Comparative Analysis of Costing Methods: Marginal, Absorption & IKEA

This report provides a comparative analysis of marginal and absorption costing methods, outlining the key differences in their approach to cost allocation and profit calculation. It explains how marginal costing focuses on variable costs, while absorption costing considers both fixed and variable costs. The report highlights the implications of each method on profit and loss figures. Furthermore, the report summarizes an IKEA document, detailing its efficient supply chain management, inventory control, and cost-saving strategies, including the use of flat packaging and self-service models. The IKEA summary emphasizes the company's focus on communication with suppliers, competitive pricing, and logistical management to maintain profitability and meet customer demands. The report provides an understanding of how businesses can leverage costing methods for better financial decision-making and operational efficiency.

MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
Difference between marginal and absorption costing.................................................................1
Use of marginal costing in business............................................................................................1
Reason for difference in profit and loss figures..........................................................................1
Summarising IKEA document ...................................................................................................1
REFERENCES................................................................................................................................3

Difference between marginal and absorption costing
Basis Marginal Absorption
Consideration
of product cost Variable cost Fixed and variable cost
Overheads
nature Fixed and variable cost
Production, distribution and selling
and administration
Profit
calculation Profit volume ratio
Fixed cost is used, so profit gets
decreased
Identifies Cost of next unit Cost of each unit
Important
aspect Contribution per unit Net profit per unit
Objective
Emphasis of contribution in cost of
product
Accuracy and fair treatment of
cost of product
(Source: Marginal Costing vs Absorption Costing, 2019)
Use of marginal costing in business
It helps in facilitating recording and reporting cost as cost classification into variable and
fixed components to make job of cost ascertainment easier. With reference to this study, business
could observe behaviour of cost at varying conditions of sales and output to exercise better
control over costs (Horton and de Araujo Wanderley, 2018). It assists management to resolve
decision making problems.
Reason for difference in profit and loss figures
The similar amount of profit is accounted under both marginal and absorption costing if
sales is equal to production. This is because fixed factory overheads are charged to period were
similar in every aspect (Nishimura, 2019). Moreover, profit under marginal costing moves in
similar direction to sales volume and in absorption costing, profit behaves irregular and it is
sometimes in oppose direction through sales.
Summarising IKEA document
IKEA supply chain and inventory management has attained 40th rank on Forbes esteemed
world's most valuable brands list along with sales of $39.3 Billion in year 2017. Its vision has
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supported through efficient supply chain management as it is distinctive to commit catalogue of
products that would be stocked for a year a guaranteed price. This has presence of different
functions such as supply chain operations and inventory management to work in value
proposition. On basis of cost savings in furniture design, with use of fewer materials, this
organization has cut its transportation cost with application of less manpower and fuel to retain
materials and ship products. The key factor to attain success is communication and relationship
management with manufacturers and material suppliers to attain good prices as per procurement.
The competition is foster among suppliers for ensuring about attainment of the best materials and
prices along with long-standing commitment by involving in long term contracts from suppliers
and lowering prices of products further.
Simultaneously, lower packaging costs with do it yourself assembly as its furniture is
designed and sold in pieces and placed into efficient and convenient and flat packages for low
cost transport due to taking less room in trucks and raising numerous products that could be
shipped and fulfilment cost of minimum orders. In this, every IKEA store has warehouses on the
premises as here space comprise items too bulky for customers for load with absence of helping
from staff. Moreover, it has desire of self service with high possibilities. IKEA gives high
reliance on rare and unique concern to logistical management for reordering products where it
employs in-store logistics personnel for handling inventory management at its stores.
Furthermore, managers implies inventory replenishment management process directly developed
through minimum/maximum setting for responding store level of inventory reorder products and
points.
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REFERENCES
Books and Journals
Horton, K .E. and de Araujo Wanderley, C., 2018. Identity conflict and the paradox of
embedded agency in the management accounting profession: adding a new piece to the
theoretical jigsaw. Management Accounting Research. 38. pp.39-50.
Nishimura, A., 2019. Uncertainty and Management Accounting: Opportunity, Profit
Opportunity, and Profit. In Management, Uncertainty, and Accounting (pp. 73-95).
Palgrave Macmillan, Singapore.
Online
Marginal Costing vs Absorption Costing. 2019. [Online]. Available through
<https://www.wallstreetmojo.com/marginal-costing-vs-absorption-costing/>.
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