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Management Accounting and its Importance for Golden Casket

The primary function of management accounting is to assist the management in taking business decisions. There is hardly any sort of fixed structure or format of management accounting. The financial accounting, business analysis, costing, economics etc. are considered some of the vital tools and techniques of management accounting (Otley 2016). The solitary need for management accounting is that the data needs to be serving its purpose that is helpful for management to take vital business decisions.

The current report is based on understanding the concept of management accounting and assessing its importance in case of Golden Casket. The report will further provide list of management accounting techniques that is available to Golden Casket. Furthermore, a critical evaluation of absorption costing and activity based costing technique will be made for Golden Casket. Finally, an advice will be provided to Golden Casket regarding the viability of ABC based costing in order to address the concern of financial directors.

Management accounting is defined as the procedure of making financial information and resources available to the managers for taking decisions. The management accounting is solely used by internal department of an organization and the financial statements is shared by finance team with management department of a company (Drury 2018). Management accounting is referred as the application of professional skills and knowledge to prepare the financial and accounting information to help the internal management in making policies, formulate plans and implement control on company operations.  

Management accounting is important because it helps the management team of Golden Casket in enhancing the overall quality of business decision (Malmi 2016). The importance of management accounting for Golden Casket is that it would help the management team possessing financial information to execute business decisions operations and activities in effective way. Some importance of management accounting to Golden Casket is explained below

1: Decision Making: For Golden Casket decision making is considered as most important procedure of management accounting. With the help of management accounting, Golden Casket can use techniques from every area such as statistics, costing, economics etc. By providing charts, projections and table, management accounting would help Golden Casket to ease its decision making procedure.

2: Planning: Unlike financial accounting management accounting has no timelines restrictions because it is a continuous and ongoing procedure (Bromwich and Scapens 2016). Therefore, the financial and other relevant information can be presented to Golden Casket management on regular basis such as weekly, monthly or at times on daily basis. The managers of Golden Casket can make use of data and analysis to plan the business activities.

3: Identification of business problem areas: If there are some products of Golden Casket that are performing adversely or some department is suffering from unanticipated losses, the management is helpful in recognizing those fundamental reasons (Eldenburg et al. 2020). If the management of Golden Casket is diligent and frequently reports their data, it would allow the management of Golden Casket to get one step ahead of problem.

The main purpose of costing is to calculate the total cost involved in production of goods or the cost involved in rendering services. Some of the alternative costing techniques that is available to Golden Casket is given below

Costing Techniques Available to Golden Casket

1: Marginal Costing: The marginal costing involves dividing all the costs in fixed and variable costs. The fixed cost is not related to production level. As evident from the name, these costs continues to be same notwithstanding of production quantities. The variable cost changes in respect to the level of production. They are considered directly proportionate. The variable cost per unit nevertheless remains same (Möller, Schäffer and Verbeeten 2020). In marginal costing, only the variable cost is taken into account while computing the cost of production. For Golden Casket, of all the techniques of costing available, the marginal costing is considered as highly suitable for company to take decisions to determine the amount of material to be bought, right mix of product and fixing of selling price.

2: Standard Costing: Standing costing is another alternative technique of costing that is available to Golden Casket. The standard costing represents a technique where Golden Casket can compare the costs that gets incurred for the purpose of producing goods and the costs must have incurred for producing goods. In actual fact, standard costing is regarded as the comparison amid the standard and actual costs (Collis and Hussey 2017). The difference originating between the two is treated as variances. On finding that the actual costs is higher than the standard costs, the variance is considered adverse. An analysis of the reason of adverse variance is done to try and eventually solve the main cause of problem.

The cost accounting make use of number of methods for allocation of costs to products where each cost has its own advantages and disadvantages. For Golden Casket, costing is viewed as the vital contributor in ascertaining the selling prices, therefore, costs must be ascertained correctly (Uyar and Kuzey 2016). The absorption costing and activity based costing are two of the most frequently used costing technique.

Absorption costing is regarded as a traditional costing system which helps in assigning costs to individual production units. It would incur costs as material, labour, overheads and would produce number of units. The absorption cost considers fixed and variable costs and this approach is viewed as full costing. The absorption costing is viewed as most simple and upfront method of allocating cost, despite some business and accounting practitioners have questioned regarding absorption cost approach to generate correct financial outcomes (Eldenburg et al. 2020). While an important drawback of absorption costing is that overhead costs cannot be directly identified to production units.

