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1 Costing Your name; Your student registration number; Your Programme of Study (e.g., BA (Hons) Business and Financial Management, BA (Hons) Business and Management) The word count (excluding the reference list, bibliography and any appendices). The name of your UGB253 module leader and tutor.

2 Table of Contents Introduction .......................................................................................................................... 3 Part A ................................................................................................................................... 3 Marginal or Variable Costing ........................................................................................... 3 Full or Absorption Costing ............................................................................................... 3 Activity-Based Costing (ABC) ........................................................................................ 4 Activity-Based Costing (ABC) Example: ................................................................... 4 Part B ................................................................................................................................... 7 Strategic Management Accounting in the Context of Strategic Planning ........................ 7 Comparison of Traditional Management Accounting Tools and Strategic Management 7 SMA Tools Supporting Each Step in Strategic Planning: ................................................ 7 Establishing Mission, Vision, and Objectives ............................................................. 7 Undertaking Position Analysis such as SWOT or PESTLE: ....................................... 8 Identifying and Assessing Strategic Options ............................................................... 8 Performance Review and Control ................................................................................ 9 View on the Validity of the Statement .............................................................................. 9 Conclusion ....................................................................................................................... 9 References .......................................................................................................................... 11

3 Costing Introduction This paper discusses costing techniques, explaining ABC (Activity-Based Costing), Full or Absorption Costing and Marginal or Variable Costing. Their strengths and weaknesses are exemplified numerically in the appendix. The research highlights the importance of strategic management accounting (SMA) in mission and vision, position analyses and decision-making for strategic planning. The report ends by emphasizing the importance of SMA in performance assessment and control and provides necessary guidance on strategic management. This study intends to shed light on the practical significance of these financial methods and reveal their practical relevance to strategic planning and decision making. Part A Marginal or Variable Costing To streamline short-term decision making, marginal/variable costing approach allocates variable against fixed costs. The second approach of costing considers just the variable components called product costs. These are all classified as period costs that do not belong to certain output units (Nikkeh, et al., 2022). This is a very valuable approach, especially in the determination of what changes in output volumes may mean to a firm’s profits. Therefore, let us look into the example of the widget manufacturing firm and how marginal costing is employed. The company’s fixed costs will be $5000, with each widget having variable costs of $10. In case the company goes for additional 500 units in production of this product, its variable cost is anticipated to be $5,000. Contribution margin is simply a figure arrived at by subtracting total sales from the variable costs. In this case, the contribution margin is $2,500 where 500 widgets have been given with $5 contribution margin per widget. Since fixed costs are not allocated to the units and instead consider the variable costs related to the increased output, this example demonstrates how straightforward marginal costing is for assessing the profitability of additional production. Marginal costing is helpful in one situation and in another case make-or-buy situation. For example, if the corporation decides to buy a widget externally at $15 or internally at $20. Marginal costing focuses on the relevant costs such as direct material, direct labour, and variable production overhead in order to facilitate the comparability of such costs. Here, the result is based on whether the $20 internal manufacturing cost is acceptable or not compared to the $15 external purchase cost. This allows for a clear assessment of which option is cheaper as separate relevant costs are considered and fixed overhead is excluded. Marginal or variable costing is one of the most effective and simplistic way to allocate the fixed expenses away from the variable costs and aid in decision making. Full or Absorption Costing Full or absorption costing is an extended form of cost accounting that gives us accurate information about all the production costs incurred. Unlike marginal costing, absorption costing considers fixed manufacturing overhead to be a product cost, absorbed into the units

