Evaluating Profitability: Absorption vs. Marginal Costing Methods

This report provides a comparative analysis of absorption and marginal costing techniques in management accounting. It presents income statements prepared using both methods, highlighting the differences in profit calculation and inventory valuation. The reconciliation of profit figures under both approaches is demonstrated, along with a working note detailing the calculation of production cost per unit and variable cost. The report concludes that both costing techniques are crucial for effective decision-making within a company. This document is available on Desklib, a platform offering a wealth of study resources and AI-powered tools to support students in their academic pursuits.

MANAGEMENT ACCOUNTING

Table of content
 Introduction
 Income statement as per the absorption costing technique
 Income statement as per the marginal costing technique
 Conclusion
 References

INTRODUCTION
 Absorption costing technique is related with managerial accounting period for
capturing all the cost associated with manufacturing a particular prod in this method
cost are distinct on the basis of direct and indirect cost.
 Marginal costing is related with change in total cost that arises when the additional
unit is produced.
 In addition to this, marginal income statement is useful in having proper evaluation
of gaining significant processing which is related with gaining appropriate
information regarding cost so that accurate evaluation can be conducted to have
higher profitability

INCOME STATEMENT AS PER THE
ABSORPTION COSTING TECHNIQUE
Particulars Amount£ Amount£
Sales ( Revenue) 3200000
Less: COGS
Direct material 1600000
Direct labor 800000
Variable production overhead 320000
Fixed production overhead 200000 2920000
Gross profit 280000
Less: Indirect expenses
Variable selling expenses 400000
Fixed admin and distribution costs 100000
500000
Net profit /loss -220000

INCOME STATEMENT AS PER THE
MARGINAL COSTING TECHNIQUE
Particulars Amount $ Amount $
Sales ( Revenue) 3200000
Less: variable expenses
Variable production overhead 320000
Variable selling expenses 400000
720000
Contribution 2480000
0
Less: Fixed expenses
Fixed manufacturing Overheads 200000
Fixed admin and distribution costs 100000.00
300000
Profit 2180000

CONTINUED..
Reconciliation of Profit figures Amount£
Profit under absorption -220000
Difference in fixed production overhead -1960000
Profit under marginal 2180000

CONTINUED..
 Working note 1:calculation of production cost per unit and
variable cost
Particulars Amount£
Direct material 20
Direct labor 10
Variable production overhead 4
Fixed production overhead 2.5
Total production cost 36.5
Particulars Amount£
Direct material 20
Direct labor 10
Variable production overhead 4
total VC per unit 34

CONCLUSION
 From the both the technique it can be evaluated that there is
requirement of making changes in performance of company
 It can be identified that both techniques of cost analysis are
crucial for decision making.

REFERENCES
 Books and Journals
Johanson, D. and Madsen, D.Ø., 2019. Diffusion of management accounting innovations: A virus perspective. Journal
of Accounting & Organizational Change.