Absorption Costing Vs Marginal Costing | Case Study

Absorption Costing Vs Marginal Costing | Case Study As Marabs Manufacturing Limited deals in different products, some standard while others customised, it should accordingly adopt different but suitable techniques for costing these products. Absorption costing and marginal costing are two different techniques of cost accounting which can be used by Marabs Manufacturing. These techniques may be suited under different circumstances. How is Absorption Costing Different from Marginal Costing? Absorption costing is a traditional method of inventory costing that traces all manufacturing costs (the variable and the fixed costs of production) to the product. These costs do not become expenses until the inventory is sold. Absorption costing considers normal manufacturing costs as product costs and includes them for inventory valuation. As sales occur, the cost of inventory is transferred to cost of goods sold. Absorption costing emphasises the functional characteristics of cost. Using this system, the profit reported for a manufacturing business for a period is influenced by the level of production as well as by the level of sales. The rationale for absorption costing is that it causes a product to be measured and reported at its complete cost. Absorption costing is based on the premise that even though it is difficult to trace costs like fixed manufacturing overhead to a particular unit of output it does not mean that they are not a cost of that output. As a result, such cost s are allocated to products. In contrast, marginal costing is a costing technique of presenting cost data wherein variable costs and fixed costs are shown separately for managerial decision-making. Marginal costing system emphasises the behavioural characteristics of cost. The focus of this system of costing is on separating costs into variable elements and fixed elements. Under marginal costing, variable costs are charged to cost units and the fixed costs are treated as period costs and, as such, are simply deducted from contribution in the period incurred to arrive at net profit. Inventory/stock for profit measurement under marginal costing is valued at marginal cost. It is in sharp contrast to the total unit cost under absorption costing method. There are various other points of difference. The key differences between marginal and absorption costing are: Accounting for Fixed Manufacturing Costs Marginal and absorption costing differ in terms of treatment of fixed manufacturing costs. Under marginal costing, fixed manufacturing costs are excluded from inventory costs and are a cost of the period in which they are incurred. On the other hand, under absorption costing, these costs are included in the cost of inventory and become a part of cost of goods sold in the period when sales occur. Presentation of Sales and Cost Data Facilitating Decision-Making Absorption costing does not differentiate between variable and fixed cost in the calculation of profits. But marginal cost statement very clearly indicates this difference in arriving at the net operational results of a firm. The differences in presentation are clearly shown in the costing pro-forma below. ABSORPTION COSTING PRO-FORMA Â £ Â £ Â £ Sales xxx Production cost of Sales Opening Stock xxx Production Costs: Direct Materials Direct Labour Production Cost absorbed xxx xxx xxx xxx xxx Less: Closing stock (xxx) (xxx) Production Overhead absorbed xxx Production Overhead incurred xxx Over absorbed / Under absorbed xxx or (xxx) xxx Administration overheads incurred xxx Selling and distribution costs xxx (xxx) Profit xxx MARGINAL COSTING PRO-FORMA Â £ Â £ Â £ Sales xxx Variable cost of Sales Opening Stock xxx Variable Production Costs: Direct Materials Direct Labour Variable Production Cost xxx xxx xxx xxx xxx Less: Closing stock (xxx) Variable Production Cost of Sales xxx Variable Selling and Distribution xxx Total Variable Cost of Sales (xxx) Contribution xxx Fixed Costs: Fixed Production Cost Fixed administration cost Fixed selling and distribution xxx xxx xxx Total Fixed Costs (xxx) Profit xxx Absorption of Fixed Overheads In absorption costing, fixed overheads can never be completely absorbed. However, this is not so under marginal costing. Under marginal costing, the actual fixed overhead incurred is wholly charged against contribution. Stock Valuation In marginal costing, work in progress and finished stocks are valued at marginal or variable cost, but in absorption costing, they are valued at total production cost. Difference in Profits The net profits under absorption costing method and marginal costing methods differ if there is a difference between opening and closing stock values. When closing stock is more than opening stock, the profit under absorption costing will be higher as comparatively a greater portion of fixed cost is included in closing stock and carried over to next period. When opening and closing stocks are same, there will be no difference in profit, provided the fixed cost element in opening and closing stocks are of the same amount. Thus, absorption costing and marginal costing differ in their approach and treatment of costs. However, each method has its own advantages and disadvantages. Arguments in Favour of Using Absorption Costing Absorption costing is simple to administer and easy to understand, and may be appropriate when direct costs are of