The Key Differences between Marginal Costing and Absorption Costing

There are two main methodologies that are employed for the determination of the cost of production and the value of inventory: Marginal Costing and Absorption Costing. Both of these methods have got their advantages and disadvantages, an account of which has been provided below:

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The Product Cost

Marginal costing is a method of accounting according to which only the variable cost is apportioned to a product’s cost. What this means is that the product costs will comprise of only the variable costs, whereas the fixed cost is ignored. The rationale behind this treatment lies in how fixed costs are treated as sunk costs and do not play a part in the overall procedure of decision making, usually.

Absorption costing, on the other hand, apportions, both, fixed and variable costs to the overall cost of the product. The logic for such a treatment lies in how, both, fixed cost and actual cost comprise of the actual cost of a product.

The Purpose

Considering that marginal costing ignores the fixed cost based on how it’s irrelevant for decision making, the basic purpose of marginal costing is to aid in the overall decision making process. Marginal costing identifies the impact of manufacturing one more unit of any given product and how it will affect the overall costs and profitability. Such an analysis is important for making various production based decisions, for a business would only wish to manufacture if it’s profitable, right?

On the other hand, absorption costing is best used for the external reporting requirements, considering how it encompasses both the variable and fixed costs. The rationale behind absorption costing dictates that the total cost of the product needs to be recovered, fully, from the selling price of the product. While such an approach is adequate for the determination of selling price, it won’t be of much help in decision making.

The Classification of Overheads

Marginal costing divides the factory overheads into two, broad categories: Variable Overheads and Fixed Overheads. Variable overheads refer to such factory overheads that vary directly with the number of units manufactured. The fixed overheads, on the other hand, are those manufacturing overheads that remain constant up to a certain number of units after which they increase…drastically!

Absorption costing, however, divides the manufacturing overheads into three, self-explanatory categories: production, administration, and selling and distribution.

Inventory Valuation

Considering the discussion above, it should be relatively easier to notice that the value of inventory will be understated in marginal costing, as compared to absorption costing. The logic behind this is pretty simple, right? Marginal costing calls for the valuation of inventory, solely, at the variable cost of production. Since the fixed costs are ignored, the use of marginal costing for inventory valuation causes the inventory to be significantly undervalued. This is the reason why the use of marginal costing for inventory valuation is not allowed in the International Accounting Standards.

Considering the variations between the two methods of costing, it’s advisable for businesses to make use of both of these methods in their best interest. However, considering that every is unique from the other, SKB Accounting knows exactly how YOUR business can make the most of both of these methodologies…and more!

Why You Need Sage Evolution Intelligence Reporting

Among the Intelligence Reporting solutions that are available for businesses to choose from, the Sage Evolution Intelligence Reporting system is definitely among the most popular. Here are a few reasons why:

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The Reports Are Ready to Use

Are you sick and tired of having to specify a format, before generating a report, every single time? If you are, then Sage Evolution Intelligence Reporting is exactly what you need. Why? Well, it’s because Sage Evolution Intelligence Reporting has got the ability to store ready-to-use reports that have already been formatted for you. The only thing you need to do is select the information you wish the report to be based on and you’ll have the report ready in a jiffy, without any fuss whatsoever. It’s a great tool to have if your organization is in the habit of generating a large variety of reports after a defined interval of time, for it’ll get rid of the monotony.

Customize To Meet Your Needs

Sage Evolution Intelligence Reporting not only gives you a wide range of ready-to-use report formats to choose from, but it also gives you the option to customize those ready-to-use formats to meet your needs. On top of the ability to customize, Sage Evolution Intelligence grants you the flexibility to create a new reporting format from scratch, making use of the Intelligence Reporting tools. Such a feature will come in handy for such organizations that are in need of generating reports with small amendments made to their formats.

Easier Exporting Of Data into Excel

Did you know that about 72% of the total users of Sage Evolution Intelligence reporting export their data into excel, regularly. Why do they do that? Well, when you consider all that excel has got to offer, the question that needs to be asked instead is: “why shouldn’t they?” From get an overview of the data with charts and graphs to getting an in depth look at what’s happening in your business with slicers—Excel truly is among the best tools that exist for business owners. The fact that Sage is able to complement the utilities provided by excel means that it, truly, is one of the best solutions for Intelligence Reporting.

Smarter Decision Making

Sage provides you the opportunity to spend more time on the analysis of your information rather than on its compilation. What this means is that you, as a business owner, will have more time to mull over the presented facts and their incorporation into your major business decisions. Spending more time in taking care of the clerical and monotonous side of things will, obviously, show on your organization’s performance—unless you’re superhuman. An ordinary man can only do that much!

