Management Accounting Report: Marginal and Absorption Costing Analysis

This report provides a detailed analysis of management accounting principles, focusing on marginal and absorption costing methods. The report uses Volpi Ltd, a manufacturing company, as a case study to illustrate the application of these costing methods. It includes calculations of various costs, preparation of income statements under both marginal and absorption costing, and a comparison of their impacts on profitability. The report also examines the importance of accurate cost analysis for business growth and decision-making. The analysis covers the calculation of prime costs, fixed costs, and variable costs per unit, and demonstrates how these costs influence the final profit or loss figures. The report concludes by emphasizing the significance of management accounting in identifying areas for improvement and enhancing overall business performance. The report highlights the differences between marginal and absorption costing and their implications for financial reporting and business strategy, offering valuable insights for understanding cost behavior and making informed financial decisions.

Management
accounting

Contents
Contents...........................................................................................................................................2
INTRODUCTION...........................................................................................................................1
TASK 2............................................................................................................................................1
P3. Preparation of income statement using marginal and absorption costing while calculating
various costs.................................................................................................................................1
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Management accounting is one of the most critical as well as essential aspect as it helps the
company to identify and evaluate various factors that are closely related with the activities that a
firm performs so as to grow and prosper in the market in which it is operating (Altukhov,
Predeus and Predeus, 2019). In this report there is a brief discussion of the firm that is Volpi
limited which is a manufacturing company and is operating since a pretty long time and thus has
captured considerable amount of share in the market too. Apart from that in this report there is a
calculation of cost done on the basis of different costing methods that are prevailing in the
current market scenario which possesses a lot of value from the firm’s point of view.
TASK 2
P3. Preparation of income statement using marginal and absorption costing while calculating
various costs
There are different types of costs that are incurred in the business that carriers a lot of
importance in the current market scenario and this all the aspects have to be analysed and
evaluated in an accurate and precise manner so that it can add to the value of the firm in the long
run (Borthick and Pennington, 2017). The firm that is Volpi limited different costing methods are
explained in detail below in an appropriate manner-
Marginal costing- It is the total cost that has been incurred while performing the activities
of the business or it can be said as the cost of producing an additional unit of output. It is very
important to determine it very precisely so that it can help the company to reduce the expenses
that are not very important in nature so that it can help the enterprise to grow by subsequently
increasing the sales and profitability in the industry in which it is operating (Giacomini, Sicilia
and Steccolini, 2016). As the firm which is Volpi limited deals in manufacturing business it
becomes very much important for it to analyse this aspect properly and all of that are explained
below briefly-
Marginal costing-
Particulars Marginal costing
Variable cost £/unit
Direct material 20
Direct labour 30
Variable production OH 10

Prime cost 60
Add fixed per unit (130000/21000) nil
Total cost per unit 60
Income statement of Volpi limited for the month of January using marginal costing
according to 18000 units when sold-
Budgeted Profit or Loss for January using Marginal costing
Units £/Unit £ £
Sales 18000 80 1440000
Less prime cost
Opening Inventory 0 60 0
Production 20000 60 1200000
less closing Inventory -2000 60 -120000 -1080000
Contribution 360000
Less Fixed Cost -130000
Profit 230000
Income statement of Volpi limited for the month of January using marginal costing
according to 17000 units when sold-
Budgeted of Profit or Loss for January using marginal costing
Units £/Unit £ £
Sales 17000 80 1360000
Less prime cost
Opening Inventory 0 60 0
Production 21000 60 1260000
less closing Inventory -4000 60 -240000 -1020000
Contribution 340000
Less Fixed Cost -130000
Profit 210000
Absorption costing- Absorption costing also known as full absorption costing as it
includes all the costs that are related with the working of the business and thus it becomes very
essential for each one of the firm to evaluate these aspects in a detailed manner so that it can add
to the value of the firm. All the costs that are both direct as well as indirect are included in it like
material, labour, rent, insurance, etc. which possesses a lot of important from the company’s

prospective. As Volpi limited is a firm that is operating on a large scale and thus becomes very
much important for it to do a detailed research of all the costs so that unnecessary ones can be
cut down or reduced significantly (Gonzalez and Mendoza, 2020). Below is done all the
calculations regarding it with the context of the organisation that is Volpi limited-
Absorption costing-
Particulars Absorption costing
Variable cost £/Unit
Direct material 20
Direct labour 30
Variable production OH 10
Prime cost 60
Add fixed per unit (130000/21000) 6.2
Total cost per unit 66.2
Income statement of Volpi limited for the month of January using absorption
costing according to 18000 units when sold-
Budgeted of Profit or Loss for January using Absorption costing
Units £/Unit £ £
Sales 18000 80 1440000
Less prime cost
Opening Inventory 0 66.2 0
Production 20000 66.2 1324000
less closing Inventory -2000 66.2 -132400 1191600
Profit 248400
Less under-absorption of FC -18400
Reconciled profit 230000
Note 1: Working note of the above solved calculations-
Budgeted fixed cost OH 130000
FC absorbed (18000x6.2) - 111600
Under absorbed 18400
Income statement of Volpi limited for the month of January using absorption
costing according to 17000 units when sold-
Budgeted of Profit or Loss for January using Absorption costing

Units £/Unit £ £
Sales 17000 80 1360000
Less prime cost
Opening Inventory 0 66.2 0
Production 21000 66.2 1390200
less closing Inventory -4000 66.2 -264800 1125400
Profit 234600
Less under-absorption of FC -24600
Reconciled profit 210000
Note 2: Working note of the above solved calculations-
Budgeted fixed cost OH 130000
FC absorbed (17000x6.2) - 105400
Under absorbed 24600
CONCLUSION
From the above it can be concluded that management accounting is one of the most
important as well as essential element as it helps the business to identify things that possess a lot
of importance for each and every firm so that it can grow in the market that is highly competitive
as well as dynamic in nature. Apart from that it can be concluded that there are different type of
costs some of which are hidden in nature too that have to be analysed in order to achieve growth
in the long run and it is very important for Volpi limited to do all these aspects. Further it can be
concluded that the firm is performing well enough in the market, though there are some areas
that needs to be focus so that it can compete with other companies effectively.

REFERENCES
Books and journals
Altukhov, P. V., Predeus, N. V. and Predeus, J. V., 2019, June. Development of the Elements of
the Mechanism Accounting and Analytical Support of Economic Security of
Construction Enterprises. In IOP Conference Series: Earth and Environmental Science
(Vol. 272, No. 3, p. 032205). IOP Publishing.
Borthick, A. F. and Pennington, R. R., 2017. When data become ubiquitous, what becomes of
accounting and assurance?. Journal of Information Systems. 31(3). pp.1-4.
Giacomini, D., Sicilia, M. and Steccolini, I., 2016. Contextualizing politicians’ uses of
accounting information: reassurance and ammunition. Public Money & Management.
36(7). pp.483-490.
Gonzalez, C. C. and Mendoza, K. H., 2020. Green accounting in Colombia: a case study of the
mining sector. Environment, Development and Sustainability. pp.1-13.