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4 manufactured. This process is essential and GAAP under external financial reporting must be used in the inventory value. Absorption costing can be illustrated through a corporation with 1,000 units of a product. The variable cost per unit is $15 after deducting $10,000 for fixed production expenses. The total cost of producing one unit equals to the assigned fixed cost plus variable per unit cost under absorption accounting system. In this case, total cost per unit would be $25 (variable cost of $15 and $10 for fixed costs). Therefore, every unit bears a part of the fixed production overhead because the fixed cost is apportioned by the amount produced. Inventory valuation process, whereby the absorption costing requires all production costs, including both variable and fixed to be used in calculating the products sold and ending inventory. Particularly important for external financial reporting is the need to achieve a more precise representation of the actual production cost. Absorption costing also proves useful in long-term price decisions. Imagine, for example, the business wishes to guarantee profitability through cost coverage selling price. Absorption costing also includes variable and fixed manufacturing cost. Its help creates a more informed pricing strategy (Špacírová et al., 2020). This encompassing method makes a suitable financial decision-making process and long- term profitability as well as that the selling price should pay all the pertinent costs. Full or absorption costing, which considers both variable and fixed costs, provides a comprehensive picture of all production costs. The accounting standards that call for its use for external financial reporting make it necessary for determining the value of inventories. Activity-Based Costing (ABC) With Activity-Based Costing (ABC), overhead expenses are assigned to products more accurately by dividing costs into different activities. For instance, a manufacturing company can design custom-made furniture, for example, even if a particular numerical case was lacking (Zamrud & Abu, 2018). The total cost of production is influenced by a number of processes, including setup, finishing, and design. Based on the particular tasks involved, ABC assists in precisely allocating expenses to each item of furniture. When items have different characteristics and production requirements, this strategy is especially helpful. ABC plays a critical role in a customer profitability study. A business that focuses on providing services, for example, could take on various tasks to cater to various clientele groups ( Quesado & Silva 2021). In addition to offering insights into the underlying cost implications of serving various client segments, ABC assists in identifying the precise activities and resources involved in supporting each customer segment. The numerical examples found in the appendix demonstrate how ABC helps to improve the precision with which client profitability is understood. Activity-Based Costing (ABC) Example: 1. Activities and Costs: Activity Total Costs Expected Activity Level Cost Driver Rate Setup $50,000 100 setups $500 per setup Machining $50,000 5,000 machine hours $10 per machine hour Finishing $50,000 200 finishing hours $250 per finishing hour

5 2. Product X and Product Y Production Details: Product Setups Machine Hours Finishing Hours X 20 1,000 50 Y 80 4,000 150 3. ABC Cost Allocation: Product Setup Costs Calculation Machining Costs Calculation Finishing Costs Calculation Total ABC Costs Calculation X $500 per setup * 20 setups = $10,000 $10 per machine hour * 1,000 machine hours = $10,000 $250 per finishing hour * 50 finishing hours = $12,500 $10,000 (Setup) + $10,000 (Machining) + $12,500 (Finishing) = $82,500 Y $500 per setup * 80 setups = $40,000 $10 per machine hour * 4,000 machine hours = $40,000 $250 per finishing hour * 150 finishing hours = $37,500 $40,000 (Setup) + $40,000 (Machining) + $37,500 (Finishing) = $117,500 Three major activities—Setup, Machining, and Finishing—are highlighted in the sample given. Each has a unique overall cost as well as a predicted activity level and cost driver rate. There will be 100 setups in the setup activity, which will cost $50,000 in total. The cost driver rate for each setup is $500. Comparably, machining, which will cost $50,000 in total, is expected to need 5,000 machine hours, or $10 per machine hour as a cost driver. With a $50,000 total cost, 200 finishing hours are expected to be required for completing, translating into a $250 cost driver rate per finishing hour. The particular expenses spent for every unit of activity are represented by these rates, which serve as the basis for the future cost allocation. Moving on to Product X and Y's manufacturing specifications, ABC considers the quantity of setups, machine hours, and finishing hours needed for each product. Product X goes through a rigorous cost allocation process, needing 20 setups, 1,000 machine hours, and 50 finishing hours. Multiplying the corresponding activity levels by the predefined cost driver rates yields the Setup, Machining, and Finishing costs. For example, the setup fee for Product X is $500 per setup times 20 setups, which equals $10,000. Finishing and Machining follow the same idea. The $82,500 total ABC cost for Product X is the total of these separate activity expenses. This all-inclusive method is repeated for Product Y, which calls for 150 finishing hours, 4,000 machine hours, and 80 setups. Similar calculations are made for the Setup, Machining, and Finishing costs, yielding an ABC cost of $117,500 for Product Y as a whole. ABC Application Instance .; Traditional Tables (TT) Modern Tables (MT) Setup $10,000 $5,000 Finishing $15,000 $10,000 Design $5,000 $15,000 Assuming production quantities:  Traditional Tables (TT): 100 tables

