Managerial Accounting: SleepEase Ltd's Costing and Performance

This report provides a comprehensive analysis of SleepEase Ltd's managerial accounting practices. It begins with an introduction to management accounting and its importance in business decision-making, followed by a detailed comparison of marginal and absorption costing methods, inc...Read More

MANAGERIAL
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
TASK 2............................................................................................................................................3
TASK 3............................................................................................................................................5
TASK 4............................................................................................................................................6
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9
.........................................................................................................................................................9

INTRODUCTION
Management accounting is of utmost importance for administration of business
organisation. This form of accounting provides various reports to administration. Such reports
are helpful in decision making of business concern. There are two approaches followed by an
organisation i.e. Marginal costing and absorption costing. These approaches are very necessary
in decision making of inventory valuation and pricing. Every company spend massive amount of
time in deciding pricing of products and services being offered to customers. If prices are
appropriate as per quality, customers will be attracted towards products and vice-versa.
SleepEase Ltd. is one of the British well known manufacturer of mattresses. They provide
variety of mattresses to customers. They produces specialised bed named Max-ease. It is one of
the product designed to ease back pains for orthopaedic patients. The company SleepEase uses
performance management tool balanced scorecard to evaluate different aspects of their
businesses.
TASK 1
Marginal and Absorption costing
There are two methods by which organisation can value its inventory i.e. Absorption and
marginal costing method. These are the approaches that SleepEase uses to deal with fixed
overheads of production. This is based on the fact that whether to use fixed overheads in decision
making of administration i.e. inventory valuation and pricing of product and offerings. The main
difference between two methods is how they are using fixed overheads in costing techniques.
The elaboration of both techniques of costing are as follows-
Marginal costing- Such method of costing can be defined as variable costing. To make
right decision of production, both fixed and variable cost are computed. The marginal cost is one
the main consideration under such approach. This also determines impact on profitability for
change in output. under such costing technique, fixed overheads cost are not distributed to
products and offerings. when an additional unit of a product and offerings is manufactured, the
additional cost incurred will be termed as marginal cost. fixed cost remain same and unaffected.
More fixed cost are not incurred when the output is increased. The marginal cost is generally
variable cost of production that involves direct material, direct labour, direct expenses and
variable overheads. This shows the impact of variable cost on volume of production/output. This
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technique is also known as variable or direct costing method. This can be referred as changes in
total cost of production by producing one additional unit of output. Fixed cost are of less
importance than variable cost of production. It overall contributes to changes occurring because
of variable cost of production. It is one of the accounting system in which marginal cost are
charged to products and offerings while fixed cost is called as periodic cost. Fixed cost are
written off against contribution. Marginal costing are of utmost importance for taking
appropriate decision regarding pricing decisions of SleepEase Ltd. A firm is more concerned
about additional cost required in extra unit of output (Salehi, Rostami and Mogadam, 2010).
Contribution concept in marginal costing is also important in decision making aspect of business.
The main advantages and disadvantages of marginal costing techniques are as follows-
Advantages
 Marginal costing technique of inventory valuation is one of the easier and simpler
method.
 The fixed cost are not considered hence it helps in avoiding complicated statement.
 The issue with under absorption and over absorption will not arise.
 Contribution details will provide benefits in decision making aspects of SleepEase.
Disadvantages
 The total cost cannot be segregated easily into different variable and fixed costs.
 It is not easy to determine the variability degree of semi variable cost incurred in
production of products and offerings.
 Tax authorities are not accepting such statements which excludes fixed manufacturing
overheads.
 The administration cannot take quality decision based on contribution aspect of
production.
Absorption costing- Absorption costing is one of the cost technique where both fixed
and variable cost are considered. Here cost are grouped into centres to find out total cost of
production. Both fixed and variable cost are of equal importance in such technique of costing.
Hence also termed as full absorption costing. Various expenses in production of products and
offerings are grouped under different overheads such as production, distribution, selling and
distribution overhead. Such techniques of costing is basically used for the purpose of reporting.
The overall cost of production are affected by involvement of fixed manufacturing overheads. It
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is one of the best way used in small businesses. Thus, organisation uses such methods to find
effect on profitability (McVay, et. al., 2012). Also it is to be noticed that fixed cost are being
incurred for production of goods and offerings hence their their inclusion in valuation of closing
stock is justifiable. It is also right to match up cost with the revenues (Maher, Stickney and Weil,
2012). It overall contribute to fix the price above cost of production. The main advantages and
disadvantages are as follows-
Advantages
 It helps in product cost determination and hence frame a suitable policy of pricing.
 All cost should be charged in determining total cost of production
 This helps in correct analyses of profit, thus an important technique of costing.
 It eliminates separation of fixed and variable cost and calculations became more easy.
