Comparative Analysis of Marginal and Absorption Costing Methods

The provided assignment compares the marginal costing and absorption costing methods in management accounting. It presents two different income statements, one based on marginal costing and the other on absorption costing. The marginal costing method calculates variable production costs, while absorption costing includes fixed production overheads in the cost of production. The assignment also discusses under/over absorbed fixed production overheads in the context of absorption costing. It emphasizes the significance of understanding these different methods for accurate financial reporting and decision-making.

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Management accounting system along with their types.........................................................1
Different methods of management accounting reporting.......................................................4
Integration of management accounting systems in organisational process............................5
TASK 2............................................................................................................................................5
Costing methods along with the net calculation of net profitability......................................5
TASK 3............................................................................................................................................9
Different planning tool used for budgetary control with their advantages and disadvantages9
Types of budget techniques..................................................................................................10
Analysis of various planning tools and their application.....................................................11
TASK 4..........................................................................................................................................11
Compare with other organisation regarding to solve financial issues..................................11
Critical analysis of financial issues......................................................................................12
Evaluation of planning tools for responding to financial issues...........................................13
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14
APPENDIX....................................................................................................................................15

INTRODUCTION
Management accounting may be referred as the process of planning, recording,
summarizing and interpreting financial as well as non-financial data in order to facilitate
managers to make a valuable decisions for the betterment of an organisation (Management
accounting, 2018). Thus, they are playing an important role in growth and success of company
by preparing reports containing statistical as well as financial information that will help in
analysing the actual financial position of an organisation which enables manager to make efforts
for further improvements. The present assignment is based on Rowlinson Knitwear which is
engaged in manufacturing clothing products for school and corporate professionals in UK . The
project discusses the different types of budgets along with the budgetary control planning tools.
In addition with this, management accounting and reporting systems are also covered under this
report along with their beneficial outcome to company. The project also described the costing
methods with proper illustration of calculation of net profitability using marginal and absorption
costing methods. Planning tools to resolve financial issues are also summarised under this report
along with the comparison to other company engaged in similar sector.
TASK 1
Management accounting system along with their types
Origin of Management Accounting: This is the concept which came into existence in the
year 1950. It first formally described in a report entitled “Management Accounting” in 1950. The
report was first published by the Anglo American Council of Productivity Management
Accounting Team after its visit to US in the first quarter of 1950.
Management accounting system is the process of recording and managing valuable
information related with financial as well as non-financial data in order to facilitate managers of
an organisation to make an effective decisions and suitable plans for the betterment of an
organisation. For this, mutual support by different departments is necessary as the reliability and
accuracy of information of different divisions are much depends on the managers of different
departments. Such departments includes production, marketing, finance, human resource etc.
whose informations of their operations are recorded at one place (Amidu, Effah and Abor,
2011).
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Therefore, it is important for Rowlinson Knitwear to establish a better management
accounting system in order to acquiring sufficient knowledge about the actual position of
company at present in competitive market.
Basis Management accounting Financial accounting
Meaning It provides accurate
information to the managers in
order to make them more easy
to frame suitable policies for
the betterment of an
organisation.
It is the process of maintain
financial records so as to assist
stakeholders in identifying
actual financial position of
company.
Is it compulsory No Yes
Information It includes monetary and non-
monetary data.
Monetary information.
Objective To make easy for managers to
make an effective decisions.
To assist investors to acquire
knowledge about the actual
financial position of company.
Users It can be used by internal
managers only.
It can be used by both external
and internal.
Time frame It is prepared on annual basis It depends on the requirement
of company.
Various management accounting systems:
Management accounting systems is considered as an important tool which enable
company to determine the reliable information of various departments so that an effective
decisions and suitable plans can be made for the achievement of organisational goals and
objectives.
Cost accounting system: It is an effective system which determines the management
about the actual cost required to be incurred by various divisions and process so that an effective
budget will be prepare for future project activities. By using this system, the manager of
2