When you take it all into perspective, you’ve got to say that the Sage Evolution Intelligence Reporting System appears to be a perfect fit for just about all businesses. However, there are more considerations that need to go into your thoughts than you may know. So, if you’re looking for the perfect Intelligence Reporting solution for YOUR business, SKB Accounting would love to be of assistance.

Important Concepts Of The Income Statement You Must Know

This post will state and define all the fundamental concepts you should know before you pick an income statement, and which you must know to be able to make sense of it. Before we talk about the different heads of the income statement, it is necessary to know what period is the income statement for. This period will most likely be for one financial year. This will always be mentioned on top of the Income Statement.

Net Revenue

A business either sells goods to its customers or provides services to them. The considerations the business earns from providing these goods or services are summed together and presented as one numerical figure under the head of net revenue.

Cost of sales

A business incurs costs to acquire or produce the goods it sells. The cost incurred for this reason is presented under this head. It is highly likely that a business does not sell all that it buys or produces in the period of the income statement. Thus, other sub-heads such as Opening inventory, Goods Acquired or Produced and Closing Inventory. The amounts of these are stated in dollar terms. The amount of Closing Inventory is deducted from the sum of Opening Inventory and Goods Acquired or Produced to arrive at the numerical figure of the Cost of Sales. In the case where a business provides services, this head is omitted from the income statement.

Gross Income

The numerical figure of the Cost of Sales head is deducted from the numerical figure of the Net Revenues. A positive figure thus indicates that the business is has made a profit, while a negative figure is indicative of the fact that the business has incurred a loss. REMEMBER; this is the gross income. This means that this is not the final profit for the business, and other incomes and costs need to be adjusted to it to arrive at the net profit.

Selling, General, and Administrative Expenses

The Cost of Sales head only presents the cost of acquiring or producing the goods. However, during the normal course of operation of a business, there are a number of other expenses that are incurred. These expenses are divided into three broad categories of selling, general or administrative expenses. Selling expenses are those costs that are incurred to make sure that the sale of a product is completed. It will also include distribution costs. Administrative expenses are those which are incurred to make sure that all the operations of a business are smoothly carried out. It may include the salary of office employees. The costs which do not fall in any of these two heads are categorized as general expenses.

Net Profit

Gross Income less the Selling, General and Administrative Expenses is what is known as the Net Profit. This is the figure that the owner of the business can take home. It is the amount of money that is left over after covering up all the costs of the business from the revenues that the business has earned. A negative figure indicates that the business has incurred a net loss.

Why You Need Standard Costing For Your Business

Standard costing is one of the most commonly used costing systems in the world of management accounting. When you consider all of the advantages that standard costing has got to offer, you’ve got to say that the preference appears to be well justified. Here are some of the proven advantages that standard costing has got to offer to your business:

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Controlling Costs

You know what they say about controlling costs, right? The lower your costs are, the higher your profits will be. Standard costing requires for you to set standard costs against which actual costs can be compared. If the variation in actual costs (compared to standard costs) is found to be remediable, it makes it easier for the management of the business to take corrective action. The better an organization is able to control its costs, the easier it will be for it to improve its profit margin. For that to happen, however, it’s essential for the standard costs to be up to date, embodying all of the latest developments. Only then will the comparison with the actual costs be valid.

Price Determination

The employment of standard costing makes it easier for a business to formulate policies and determine the prices. This is one of the biggest advantages of standard costing, considering that it allows for the formulation of budgets and projections. Making estimates, through standard costing, in the pre-manufacturing phase, for example, can give the management a fair idea of whether the manufacturing will be beneficial for the business or not.

Efficiency

Efficiency is among the essential keys of success for any business, right? Yet, few businesses are able to achieve it. With standard costing, however, a business can be made more efficient over the course of time. How? Well, a thorough investigation conducted for the variation between standard and actual costs often brings into light operational and manufacturing inefficiencies within the business. The management then has the opportunity to take the corrective actions required for promoting efficiency within the organization. Over time, such procedure can lead to the determination and eradication of quite a few inefficiencies.

Better Decision Making

Ultimately, the basic purpose of standard costing is to aid the management of any business in making more informed decisions. Standard costing provides employees targets that are needed to be met. If the employees are unable to meet their targets—or in some extreme conditions—is the management required to interfere. Such a procedure ensures that the management is able to direct its energy towards such departments and segments of the business that REQUIRES its attention. Let’s face it: most employees are annoyed by undue attention from the management. Standard costing, thus, is able to make life easier for the management and employees alike. Standard costing also serves as an evaluation for the performance of the employees and is, often, the basis of bonuses and terminations!

Standard costing has got its advantages, no doubt, but there’s no guarantee if it’s the RIGHT system for your business. Therefore, to facilitate your choice in the perfect accounting system for your business, SKB Accounting has got all of the required expertise!