6  Modern Tables (MT): 50 tables Traditional Tables (TT): Activity Cost per Table Total Cost for TT Setup $100 $10,000 Finishing $150 $15,000 Design $50 $5,000 Total Cost per TT = $100 + $150 + $50 = $300 Modern Tables (MT): Activity Cost per Table Total Cost for MT Setup $100 $5,000 Finishing $200 $10,000 Design $300 $15,000 Total Cost per MT = $100 + $200 + $300 = $600 Decision Situations: 1. Product Pricing:  Scenario: One of the areas of improvement for the company’s Modern Tables would be the pricing.  ABC Impact: Besides, much to its cost, Modern Table’s major price driver is Design activity. Modern Tables are likely to be priced incorrectly in a scenario where pricing is determined by production costs alone. Through the use of ABC, the company would enable itself to come up with appropriate prices for Modern Tables. 2. Product Mix Decision:  Scenario: The company has yet to decide whether it will continue producing both Traditional and Modern Tables or concentrate on only one category.  ABC Impact: For each table type, ABC identifies the specific activities and their costs. Primarily, the increased cost in Modern Tables arises from Design. In case Modern Tables will have considerable demand on it, then focusing solely on this product can still be possible because more special activities require more expenses.

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7 Part B Strategic Management Accounting in the Context of Strategic Planning In order to support strategic objectives and decisions made inside an organization, strategic management accounting, or SMA, is essential. In order to evaluate the statement, it will be critically examined in relation to a number of strategic planning domains, such as defining the mission, vision, and objectives; conducting SWOT analysis; identifying and evaluating strategic options; formulating long- and short-term plans; and reviewing and controlling performance. However, a comparison of Traditional management accounting tools is necessary. Comparison of Traditional Management Accounting Tools and Strategic Management The perspectives and applications of traditional management accounting tools and SMA tools are very different. These traditional tools such as budgets and variance analysis are based on the historical financial data and they provide information about the past performance. These procedures, in essence, look back seeing what has occurred. On the other hand, SMA tools consider this future viewpoint and include non-financial data in financial indicators. Balanced scorecards and performance benchmarks offer a wider perspective on the organization’s performance oriented towards the future. Another aspect that needs considering is the flexibility and adjustability of these instruments. Traditional management accounting tools tend to be inflexible and unresponsive to changes in the business environment. Upon setting them, these budgets are static and do not capture dynamic changes in market reality as well as shifts in strategic direction. Nonetheless, SMA tools are highly flexible and adaptable to varying business conditions. Such tools enable an organization to be responsive through strategic realignment. For management accounting, these tools are essential as they make it remain relevant and effective. The second difference involves the different ways for measuring performance with the traditional and SMA tools. For starters, some of the traditional tools have a narrow focus on financial success and disregard other non-financial factors such as customer satisfaction, employee commitment, and innovation. Nevertheless, SMA tools are more thorough; they include both financial and non-financial aspects. This approach gives deeper insight into organizational performance, considering financial strategy as part of a broader plan for a more balanced assessment. The transition from the conventional management accounting to the SMA tools, therefore, is from a retrospective, financially oriented approach to a more modern, future oriented, and comprehensive system which is more suitable to the complexities of modern business environments. SMA Tools Supporting Each Step in Strategic Planning: Establishing Mission, Vision, and Objectives Strategic Management Accounting is one of the most important tools that comes into play while setting up mission, vision, and objectives of a company. It also helps in aligning financial strategies with goals. George et al. (2023), stress the importance of SMA in offering financial insights relevant to the broader goals of the company. For instance, take a case of the manufacturing company that embraces sustainability as part of its mission, vision, and strategy. It

