Performance Management Report: Costing Techniques, Risk and Decisions

This report delves into the core concepts of performance management, focusing on costing techniques and risk analysis. It begins by defining and contrasting marginal and absorption costing, highlighting their applications in business decision-making, including inventory valuation, profit measurement, and sales policy design. The report then provides a literature review and critical analysis of these techniques, referencing key authors and studies to evaluate their effectiveness. The second part of the report addresses risk and uncertainty in business, categorizing various types of risks such as operational, financial, and market risks, and explaining their impact on business performance. It concludes by exploring decision-making techniques used to enhance performance management, emphasizing the importance of strategic choices in achieving company goals and objectives. The report offers insights into how effective decision-making and risk management can improve business performance.

Performance Management

1. Cost & management accounting Techniques
1.1 Application of absorption costing & marginal costing in business
Marginal costing is defined as the costing which distinguishes variable costs and fixed
costs. The main features of the marginal cost include inventory valuation, cost
classification, and marginal contribution. The technique of cost classification is used to
differentiate between fixed and variable costs and variable cost is further used to design
the sales policies (DRURY, 2013). The inventory valuation is used for profit
measurement is valued at marginal cost. It is also used to judge the profitability of
different products. It also helps to develop short-term planning, and it is also used to
control costs.
The absorption cost is the method for accumulating the costs which are related to the
production process, and it is used to develop the inventory valuation which is stated in
the balance sheet of the company (Kee, 1995). According to the (Shields, 1995)It is
used for activity-based costing in order to allocate overhead costs for the inventory
valuation, and is used to maintain the cost in an effective manner in accordance with
IFRS and GAAP.
1.2 Literature Review and Critical Analysis of the techniques used
1.2.1 Literature review
According to Caplan (2013) accountability is also called as management of funds and
control which the sensitive aspect of organizational activities. According to Varian
(2014) absorption costing and marginal costing are the methods of costing which is
used to create profit statements, assist with pricing decisions, and value inventory. Both
the costing methods have differences which can be reconciled. According to Seiler
(1959), the absorption method is used to value all the inventory of the company which

includes fixed as well as variable costs whereas the marginal costs absorb only variable
cost of manufacturing. The method of costing affects on preparing the profit statement
of the company (Varian, 2014). On the other hand, Lakmal (2014) explained that
marginal accounting is used for the internal decision-making process. The fixed costs
are incurred regardless of the units produced, and marginal cost is used to determine
the contribution of the variable cost in the overall cost of manufacturing. The variable
cost includes direct labor, direct material, and another direct cost which contributes
towards the manufacturing overhead within the specific period of time (Bös, 2014).
Variable costs are also known as marginal costing. According to the Trần Triệu (2014),
the product cost is not considered as fixed manufacturing overhead in the inventory
valuation process.
1.2.2 Critical analysis
From the above literature review and previous research on the applicability of marginal
costing and absorption costing it is shown that both are different from each other. The
marginal costing technique is decision making in a manufacturing costing through
absorbing the cost of the manufacturing (Weygandt, 2015).
There are various applications of the marginal costing techniques such as managerial
decision related to the prediction of optimum selling place, to determine the effect of
reduction in current price on the profitability of the company, choosing of good product
mix, calculation of margin of safety, and decision regarding the selling of products and
services at distinguished prices to the different customers (de Boer, 2014).
The marginal costing technique include variable and fixed costs which is used to take
managerial decision in order to increase the profitability of the company through taking
decision to control the variable cost structure of the company. It is mainly a technique of
analysis which is used for cost information for the management guidance in order to
determine the impact of change in volume of output on the profitability of the company
for example the manufacturing of a part need Y in raw material and Z in labour which
cannot be produced without overhead such as logistics and production management.

The absorption cost provides complete financial cost picture of the company. The
marginal cost is more useful for decision making for example it is used to determine the
pricing of the company in order to earn 15% net margin on 20000 units sold then
through determining the break-even point at desired profit the company can quote
prices. The marginal technique has some negative aspects such as it is difficult to
predetermine the degree of variability, the segregation of total cost is not easy, and the
valuation does not considered by tax authorities (Leon, 2015).
2. Risk and Uncertainty
2.1 Risk and uncertainty in business performance
There are various types of risks which are associated with the business transactions of
the company such as operational risk, financial risk, marketing risk, exchange rate risks,
legal risk, and environmental risks. The risks are explained below:
2.1.1 Operational risks
It is the related to the business operations which leads to the failure of the
operational plan that directly impacts on the sales volume of the company.
2.1.2 Financial risks
It is related to the financial transactions of the company, and it includes risk
related to the company loan that leads to the financial loss.
2.1.3 Exchange rate risks
It is also known as currency risks which occur at the time of currency exchange
which leads to the devaluation of investment.
2.1.4 Legal risks
It is the risk which arises due to the failure to comply with regulatory or statutory
obligation on the business transaction.
2.1.5 Market risk

It is the systematic risk which cannot be completely eliminated, but it can be
diversified (Chen, 2013).
All risks need to be managed as it directly impacts on the business performance which
leads to the minimization of sales volume of the company. The risk management
process helps to manage the performance of the company through minimizing the risk
by considering the systematic as well as unsystematic risk which enable to improve the
business performance within the specific period of time.
2.2 Decision making in enhancing performance management
The decision making is one of the critical factors which directly impacts on the overall
business performance of the company. All risks need to be managed in order to
manage the performance of the company in a most efficient and effective manner.
There are various effective decision-making techniques such as Delphi method,
electronic meeting, multi-voting method, brainstorming, nominal group techniques, and
others which help to take appropriate decision that enhance the performance of the
company within the specific period of time. The decision making helps to achieve the
mission and vision of the company through managing the performance of business
resources in an effective manner.
The appropriate decision making helps to provide the competitive advantage to the
company through taking the effective decisions towards the achievements of goals and
objective of the company. For example, the training and development decision is taken
by the company in order to improve the business performance which helps to gain the
skills and knowledge in order to perform their roles and responsibilities in an effective
manner that directly improve the performance of the company.
The performance management decision includes increment in compensation, reduction
of work pressure, and others which help to improve the performance of employees
(Kaplan, 2015). The marginal costing techniques is used for taking managerial
decisions and financial decision such as determination of optimum selling price, to

determine the effect of price reduction on profit, to select good product mix, and to
determine the selling price of different goods and services for different types of
customers.
It can be concluded that marginal costing technique is more useful in managerial
decision making of the company then absorption costing. It helps to achieve the desired
profitability of the company through taking corrective decisions.

References
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