Report on Management Accounting Techniques, GSK Costing Strategies

This report provides a comprehensive overview of management accounting practices at GlaxoSmithKline (GSK). It begins with an introduction to management accounting, highlighting its importance in planning, execution, and control of operations, with a focus on decision-making. The report examines various management accounting techniques employed by GSK, including cost accounting, inventory management, budgetary control, and break-even analysis. It then delves into the application of absorption costing and activity-based costing (ABC) techniques, providing detailed income statements for both methods. The analysis interprets the findings from these costing methods and recommends future costing strategies for GSK, advocating for the adoption of absorption costing. The report concludes by emphasizing the critical role of management accounting in achieving organizational growth and success.

MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
TABLE OF CONTENTS................................................................................................................2
INTRODUTION..............................................................................................................................1
REPORT..........................................................................................................................................1
1. Management accounting and its importance of GSK..............................................................1
2. Management accounting available for GSK............................................................................2
3. Application of Absorption costing and activity based costing technique................................3
4. Interpretation of the findings and recommendation of the future costing strategy for GSK.. .4
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6
APPENDICES.................................................................................................................................7
Calculations.................................................................................................................................7

INTRODUTION
Management accounting is an accounting approach concerned with identifying, gathering,
analysing, interpreting and preparation of the financial reports. Management is concerned with
the objective of effectively managing the operations of company for increasing the productivity
keeping the costs to minimum. The report is based over GSK that is a manufacturer of innovative
pharmaceuticals medicines, vaccines and consumer health products. Company has the objective
of becoming the most innovative, best performing and the trusted healthcare products. The report
will provide the different management accounting techniques used by GSK. It will also provide
the costing strategy that could be used by company for achieving its objective.
REPORT
1. Management accounting and its importance of GSK
Management Accounting, its nature and scope.
Management accounting is concerned with task of planning, executions and controlling
the operating activities of enterprise. It works on the accounting information of the enterprise.
Management accounting provides information important for decision making of the enterprise.
Nature of management accounting is concerned with furnishing accounting information for
making management decisions. There are not set principles to be followed by the organisation
under management accounting like the financial accounting (Otley, 2016). Scope of
management accounting is concerned with the presentation of the accounting information useful
for management operations. It has a vast scope that includes almost every aspect of business
enterprise.
Importance of management accounting.
Management accounting is very essential as it assists the management for making
effective decisions. It provides accounting information serving vital source of the data in
management planning. Reports and accounts provided by MA forms bridge between financial
and other parts of business. Management accounting helps in pricing the products after
considering all the market conditions. Various cost accounting techniques are used for
calculating the cost of product to decide the profits margins. Manager using MA identifies the
area of improvements and take appropriate corrective strategies for achieving the growth of
GSK. It consists of various techniques used for monitoring and controlling the cost and
expenditures.
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Management accounting is application of concepts and techniques for the projection of
projected and historical data for assisting the management to establish the plans for reasonable
economic objectives. This helps the management in taking rationale decisions for the attainment
of these objectives of the organisation. It is different from financial accounting that prepares for
external users that are known as financial statements mainly consisting of income statement,
balance sheet and cash flow. On the management accounting prepares report for the internal
users. This play a critical role in management of operations for achieving the desired goals and
objectives of GSK.
2. Management accounting available for GSK
Management accounting consists of various techniques used by GSK for managing its
operations.
Cost Accounting
Cost accounting is an important management accounting technique used by the
management for calculating the cost of product. It is concerned with ascertaining the cost of
different products manufactured by GSK for deciding the profit margins associated with the
product. It involves various costing techniques such as marginal costing, standard costing, direct
costing, activity based costing and other costing techniques for valuing its inventory and
recording the accounting transactions. Objective of cost accounting is to analyse the cost
associated with different products in detailed manner for identifying the areas of improvement.
On the basis of analysis done by GSK it takes operational and strategic decision for
improvements in the given areas
Inventory management
It is a management accounting technique used by GSK for having proper track of all the
inventory movements within the company. Inventory management is defined as the system used
by management for recording all the transactions and movements of enterprise. It contains
information elated to each and every type of inventory from company assets, raw materials, work
in progress and the finished goods. It is used by company for having detailed information
regarding the flow of inventory within and outside the firm. This provide important information
useful in decision making (Cooper,Ezzamel and Qu, 2017). It is possible to analyse the
