Costing Approaches in Management Accounting

Avoiding plagiarism

When you write an essay, report or dissertation you should always cite the published sources to which you quote, refer to or use as evidence, otherwise you are likely to be committing plagiarism, which is a form of academic misconduct with potentially very serious consequences. References need to be made both within the text and in a list at the end. 

The aim in doing this is to ensure that somebody reading your work can easily find these sources for themselves. This applies to whether you are using a book, a report, a journal article or an Internet site. You will probably know from your own experience how much easier it is to find a reference when a reading list or bibliography is clear and unambiguous.  There is help available from the library and online, including a range of videos such as those given below:  

https://mykingston.kingston.ac.uk/library/help_and_training/Pages/referencing.as px.

http://www.citethemrightonline.com/basics

Do remember you can submit your work as many times as you like before the final deadline. It is a good idea to check your Originality Report and ensure that any potential plagiarism is eradicated for your work by rewriting in your own words and referencing correctly. The staff on the BLASC desk in the LRC will be able to advise on this. Here you can find out how to access your Originality Report: 

https://studyspace.kingston.ac.uk/bbcswebdav/institution/Support/Student_Guid e_to_Turnitin_v2.pdf?target=blank

Additional helpful resources can be found here:

http://www.youtube.com/watch?v=1yYf8AihndI

The best way to avoid academic misconduct or plagiarism is to use your own words at all times; do not cut and paste from other work.

Sample Answer

Costing Approaches in Management Accounting

Introduction

Cost accounting provides managers with essential tools to measure, control and plan costs effectively. By using different costing approaches, businesses can determine how much it costs to produce goods or services, make pricing decisions and improve efficiency. Four of the most widely used approaches are job order costing, process costing, activity-based costing and marginal costing. Each method has its own features, advantages and limitations, which makes them suitable for different industries and business contexts. This essay will compare and contrast these approaches, supported by numerical examples, before providing a brief explanation of target costing and how it differs from the other methods.

Job Order Costing

Job order costing is used when products are made in small batches or as unique orders. Each job is treated as a separate cost unit, and materials, labour and overhead are traced or allocated to that specific job. Industries such as construction, printing, consultancy and bespoke furniture manufacturing use this approach.

For example, a furniture company makes a custom dining table. Direct materials cost £800, labour costs £400, and overheads allocated amount to £200. The total job cost becomes £1,400. The company can then decide to sell the table at a 30% profit margin, resulting in a price of £1,820.

The advantage of job order costing is that it provides detailed cost information for each specific order. However, it can be time-consuming to maintain records for every job, and overhead allocation may not always reflect actual resource consumption.

Process Costing

Process costing is suitable for industries that produce large volumes of identical or homogeneous products, such as chemicals, beverages, textiles and cement. Costs are accumulated by process or department over a period of time, and the average cost per unit is calculated.

For instance, a soft drink factory incurs £100,000 in materials, £50,000 in labour and £30,000 in overheads during a month. The total cost is £180,000. If 60,000 bottles are produced, the cost per unit is £3. This average cost can then be compared with the selling price to determine profitability.

Process costing is efficient for continuous production and provides a clear cost per unit. However, it lacks the precision of job order costing because costs are averaged across all units, which may not reflect variations in resource usage.

Activity-Based Costing (ABC)

Activity-based costing was developed to address the limitations of traditional overhead allocation methods. Instead of spreading overhead costs arbitrarily, ABC assigns costs to products based on activities that drive those costs. This provides more accurate information about resource consumption and product profitability.

For example, suppose a factory produces two products: standard pens and luxury pens. Machine setup costs are £50,000. Standard pens require 100 setups, while luxury pens require 150 setups. The total setups are 250, so each setup costs £200. Standard pens are charged £20,000 (100 × £200), while luxury pens are charged £30,000 (150 × £200). This reveals that luxury pens consume more setup resources, even if they represent a smaller portion of total output.

ABC helps managers identify high-cost activities and improve efficiency. It is particularly useful in complex environments with diverse products. The drawback is that it requires detailed data collection and can be expensive to implement.

Marginal Costing

Marginal costing, also known as variable costing, focuses on the additional cost incurred in producing one more unit. It separates variable costs (materials, direct labour, variable overheads) from fixed costs, treating fixed costs as period expenses rather than product costs. This method is often used for decision-making rather than external reporting.

For example, if a company sells a product for £50 and its variable cost is £30, the contribution margin is £20 per unit. If fixed costs for the period are £100,000, the company must sell 5,000 units to break even (100,000 ÷ 20). Marginal costing helps managers with pricing, shutdown decisions and product mix choices.

The strength of marginal costing is that it supports short-term decision-making and highlights contribution margins. However, it does not provide a full cost per unit since fixed costs are excluded, which limits its usefulness for long-term pricing strategies.

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