significance. Besides, absorption costing is required for outside reporting where other methods of costing such as marginal costing are not accepted. It is also widely used for cost control purpose. Thus, there are various arguments in favour of absorption costing are: Absorption costing does not need to separate costs into fixed and variable costs. This is especially useful in situations where separation of costs into fixed and variable is difficult and gives misleading results. Under marginal costing, stocks and work in progress are understated. The exclusion of fixed costs from inventories affect profit and true and fair view of financial affairs of an organisation may not be clearly transparent. Absorption cost data is more realistic than marginal cost data in case of highly fluctuating levels of production, e.g., in case of seasonal factories. Besides, volume variance in standard costing also discloses the effect of fluctuating output on fixed overhead. Application of fixed overhead depends on estimates and not on the actuals and as such there may be under or over absorption of the same. Absorption costing takes care of this while marginal costing may not be able to do so. Absorption costing controls cost by means of budgetary control. This is an acceptable process to many. In order to know the net profit, one needs to take into account fixed overheads also. A system like marginal costing which ignores fixed costs is less effective since a major portion of fixed cost is not taken into account. Thus, absorption costing proves to be better. Arguments in Favour of Using Marginal Costing Despite its various advantages, absorption costing may not always prove to be the best approach to costing or pricing a product. It may not help management take important decisions about a product. Marginal costing may prove to be a better system of costing. For the decision-making purpose of management, better information about expected profit is obtained from the use of variable costs and contribution approach in the accounting system. The arguments that favour marginal costing are: It is simple to understand and avoids having varying charges per unit as it does not charge fixed overhead to cost of production. It prevents the illogical carry forward in stock valuation of some proportion of current year’s fixed overhead. It facilitates cost control as it avoids arbitrary allocation of fixed overhead. Marginal costing uses cost control methods such as flexible budgets. It facilitates cost-volume-profit (CVP) or breakeven analysis and profitability analysis and thus helps in short-term profit planning. It also helps an organization compare profitability and performance between two or more products and divisions and help the management in decision making. Under marginal costing system, large balances are not carried under overhead control accounts and thus there is no difficulty of ascertaining an accurate overhead recovery rate. As marginal costing is much closer to cash flow managers usually find it easier to understand marginal costing reports. Using Both Absorption Costing and Marginal Costing Like any other organization, a manager at Marabs Manufacturing Limited will need to take decisions when he encounters problems and alternative courses of action are available. In deciding which option to choose he will need all the relevant information. In most cases cost information proves to be relevant to any decision making. However, no single costing approach can provide appropriate information for taking decisions in all circumstances. In certain cases absorption costing will provide more complete information while in other cases marginal costing information will be more relevant. The theoretical basis for absorption costing is that decisions should be based on the matching principle for all manufacturing costs. Marabs Manufacturing incurs fixed manufacturing cost with the expectation that the resources represented by these costs will be used in the production of inventory. Hence, these costs should be matched against the revenue generated from the sale of that inventory. In contrast, the theoretical reasoning for marginal costing is that fixed manufacturing overhead will be incurred in the short-run irrespective of the volume of production or level of inventory. A significant portion of the fixed manufacturing overhead costs is unavoidable in the short run even when the facilities are idle. Marabs Manufacturing Limited is in a multi-product business. Some products are standard products while others are based on specific orders or are customized according to specifications provided by customers. Wherever the company is costing for standard products it may use absorption costing. It is also given in the scenario that the standard products tend to be seasonal and highly fluctuating. Absorption cost data is more realistic than marginal cost data in case of highly fluctuating levels of production. Absorption costing will also be useful while making certain decisions, for example the price to be charged for external services. However, all decisions related to specific orders and or products adapted to meet the requirements of individual customers should be based on marginal costs. Thus, Marabs Manufacturing Limited should not restrict itself to just absorption costing or just marginal costing and use cost data based on both approaches. The chosen approach should depend on the nature