frequency of inventory movements on the basis of which organisation place different purchase
orders for smooth running of productions and prevents from overstocking of raw materials or
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finished goods.
Budgetary control
Budgetary is one of the important technique of management accounting that is concerned
with heading the company towards a defined direction. Management accounting uses this for
preparation of various budgets. Budgets are prepared by GSK on the basis of previous budgets.
Adjustments are made for preparation of the budgets of current year. These adjustments are
related with inflations, market conditions, consumer behaviours and such other factors. At the
end of periods budgeted figures are compared with the actual production figures for measuring
the variances. Management takes effective corrective steps for reducing the variances between
the budgeted and actual outputs (Weetman, 2019). Budgeting helps GSK in keeping control over
the cost and expenditures. It is also referred as the spending plan of the organisation that helps in
effective allocation of the resources among various departments.
Break Even Analysis
It is a financial tool used by organisation for determining the point where the product or
services of company will be profitable. This may also be referred as the financial calculation to
determines the number of products or service to be sold for covering the costs mainly the fixed
cost. This is very essential in decision making purposes.
3. Application of Absorption costing and activity based costing technique.
Absorption Costing – It is a cost techniques used by organisations for calculating the cost of
product. It covers all the costs associated with the manufacturing of products both variable and
fixed costs. Unlike marginal costing it do not consider fixed as period costs but allocates it to
cost of product.
Income Statement as per Absorption costing
Multi-vit
Patch
Multi-vit
Syrup
Particulars Amount Amount
Production 10000 10000
Cost of Sales
Materials £5 50000 £6 60000
Labour Cost £7 70000 £5 50000
Production Overheads (2hrs*£4) 80000 (0.5hrs*£4) 20000
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Cost of Production 200000 130000
ABC Costing – It is methods of costing which identifies the different activities carried out by
organisation for production of products and services. On the basis of these activities actual costs
are allocated to the products or services of products. This costing assigns much of the indirect
cost in direct costs as compared with other costing methods.
Income Statement as per Activity Based costing
Multi-vit Patch Multi-vit Syrup
Particulars Amount Amount
Production 10000 10000
Cost of Sales
Materials £5 50000 £
6 60000
Labour Cost £7 70000 £
5 50000
Production setup 10333.33 20666.67
Inspections 22157.14 10842.86
Material Handling 27096.77 8903.226
Cost of Production 179587.3 150412.7
4. Interpretation of the findings and recommendation of the future costing strategy for GSK.
Interpretations
The above analysis has given different results related with the costing of products.
Absorption costing measures the cost of product on the basis of variable and fixed costs.
Company had produced 10,000 cartons of both multi-vit tables and syrup. Total production
overheads were £100,000 with total hours of 25,000. These were the overheads incurred in
common between the production of both the cartons. In absorption costing material and labour
cost amounts to £120,000 for tablets and £110,000 for the syrup. Overhead costs in this are
allocated on the basis of machine hours incurred for each product. It takes 2 hours for producing
1 carton of tablets and 0.5 for syrup. On calculation overhead cost per hour is £4 and the
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allocation of total overhead is done on the basis of time taken for the production of each carton.
Overheads are allocated as 80,000 for tablets and 20,000 for syrup amounting to 100,000 in
total.
Under ABC costs are allocated as per different activities not on the variable and fixed.
Cost of material and labour remains same under both the methods that amount to 120000 for
tablets and 110000 for the syrup. Overhead costs are not allocated on the basis of machine hours
but on the basis of cost driver associated with different cost of activities (Hopper and Bui, 2016).
It carries out set up for machines, inspections and the material movements. Allocations are
segregated on the basis of separate cost drivers that caused cost of production to tablets to reduce
and for syrups to increase.
Recommendation of the cost strategy.
GSK should adopt for absorption costing as its cost strategy. Absorption costing makes
proper allocation of the overheads on the basis of machine hours that are incurred for the
production of both the cartons. ABC costing includes indirect costs like material handling into
direct costs that are indirect in actual that do not give clear bifurcation of the costs between
variable and fixed costs. Absorption costing is accepted by the accounting standards and
reporting frameworks for valuation of the inventory also. Therefore GSK should adopt for
absorption costing as the costing strategy for achieving the goal of organisation.
CONCLUSION
From the above study it could be concluded that management accounting plays an important
role in the growth and success of organisation. It concludes various concepts and techniques that
helps the managers in keeping its costs and expenditures under control for increasing the
productivity and efficiency.
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REFERENCES
Books and Journals
Otley, D., 2016. The contingency theory of management accounting and control: 1980–
2014. Management accounting research.31.pp.45-62.
Cooper, D.J., Ezzamel, M. and Qu, S.Q., 2017. Popularizing a management accounting idea: The
case of the balanced scorecard. Contemporary Accounting Research.34(2).pp.991-1025.
Weetman, P., 2019. Financial and management accounting. Pearson UK.
Hopper, T. and Bui, B., 2016. Has management accounting research been critical?. Management
Accounting Research.31. pp.10-30.
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APPENDICES
Calculations
Working notes
Total Overheads 100000
Total Machine Hours 25000
Cost per hour £4
Total overhead % 100000
Setup Cost 31% 31000
Inspections 33% 33000
Material Handling 36% 36000
Cost drivers
Cost
Assigne
d
Multi-vit
Patch
Multi-vit
Syrup Total
Setups 31000 35 70 105
Inspections 33000 47 23 70
Matrial Movements 36000 70 23 93
Total Overhead 100000
Cost drivers
Multi-vit
Patch
Multi-vit
Syrup Total
Setups 10333.33 20666.67 31000
Inspections 22157.14 10842.86 33000
Matrial Handling 27096.77 8903.226 36000
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