The Activity Based Costing involves overcoming the limitations that is present in absorption costing and for Golden Casket, ABC is a modern system of costing (Hanif 2019). This method moves away from single base for allocation of overhead costs and makes an effort to recognize different type of activities in the process of production along with the cost drivers. The overhead costs is subsequently computed on the basis of activity use and cost driver.

Critically, absorption costing is considered as the method of allocating all the costs to an individual production units. The ABC method makes use of several cost drivers to allocate costs. Absorption costing makes use of single base for allocating all the costs while ABC several cost bases to allocate the cost. The absorption costing is viewed as less time taking and not very correct way of allocating cost whereas, ABC is a time taking process but has higher accuracy. The absorption cost represents a traditional system of costing and large number of managers have agreed that the absorption method of cost allocation is less successful. The ABC method is referred as modern way of cost accounting.

Absorption Costing

As evident from the calculations stated by Golden Casket, the numerical figures provides suggestion that the company uses traditional absorption costing method to determine its key activities. Later the Golden Casket through absorption costing method also determine the cost driver for every key activity. Later the cost of every key activity group is computed by Golden Casket. The computation of cost driver and rate of allocation for every activity is obtained by simply dividing the activity cost in allocation base (Geiszler et al. 2017). Finally, Golden Casket allocates costs to every cost object through the allocation rates. Golden Casket makes use of multiple basis for allocation of cost facilities that eventually results in cost control and better decision making. However, as Golden Casket makes use of same cost base for all the activities is considered less accurate and it is not justifiable.     

The ABC costing is considered viable for Golden Casket because this method will provide much more detailed measure of costs than the traditional absorption costing method. By adopting the ABC method Golden Casket can help its marketing people to provide more correct product cost numbers for making decisions regarding the prices and those products that are not profitable can be eliminated.

The production would also benefit Golden Casket because by adopting ABC, it would provide better information regarding the cost of every activity. Upon adopting the ABC, it would help the manager of Golden Casket to recognize the cost-causing activities (Lueg 2020). The activity based costing is helpful for Golden Casket to provide much more information regarding the product costs instead of traditional method or absorption costing and also requires much more record keeping. The ABC method is considered viable for Golden Casket because it would help in providing more accurate record-keeping.

Conclusion:

Conclusively, the actual difference between absorption and ABC costing is that it mainly depends on the way indirect cost gets allocated. Consequently, ABC method is preferred for Golden Casket because of the nature and relevance of information that is provided to managers. Although this method is costly and time consuming but the information provided is more accurate and helpful in making decisions.

References:

Bromwich, M. and Scapens, R.W., 2016. Management accounting research: 25 years on. Management Accounting Research, 31, pp.1-9.

Collis, J. and Hussey, R., 2017. Cost and management accounting. Macmillan International Higher Education.

Drury, C., 2018. Cost and management accounting. Cengage Learning.

Eldenburg, L.G., Brooks, A., Oliver, J., Vesty, G., Dormer, R., Murthy, V. and Pawsey, N., 2020. Management accounting. John Wiley & Sons.

Eldenburg, L.G., Brooks, A., Oliver, J., Vesty, G., Dormer, R., Murthy, V. and Pawsey, N., 2020. Management accounting. John Wiley & Sons.

Geiszler, M., Baker, K. and Lippitt, J., 2017. Variable Activity?Based Costing and Decision Making. Journal of Corporate Accounting & Finance, 28(5), pp.45-52.

Hanif, M., 2019. Modern Cost and Management Accounting. McGraw-Hill Education.

Lueg, R., 2020. Activity-based costing as a basis for transfer prices and target setting.

Malmi, T., 2016. Managerialist studies in management accounting: 1990–2014. Management Accounting Research, 31, pp.31-44.

Möller, K., Schäffer, U. and Verbeeten, F., 2020. Digitalization in management accounting and control: an editorial. Journal of Management Control, 31(1), pp.1-8.0

Otley, D., 2016. The contingency theory of management accounting and control: 1980–2014. Management accounting research, 31, pp.45-62.

Uyar, A. and Kuzey, C., 2016. Does management accounting mediate the relationship between cost system design and performance?. Advances in accounting, 35, pp.170-176.

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