Disadvantages
 It create difficulty in cost controlling element. Also comparison done by an organisation
based on different levels of output are not easy.
 It is not helpful for administration in managerial decisions.
 fixed cost inclusion in computation of total cost of production is not justifiable.
 preparation of flexible budgets are also not easy to be done.
TASK 2
Below is the calculations of absorption and marginal costing to find income statement for
the end of year 2015 and 2016:
Profit and loss statement through absorption costing
for the ending 31st December, 2015
Units Price ₤ Amount ₤ Amount ₤
Net revenues 900 1000 900000 900000
Less: Cost of Sales
Production cost 1200 767 920400
Less: Closing Stock 300 -767 -230100
690300
Gross Profit 209700
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Less: Selling and administration
expenses
Variable distribution cost 900 50 45000
Fixed selling and administrative costs 900 74 66600
111600
Net Profit 98100
Profit and loss statement through Marginal costing
for the ending 31st December, 2015
Units Price ₤ Amount ₤ Amount ₤
Net revenues 900 1000 900000
Less:Cost of sales
Direct materials 1200 300 360000
Direct labour 1200 200 240000
Variable manufacturing overheads 1200 100 120000
Variable distribution cost 900 50 45000
Less: Closing Stock 300 -767 -230100
534900
Contribution 365100
Less: Fixed Costs
Fixed manufacturing overhead costs 200000
Fixed selling and administrative costs 67000
267000
Net Profit 98100
Interpretation: Profit and loss statement by both the methods shows same outcomes
which is net profit of ₤98100. Company is left with the closing stock of 300 units which is due to
difference between actual and budgeted sales.
Profit and loss statement through absorption costing
for the ending 31st December, 2016
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Units Price ₤ Amount ₤ Amount ₤
Net revenues 1000 1000 1000000
Less: Cost of Sales
Opening Stock 300 767 230100
Production cost 800 850 680000
Less: Closing Stock 100 -850 -85000
825100
Gross Profit 174900
Less: Selling and administration
expenses
Variable distribution cost 1000 50 50000
Fixed selling and administrative costs 1000 67 67000
117000
Net Profit 57900
Profit and loss statement through Marginal costing
for the ending 31st December, 2016
Units Price ₤ Amount ₤ Amount ₤
Net revenues 1000 1000 1000000
Less:Cost of sales
Opening Stock 300 767 230100
Direct materials 800 300 240000
Direct labour 800 200 160000
Variable manufacturing overheads 800 100 80000
Variable distribution cost 1000 50 50000
Less: Closing Stock 100 -850 -85000
675100
Contribution 324900
Less: Fixed Costs
Fixed manufacturing overhead costs 200000
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Fixed selling and administrative costs 67000
267000
Net Profit 57900
Interpretation: On the basis of calculation of Income statement through marginal
costing and absorption costing for the year ended 31st December, 2016, it can be concluded that
companies net profit is same which is ₤57900 through both the methods. But companies variable
cost per unit is increase by ₤83 per unit due to which its net profit is decreased. This indicates
that to decrease cost of production company needs to produce more units.
TASK 3
On the basis of calculations done in TASK 2, findings from the calculations will support
in making decisions, whether Mr. Spenser should get a bonus or not. A bonus is an additional
payment which is used as a reward system to motivates employees for their good work or
performance.
Explanation of board of director's decision not to pay Mr. Spenser a bonus:
According to board of director, Mr. Spenser was supposed to increase sales by 10%. On
the basis of profit, board analyses that despite of increasing its sales, company fails to increase its
profit. Hence, company has face losses as profit in 2015 was ₤98100 but in 2016 it was
decreased by approx 40.8%, as in 2016 it records ₤57900 net profit. So, board of director's
analyse that company is not benefiting with the increased revenue and they decided not to give
bonus to Mr. Spenser.
According to bonus Act, 1965: The payment of bonus to persons employed in company is
based on profits or on the basis of production and for matters connected therewith. This act also
defines that certain amount has to be paid to their employees based on their profitability each
year. This amount is based on their basic salaries. Therefore, as per this act, Mr. Spenser is not
liable to pay bonus by the company, as he is fail in increasing profit and productivity both.
Opposing arguments
As Mr. Spenser is a sales manager, he's only responsible for increase the sales. As he's
achieving he's target by increase the sales by more than 10%, he is eligible to receive bonus from
the company.
The main reason behind less profit is, failure of company in producing more. Because
fixed costs is always fixed regardless of any increase or decrease in the profit. Hence, company
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is only producing 800 units and remaining costs are same. It indicates that company is producing
800 units at same cost at which it was producing 1200 products.
