INTRODUCTION
Management accounting is the technique that is used by managers in the firm to evaluate feasible data linked with organizational performance, so that accurate decisions can be taken for the welfare of organization and directly supports management. To carry out operations in the market of perfect competition it is required for organization to take appropriate decisions linked with finance (Schiller, 2010). Management has to take various financial decisions that are linked with overall development and helps to achieve the targeted objectives. Present report focuses on the importance of management accounting in firm and various tasks have been covered which includes different type of cost, calculation of cost using different methods etc.
SECTION 1 – COLLECTING AND ANALYZING COST INFORMATION
Identifying and classifying different type of costs
Various types of costs are present that are discussed below:
- Direct and indirect cost– As per view Ng and et. al, (2013) Direct cost is considered as the cost that is directly linked with the process of production to produce goods whereas indirect cost is not directly linked with the production process but has effect on the price of products like depreciation cost, insurance, power etc (Ng and et. al, 2013).
- Material cost: It is the cost incurred by firm in order to purchase materials which are used in the production process. So, this cost must be handled efficiently so that more amount can be saved at the time of purchasing products.
- Overhead cost: According to Kattan and et. al, (2007) It is the cost that involves operational expense that company incurs at the time of carrying out operations such as miscellaneous expenses, building etc (Kattan and et. al, 2007).
Different costing methods
Various costing techniques are used by the firm in order to identify its costs that are incurred in different activities in the workplace. Such costing methods are:
- Contract costing: This type of costing technique is used when firm perform activities that are based on contract such as construction of dams, buildings etc.
- Job costing: According to Jack and Mundy, (2013) this method is used by organization to identify cost of material and labor incurred in different tasks. It is regarded to be the most effective technique as it analyzes cost of manufacturing units in different job.
- Process costing: Process costing is methodology of accounting that helps in gathering information linked with direct and indirect cost incurred in the production process (Jack and Mundy, 2013).
Calculation of cost using different techniques
Different methods are present with the help of which company can calculate costs which are discussed below:
Marginal costing method:
With the help of this method organization can determine marginal cost which is the difference between fixed and variable cost. Whereas it helps to keep track on variances.
Formula of Marginal cost (MC) = Change in TC/ change in Q
Where,
TC = Total cost
Q = Quantity
For calculation of marginal costing this formula is being used by company and through this it is possible to identify the marginal cost associated with the business.
Absorption costing method:
As per view of Dugdale (2005) this method is used by organizations to determine the direct and overhead cost associated with the production of goods and services. However GAAP considers absorption costing for external reporting (Al‐Htaybat, 2010).
Absorption Cost per-unit = (Per-Unit Variable Costs) + (Per-Unit Fixed Overhead)
Activity based costing:
This technique is considered to identify the relationship between tasks, products and costs.
Analysing and presenting data using different techniques
Company can analyse and present its cost data with the help of different techniques. Management can use method of cost allocation where cost can be allocated in different departments and it can be identified how much amount is incurred in different activities whether they are profitable or not.
According to Merchant (2012) cost benefit analysis is another technique to analyse data which helps in knowing the worth of amount allocated in various activities (Merchant, 2012). On the other hand to present cost data cost reports are used that considers all the costs incurred in carrying out the business activities. Full job costing, total administration costs are calculated for presenting data.
SECTION 2 WAYS TO REDUCE COST AND INCREASE BUSINESS VALUE
Preparing and analyzing cost routine reports
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