of decision required. As a guideline, if the required decision relates to cost control, cost data based on absorption costing will be more appropriate. However, cost data based on marginal costing will be more appropriate for short-term managerial decision-making and control. Decision analysis should ideally include costs that vary with a decision. Though marginal costing identifies both fixed and variable costs its decisions are based on only the variable component of costs of an activity. Fixed costs are not relevant in case of many decisions that involve relatively small variations from existing practice and/or are for relatively limited periods of time. This is because fixed costs are difficult to alter in the short term. Variable cost corresponds closely with the expenditure n ecessary to produce and sell products and services and can therefore be used more readily in incremental analysis than absorption costing data. Marginal costing is also appropriate for decision making when an activity centre has short-term spare capacity. Marginal costing will also help the company in taking a decision on the minimum price that could be charged for a product. This can be particularly useful for pricing additional sales at special reduced rates when sales have already been made at the normal selling price. As fixed costs have already been paid of all that is required to cover the variable costs of any additional sales Finally, marginal costing can help Marabs Manufacturing take decisions related to: Budget planning and determining the volume of sales required to make a profit Pricing and sales volume decisions. Sales mix decisions, to determine in what proportions each product should be sold. Decisions that will affect the cost structure and production capacity of the company. Whether or not to close down a factory, department, product line or other activity, either because it is making losses or because it is too expensive to run. To sum it up, both absorption as well as marginal costing techniques are appropriate for the company and one cannot be treated as better than the other. The choice of a technique should be dependent on the costing objective. References: Charles T. Horngren, George Foster, Srikant M. Datar, Cost Accounting: A Managerial Emphasis, Prentice Hall John K. Harris, Cost Accounting Student Guide, 12th Edition, Prentice Hall Michael W. Maher, William N. Lanen, Madhav V. Rajan, Fundamentals of Cost Accounting, McGraw-Hill/Irwin Ronald W. Hilton, Frank H. Selto, Michael W. Maher, Frank Selto, Cost Management: Strategies for Business Decisions, McGraw-Hill College Absorption Costing / Full Costing accessed from: http://www.valuebasedmanagement.net/methods_absorption_costing.html

Racial Profiling in America Essay -- Black Lives Matter Essays

On February 4, 1999, Amadou Diallo, an unarmed 22 year-old immigrant from New Guinea, West Africa, was shot and killed in the narrow vestibule of the apartment building where he lived. Four white officers, Sean Carroll, Kenneth Boss, Edward McMellon and Richard Murphy fired 41 bullets, hitting Diallo 19 times. All four were members of the New York City Police Department's Street Crimes Unit, which, under the slogan, "We Own the Night," used aggressive "stop and frisk" tactics against African- Americans at a rate double that group's population percentage. A report on the unit by the state attorney general found that blacks were stopped at a rate 10 times that of whites, and that 35 percent of those stops lacked reasonable suspicion to detain or had reports insufficiently filled out to make a determination. Thousands attended Diallo's funeral. Demonstrations were held almost daily, along with the arrests of over 1,200 people in planned civil disobedience. In a trial that was moved out of the community where Diallo lived and to Albany in upstate New York, the four officers who killed Diallo were acquitted of all charges. (â€Å"Persistence† 21) Racial Profiling is any police or private security practice in which a person is treated as a suspect because of his or her race, ethnicity, nationality or religion. This occurs when police investigate, stop, frisk, search or use force against a person based on such characteristics instead of evidence of a person's criminal behavior. It often involves the stopping and searching of people of color for traffic violations, known as â€Å"DWB† or â€Å"driving while black or brown.† (Meeks 17) After 9/11, racial profiling has become widely accepted as an appropriate form of crime prevention. People were s... ... as far back as any of us can remember. Racial profiling stems from racism, and fear of people who are different, ethnically and culturally, than the person making the judgments. Sadly, it spreads even further than that, and clouds the judgment of the people who are in positions of authority, even when they come from the same ethnic background. Racism, classism, sexism and all the other –isms combine to create trends such as these, which affect more than just the person being judged; it affects their families, friends, neighborhoods, communities, etc. Like all other issues that deal with the problem of –isms, the only way to change the dominant perception is to change the way people are programmed throughout life and their experiences. Until that day, no legislation or rule is going to change the way people feel about the minority, or perceived lower class, group.

