Management Accounting: Costing Analysis and Profit Reconciliation

This report conducts a costing analysis comparing absorption and marginal costing methods. It utilizes income statements to analyze the different costing types and their impact on profit. The analysis includes calculations of selling price, variable and fixed costs, and the preparation of income statements for both absorption and marginal costing for two quarters. The report then reconciles the profits generated under each method, highlighting the differences and explaining the reasons behind them. The analysis section discusses the implications of each costing method, emphasizing their respective uses for internal and external reporting. Finally, the report concludes by acknowledging the significance of both costing approaches and their applicability in various management accounting functions. References are provided at the end of the report.

MANAGEMENT ACCOUNTING

Table of Contents
• Introduction
• Costing Analysis
• Income statement using absorption costing
• Income statement using marginal costing
• Reconciliation of profits
• Analysis
• Conclusion
• References

Introduction
• The presentation does a costing analysis of marginal and absorption costing.
• It uses income statements to analyze the different types of costing.

Costing Analysis
•Selling price=80000/80000 units=£1
•Variable Cost production per unit=52000/80000 units= £0.65
•Fixed cost production per unit=16000/80000 units= £0.2
•Total cost per unit=0.65+0.2=£0.85

Income statement for Quarter 1 and Quarter 2 using absorption costing
Particulars Q1 £ Q1 Q2 £ Q2
Sales 66000 74000
Cost of goods sold
Beginning
inventory
- 10200(0.85*12
000)
Variable
production cost
50700(0.65*7
8000)
42900(0.65*66
000)
Allocated fixed
production cost
15600(0.2*78
000)
13200(0.2*660
00)
66,300 66,300
Less: Ending
Inventory
10200(0.85*1
2000)
3400(0.85*400
0)
56100 62900
Less: under
absorption of
fixed cost
400 2800
Gross Margin 9900 11100
Less: Selling and
administrative
cost
5200 5200
Operating Income 4300 3100

Income statement for Quarter 1 and Quarter 2 using variable costing
Particulars Q1 £ Q2 £
Sales 66000 74000
Less: Variable costs 50700 42900
Add: Opening stock 0 7800
Less: Closing stock 7800(0.65*12000) 2600(0.65*4000)
COGS 50700-7800=42900 48100(42900+7800-2600)
Contribution 23100(66000-42900) 25900(74000-48100)
Less: Fixed and administration costs 5200 5200
Fixed costs 16000 16000
Net profit 1900 4700

Reconciliation of Profits
Reconciliation of differences in net income
Absorption costing
operating income - Variable costing operating
income = Fixed Production cost in
inventory(ending) - Fixed Production cost in
beginning (inventory)
4,300.00 – 1,900.00
2,400.00 = (0.2*12000 units) – 0
2,400.00
3,100.00 – 4,700.00
(1,600.00) = (0.2*4,000 units) – (0.2*12,000 units)
(1,600.00)

Analysis
• Absorption costing reports higher profits than marginal as costs get distributed over fixed
overheads.
• Variable costing are used for internal reporting and decision-making.
• Absorption costing is used for reporting to external shareholders and for filing of taxes.

CONCLUSION
• It concludes that both absorption as well as marginal costing have their own prominence and used
for different functions.

References