Rowlinson Knitwear is able to record, categorise and estimate the total cost which will be
incurred in future business operations so that maximum profitability can be achieved (Ax and
Greve, 2017). Such system is categorised into three types which includes normal, direct and
standard cost. Such system assist an organisation in handling material, labour and overhead costs
accurately so as to determine accurately the unit cost. Rowlinson Knitwear is engaged in
manufacture school and corporate wear garments due to which such system brings more
beneficial outcome in terms of identifying the cost and budget to execute different functions of
business. It minimises the expenses as well as enhanced profit of company. Types of costs are
given as under:
Direct cost: Such kind of cost in inconsistent and fluctuated on the basis of trends and
changes in the market. Such price is wholly attributed for manufacturing products and creating
services.
Standard cost: It defined as the process of comparing desired cost with actual cost in the
accounts and records. It enables management to identify the deviations which can restrict
employees to execute activities within allotted cost. Benefit: It assist management of Rowlinson Knitwear to prepare accurate budget for
future business operations after analysing the actual cost incurred in previous year. It
minimises the wastage of funds which makes positive impact on the profitability of
company (Drury, 2013).
Inventory management system: It is such system related which brings awareness towards
managers about the actual level of inventory the company have at present. It is further classified
into two parts which includes periodic and perpetual system. Periodic system is adopted to
record the transactions related with inventory on monthly or weekly basis. On the other hand,
perpetual system is adopted to update the managers after the selling or acquiring products.
Rowlinson Knitwear is following FIFO and LIFO analyse which makes easy for managers to get
information about available resources with company. It assist managers to decide whether the
company have sufficient amount of inventory or should order from the suppliers in order to
continue business operations smoothly. It can facilitate company to meet customers needs and
requirements on time due to which the loyalty of customers can be easily achieved. Benefits: It facilitate Rowlinson Knitwear in maintaining adequate level of inventory as
as to make easy for managers to take orders of products from the customers and supply
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them on time. It establishes trust and gain loyalty of customers towards company for
longer period of time.
Job costing system: It is the system which enables managers to determine the costs and
expenses allocated to a particular product and service so that estimation of profits will be
determined. Costs is the valuation of efforts, resources, time etc. which are utilised in execution
of various process of organisation. Such system is categorised into two types which includes
batch and process costing. Using such system by the managers of Rowlinson Knitwear enable
them to calculate the necessary cost of workers and production accordingly in order to achieve
huge profits and revenues (Gibassier and Schaltegger, 2015). It increases capabilities of an
organisation to meet customers requirements through producing products which are more in
demanded. It provides an opportunity to company to achieve loyalty of existing customers and
attract new customers.
 Benefit: Using such system facilitate the management of Rowlinson Knitwear to
determine the overall cost of workers' efforts which will assist them to make an effective
decisions regarding distribution of resources and expenses required to incurred in
execution of business operations.
Different methods of management accounting reporting
Every organisation always tried to achieve huge sustainability and profitability in market
so as to increase their brand position among their rivals. It can be possible through maintaining
accounting reports related to the cost and budget of various departments working for the
betterment of an organisation. For this, the management is held liable to prepare and manage
such reports on quarterly basis so as to determine the financial stability of company. Therefore,
the management of Rowlinson Knitwear should maintain accounting reports ion regular basis if
wants to expand its business to large scale. There are various kinds of reports such as
performance reports, account receivable reports etc. which are further discussed as under:
Inventory management report: Such reports detailing the information about the level of
inventory the company have at present so that further decision of filling inventory are made.
Preparing such report enables the managers of Rowlinson Knitwear to manage the stocks
movements and reviewing the current stocks by using time and location of movements of
inventory. There are various methods and techniques which can be adopted by Rowlinson
Knitwear such as Just-in-time, EOQ, and Turnover ratio. As Rowlinson Knitwear is engaged in
4

