Account Assignment

FACULTY OF BUSINESS MANAGEMENT

BBAP2103

MANAGEMENT ACCOUNTING

ASSIGNMENT

SEPTEMBER 2015 Trimester

Date Assigned: 15th September 2015

Due Date: 14th October 2015

Lecturer: ALI SHAFEEU

Weighting: 40%

Aishath FarahanaazS12425427, BBA Batch 15

Table of ContentsPurpose.................................................................................................................................................3

Introduction...........................................................................................................................................3

Nestlé’s Products...............................................................................................................................3

Product Costing Systems in manufacturing...........................................................................................5

Absorption Costing............................................................................................................................5

Purpose of Absorption Costing/Advantages of Absorption Costing...............................................6

Limitations of Absorption Costing..................................................................................................6

Marginal Costing................................................................................................................................6

The principles of Marginal Costing................................................................................................7

Advantages of Marginal Costing....................................................................................................7

Difference between Marginal Costing and Absorption Costing.....................................................8

Discussion on the product costing system used by the selected company...........................................9

Absorption Costing Calculations of Nestlé Kit Kat.................................................................10

Evaluation on the impact on the product pricing in the selected company........................................22

Marginal Costing Calculations for Nestle Kit Kat....................................................................22

Impact on product pricing...............................................................................................................34

Conclusion...........................................................................................................................................35

Bibliography.........................................................................................................................................36

Appendix 1...........................................................................................................................................37

Page 2 of 37


PurposeThe purpose of this coursework is to analyse and evaluate different product costing systems

in a manufacturing company and its impact on product pricing.

IntroductionWith a mission, that is to be the world’s largest Nutrition, Health and Wellness Company,

Henri Nestlé along with Charles Page and George Page, incorporated Nestlé in 1905 in the

town of Vevey, Switzerland (Strategy, 2015).

Today, almost 110 years after, Nestle is the world’s leading food company measured by

revenue and is ranked 72nd on the Fortune Global 500 in 2014. Over the years, Nestle has

been recognised for its industry reference for financial performance and is trusted by the

stakeholders (Strategy, 2015). The company at present has its presence globally over 100

countries and has dominated almost every food market by enhancing people’s lives by

offering tastier and healthier food products for all the groups of consumer in the market

(Strategy, 2015).

With a vision of ‘Good Food, Good Life’ Nestle aims to meet today’s needs without

compromising the ability to meet future generations’ needs along with a high profitable

growth year by year (Strategy, 2015).

Nestlé’s ProductsNestle has almost everything in food and beverages category to offer for the enhancement of

every consumer. From baby products to pet care products, Nestle offers a greater variety of

choices to the market. Below is the sample of Nestlé’s products range (Our Brands, 2015).

Baby foods: Cerelac, Gerber, Gerber Graduates, NaturNes, Nestum

Bottled water: Nestlé Pure Life, Perrier, Poland Spring, S.Pellegrino

Cereals: Chocapic, Cini Minis, Cookie Crisp, Estrelitas, Fitness, Nesquik Cereal

Chocolate confectionery:

Aero,Butterfinger, Cailler, Crunch, KitKat, Orion, Smarties, Wonka

Coffee: Nescafé, Nescafé 3 in 1, Nescafé Cappuccino, Nescafé Classic, Nescafé

Decaff, Nescafé Dolce Gusto, Nescafé Gold, Nespresso

Culinary, chilled and frozen food: Buitoni, Herta, Hot Pockets, Lean

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Cuisine, Maggi, Stouffer's,Thomy

Dairy: Carnation, Coffee-Mate, La Laitière, Nido

Drinks: Milo, Nesquik, Nestea

Food service: Chef, Chef-Mate, Maggi, Milo, Minor’s, Nescafé, Nestea, Sjora,Lean

Cuisine, Stouffer's

Healthcare & nutrition: Boost, Nutren Junior, Peptamen, Resource

Ice cream : Dreyer’s, Extrême, Häagen-Dazs, Mövenpick, Nestlé Ice Cream

Petcare : Alpo, Bakers Complete, Beneful, Cat Chow, Chef Michael’s Canine

Creations, Dog Chow, Fancy Feast, Felix, Friskies,Gourmet, Purina, Purina ONE, Pro Plan

Table Extracted from: http://www.nestle.com/aboutus/ourbrands

Nestlé stands out among all the other food processing companies because of its exuberant

strategic operational pillars or objectives; which include creating shared values, nestle

cultures, values and principles, and compliance-sustainability (Strategy, 2015).

As mentioned earlier, Nestle operates its business transnationally. Among all of those

nations, Nestle India is one of the most profitable companies throughout the southern region

of Asia. Nestlé foot stepped in India in 1961 at Moga, Punjab. Today with 8 manufacturing

factories and 4 branch offices, and its head office in Gurgaon, Haryana, and Nestlé has

dominated Indian food market vibrantly (Presence Across India, 2015).

However, for a rapid moving company like Nestlé, it would not be a straight forwarding task

to ascertain profitability in technologically developing world, without a proper product

costing system. Therefore, in this coursework, one of the rapidly famous product of Nestlé

India, the Kit Kat chocolate; is being selected and the costing system of the product is

analysed and evaluated through the impact it has on product pricing of Kit Kat chocolates.