Gucci’s Closest Competitor

CRITICALLY CONTRAST THE KEY ELEMENT OF GUCCI’S MARKETING STRATEGY TO ITS CLOSEST COMPETITOR. JUSTIFY WHY YOU HAVE CHOSEN THIS COMPANY AS GUCCI’S CLOSEST COMPETITORS Gucci is one of the most powerful leaders in luxury fashion market. Gucci is founded by Guccio Gucci in 1921 in Florence, Italy. Now, Gucci is the part of Gucci Group and Pinault Printemps Recloute (PPR). The globalization of the fashion environment and boost in the western economies transform Gucci from a small Italian company in to large luxury fashion brand in global level. In 1980s, Gucci had lost its appeal and became a tacky brand and was also in deep financial crisis. But Tom Ford raised Gucci from dead and found out the company’s leading status and maintains their customer loyalty. He created Gucci’s image as: sleek, sexy, and daring. And, Frida Giannini the new creative director of Gucci after Tom Ford changed the image of Gucci from sexy to sensuality. There are two sides to a brand like Gucci: the glamorous, very fashionable side but also with its roots and heritage of 90yrs history and artisans working for Gucci. (Frida Giannini , The Times, sept 5, 2009) For the Gucci’s rebirth marketing mix plays a vital role. The concept of 4Ps or the marketing mix is to explain the relationship of product, price, promotion and place with in the brand/business. The marketing mix is set of marketing tools that the firm uses to pursue its marketing objectives in the target market. So, this theory proposes that all brands/business need the right product, sell that product at right price, in the right place, using the most suitable promotion. Basically brands use this concept to attract their target consumer to match their needs and demands. Out of these 4Ps product is main focused area of marketing mix because the product is combination of tangible and intangible offer that a brand sells to customer to make money. Product addresses the need of consumer. The product has to have the right features like: it must look good and work well. â€Å"When well designed, good-quality product is at the root of the marketing campaign it often adds a degree of authenticity and sincerity to the marketing strategy. † (Gary Aspden – Adidas) For example: consumer needs to fit in with the peer group and the problem of how best to do this is solved by wearing particular brand’s trendy product. Mastering Fashion Marketing, Tim Jackson, 2008). As mentioned earlier that product is the main element of the marketing mix and in that product category footwear is the main focused area. â€Å"Shoes are always the most important thing because they are who you are. They change the way you walk, the way you move. † – Tom Ford The market for the footwear category is United Kingdom. The reason behind choosing this market is that the United Kingdom footwear market, the value of this market is reached a record high of over ? bn in 2008. The UK is one of Europe’s leading footwear markets, accounting for nearly 19% of the European footwear sales. PRODUCTSGUCCIPRADACHANELLouis Vuitton Women’s wear Men’s wear Shoes Hand Bags Jewellery Fragrance Watches Eye wear Beauty products X Hats Tie Scarves Based on the above mentioned table Gucci's competitors are Prada, Chanel and Louis Vuitton. The reasons behind taking only these brands are these four brands are very popular in luxury market all over the world. So, through this table get the basic idea of the product wise comparison in these four brands. All the four brands have almost similar products but the personality is different. Gucci is much more similar to Prada in terms of brand image and product comparison. The brand image of Gucci and Prada is very seductive, powerful, accomplished, sexy and chic. Where as Chanel and Louis Vuitton have very smart, classic, sophisticated and mature personality. In terms of prices Gucci and Prada go hand in hand while Louis Vuitton and Chanel are quite expensive as compare to Gucci and Prada. While comparing the brand value of these brands and the ranking of Top 100 Brands Louis Vuitton stands on 17th rank with the brand value of $21,120millions, Gucci stands on 45th rank with the brand value of $3530 millions, Chanel stands on 60th rank with the brand value of $6040 millions and Prada stands on 91th rank with the brand value of $3530 millions. So, as comparing the brand value and rank of top 100 brands Chanel will be the closest competitor of Gucci. But, here the comparison is based on the product so, Prada will the Gucci’s closest competitor because as per the product line and brand image Prada is Gucci’s closest competitor. GucciPrada As, mentioned earlier in the product line Prada is the closest competitor of