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Introduction to accounting

University: University of chester

  • Unit No: 5
  • Level: Diploma
  • Pages: 4
  • Words: 1000
  • Paper Type: Dissertation
  • Course Code:

    MBA87

  • Country: UK
  • Downloads: 6
Question :

This project focuses on preparation of a report for the board of management of Morrison’s. The following aspects will be covered.

  • Identifying and describing the relevant stakeholders considering the conceptual framework.
  • Provide an explanation of how constructing the financial statements meet their needs.
  • Description of the major advantages and disadvantages offered by absorption and marginal costing.
  • Identifying costing system which will be suitable for business operating in car manufacturing, construction firm and garage specialising in servicing cars.
Answer :
Organization Selected : Morrison’s UK

INTRODUCTION

Financial accounting field laid high level of emphasis on summarizing, analyzing and reporting financial transactions which are related to the business. Further, management accounting system or tools furnish information about the internal operations and functions. The present report is based on Morrison’s, a leading retail business unit of UK, which provides customers with wide range of products or services at suitable prices. In this, report will provide deeper insight about the manner in which financial statements satisfy information need of stakeholders. Further, it also develops understanding about different types of costing system such as absorption and marginal.

PART 1

A. Identifying and describing relevant stakeholders as per conceptual framework

In accordance with International Accounting Standard Board (IASB), main stakeholders of Morrison’s include shareholders, management team, employees, financial institution, suppliers, customers and government authority (IASB, 2018). On the basis of accounting rules and regulations company needs to prepare as well as publish financial accounts & report at the end of financial year.

B. Explaining how financial statements meet the information need of stakeholders

Financial report which is published by Morrison’s at the end of accounting year fulfils information need of concerned stakeholders to a great extent in the following manner:

Internal stakeholder

  • Management: For making effectual operational and financing decisions management team of Morrison’s undertake as well as evaluate financial statements. Moreover, annual report clearly furnishes information about profitability, liquidity and solvency aspects. Hence, considering such information management team would become able to take suitable and strategic decisions for the near future.
  • Employees: With the motive to assess future growth in both monetary and non-monetary terms personnel make evaluation of final accounts. Moreover, profitability statement clearly presents the growth take place in income level of the firm and thereby assists in making estimation about salary, incentives and other benefits.

External stakeholders

  • Shareholders: Investors make evaluation of annual report to ascertain financial position and performance of firm (Users of financial statements, 2018). Hence, financial statements help investors in taking decision whether they should hold the investment or sell it now.
  • Financial institution: Financial statements mainly balance sheet helps lending institution in identifying that Morrison’s is able to payback loaned funds along with the relative interest charges or not.
  • Suppliers: Using final accounts and reports suppliers can decide whether they should extend credit to a company or not.
  • Customers: Now, customers prefer to purchase products or services from the retailer which carries out operations in a sustainable manner. Hence, by reviewing annual report customers can assess that company is performing activities in an eco-friendly manner or not.
  • Government: Profitability statement and balance sheet is evaluated by the government authorities to assess whether business unit has paid appropriate tax amount or not.

Hence, the above depicted aspects clearly show that financial statements satisfy informational need of the stakeholders to a great extent.

PART 2

A. Describing advantages and disadvantages of marginal & absorption costing method

Absorption costing system: This is also known as full costing method which considers both fixed and variable production expenses as product cost. As per GAAP and IFRS such costing technique is highly recommended to the business units.

Advantages

Disadvantages

  • It highlights the significance of fixed cost in production
  • Highly effectual method which assists in preparing financial statements in the best possible way.
  • Absorption costing method shows less fluctuation in net profit margin when production level is constant and sales level changes.
  • It is not highly helpful in preparing flexible budgeting framework
  • Apportionment of fixed overheads by arbitrary method also affects the significance of such costing method.
  • It avoids relationship which takes place between cost, volume and profit (Advantages and Disadvantages of Absorption Costing System, 2018).
 

Marginal costing system: In this costing system, only variable or direct expenses are charged to the unit cost produced.Under marginal costing method, fixed cost is recognized as a periodical cost, whereas variable expense considered as product expense.

Advantages

Disadvantages

  • Assists in determining and exerting control on production cost
  • It is highly simple and understandable
  • Helps in eliminating variance cost per unit
  • Provides assistance in short-term planning and demonstrating BEP as well as profitability graphs
  • Facilitates assessment of accurate overhead recovery rate (Marginal Costing System, 2018)
  • Such costing system ignores fixed cost
  • Marginal costing system fails to ascertain that, in long-rum, fixed cost may become variable Hence, cost classification in terms of fixed and variable expenses give misleading results.
  • In this, problem pertaining to under and over-recovery of overhead takes place
  • Such costing method does not provide clear or suitable information in the case of increasing cost and production
 

B. Identifying costing system which is adopted by each type of business

Business

Costing system

Reason

Kwik Fit: a garage specialising in servicing cars, vans and other vehicles.

Job costing method

This is suitable for garage company because it places emphasis on cost accumulation regarding material, labour and overhead (Waters, 2018).

A construction firm specialising in building offices and or houses.

Activity based costing method

With the motive to assess and present suitable view of cost construction firms undertake ABC costing system. The rationale behind the adoption of such technique is that it helps in allocating cost to the products or services as per their consumption level.

A car manufacturing industry: producing cars and SUVs

Activity based costing

In this, ABC costing method produces highly suitable results over other methods. Moreover, it lays emphasis on recognizing relationship which takes place between cost, activities and products (Jurek and et.al., n.d). Hence, such relationship helps in assigning indirect cost or expenses more effectually.

CONCLUSION

By summing up this report, it has been concluded that annual report presented by Morrison each year provides high level of assistance to the stakeholders in taking appropriate decisions. Besides this, it can be inferred that absorption costing system is highly suitable over marginal because it considers both fixed as well as variable expenses while determining production cost.

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