manufacturing clothing products fro school and corporate professionals which is always more in
demanded. Therefore, it is important for management to have knowledge about their current
level of inventory (Griffin, 2017).
Account receivable report: Such kinds of report contains the information about the
unpaid customer bills and unused names which makes easy for managers to identify the debtors
from which the unpaid amount will be recovered. It also facilitate managers to determine the
unpaid consumers and recover the amount within due date. Therefore, the management of
Rowlinson Knitwear required to maintain these kind of reports in order to make suitable changes
in credit policies so that financial stability can be maintained for longer period of time.
Batch costing report: These kind of reports assist management of Rowlinson Knitwear to
track the expenses and costs of activities performed by the workers. Such reports will make easy
for management to evaluate and control overall cost incurred in production and selling activities.
This will increases the chances of generating huge profits and revenue (Lavia López and Hiebl,
2014).
Integration of management accounting systems in organisational process
Rowlinson Knitwear is utilizing the management accounting as well as reporting system
for giving information and data of financials to the different investor and speculator. The
interconnection between reporting and management system in business process is termed as
integrated accounting system. For example, inventory management system and reporting assist
manager to identify the actual level of inventory with company at present which enable them to
take orders from the suppliers so that production department can perform its functions without
any interruptions and meet the customers requirements on time. It achieved loyalty and trust of
customers. On the other hand, using account receivable report provides the list of unpaid debtors
so that it can be recovered on time. Failure of recovery of due amount may affect their pricing
strategies on sales and revenues. Therefore, it is essential to maintain such kind of report in order
to enhance financial stability of company.
5

TASK 2
Costing methods along with the net calculation of net profitability
Cost: It may be defined as the amount of value which is invested in produce or acquire
something to gain huge profits. In other words, it is a valuation of different aspects such as
efforts, time, resources etc. which are necessary to utilise in production process.
Management of Rowlinson Knitwear should prepare an effective budget for the execution of
future business activities in which allocation of cost, time and efforts are allocated properly after
analysing the effectiveness and profitability of future activities. Cost is classified into two types
which includes marginal and absorption costing method that will be adopted on the basis of
needs and requirements so that maximum profitability can be achieved (Mokhtar, Jusoh and
Zulkifli, 2016).
Marginal costing:
It is also known as variable costing method which includes only variable cost and avoid
fixed cost. It is a costing method which is mostly used to adopt when an organisation
manufactures extra unit of products and services. It focuses on variable cost which includes
direct material and labour involved, selling price etc. Mostly Small-scale organisation are using
such method in order to show increment in net profitability in their financial statement so that
investors can be easily towards them with a hope of getting maximum return in future (Nixon
and Burns, 2012).
Absorption costing:
It is considered as an effective costing method which assist company to represent actual
total cost incurred and net profitability generated in their financial statements by including
variable and fixed costs. It is adopted by large sized organisation such as Rowlinson Knitwear in
order to show their actual financial position to their existing investors so that their trust and
loyalty will be successfully retained with company for longer period of time.
These both costing methods are adopted by company to determine the net profitability of
company. It can be better understood through a following illustration:
Income statement on the basis of Marginal costing method:
Working 1: Calculate variable production cost £
Direct material cost 8
6

