Advantages And Objectives Of Management Accounting

report can be prepared anytime the management of the organization needs it. Hence, its reporting periods are flexible.

Estimates and approximations: Since management accounting reports are futuristic, they entail usage of estimates and approximations while in the case of financial accounting reports which are usually historical, the use of estimates and approximations are reduced to the barest minimum.

Objectives: The objective of financial accounting report is stewardship while management accounting reports are used for planning, controlling and decision-making.

Inter-disciplinary relationship: Management accounting relates to other courses. For example economics. Statistics. Psychology.

Quantitative Techniques, Production Management, etc.

Such a classification of costs is used in marginal costing to work out how much it costs to produce each extra unit of output.

Marginal cost is often - but not always - the total of the variable costs of producing a unit of output. For most purposes, marginal costing is not concerned with fixed period costs (such as the rent of a factory); instead it is concerned with variable product costs - direct materials, direct labor, direct expenses, and variable production overheads - which increase as output increases. For most decision-making, the marginal cost of a unit of output is, therefore, the variable cost of producing one more unit.

Knowing the marginal cost of a unit of output enables the managers of a business to focus on the contribution provided by each unit. The contribution is the sales revenue after marginal/variable product costs have been paid. The contribution formula is: selling price less variable cost =

The relationship between marginal costing, contribution and profit is shown in the Case Study which follows.

UZMA BIKE / CYCLE COMPANY: MARGINAL COSTING

Situation

The Uzma Company makes 100 bikes each week and its costs are as follows:

Direct materials: 4,000 AED

Direct labor: 5,000 AED

Production overheads: 5,000 AED

Investigations into the behavior of costs have revealed the following information: Direct materials are variable costs Direct labor is a variable cost: of the production overheads, 2,000 AED is a fixed cost, and the remainder is a variable