Management Accounting Report: Marginal & Absorption Costing Methods

This report delves into the core concepts of management accounting, using Jeloa Limited as a case study. It explores cost analysis, including direct, indirect, fixed, and variable costs, and examines flexible budgeting and cost variance analysis. The report clarifies marginal and absorption costing methods, detailing their applications through income statements. It also covers valuation methods like LIFO and FIFO and discusses the collection and management of overhead costs. The conclusion emphasizes the role of management accounting in decision-making and financial sustainability, highlighting the importance of techniques such as KPI and Benchmarking.

Management Accounting

Table of content
Introduction
Meaning of cost & cost analysis
Flexible budgeting & Cost variance
Marginal & absorption cost
Valuation method
Income statement marginal cost
Income statement absorption costing
Conclusion
References

Introduction
The term management accounting is explicated as a process of analysing, collecting and reporting overall
information related with functions and operations of organisation. In simple terms, management accounting is
explained as an activity which tracks all information and data related with financial factor of business. Jeloa
Limited is selected as an organisation for this report and the section learn from the upcoming reports is
management accounting and its types. Different method and their use for management reporting will also include in
this report. Cost calculation and methods for preparation of income statement is also understands through this
report. In the last, advantages and disadvantages of planning tools and their use in budgetary control is focused in
the report.

Meaning of cost & cost analysis
COST- The term cost refers to expenses which are occurred at time of manufacturing and there are
used to manage operations and functions. It is also classified according to the categories of product. Direct,
variable, Indirect and fixed cost related with business is included under cost perspective. Jeloa Limited also
engage labour cost, supplier and material cost and this denote with whole process that is used for affiliating about
overall cost related with production system.
COST ANALYSIS- This technique relates with the determination of divergence and it include all
expenditures and earning. One of the most important objective consider towards analysis of financial information
and situation through which separation among all factors is included by management. All cost analysis factors
improve the situation of Jeloa Limited through controlling product cost and margins.

Flexible budgeting & Cost variance
FLEXIBLE BUDGETING- All factors related with flexible budgeting connect the number of sales and volume
that relates with business. The primary purpose of flexible budgeting is to engage the organisation future operations in
budgets. Jeloa Limited utilise the selected budget in the business for performing all functions in a cost-controlled manner.
These also consider flexible budgeting helps for completion of task with monitoring of company operations.
COST VARIANCE- This explains to the method which indicates about changes that take place in the existing
products. Moreover, cost variance find all differences between exist and computed cost which engage in production
activities. This also define work is controlled through develop of right cost systems. Cost variance also engage the number
of fixed approaches and change in costing of products.

Marginal & absorption cost
MARGINAL COST- The additional cost is obtained at the time of producing extra portion of results. Moreover,
marginal cost devote to the changes due to which total cost of product is changed with increase in the production by one
unit. This refers to cost which is charged as per cost of unit but fixed cost is not included in marginal costing system.
ABSORPTION COST- This is also included in the part of marginal costing but absorption cost is accounts for
variable and overhead cost. It is related with the additional cost that is pay for formulation of specific product. Moreover,
this denote to all manufacturing cost after completion of finished product. Direct material cost, labour cost, overheads, etc.
are included in the manufacturing overhead system. This result variable and fixed both cost are calculated by Jeloa
Limited.

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COST COLLECTION- This indicates to the process of managing overhead according to the number of operations that are
performed by organisation. According to the Jeloa Limited, cost collection method assigns all different activities that are
related with manufacturing.
FIXED COST- The fixed cost indicates about all expenses which are related with manufacturing and they are not changed
whether, production done for one unit or for thousand units. Along with this Jeloa Limited consider fixed cost because it is
paid by the management instead number of operations.
VARIABLE COST- The corporate expense that occurs due to different dimension related with production outputs are
included in category of variable cost. In simple terms, variable cost refers to the category of increment and decrement that
occur due to change in the organisation productions. Like, if production is increased than variable cost also increase.

Valuation method
LIFO- This is explained as an accounting method that relates with inventory and also the cost of sales in which items or
products are purchased. It also arrogated and oversubscribe first as this is used for permit business owner to manage task
according to number of inventory and their use that is basically related with high inflation.
FIFO- The first in and first out method is indicated and according to this it is one of the oldest inventory valuation methods.
They helps for managing the inevitably cost and number of excel spread sheet by which all products are sold and tracked.
Moreover, Jeloa Limited considered that all tasks which are performed are completed according to original phase.
OVERHEAD- This indicates to indirect cost and the fixed expenses which are utilized for performing the business
operations. In simple terms, factor start from marketing to rent all cost is included in production action or process.

Income statement marginal cost
Income statement Marginal costing
Units Price per unit Amount Amount
Sales 60,000 £ 40 £ 24,00,000
Less: Cost of sales
Direct materials 60,000 £ 10 £ 6,00,000
Direct labor 60,000 £ 6 £ 3,60,000
Variable manufacturing overhead 60,000 £ 2 £ 1,20,000
Variable sales expenses 60,000 £ 4 £ 2,40,000 £ 13,20,000
Contribution £ 10,80,000
Less: Periodic cost
Fixed Manufacturing overhead £ 1,80,000
Fixed admin and distribution costs £ 50,000 £ 2,30,000
Net Profit £ 8,50,000

Income statement absorption costing
Income statement Absorption costing
Units Price per unit Amount Amount
Sales 60,000 £ 40 £ 24,00,000
Less: Cost of sales
Direct materials 60,000 £ 10 £ 6,00,000
Direct labor 60,000 £ 6 £ 3,60,000
Variable manufacturing overhead 60,000 £ 2 £ 1,20,000
Fixed Manufacturing overhead 60,000 £ 3 £ 1,80,000 £ 12,60,000
Gross Profit £ 11,40,000
Less: Periodic cost
Variable sales expenses £ 2,40,000
Fixed admin and distribution costs £ 50,000 £ 2,90,000
Net Profit £ 8,50,000

Conclusion
According to the analyses of above information this is concluded that management accounting perform an
important role for development of organisation through maximising the efficiency of decision making. There are
different accounting systems such as inventory management, cost-accounting, etc. relates with business and they
are essential for managing sustainable financial positions of business. Apart from this, management reporting and
budgetary tools aids an organisation for improving their performance by calculating overall cost of business. In the
last, techniques such as KPI and Benchmarking are understood as they helps to overcome from financial problems.

References
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