Direct labour cost 5
Variable production O/h 2
Variable production cost 15
Working 2: Calculate value of inventory and production
Opening inventory Production Closing inventory
Nil 2000*15 = 30000 500*15 = 7500
Net profit using marginal costing ￡Amount £ Amount
Sales value 1500*35
Less: Variable costs
Stock at the beginning
Cost of production
Stock at the closing
Variable sales overheads
Contribution
Less: Fixed costs:
Fixed Production overheads
Fixed Selling overheads
NIL
30000
(7500)
15000
10000
52500
(22500)
(7875)
22125
(25000)
Net loss -2875
Income statement on the basis of Absorption costing method
Production overhead: In this budgeted cost is £15,000and Actual cost is £10,000
Selling cost: under this budgeted cost is £10,000and Actual cost is £7875
Absorption costing working notes
Working Note 1: Calculate full production cost
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Direct material ￡8
Direct labour ￡5
Variable cost ￡2
Fixed cost ￡5 (It is assumed hypothetically)
Total ￡20
Working Note 2: calculate value of inventory and production
Opening inventory Production Closing inventory
0 2,000*20 = £40,000 500*20 = £10,000
Working Note 3: under/ over absorbed fixed production overhead
Actual fixed production: ￡15000
Fixed overhead: ￡10000
Total £5000 (under absorbed)
Net profit using absorption costings ￡Amount £Amount
Sales value 1500*35
Less: Cost of Sales:
Opening stock
Cost of production
Closing stock
(Under)/Over absorbed fixed prod. O/h
Gross Profit
Less: Selling Expenses
Variable sales expenditure
Fixed selling expenditure
NIL
40000
(10000)
7875
10000
52500
(30000)
(5000)
17500
17875
Net loss -375
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TASK 3
Different planning tool used for budgetary control with their advantages and disadvantages
Budget: It is the predicted costs and funds which is necessary for performing the various
business operations in an organisation. It is the process of allotting funds for doing the activities
of a firm after analysing the costs and profit of previous year.
Budgetary control: This is the process for controlling and regulating the various budgets
which are assigned to various departments and processes. It compares the expected results with
the actual outcomes for determining that the process is following the allotted budget properly or
not. It is useful for Rowlinson knitwear to determine the variations and gaps in their performance
and then take suitable and appropriate measures for removing the identified gaps in future
(Schaltegger and Burritt, 2017).
It is very necessary for the management of Rowlinson knitwear to control their budget of
various operations for improving their efficiency and profit. Budget control plan must be
formulated accordingly to the needs of departments for ensuring that the operations are carried
out properly for accomplishing the desired goals and objectives of the firm. Various tools of
budget control are used by the companies to determine their financials which are given below:
Forecasting tools: It is an effective tool which helps organisations in estimating the
future situations and scenarios through analysing the trends of past and present. The data is
gathered through various internal and external functions of the firm so it is reliable to use. It will
help the Rowlinson knitwear to identify the future trends which can effects the performance of
the company in future (Song, Wang and Zhu, 2018).
Advantage: This tool provides the valuable and necessary information to the business for
taking important decisions for the future which will benefits the company.
Disadvantage: The future can't be predicted accurately as the nature of future is
qualitative and dynamic.
Contingency tools: This tool is useful for determining the future risk factors which can
effects the business operations of the firm. This tool is used by Rowlinson Knitwear for
examining the performance and productivity of the business. Rowlinson knitwear must recognise
such risky factor and implement suitable measures for overcoming them.
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Advantage: It is useful for taking decisions as well as providing additional resources in
case of unexpected problems in the future.
Disadvantage: This tool requires huge investment and time for implementing in the
business operations of the company.
Scenario planning: It is a systematic and structured way for strategic planning in an
organisation. It is the process of making assumptions on the future impact of business
environment of an organisation. Rowlinson knitwear must determine the uncertainties that can
happen in future which can affects the business processes of the firm.
Advantage: It is a very flexible tool which can be adjusted according to the assigned task
or situation (Vanderbeck, 2012).
Disadvantage: It is very time taking process when taken into practice.
Types of budget techniques
Budget is a necessary n important feature of any firm for performing their operations
without any hindrance of funds and money. Sales budget is used for evaluating the total profit
and loss of an organisation. Different types of budgets are given below:
Production budget: Production budget is the expenses and costs which occurred during
the production of a product or services and based on the sales. It involves production cost,
transportation cost etc. which are invested for the development of the product. Production budget
is divided into various budgets such as cost of raw material, cost of labour, R&D budget and
machinery budget.
Cash budget: Cash budget is the budget which includes the cash flows of different
operations and processes. Cash budget is helpful for the Rowlinson knitwear to identify whether
their cash flows are controlled or not, if not then management adopt suitable methods and
measures to control them. It is helpful in determining the budgets which are allocated are enough
or needed more to perform various operations within an organisation (Windolph and Moeller,
2012).
Financial Budget: It is the process of estimating the incomes and expenses of a firm on
the basis of time. It is useful for identifying the financial stability and position of the Rowlinson
knitwear in the market. It also enables the company in managing and regulating the various
budgets which are assigned to the other departments for performing their operations effectively.
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Analysis of various planning tools and their application
There are several planning tools mentioned above which help Rowlinson Knitwear to
minimise the financial issues and increases effectiveness of budget. Such tools include scenario
tools, forecasting tools, contingency tools etc. which are used to determine the future
contingencies which affect the execution of desired project activities either in negative or
positive manner. This will enable management to prepare an effective plan in advance so that
limited resources can be utilised in an optimum manner. For example, contingency tool
facilitates management of Rowlinson Knitwear to control the risk which are grown up in
different divisions by determining the future contingencies in advance. Forecasting tool is
another effective tool which assist manager to forecast the activities that will be executed in
particular situations so that budget can be prepare with proper modifications.
TASK 4
Compare with other organisation regarding to solve financial issues
Financial issues can hugely have affected the execution of business operations due to
which it is the responsibility of management to monitor each and every activity performed by
employees and market situations so that financial stability can be maintained in market for longer
period of time. There are various financial issues and risk that may face by Rowlinson Knitwear
which are briefly discussed as under:
Financial or capital risk: It is the main risk related with the finance sector which largely
affect the business operations of Rowlinson Knitwear. It restricts company's growth and
sustainability in market.
High cost of capital: It is another major issue which can affect the growth and efficiency
of workers as well as an organisation. It is also named as rate of return which can be achieved by
investing money in particular business activities in the presence of risk (Zaleha Abdul Rasid,
Ruhana Isa and Khairuzzaman Wan Ismail, 2014).
To prevent such financial issues in advance, the management of Rowlinson Knitwear should
adopt various financial tools and techniques which are determined as under:
Key Performance Indicators (KPI): It is the process of determining the actual
performance level of employees by comparing their actual with standard performance.
Deviations if any, can be eliminated through adoption of new policies and strategies in order to
11

