Impact of Costing Methods on Profitability: A Comparative Analysis

This report provides a comprehensive analysis of marginal and absorption costing methods. It begins by defining marginal cost and its relevance, followed by profit and loss calculations using both absorption and marginal costing techniques. The analysis includes a detailed breakdown of sales revenue, cost of goods sold, and various expenses, leading to the determination of net profit or loss under each method. Furthermore, the report presents a reconciliation statement to explain the differences in profit figures between the two costing approaches. The report also highlights the implications of each method, discussing how they influence financial reporting and decision-making within a business context, particularly focusing on the impact of fixed costs and inventory valuation. The conclusion summarizes the key findings and offers insights into the advantages and disadvantages of each method, providing valuable information for financial analysis.

Name:
Student ID:
Marginal Cost:It is the marginal cost of production which is all about to change in total
production cost which comes from the making or producing the additional unit. Hence, it can
be calculated by divide the change in production cost by the change in quantity. Therefore, in
the present scenario, it is an important measurement because it accounts for an increase as
well as decrease cost of production that allows the firm to evaluate how much company
should actually pay. Or else, it will normally decrease with a short range but on the other side
it is also increase when it produces more.
Profit and loss based on absorption costing
Absorption Costing Profit/Income Statement For The Month June
Sales revenue (1500 * 35) £52500
Less: Cost of the Goods Sold
£
Opening Inventory £
Add: Cost of the goods manufactured (£27*1500) £ 40500
Gross Profit
£12000
Less: Selling fixed expenses £10000
Selling variable expenses (52500*15%) £7875
Net loss £5875
(Fixed manufacturing overhead cost assumed at £15000)
Interpretation- with the help of the above calculation and its analysis it is clear that with the
help of the absorption costing the company FASTRAX AND MAXWELL has incurred the

loss of £5875. This states that when the absorption costing is used then the company does not
take into consideration the fixed cost and for the calculation of the profit the fixed cost is not
deducted. Thus, for this company has incurred the loss.
Absorption cost:it is also known as absorbed cot and it is a managerial method that is used
for the variable and fixed overhead cost of producing a particular product. Hence it is a direct
and indirect cost such that direct material, direct labor, rent and insurance which is also used
in this method. Hence, the main advantage of using this method is such that it complies with
GAAP and also track profit that variable costing. Hence, it increases the company’s
profitability by moving fixed manufacturing overhead cost from the income statement to a
balance sheet.
Profit and loss calculation based on marginal costing
Marginal Costing Profit/Income Statement For The Month June
Sales revenue (1500*35) £52500
Less: Cost of the goods sold
Opening Inventory
£
Add: Variable Cost of the goods manufactured
(22*1500)
£ 33000
Production contribution £19500
Less: Selling &Admin variable overheads (£7875)
Production Profit £11125
Less: Selling &Admin Fixed overheads (£10000)
Fixed overhead manufacturing cost (£15000)
Net loss £13875

Interpretation- with the help of the above calculation it is clear that when the marginal costing
is used then at that time the company suffers more loss that is £13875. Thus, this states that
when the company FASTRAX AND MAXWELL will make use of the fixed cost and when it
is deducted then the loss is more as as compared to the profit and loss calculated with the help
of the absorption costing. This is particularly because of the reason that when the company
uses the absorption costing then this will be more beneficial for the company.
Reconciliation Statement For The Year Ending 30 June
Absorption costing profit (£5875)
Less: Fixed cost (£8000)
Marginal costing profit (£13875)