8 is, however, difficult to pinpoint the financial implications on the eco-friendly processes. In this respect Activity-Based Costing (ABC) is indispensable. The company can dig into details of its cost structure for the specific costs associated with sustainability practice adoption. For instance, ABC could assess the costs of green materials sourcing and using energy efficient processes with lower waste. ABC will also give an insight into the financial implications, that is necessary for integrating sustainability into operations. The financial insight that is specific is a good guide in lining up the intended goals with the needed financial resources. Decision-makers’ ability to make informed decisions makes sustainability pursuits to be more than just missions on paper to avoid losses and align with the organization strategies. In addition, ABC can be supplemented with Value Chain Analysis, adding an additional tier of strategic focus. Value Chain Analysis enables the company to identify certain parts of the production process where sustainable practices can easily fit in. The company can locate these strategic points in the value chain and allocate resources strategically to ensure that the impact of its sustainability initiatives positively contributes to the long-term objectives of the business as well as to the broader mission and vision of fostering environmental responsibility. Undertaking Position Analysis such as SWOT or PESTLE: As mentioned by Jassem (2023) tools such as SWOT analysis offer insight into internal strengths, weaknesses, external opportunities, and threats. This is a financial perspective which ensures that strategic plans are in line with organizational capabilities. On another note, George et al., 2023, consider the case of a technological company venturing into a new market. PESTLE Analysis highlights external factors that play a role in market entry such as technology or regulations. At the same time, Scenario Planning enables the company to forecast some challenges and contributes to the SWOT analysis of the company.. Identifying and Assessing Strategic Options Through the complicated process of evaluating and defining strategic options, SMA proves to be an essential tool, according to Petera and Šoljaková (2020). SMA provides detailed cost information that is essential in determining financial impact that arises from different strategic options. Imagine a real-life situation of a company dealing with a new drug and thinking of possible entry options. As such, SMA through its tools and methodologies become vital in this context. A method that may be applied is Life Cycle Costing, as proposed by Petera and Šoljaková (2020), which looks into the costs across the entire life cycle of a product, from the research and development phases up to the decline stage. Life Cycle Costing would include an in-depth assessment of research, clinical trial costs, compliance with regulatory requirements, manufacturing, marketing, and distributor costs for the pharmaceutical company. The intricate analysis allows decision-makers to not only project the initial costs, but also to budget and plan for the ongoing expenses from the start to the end of the product life. These perspectives are crucial in picking the most viable financial option from different strategic choices. Moreover, SMA promotes benchmarking, as Xolmirzaev et al. (2021) indicate. Benchmarking is the comparison of the proposed strategic options against industry best practices, to achieve a competitive advantage. In this regard, benchmarking in the case of the

9 pharmaceutical company would be assessing its strategies against those of leaders in the industry or competing entities that have successfully marketed similar products. These findings are essential for the understanding of the industry benchmarks, the improvement prospects, as well as the strengths that drive the decisions. Tran, SMA contributes during the selection stage of financial consequences of selected strategic alternatives and their financial viability. According to George et al., traditional budgeting approaches make sure that plans match organizational goals. For instance, consider the case of a fashion retailer who is contemplating the adoption of Target Costing for a new product line. They make sure that their costs are in tune with strategic objectives, so as to be affordable and competitive. At the same time, they convert the strategy into quantitative targets such as improved market share and customer satisfaction through a Balanced Scorecard. Performance Review and Control According to Špacírová et al. (2020), a firm’s success management account (SMA) comprises performance assessment and control as well as indicators for evaluating financial progress. For example, continuous KPI based performance review for an e-commerce site. In order to implement highly quality service, continuous monitoring of metrics against benchmarks is made for pre-adjusted operations. In addition, a Customer Profitability Analysis can be used to design new marketing strategies and services focused on the most profitable segment of customers. View on the Validity of the Statement Practical applications validate the statement that SMA supports strategic plans and decisions. SMA tools also play a vital role in the stages of strategic planning, offering additional information that may be missed by the conventional tools. Thus, financial considerations are acknowledged and become part of strategic decision-making, which in turn improve the overall effectiveness of strategic planning processes. Conclusion The discussion on the exploration of costing methodologies such as Marginal or Variable Costing, Full or Absorption Costing, and Activity-Based Costing (ABC) brings the conclusion that each one has its pros and application cases. Short-term marginal or variable costing is better at pricing decisions compared with the full cost that provides a broad perspective that is fundamental for long-term pricing decisions. In different production cases, ABC is extremely accurate in costing-to-specific activities. For SMA, it is compared as forward looking and flexible with traditional approach used by accounting. In every aspect of strategic planning-from mission setting to performance review, SMA’s value is reinforced by providing broad-based financial data. Practical examples stress SMA’s usefulness for basing of financial strategies from strategic planning and their correlation with wider business directions. This paper provides evidence that supports the agreement with the statement “SMA is about supplying information which would be helpful for planning and decision making inside a firm.” A focus in SMA for a forward looking and flexile direction towards strategic planning

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10 inclusive financial and non- financial indicators for their success. Thus, SMA comes to serve a very important purpose of aligning financial strategies with wider organizational objectives, and therefore becomes a vital instrument in decision making within an organization. Recommendation The report suggests that organizations implement a costing methodology that is balanced and considers the unique requirements of each decision-making scenario. When making make- or-buy decisions or making short-term adjustments to manufacturing volume, marginal or variable costing works well. For inventory value and long-term price choices, either full or absorption costing should be used to assure conformity with accounting requirements. MA methodologies are recommended for better and flexible strategic planning in enterprises. An activity-based costing, which focuses on detailed cost structures, improves the internal analysis considerably. In SMA, the strategy beyond budgeting involves adaptation and continuous planning with the ever-changing nature of strategic decision making.

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