Management Accounting: Marginal and Absorption Costing Techniques

This document discusses the concepts of marginal costing and absorption costing in management accounting. It explains how these techniques are used to calculate profit or loss statements and compares the differences between the two methods. The document also explores the relevance of these techniques in cost accounting.

MANAGEMENT ACCOUNTING

TABLE OF CONTENTS
QUESTION 5...................................................................................................................................1
QUESTION 6...................................................................................................................................3
QUESTION 7...................................................................................................................................3

QUESTION 5
Calculating and producing income statement using marginal and absorption costing techniques.
Marginal Costing
Profit or loss statements using Marginal costing
January
Februar
y March
Sales Revenue
(12000*1
50) 1800000
(14000*1
50) 2100000
(11000*1
50) 1650000
Marginal cost of sales
Direct materials
(15000*5
0) 750000 600000 500000
Direct Labour
(15000*1
5) 225000 180000 150000
Variable production
overhead
(15000*4
) 60000 60000 50000
1035000 840000 700000
Add: Opening Stock 0 207000 140000
Less: Closing
inventory
(3000/15
000)*103
5000 207000 828000 140000 907000 70000 770000
Contribution 972000 1193000 880000
Fixed production
overhead 24000 24000 24000
Selling cost Fixed 3000 3000 3000
Selling cost variable
(12000*4
) 48000 75000 56000 83000 44000 71000
Net Income 897000 1110000 809000
Absorption Costing
Profit or loss statements using Absorption costing
January
Februar
y March
Sales Revenue
(12000*1
50) 1800000
(14000*1
50) 2100000
(11000*1
50) 1650000
Marginal cost of sales
Direct materials (15000*5 750000 600000 500000
1

0)
Direct Labour
(15000*1
5) 225000 180000 150000
Variable production
overhead
(15000*4
) 60000 60000 50000
Fixed production
overhead 24000 24000 24000
1059000 864000 724000
Add: Opening Stock 0 211800 144000
Less: Closing
inventory
(3000/15
000)*105
900 211800 847200 144000 931800 72400 795600
Gross Profit 952800 1168200 854400
Selling cost Fixed 3000 3000 3000
Selling cost variable
(12000*4
) 48000 51000 56000 59000 44000 47000
Net Income 901800 1109200 807400
Marginal Costing
Marginal costing refers to costing technique where the variable costs are charged by company to
the units manufactured. In this technique fixed cost associated with manufacturing a product are
charged against contribution. In this only variable costs are accounted for in the costing of the
product.
Absorption Costing
This costing techniques represents that all manufacturing costs are absorbed by unit produced. In
other words it is an accounting method recognising all the costs incurred for manufacturing a
specific product. In this method all direct and indirect cost are incurred are accounted for by the
company.
In both the above techniques, absorption costing is more relevant. It consider both direct
and indirect cost incurred for manufacturing a product. All the costs incurred are absorbed by the
units produced by companies where the fixed costs are not accounted for in marginal costing.
Absorption costing accounts per unit cost for fixed overhead. It gives true and more accurate
representation of the costs incurred for manufacturing a product.
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QUESTION 6
Break even analysis
Break even point refer to point where cost is equal to total revenues. Fixed and variable
cost are included in total cost. Break even helps the management in making decisions. It helps
management to know the point where company is having no profit and no loss. When company
is aware of the break even point it guides company in setting targets and budgeting. Also margin
of safety is calculated with the help of break even point. It is important for the company as it
helps in framing pricing strategies that will help company in improving its costs.
Particulars Formulas Amount
Selling price per unit 60
Variable cost per unit 20
Fixed cost 150000
Contribution per unit Selling price per unit –
Variable cost per unit
40
Break even point ( in units) Fixed cost/ contribution (per
unit)
3750
Break even point (in
amount)
Break even analysis (in units)
* selling price per unit
225000
QUESTION 7
Net profit calculations
Income Statement
Revenues 145552
Expenses
COGS 110916
To GST Paid 6000
To Sales Salaries 7740
To Office Salaries 4680
To Bad Debt 1584
To Insurance 360
To Depreciation 5196
Net Income 9076
Net profit helps investors in assessing the performance of company. They can assess whether the
management is generating enough profits through sales of its products. Net profit is the
important factor for determining the financial health of organisation. It is essential for the
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companies to calculate the net profit so that they can identify whether they are enough revenues
for meeting the their production and operating cost. Net profits motivates business to perform or
improve its performance if income is less even after generating revenues. They have to identify
where the company is lacking its cost. All the strategies of the company are framed for
increasing the profit of company controlling it cost. Investor decide before making the
investment decision by analysing the profits of company. They depicts the financial health of an
organisation.
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