enhance the skills and capabilities of employees to perform their allotted roles and
responsibilities in a desired manner. Training and development programs shall be conducted at
workplace to make their staff more capable so that the chances of making mistakes while
utilising resources are less.
Financial governance: It is considered as an effective technique which directs an
organisation to collect, manage, monitor and control the financial information of company. It
will be more useful to adopt by Rowlinson Knitwear as it enables management to track the fund
transactions, managing and monitoring the performance level, compliance, operations etc. It
determines an appropriate plans and policies which drives company to manage accurate and
reliable information related with business and employees. This will maintain the financial
position of company by identifying the deviations if any, which can cause the financial issues to
company.
Differences between Rowlinson Knitwear and Marks and Spencer
Rowlinson Knitwear Marks and Spencer
It is a manufacturing company uses inventory
management system due to meeting needs and
demands of customers on time. It can be
possible through recording inventory with
opening and closing cost.
It is a clothing company operated at large scale
which uses job costing system due to
increasing efficiency in their business
operations.
Key performance tools is considered as an
effective financial tool which makes their
employees more capable to perform allotted
task in desired manner. It minimises the errors
and mistakes done by them while performing
task.
Financial governance is an appropriate tool
which is used by Marks and Spencer as it is
operated at large scale achieving huge
employees strength due to which it is important
for them to follow strategies and policies so as
to maintain financial stability of company.
Critical analysis of financial issues
The overall performance of company gets affected if their employees made mistakes in
execution of different business activities. For this, management of Rowlinson Knitwear should
12

opt various financial tools and techniques such as KPI, Financial governance etc. in order to
resolve financial issues more effectively.
Evaluation of planning tools for responding to financial issues
There are various financial issues mentioned above which can be arise at workplace that
can affect the business operations of an organisation. To resolve such issues, the management of
Rowlinson Knitwear should implement various financial tools such as KPI and Financial
governance which directs managers and employees to perform in right directions with using their
effective skills and knowledge. It minimises the chances of errors or mistakes done by
employees while performing allotted roles and responsibilities.
CONCLUSION
It has been concluded from the above project report that management accounting is an
essential for every organisation such as Rowlinson Knitwear which assist them to maintain
financial stability in market. For this, accounting manager is responsible to adopt various
management accounting and reporting systems which facilitate them in updating information
about the current financial situations of company. It enables managers to make an effective
decisions and suitable plans to achieve competitive advantage in the market. There are various
financial tools such as KPI and Financial Governance which help in resolving financial issues
and achieve strong financial position in market.
13

