Management Accounting: Marginal Costing vs Absorption Costing

This presentation provides an analysis of marginal costing and absorption costing in management accounting. It discusses the differences between the two approaches and their application in budgeting. The presentation also offers advice to GSQ Limited on the budgeting approach to follow. References are provided for further reading.

Management Accounting

TABLE OF CONTENT
• INTRODUCTION
• MARGINAL COSTING
• ABSORPTIONAL COSTING
• ADVICE TO GSQ Limited
• CONCLUSION
• REFERENCES

Introduction
• Management accounting is the concept of analysis and reporting income and
expenditures which an organization earns and expends while operating in
business environment.
• For this purpose, a company is selected which is GSQ Limited.
• In this presentation, an analysis of marginal and absorption costing is
conducted in order to advising GSQ about budgeting approach to follow.

Marginal Costing
Marginal costing is a technique of costing under which only variable cost of is
charged to the unit of cost and the fixed cost for that period is written off
completely against the contribution.
Income Statement under Marginal Costing
Sales ( £30*50000 ) 1,500,000
Less: Variable Cost of Production
Direct Materials ( £8*50000 ) 400,000
Direct Labour ( £9*50000*20/60 ) 150,000
Manufacturing O/H ( £2*50000 ) 100,000
650,000
850,000
Less: Variable Selling Cost
Variable Sales O/H ( £4*50000 ) 200000 200000
Contribution : 650,000
Less: Fixed Production Costs 160,000
Less: Fixed Selling Costs 60000

Continue..
Total cost = Sales - Profit
= 1500000-430000 1070000
Cost per unit = 1070000/50000 21.4
Working Note:
Direct Manufacturing labour p/u: 20 mins
Units produced: 50000
Total labour mins: 50000*20 1000000
Total labour hours: 100000/60 1666.666667

Absorption costing
Absorption costing is a technique of costing under which both variable costs
and fixed costs of manufacturing a product is charged to the units of cost.
Income Statement under Absorption Costing
Sales ( £30*50000 ) 1,500,000
Less: Cost of Production
Variable Production Cost:
Direct Materials ( £8*50000 ) 400000
Direct Labour ( £9*50000*20/60 ) 150000
Manufacturing O/H ( £2*50000 ) 100,000
650,000
Fixed Production Costs: 160,000
810,000
Gross Profit: 690,000
Less: Selling and Administration Costs
Variable Sales O/H ( £4*50000 ) 200000
Fixed Selling Costs: 60000
260000 260000
Net Profit: 430,000

Continue..
Generally, there is a difference in the amount of net profit calculated under marginal
costing and absorption costing due to the difference in valuation of closing stock.
Closing stock is valued at variable cost of production under marginal costing
whereas under absorption costing, closing stock is valued at total cost of production
including both variable as well as fixed costs. However, in this case, there is no
difference in the amount of net profit due to the absence of closing stock.
Total cost = Sales - Profit
= 1500000-430000 1070000
Cost per unit = 1070000/50000 21.4
Working Note:
Direct Manufacturing labour p/u: 20 mins
Units produced: 50000
Total labour mins: 50000*20 1000000
Total labour hours: 100000/60 1666.666667

Advice to GSQ Ltd.
From the above discussion, it is quite clear that absorption costing is a better
approach for GSQ limited. Absorption costing takes into consideration both
variable costs of production as well as fixed costs of production which helps the
management to look at the total costs comprehensively. Absorption costing is a
better approach which helps in tracking profits more accurately. However,
marginal costing is more useful if the company has just started and the objective
is to find out contribution per unit and break-even point.

CONCLUSION
Management accounting and financial accounting are very different from each
other. It can be concluded that while financial accounting methods are used to
ascertain the financial position of the company, management accounting aims at
providing aid to the management in managing and controlling the operations of
the organisation.

REFERENCES
• Parker, L.D., 2012. Qualitative management accounting research: Assessing
deliverables and relevance. Critical perspectives on accounting. 23(1). pp.54-
70.
• Yalcin, S., 2012. Adoption and benefits of management accounting practices:
an inter-country comparison. Accounting in Europe. 9(1). pp.95-110.

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