After taking consideration of law, it is clear that Mr. Spenser is not eligible for bonus as
he was not able to increase production and profits of the company. But at the same time it can't
be neglected that he able to sell previous units, for which he's eligible to receive bonus. He
achieves sales of 1000 units in 2016 from 900 units in 2015. In the deal it is clearly mentioned
that, if he's able to increase sales by 10% than he's eligible for ₤10000 commission or bonus and
he achieved that target.
Hence, Mr. Spenser should receive bonus because he has fulfilled the terms offering by
company. He's not responsible for increase in the cost of production, as he's only a sales manager
not a finance and production manager and cost controlling factor is out of his sales domain.
TASK 4
Strategic importance of using Balanced scorecard in performance management
Every organisation wants to improve their performance. To effectively implement
corporate strategies, balanced scorecard is of utmost importance (Strategic importance of using
Balanced scorecard in performance management. 2017). SleepEase Ltd. should have to tighten
their belts for demanding high performance. The use of balanced scorecard gives many
advantages to firm. Many firm struggle with suitable performance management system. The
system that an organisation uses consist of annual employee evaluation which not reveal true
assessment of performance. Annual employee evaluation will not work as performance
management is an on-going process of conversation between manager and employees. Manager
should done timely evaluation of performance and set clear objectives and deliver feedback to
workers about their performance reviews. The Balanced scorecard is the set of financial and non-
financial measure that are meant to be assessed. It helps in making improvement in performance
and create value for an organisation. Large number of enterprises are using balanced scorecard to
analyse performance of different aspects of businesses. Major enterprises in US, Europe and
Asia are using tool of balanced scorecard.
Balanced scorecard is one of the tool of strategic planning developed by Kaplan and
Norton in 1996. organisation really exist to satisfy its stakeholders. It is based on four different
dimensional framework (Hall, 2010). Each of the dimension represent different stakeholders.
The four perspectives are Learning and Growth, Internal business processes, Customers and
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Finance. The finance perspectives are generally at the top and contains clear set of objectives.
Customer perspectives always focuses on meeting customer needs. This will result in making
them loyal towards brand. SleepEase can able to drive sales based on the same perspective.
Operational perspectives is primarily based on smooth functioning of business organisation.
Finally people perspectives consist of set of goals that support operational perspective of
business. It is an important strategic planning and management tool that are used by firm to
improve communication processes of tasks that are to be attained, assigning of work to be done,
measuring and monitoring progress.
The balanced scorecard helps organisation like SleepEase Ltd. in many ways-
Overcoming challenges- SleepEase organisation can able to overcome challenges arise
during different course of time. It helps in effectively implementing strategies. It facilitates
advantage of performance measurement and rise of intangible asset of firm (Garrison, et. al.,
2010). It also encourage long term thinking of business concern. It is also one of the beneficial
tool for reducing barriers in operational activities of SleepEase Ltd.
Four perspectives- It consist of four different perspectives i.e. Financial, customers,
Internal business processes and learning and growth. This allows firm to have four viewpoints to
create a value for the firm. Therefore company able to gain higher customer satisfaction and
market share.
Competitive advantage- SleepEase Ltd. Can able to improve performance of business
by using balanced scorecard (Demski, 2013). This contributes to gain an edge over rivals. Hence,
they should implement such strategic tool in performance management system.
CONCLUSION
By this report, it has been concluded that managerial accounting is vital for taking
decisions in business. The accounting generally uses two approaches of valuation of inventory
i.e. marginal costing and absorption costing. These approaches helps with production and pricing
aspects of business concern. SleepEase is one of the British enterprise engaged in business of
mattresses. They produces specialised bed named Max-ease. It is the product designed to ease
back pains for orthopaedic patients. They also constantly need to review their performance.
performance is one of the important aspect of business organisation. Hence use of balanced
scorecard in implementing strategies in business will give an advantage to the firm.
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REFERENCES
Books and Journals
Demski, J., 2013. Managerial uses of accounting information. Springer Science & Business
Media.
Garrison, R.H., et. al., 2010. Managerial accounting. Issues in Accounting Education. 25(4).
pp.792-793.
Granlund, M., 2011. Extending AIS research to management accounting and control issues: A
research note. International Journal of Accounting Information Systems. 12(1). pp.3-19.
Hall, M., 2010. Accounting information and managerial work. Accounting, Organizations and
Society. 35(3). pp.301-315.
Maher, M.W., Stickney, C.P. and Weil, R.L., 2012. Managerial accounting: An introduction to
concepts, methods and uses. Cengage Learning.
McVay, S.E., et. al., 2012. Managerial ability and earnings quality. The Accounting
Review. 88(2). pp.463-498.
Salehi, M., Rostami, V. and Mogadam, A., 2010. Usefulness of accounting information system
in emerging economy: Empirical evidence of Iran. International Journal of Economics
and Finance. 2(2). p.186.
Online
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