Critically Investigating Marginal Costing vs. Absorption Costing and Strategic Management Accounting

Marginal Costing vs. Absorption Costing

A.Critically investigate the benefits and limitations of marginal costing compared to absorption costing as an aid to management decision making by considering the following areas:

a) Demonstrate and discuss the underlying differences between the marginal costing and absorption costing approach?

b) What has been the basis of theoretical criticism of both approaches?

c) Outline the practical problems that may be encountered in implementing each technique in manufacturing industry and comment on how they may be overcome? 

B.Strategic management accounting is concerned with providing information that will support the strategic plans and decisions made within a business: you are required to critically review this statement. In doing so you should consider the following areas ofstrategic planning:

a) Establishing mission, vision and objectives

b) Undertaking a position analysis such as SWOT

c) Identifying and assessing strategic options

d) Selection of strategic options and formulation of long- and short-term plans e) Performance review and control 

C. Machine Makers Ltd (MM) makes specialist machinery to customers’ specifications.

Recently, just as MM completed a particular machine for a customer, it received information that the customer had gone bankrupt with no possibility of any payment to MM being seen as likely. The total contract price was £110,000. The contract specified that payment must be made in stages, as the machine’s manufacture progressed. MM had received £60,000 in progress payments for the machine. It is estimated that the machine could be sold, as it stands, for £80,000. Another potential customer has been identified for the machine, but this would require alterations to it. Details of the alterations are as follows:

1) Material A. The required quantity is held in inventories. This cost £6,000 when it was bought. It would cost £6,400 to replace it. The material is hazardous and would cost the business £1,000 to scrap it. The business uses it constantly.

2) Material B. By coincidence the appropriate quantity of this material was ordered recently for another contract that was subsequently abandoned because the material was not delivered in time. MM does not normally use this material and its scrap value is £4,000. The original cost price was agreed at £10,000. Though the contract to buy this material is binding, the supplier will accept £8,000 to compensate for the late delivery. The current market buying price is now £7,000.

3) Material C. 20 units of this material will be required. This is in general use in the business. An order for 35 units is shortly to be placed for another job. The price for this material is £130 a unit, but the supplier allows a bulk discount of £10 a unit, for the entire order, for orders of 50 units and above.

4) Labour. 50 hours of labour will be required for the alterations. Labour is a fixed cost to MM, because members of staff are paid in full the normal £12 an hour whether there is work for them to do or not. 20 hours, of the required 50 hours, can be provided by members of staff who currently have no work to do. Only taking staff off other work can provide the remaining 30 hours. This other work is charged out to customers at £30 an hour.

Required:

(a) Define the terms ‘cost’ and ‘relevant costs’ and describe the type of costs that ‘relevant costs’ may include. (6 marks)

(b) Show, with supporting explanations, the minimum price that MM could charge the customer for the altered machine, such that the shareholders would be no worse off as a result.