Absorption costing and marginal costing Assignment

Absorption costing and marginal costing - Assignment Example Simpson Ltd has produced more than its estimated sales volume. Hence closing stock got piled up which could be avoided if they would have followed methods like just in time inventory system, regular delivery system etc to reduce the stock holding costs (Chadwick. L., 1998). As of now, in this case, since the sales volume is lower than the production volume, the profit is higher in absorption costing than in marginal costing. This is because of higher valuation for the closing stock in absorption costing than what is valued in the marginal costing. The difference of increase in closing stock valuation is attributable to the fixed expenses charged to the cost of goods manufactured in the absorption costing while in marginal costing, the same are not being charged as it is guided by the contribution principal of sales less variable costs. Hence, as the costs of goods manufactured is more in absorption costing, naturally, its closing stock valuation would also be higher which is deducted from the actual sales (through deduction in the cost of goods manufactured) indirectly thereby increasing the profit figure. In this way, the profit figure gets inflated in the case of absorption costing than in marginal costing thereby misleading the management about the higher profit figures than what is really earned if we observe the data for only one term. However, as this closing stock gets utilized in the next period, if the production is lesser in that period, the absorption costing would record lesser profits than that of the variable costing thus nullifying the differences arising in this term. In this way, there is no difference in the reporting of the profit figures if taken on a long term basis in both the systems. (Walker.J. & Burke. L., 2003). Absorption costing is used for external reporting purposes as mandated by the financial statements under the guidelines of the generally