REFERENCES
Books and Journals
Amidu, M., Effah, J. and Abor, J., 2011. E-accounting practices among small and medium
enterprises in Ghana. Journal of Management Policy and Practice. 12(4). pp.146-155.
Ax, C. and Greve, J., 2017. Adoption of management accounting innovations: Organizational
culture compatibility and perceived outcomes. Management Accounting Research. 34.
pp.
Drury, C., 2013. Costing: an introduction. Springer.
Gibassier, D. and Schaltegger, S., 2015. Carbon management accounting and reporting in
practice: A case study on converging emergent approaches. Sustainability Accounting,
Management and Policy Journal.6(3), pp.340-365.
Griffin, P., 2017. Financial governance after crisis: On the liminality of the global financial crisis
and it’s afterwards, through a gender lens. Politics. 37(4). pp. 402-417.
Lavia López, O. and Hiebl, M. R., 2014. Management accounting in small and medium-sized
enterprises: current knowledge and avenues for further research. Journal of
Management Accounting Research.27(1).pp.81-119.
Mokhtar, N., Jusoh, R. and Zulkifli, N., 2016. Corporate characteristics and environmental
management accounting (EMA) implementation: evidence from Malaysian public listed
companies (PLCs). Journal of cleaner production.136. pp.
Nixon, B. and Burns, J., 2012. The paradox of strategic management accounting. Management
Accounting Research. 23(4). pp.229-244.
Schaltegger, S. and Burritt, R., 2017.Contemporary environmental accounting: issues, concepts
and practice. Routledge.
Song, Y., Wang, H. and Zhu, M., 2018. Sustainable strategy for corporate governance based on
the sentiment analysis of financial reports with CSR. Financial Innovation. 4(1). p.2.
Vanderbeck, E. J., 2012. Principles of cost accounting. Cengage Learning.
Windolph, M. and Moeller, K., 2012. Open-book accounting: Reason for failure of inter-firm
cooperation?. Management Accounting Research. 23(1). pp.47-60.
Zaleha Abdul Rasid, S., Ruhana Isa, C. and Khairuzzaman Wan Ismail, W., 2014. Management
accounting systems, enterprise risk management and organizational performance in
financial institutions. Asian Review of Accounting. 22(2).pp.128-144.
Online
Management accounting. 2018 [Online]. Available through:
<http://www.businessdictionary.com/definition/management-accounting.html>
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APPENDIX
15

Income statement on the basis of Marginal costing method:
Working 1: Calculate variable production cost £
Direct material cost 8
Direct labour cost 5
Variable production O/h 2
Variable production cost 15
Working 2: Calculate value of inventory and production
Opening inventory Production Closing inventory
Nil 2000*15 = 30000 500*15 = 7500
Net profit using marginal costing ￡Amount £ Amount
Sales value
Less: Variable costs
Stock at the beginning
Cost of production
Stock at the closing
Variable sales overheads
Contribution
Less: Fixed costs:
Fixed Production overheads
Fixed Selling overheads
NIL
30000
(7500)
15000
10000
52500
(22500)
(7875)
22125
(25000)
Net loss -2875
Income statement on the basis of Absorption costing method
Production overhead: In this budgeted cost is £15,000and Actual cost is £10,000
Selling cost: under this budgeted cost is £10,000and Actual cost is £7875

Absorption costing working notes
Working Note 1: Calculate full production cost
Direct material ￡8
Direct labour ￡5
Variable cost ￡2
Fixed cost ￡5
Total ￡20
Working Note 2: calculate value of inventory and production
Opening inventory Production Closing inventory
0 2,000*20 = £40,000 500*20 = £10,000
Working Note 3: under/ over absorbed fixed production overhead
Actual fixed production: ￡15000
Fixed overhead: ￡10000
Total £5000 (under absorbed)
Net profit using absorption costings ￡Amount £Amount
Sales value
Less: Cost of Sales:
Opening stock
Cost of production
Closing stock
(Under)/Over absorbed fixed prod. O/h
Gross Profit
Less: Selling Expenses
Variable sales expenditure
Fixed selling expenditure
NIL
40000
(10000)
7875
10000
52500
(30000)
(5000)
17500
17875
17

Net loss -375
18

19