Management in Accounting

Management Accounting Techniques

Cost: In accounting, cost implies for the figure that a company spend to produce something valuable. It does no include any profit. From the customer's point of view, the cost is known as price. It includes both production cost and mark up value.

Cost analysis: It is process of measuring the cost and output relationship. It determines the cost incurred in procuring input and how it can be arranged so that it will help in increasing the productivity of the firm.Need Assignment Samples.Talk to our Experts!

Types of cost

Cost are of different types, a detailed description is given below.

Fixed cost: It includes rent, insurance, salaries etc which remains same at each level of output or level of production.

Variable cost: It changes with the change in the output level (Collis and Hussey, 2017). If there is no production then variable cost will be zero.

Direct cost: It is the cost that is directly or completely assigned to the specific product or service. It includes direct labour, direct material etc.

Cost volume profit

It helps in analysing the effect of change in cost and volume on the company's operating income. It is based on several assumptions such as sales price per unit, variable cost per and fixed cost is constant, everything is sold etc.

Flexible Budgeting

It is the more sophisticated budget that adjusts itself with the changes in level of activity. It is an estimated financial plan of revenue and expenditure.

Cost variances

It refers to the deviation between the set budgeted outcome and the actual outcome of the organization. These variances can be of two type's positive and negative variances.

Cost allocation

It refers to the process of identifying and assigning cost to cost objects. It is used in financial reporting and also useful in knowing the profitability.

Normal and standard costing

The method of cost allocation in which cost is assigned to the product based on material labor and overheads is known as Normal costing. Standard costing involves creation of estimation for each activity. It helps in comparing the actual cost and revenue with the standard cost and revenue.

Different Types of Costing Methods

Marginal costing

This method refers to the ascertainment of marginal cost by charging variable cost per unit and written off the fixed cost against the contribution (Collis and Hussey, 2017).

Absorption costing

In this method, all the manufacturing cost is assigned per unit in the cost of production irrespective of fixed and variable. It is used in external financing and for tax reporting (FIMYAR and TURCHENYAK, 2017).

Activity-based costing

In this method, overhead and indirect cost is assigned to the products in a more logical manner to the related product or services. It is mostly used in the environment where there are many machines and products.

Role of costing in setting price

Costs never determine price but plays a crucial role in pricing strategy. Other than price there are two other factors that is required to be taken into consideration which are demand and supply. Price decides what and for whom to produce. Moreover, usually with the motive to enhance both sales and customer base producer emphasizes on charging lower prices. A high cost producer will target customers who are willing to pay premium prices. So, change in cost affect the producer to change its price.

Cost of inventory

Inventory cost: It refers to the expenses that associated with the management of inventory namely procurement and storage (Birt, J., and et.al, 2020). The different types of cost associated with it are stated below.

Ordering cost: It is the cost that firm incurs while ordering inventory. It covers purchase cost and inbound logistics cost.

Carrying cost: It implies for the expenses incurred for handling and maintaining the inventory. It includes rent of warehouse for storing the inventory.

Shortage cost or cost of replenishment: These cost are incurred in an unusual circumstance. For example, damaged inventory, stock depletion etc.

Benefits of reduced inventory cost

• It will lead to reduced material maintenance cost.
• Ordering in small lots will help in reducing the ordering cost and also reduces inventory wastage.
• Reduced cost will help in increasing profitability of the organization.

Different inventory valuation methods

Some widely used inventory management methods are stated below.

FIFO: In this, cost of the good purchased is charged when that good is sold out. It assumes that first good purchased will be sold first.

LIFO: In this, the cost of last purchased good are the first cost charged at the time of selling the goods.

Weighted average: In this, ending inventory is measured using the weighted average unit cost.

Overhead costs

It refers to the business expenses that cannot be directly attributed to the specific product or services. It includes three types of cost which are indirect material, labor and other expenditure.Want to get Assignment help? Talk Our Expert Now!

Calculate cost using appropriate technique of cost analysis

Income statement as per marginal costing:

Profitability statement according to absorption costing method is enumerated below:

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