Costing Comparison: Marginal, Absorption, and Break-Even Analysis

This assignment analyzes two primary costing methods: marginal costing and absorption costing. It presents profit/income statements for both methods, detailing sales revenue, cost of goods sold (COGS), and various expenses to determine net profit or loss. The solution also calculates the break-even point in sales volume, identifying the minimum number of units the company needs to sell to cover its fixed costs and avoid losses. Based on the analysis, the assignment offers management advice, emphasizing the importance of exceeding the break-even point to achieve profitability. The assignment provides a comprehensive overview of cost accounting principles and their application in financial analysis and decision-making.

Management Accounting

A) Marginal costing
Marginal Costing Profit/Income Statement For The Month June
Quantity
Price per
unit £ £
Sales revenue 1500 £35 £52,500
Less: COGS
Direct materials 2000 £7 £14,000
Direct labor 2000 £7 £14,000
Direct expenses 2000 £8 £16,000
Variable selling and
distribution expenses £7,875
Less: Closing stock
Direct materials 500 £7 £3,500
Direct labor 500 £7 £3,500
Direct expenses 500 £8 £4,000 £40,875
Contribution £11,625
Less: Periodic cost
Fixed production overhead 36000 £22
£792,00
0
Fixed selling expenses
£120,00
0
Annually
£912,00
0
Per month = Annually/12 £76,000 £76,000
Net Loss -£64,375
B) Absorption costing
Absorption Costing Profit/Income Statement For The Month June
Quantity
Price per
unit £ £
Sales revenue 1500 £35 £52,500
Less: COGS
Direct materials 2000 £7 £14,000
Direct labor 2000 £7 £14,000
Direct expenses 2000 £8 £16,000
Standard production cost 2000 £22 £44,000
Less: Closing stock
Direct materials 500 £7 £3,500
Direct labor 500 £7 £3,500
Direct expenses 500 £8 £4,000

Standard production cost 500 £22 £11,000 £66,000
Gross loss -£13,500
Less: Selling & Admin expenses
Fixed (£120,000/12) £10,000
Variable £7,875 £17,875
Net Loss -£31,375
C) Advising management on the actions to take
The above result shows that company is bearing losses in both statement through marginal
costing and absorption costing. To check how much minimum units required for company to sell
in a month; break-even point has been calculated below:
Break-even Point in Sales volume:
= (Fixed cost / contribution per unit)
Fixed cost per month = £10,000 + £66,000 = £76,000
Contribution per unit = Selling price per unit – Variable cost per unit
= £35 – (£7 + £7 + £8 + .15(£35))
= £35 - £27.25
= £7.75
Breakeven point in sales volume = £76,000 / £7.75 = Approximate 9,806 units
Hence, the above result shows that; company has to sale atleast 9,806 units to cover its fixed cost
or obtain a situation of no profit no loss. Any sale of above these units will give profit to the
company. Therefore, the target for the company should be selling of atleast 9,806 units to avoid
loss situation during a month. Below is the scenario where company sells exactly 9,806 units
during month.
Sales revenue = 9,806 * £35 = £343,210
Less: Variable cost = 9,806 * £27.25 = £267,214
Contribution = £76,000
Less: Fixed cost = £76,000

Net Profit = £0
So, the desired sale for the company should be above 9,806 units.