Management Accounting: Absorption Costing vs Marginal Costing

Management Accounting
Portfolio

Contents
INTRODUCTION...........................................................................................................................3
TASK 2............................................................................................................................................3
Part A......................................................................................................................................3
PART B..................................................................................................................................6
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
Management accounting is the systematic process of recording, analysing, evaluating and
presenting of useful financial and non-financial information for internal manager so that valuable
decision taken to attain overall gaols (Arroyo, 2012). There are various costing techniques
included in managerial accounting which are used to prepare income statement in order to
determine the net profit for the accounting year.
In this report, different costing methods are used to prepare income statement and detect the
overall net profit margin.
TASK 2
Part A
Absorption costing: Absorption costs are the management system of valuation for all the
costs required to manufacture a certain item, occasionally named absorption costing costs. This
really is the technique used to compensate for internal and external costs, for example direct
equipment, direct labour, rent and health coverage. Cost absorbing is needed for reporting
purposes according to widely agreed accountability standards (GAAP) (Chenhall and Moers,
2015). Unlike the variable costing technique, all costs are applied to finished goods, if either sold
before the end of the term or otherwise. Absorption costs make sure that perhaps the final part of
inventory is accurately accounted for, so because cost involved with this inventory were also
connected to the overall amount of the remaining inventory. More costs of non-sold goods are
also paid for, thus reducing the real expenditures listed on a report of sales during the current
cycle. In comparison with unit variable computations, this results in increased net revenue
measurement. Furthermore, the utilization of absorption expense provides a special scenario
under which it actually raises net profit to make more products that are not consumed at the close
of the year. As fixed cost is spread over all of the items built, the total expenses of the unit
decreases when additional products can be produced. As output increases, thus, net profit
automatically decreases as the fixed cost share of the products produced is reduced.
Income statement under absorption costing for May and June:
May June
£ £ £ £
Sales 300,000*14 4,200,000 280,000*14 3,920,000