Gucci. Here, the images from Prada and Gucci men’s footwear collection of Spring Summer 2010. The design of the product is similar, shape of the shoes is also similar, and material they used is also same. The cut detail of the outside counter of the shoes is also similar. From the top view both the shoes look very similar The stitching detail is similar but Gucci gave dark color piping on the toe cap and gave same color stitching where as Prada gave contrast color stitching detailing which is quite noticeable. The colors of these shoes are different Gucci used Bordeaux color in suede material which gives very dull look while Prada used same material in Red color which gives very bright and smart look. Prada also gave a logo on side of the shoe whereas Gucci gave green, red and green color web stripe. The detailing on the tongue of the shoes is also different Gucci gave zig zag look on the edge which gave a rough look though its finished where Prada gave very finished look stitching which give very sophisticated look. The lining of the both the shoes are also similar in terms of color and leather in sole logo. The color of the sole is also similar but detailing is different Gucci gave their own brand logo detailing on the rubber sole where as Prada used nice detailing on drive sole. The price of Gucci’s shoes is $530 where as Prada shoes cost around $557. Good design and color and with affordable price Prada is better than Gucci in this comparison. Gucci Prada This advertising campaign is for Autumn Winter 2009/10 for Prada and Gucci for the footwear collection. In both the advertising campaign both the brand focused only on the product. Gucci’s products are very shiny and glamorous which represents very urban, beautiful, young and chic look. Where as Prada shoes are inspired by Trojan helmet/headgear which gives very stylish and cool look and more focus on product detailing. Gucci ( Gucci’s store display window is very basic with perfume bottle shape with yellow light and hand bag shape with pink light and back drop is decorated with Gucci logo. In the display Gucci display bags and shoes together. The ambience and the light effect give very rich look to Gucci’s display window. In the display window Gucci only displayed their basic and classic bag and shoes. Whereas Gucci’s image is very sensuous, sleek and sexy, but through this window display Gucci can not convey its brand image. But, the light effect, ambience and product complement each other. But this display does not Whereas Prada’s window display is totally opposite to Gucci’s window display. Prada give more focus on their product in the display window. Prada used six silver mannequins to display their footwear and which gave very trendy look. Even the color of footwear is very nice and eye catchy when it put on those silver mannequins. The placement of the mannequins is also very nice, they displayed 3 mannequins in the right direction and rest of 3 mannequins they just flip it so that the product can highlight more. And they used white lights for the display. So, through this window display Prada convey their brand image which very trendy, smart, sexy and sensuous. Thus, to conclude we can say that Prada is Gucci’s closest competitors. The reason behind this is Prada offer almost all the product which Gucci offers and the brand image of Gucci and Prada is same which is very sexy, sleek, sensuous and smart. In product line in the same season Gucci and Prada offers almost similar shoes but Prada’s shoes are very smart and trendy where as Gucci’s shoes give very dull look. So, from that comparison Gucci is not able to maintain their brand image where as Prada’s shoes are simple but Prada maintain their brand image which is very smart. While comparing the advertising campaign and the store display window, Prada and Gucci go hand in hand in terms of convey the message through advertising campaign and also highlight their image through store ambience. But Gucci has 278 stores all around the world where as Prada have 128 stores around the world. So, globally Gucci is more famous than Prada. The brand value of Gucci is more than Prada. Reference: Websites: http://bwnt. businessweek. com/interactive_reports/best_global_brands_2009/index. asp? sortCol=rankid=1=2=50 http://www. stanforddaily. com/2009/03/06/milan-fashion-week-sexes-out/ http://www. researchandmarkets. com/research/34a553/footwear_market_re Books: Journals: Images: Prada Display: http://williamyan. com/blog/2009/7/24/retail-prada-window-display-in-soho. html) Gucci display: http://www. bobbintalk. com/2009/11/window-shopping-gucci. html

A Research Study On Data Mining - 1171 Words

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