Management accounting is the process by which financial statistical information are put together. Management accounting is used to produce reports annually which are used by managers on a day to day basis to make decisions for the company.
The benefits of management accounting systems
Expenses are handled in the same way. The company records any expenses when they’re incurred, even if it hasn’t paid for the supplies yet. For example, when a carpenter buys lumber for a job, he may very likely do so on account and not actually lay out the cash for the lumber until a month or so later when he gets the bill.
Marginal and absorption costing system both are important for the company. By using both of these approaches, profit calculation can be done by the business firm. Income statement refers to the statement where cash inflow amount which is revenue and outflow elements like varied sort of expenses are included. From revenue expenses values are subtracted to identify whether company earn profit or loss in its business. Usually, from sales revenue direct expenses are subtracted and in this way, gross profit value is computed. Thereafter, from gross profit amount, indirect expenses are subtracted and by doing so, net profit amount is calculated (Zimmerman and Yahya-Zadeh, 2011). Thus, it is assumed that income statement have significance for the firms. In management accounting, income statement can be prepared in two ways which are marginal and absorption costing method. There is large difference between both approaches because calculation method vary in case of these methods. It MC method,out of FC and VC exclusively expenses that are not stable in nature are taken in to account. Apart from this, in absorption costing,all sort of expenses are considered for costing purpose and profit calculation. Due to this reason, profit amount revealed by both these approaches are also different from each other. Marginal costing method reflects higher amount of net profit then absorption costing method. However, this does not mean that specific calculation approach is more effective than other approach.This is because fixed expenses are not incurred directly in production of goods (Macintosh and Quattrone, 2010). Hence, manager is always interested in knowing whether variable expenses have high, low or moderate impact on the firm profitability. On other hand, manager would like to use absorption costing method. One of the main reason behind such kind of belief is thatall sort of expenditures are included in the calculation process. Fixed expenses are directly not related to production of goods and services but fixed assets are used by the business firms for production of goods. Hence, it can be said that it is very important to take in to account fixed expenses in profit calculation. So, there is significance of both marginal and absorption costing methods for the business firms (Baldvinsdottir, Mitchell and Nørreklit, 2010). It depends on the manager requirements and discretion that which approach of profit calculation it think is more appropriate for the company. It means that there are advantages of using both approaches to managers in respect to making business decisions. However, most of times managers prefer to use marginal costing method in the business. This is because they give much importance to the expenses that are directly related to the production of goods and services at workplace.
Table 1: Profit by absorption costing method
Cost of production
Less: Closing stock
Less: Variable sales indirect expenses
Less: Fixed cost, production overhead
It can be observed that in case of absorption costing method, net profit amount to 900. Under this, first of all sales revenue amount is recorded which is 100000 and thereafter, from cost of production closing stock amount is deducted. From sales cost of goods sold value is subtracted and in this way gross profit amount is calculated. Variable expenses are listed in the calculation table and it can be observed that variable sales indirect expense amount to 6000 followed by fixed cost production overhead value which is 8000 and administration expenses whose value is 7000 followed by selling cost whose value is 100. On this basis, it can be said that systematic approach is followed for calculation purpose. From gross profit amount, all expenses are subtracted and by doing so, net profit is computed whose value is 900.
Table 2: Profit by marginal costing method
Less: Cost of production
Less: Over absorption of FC
Less: Non static expenses
Less: Admin and FC
In case of marginal cost method, sales value again is 100000 and like absorption costing method from cost of production closing stock amount is subtracted in marginal costing method. Fixed overhead expenses are subtracted from newly computed value. In this way, overall production cost of sales is calculated. From sales revenue amount 85900 value is subtracted and in this way gross profit amount is calculated. Finally, from gross profit variable expenses are subtracted and in respect to fixed cost only, fixed cost administration cost is subtracted. Here major, difference comes between fixed and marginal costing method at a point where fixed production expenses were subtracted along with variable expenses in absorption cost but in marginal costing, fixed production overhead are directly deducted from sales (Lukka and Modell, 2010). Hence, profit amount vary for MC and AC method as it may be observed that in MC method, profit amount is 1000 and same in case of AC method is 900. Thus, it is clear that there is difference in the profit amount that is computed by using marginal and absorption costing methods. Managers must use both these methods for profit calculation and must use both of them to make business decisions. Like financial models, calculation models in respect to marginal and absorption costing can be developed and by changing values of fixed and variable expenses, it can be identified that with change in these expenses, what sort of variation comes in profit amount. Such kind of models can assist firm in making business decisions in respect to setting of target for fixed and variable expenses which assist firm in earning determined amount of profit in the business. It may be assumed that MC and AC method have significance for the firms and managers because by using these approaches in different manner profit calculation can be done and performance can be accessed. Hence, managers must use both these approaches to make business decisions.
What are common concepts and techniques of managerial accounting?
In-text: (Tarver, 2017)
Your Bibliography: Tarver, E. (2017). What are common concepts and techniques of managerial accounting?. [online] Investopedia. Available at: http://www.investopedia.com/ask/answers/062915/what-are-common-concepts-and-techniques-managerial-accounting.asp [Accessed 30 Oct. 2017].
HE IMPORTANCE OF MANAGEMENT ACCOUNTING FOR PROFESSIONAL ACCOUNTANTS IN BUSINESS – GAA ACCOUNTING
Drilling data Much of management accounting focuses on the analysis of data, experts say, and how that data is acquired and analysed differentiates the management accountant from the auditor. As K.M. Wong, Group Manager, Finance and Accounting, at Power Assets Holdings and an Institute Council member, points out, “one of an accountant’s essential functions is providing useful information to company management.”
In-text: (Gaaaccounting.com, 2017)
Your Bibliography: Gaaaccounting.com. (2017). The Importance of Management Accounting for Professional Accountants in Business – GAA Accounting. [online] Available at: http://www.gaaaccounting.com/the-
Baldvinsdottir, G., Mitchell, F. and Nørreklit, H., 2010. Issues in the relationship between theory and practice in management accounting. Management Accounting Research. 21(2). pp.79-82.
Lukka, K. and Modell, S., 2010. Validation in interpretive management accounting research. Accounting, organizations and society. 35(4). pp.462-477.
Macintosh, N.B. and Quattrone, P., 2010. Management accounting and control systems: An organizational and sociological approach. John Wiley & Sons.
Zimmerman, J.L. and Yahya-Zadeh, M., 2011. Accounting for decision making and control. Issues in Accounting Education. 26(1). pp.258-259.
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