Report on Management Accounting Unit 5 (L02) Cost Analysis

This report provides a comprehensive overview of management accounting, specifically focusing on Unit 5 (L02). It explores microeconomic techniques such as cost analysis, cost-volume-profit analysis, flexible budgeting, and cost variances. The report delves into product costing, including absorption costing and marginal costing, and examines fixed and variable costs, cost allocation, and normal and standard costing. Furthermore, it addresses the cost of inventory, covering definitions, types of costs, inventory valuation methods (FIFO, LIFO, weighted average), and the benefits of reducing inventory costs. The document also includes references to books and journals related to management accounting. The report emphasizes the importance of cost data in setting prices and provides a detailed analysis of various costing methods and their applications in business operations.

Unit 5 Management Accounting(L02)

Table of Contents
LO2:.................................................................................................................................................1
Microeconomic techniques:.............................................................................................................1
Product costings:..............................................................................................................................2
Cost of inventory:............................................................................................................................3
References........................................................................................................................................5

LO2:
Microeconomic techniques:
Cost: The term Cost could be described as the amount of money that could be used to
cover expenses of the product/goods. It is aggregate sum of money expended during the
production process (Ameen, Ahmed and Abd Hafez, 2018).
Type of costs:
 Marginal costs
 Fixed costs
 Variable costs
 Total costs
Cost Analysis: Cost analysis relates to costs comparison. The costs of preparing financial
statements differ from those of controlling activities. Costs can be regulated or uncontrollable,
and they are limited by time-frame and resources.
Cost-volume profit: This approach is being used to determine costs that may have an influence
on sales volumes which would help the business produce operating income. The management
uses this approach when undertaking tactical decisions.
Flexible budgeting: This approach can be used to respond to a variety of transitions in business
entity. The company will be enabled to expand their capital budgeting as well as have room for
other operating expenses if they used flexible budgeting.
Cost variances: It is also known as budget variance, that depicts the disparity between the
corporation's budgeted and actual incurred expenditures. Budget is created using data from
previous year's expenditures to identify advantageous and unfavorable components, allowing
managers to make informed decisions (Abdusalomova, 2020).
Absorption Costing: This approach of the costing is being used to calculate the ultimate price of
products, which may include costs such as direct including indirect labours, materials, and so on.
Executives who want to maximize profitability of their business by moving fixed production
overheads costs may use this process.
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Marginal costing: Variable costs are incurred during the measurement of the overall price
of products in this costing process. Fixed costs are not involved in this process, and quantity
generated by the corporation is enhanced by one. In this method contribution is assessed by
reducing all variable costs from sales.
Product costings:
The accounting method of calculating all business costs related to the production of
organization products is known as product costing. Buying of raw materials, worker salaries,
manufacturing shipping costs, including retail stocking charges are all examples of such costs.
These total costs are used by an organization to formulate a range of business tactics, such as
product pricing and marketing campaigns. Material costing may also be used to find solutions to
reduce manufacturing costs and increase profits. Selecting relatively cost-effective raw materials
in production, for instance, will help a business raise profit through retail selling by reducing
product manufacturing costs.
Fixed and variable costs:
Fixed costs are business expenditures which do not adjust over period or rely on the organization
's efficiency. Fixed costs are any expenses that a company spends on a consistent basis and that
remain constant irrespective of the manufacturer's production levels. In other terms, it is
actual amount that the organization must spend in order to continue operating, regardless of how
far the financial period has progressed. Fixed costs don't really vary over period and are
employed to calculate break-even point for companies, particularly those that are just getting
started (Azudin and Mansor, 2018).
A variable cost regarded as cost that fluctuates in value based on variables such as sales
revenues and outputs. Labors, raw materials, including distribution costs are all examples of
variable costs. Entity with higher variable costs, like project consulting, provide lower margins
although lower breakeven levels than other enterprises.
Cost allocation: The allocation of costs to many cost items, such as items or divisions, is known
as the cost allocation. Since the cost cannot be explicitly linked to a particular item, cost
allocation process is required. The eventual allocation is rather subjective since the expenditure
is not explicitly identifiable. Some individuals refer to cost allocation as spreading of cost
because of arbitrariness.
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Normal and standard costing:
The approach of costing employed in derivation of costs is known as normal costing. In
the standard costing, costs involved are all fixed, e.g. budgeted costs, while in regular
costing, actual data is typically employed to measure cost for product, except for production
overhead rate.
Standard costing implies to costing approach that compares standard costs of
business with sales to real outcomes in attempt to identify variances and their triggers, notify
managers of the anomalies, and undertake corrective action to improve situation.
Activity-based costing: Activity-based costing (ABC) approach is accounting method for
calculating overall cost of business activities needed to manufacture a product. Every operation
that heads into manufacturing like workers checking a product, is costed using the ABC method.
Role of costing in setting price: In the price setting process, cost data are most important
element. Hence, cost must be relevant to the pricing decision and under-estimation and
exaggeration must be avoided. Besides costs, there are also other factors that require
consideration. An increase in the demand may make an increase in prices possible even without
an increase in costs. Pricing is like a tripod having three legs (Pedroso and Gomes, 2020).
Cost of inventory:
Definition and meaning of inventory costs: Inventory costs are characterized as the overall cost
an organization incurs when maintaining stock. It is also one of most critical factors in a
corporation 's performance Financing, supplies, manpower, safety precautions, insurance,
handling, unsustainability, pilferage damages, and opportunity cost of dealing with inventory are
all aspects of inventory costs management. Net cost of keeping inventory is the sum of these
variables.
Different types of inventory costs:
 Ordering costs
 Holding costs
 Shortage costs
 Spoilage costs
The benefits of reducing inventory costs to an organisation:
Inventory Valuation Method:
FIRST-IN, FIRST-OUT (FIFO)
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This method works under the assumption that first ever inventory purchased would be first to
sell. The residual inventory reserves are compared to most recently acquired or generated assets.
LAST-IN, FIRST-OUT (LIFO)
The presumption in this valuation approach is that newest stock are sold first, with older
inventory remaining in storage. Businesses seldom use this approach because older stocks are
typically sold as well as lose value over time. The company suffers a major loss as a result of this
(Pelz, 2019).
WEIGHTED AVERAGE COST
Weighted average costs approach determines the sum that falls into cost of products sold as well
as inventory by using weighted average.
Cost variances: The word "cost variance" refers to the budget variance. Variability is difference
between cost and the forecasts, as one probably aware. Cost variation, on the other hand, is the
disparity between a business's real costs and its budgeted, projected, or normal cost.
Overhead costs: Other costs which not linked to labours, direct materials, or sales are referred to
as overhead costs. These are more fixed costs that relate to regular business operations like
paying accounting staff and operating cost. These expenses are typically ongoing, irrespective of
whether a company generates income. Such costs, unlike business's operating expenses, are
fixed, implying they will stay same over time.
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As per marginal costing-
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Actual statements
As per marginal costing-
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