the number of hours worked and if overtime is
covered. Other variable costs will be raw material buy that can vary relied upon the amount of
sales order which have been formed throughout the month.
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Fixed Costs: Fixed costs are those which cannot change even after changing the
production of good. However, this can be said that the company needs to produce more products
so that they could gain more profits as more production helps the firm to lowering down the per
unit fixed costs. This costs ate those that do not change as per the change according to the level
of activities throughout the relevant range. These costs cannot change according the change with
the level of activity throughout the relevant range. These costs would incur even if no units are
manufactured.
Mixed costs: This consists of variable and fixed costs. Under which fixed and variable
costs are apportioned effectively. This also known as the semi- variable costs which contains
fixed and variable costs due to the presence of both variable and fixed factor in them. For
example, mixed costs is the delivery cost.
2. Relevance of costs:
The primary objective of examine the cost those are going to be incurred on production
of products and services. There are various methods which is used to make proper investments in
order to make crucial decision regarding the cost of capital as cut off rate. It is a managerial
accounting in terms of describes avoidable costs those are going to incurred for making better
decision for the company. The relevant cost is mainly used to eliminate unnecessary information
those would complicated in future decision-making process. Some of the are associated with
Direct and indirect cost which that can create maximum advantages to an organisation for
increasing their business (Simkin, Norman and Rose, 2014). Management Accounting works to
identify the causes of profits or loss and research the factors that affects efficiency in order to
help in decision making. Henceforth, cause and effect is a crucial feature of management
accounting.
Evaluate impacts of various costs:
It has been found that company need to deal with various costs those are affecting their
performance of an organization. These are mostly make huge impacts in the production produces
of any additional units produce by the project managers. One of the important aspects of cost
accounting is to manager there control overall production costs. These are implies various action
which will be taken into consideration to ensure that cost does not increase beyond a specific
level.
Impacts of various costs
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Costs and price output decision: Costs are the most crucial factor of price in entire
market layout, and in whole models relating to the elaboration of the behaviour of the company.
The main competition model breaks down unless the costs are U-shaped, as otherwise the size of
the company is indeterminate. In the monopolistic competition the shape of the costs curves is of
common importance; Henceforth, marginal costing is similar to the marginal revenue curve the
size of the company is identified. Although, costs are one of the factor of the price and output
both in the short term and long run.
Variable and fixed costs: Variable costs are mostly related with variable costs in retail
firm. The variable aspects of various factory overhead are mainly helpful in were sales are
varying with sales volume. Both fixed and variable costs have a wide impact on total profit and
operating profit of an organization. This would make more difficulty to make future decision
regarding increasing productivity.
Direct or indirect cost: These costs are mainly related with economic implication. An
evaluation of direct and indirect costs covers various aspects those are making huge impacts on
the manufacturing of products and services. Direct labour production costs related to the amount
paid to the employees who earned organisation's products. While production costs cover
anything required to make in the manufacturing facilities besides direct materials or direct labour
costs. For instance, electrical expenses will be production overhead cost. As costs are calculated
by multiplying overall utilisation of units’ costs. Whereas indirect costs were calculated through
total number of days affected from employment and other productions activities.
Manufacturing costs implications: There are various factors those are affecting the cost
of creating any new product. Some of them are associated with material costs which is making
huge impacts on the expensive material for producing a new product. Another one is related with
quality which need to be of superior so that customers would get more attracted toward them.
This will create maximum changes for taking crucial decision if they are delivery superior
quality in their products services.
Product and period costs: This accounting is more helpful in order to earn maximum
profit from their products sold which are associated with cost of goods sold. This make huge
impacts over sales transactions which is appear within one profit and loss statements. This will
create chances for control their losses and make appropriate decision making in near future
(Management accounting and its importance, 2017).
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Implications of opportunity cost – This is the cost which has to bear in order to take advantage
of the other better option available. In business day to day decisions need to be taken in which
selection has to be done from the different alternatives which increases pressure on the
management to choose what is more beneficial. The implications of this cost cannot be ignored
as it has high influence on the profits margins of a particular accounting year.
Incremental cost – In order to raise the profit fluctuations in the net production is done which
shows that there will be change in the total cost to the organisation. Any increase in the present
cost due to unit increase in the production is termed as incremental cost. It also has high impact
on the organisation as with increase in this cost the net profit reduces.
CONCLUSION
It has been concluded from the above project report that management accounting plays an
important role in making an effective decision through proving important and crucial information
related with different department of an organisation. There are mainly two methods such as
marginal and absorption cost which in ascertaining cost to the product. Various accounting
systems also help management to make an effective plan and policies in orde4r to achieve
desired goals and objectives within limited period of time.
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REFERENCES
Books and Journals
Bennett, M. and James, P. eds., 2017. The Green bottom line: environmental accounting for
management: current practice and future trends. Routledge.
Kouvelis, P. and Yu, G., 2013. Robust discrete optimization and its applications (Vol. 14).
Springer Science & Business Media.
Simkin, M. G., Norman, C. S. and Rose, J. M., 2014. Core concepts of accounting information
systems. John Wiley & Sons.
Online:
Management accounting and its importance [Online]. Available through:
<https://www.invensis.net/blog/finance-and-accounting/what-is-management-
accounting-and-its-importance/>
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