Page 4 of 37

Production Cost

Direct Materials Direct labour

Fixed Manufacturing

Overheads

Variable Manufacturing

overheads


Product Costing Systems in manufacturingPredominantly, there are two types of costing system practiced by any manufacturing

company; absorption costing and marginal costing or in other words Total Costing and

Variable Costing.

Absorption CostingAbsorption costing, sometimes referred as traditional costing is the summation of all the cost

of manufacturing components which include direct material, direct labour, variable overheads

and fixed overheads, as product costs, accordingly with the generally accepted accounting

principles (Jamal, 2007).

The figure below illustrates the product costing through absorption technique.

Direct materials: direct materials are raw materials that are being used to

manufacture the product. For example, direct material for chocolate will be Cocoa,

Sugar and other ingredients that are used while preparing chocolates.

Direct Labour: direct labours are the core workers of a company. For example, in a

car manufacturing company, direct labours will be the people who are directly

involved in making the products.

Manufacturing Overheads: there are two types of manufacturing overheads: fixed

and variable. Fixed manufacturing overheads are the fixed expenses relating to

manufacturing activities; such as factory insurance, utilities and depreciation.

Variable manufacturing overheads are the variable expenses relating to manufacturing

activities.

Page 5 of 37

Marginal Costing

Direct Labour

Direct MaterialVariable Manufacturing Overheads


Purpose of Absorption Costing/Advantages of Absorption CostingThe main purpose of absorption costing is external reporting. This means that the report

of absorption costing provides financial knowledge of the company to its stake holders.

The main advantages of absorption costing are;

Since absorption costing consider all manufacturing costs, unlike variable costs in

marginal costing; therefore the company does gets a clearer scenario of cost per

unit for the manufacturing line of that particular product. Hence it is more

effective in accounting profitability and determining product price (Investopedia,

2015).

In absorption costing, when there is more inventory unsold (closing stock), the

company is on advantage. This means that each unit in inventory will have a value

which includes part of the fixed overheads, and when the product is unsold, there

is no need accumulate it on expenses; hence it increase profitability (Johnston,

2015).

Limitations of Absorption CostingAbsorption costing can misleadingly inflate company’s profit figures in the provided

accounting period. Since the company will not deduct their entire fixed overhead if they

haven't sold all of their manufactured products, their profit-and-loss statement does not

demonstrate the full cost they had for the period. This can delude the company when they are

accumulating the profitability (Johnston, 2015).

Marginal CostingMarginal Costing refers to “the accounting system in which variable costs are charged to cost

units and the fixed costs of the period are written-off in full against the aggregate

contribution. Its special value is in recognising cost behaviour and hence assisting in decision

making” (Lucey, 2002).

The figure below illustrates the components of marginal costing.

Page 6 of 37


The principles of Marginal Costing For any specific timeframe, fixed overheads remain unchanged for any volume of

sales and production; hence by selling an additional unit of product or service, the

accompanying will occur:

Revenue will increment by the business estimation of the product sold

Cost will increase by the variable overhead per unit

Profit will increase by the amount of contribution gained from the additional

item (Marginal and Absorption Cost).

Likewise, if the volume of sales falls by one unit, the profit will fall by the amount of

contribution earned from the unit (Marginal and Absorption Cost).

Profit estimation ought to accordingly be found on an analysis of aggregate

contribution. Since fixed costs relate to a timeframe, and do not change with increases

or decreases in sales volume, it is misleading to charge units of sale with a share of

fixed costs. Absorption costing in this way is deceptive, and it is more appropriate to

deduct fixed costs from total contribution for the period to derive a profit figure

(Marginal and Absorption Cost).

When a unit of product is made, the additional costs incurred in its manufacture are

the variable production costs. Fixed costs are unaffected, and no additional fixed costs

are incurred when output is increased. It is hence contended that the valuation of

closing inventories ought to be at variable production cost (direct materials, direct

labour, direct expenses (if any) and variable production overhead) in light of the fact

that these are the main expenses appropriately inferable from the product (Marginal

and Absorption Cost).

Advantages of Marginal Costing Since marginal costing clearly distinguishes variable manufacturing overheads and

fixed manufacturing overheads, it provides the company with accurate information

regarding costs for the purpose of decision making.

Variable costing is done for the purpose of internal reporting.

Since fixed costs are not accounted to the cost of production, it is easier to trace the

incurred fixed expenses, because the fixed overheads are clearly shown in income

statement under expenses.

Marginal costing technique is far easier to understand than absorption costing, for the

managers.

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Marginal costing helps in eliminating fixed costs carried forward by closing

inventories, since fixed overheads are treated in income statement.

Difference between Marginal Costing and Absorption Costing

One of the main differences between marginal costing and absorption costing is that

marginal costing is done for the purpose of internal reporting, whereas absorption

costing is done for external reporting

Marginal Costing accounts all the variable overheads, however absorption costing

accounts fixed overheads along with variable overheads, in product costing

Fixed overheads are treated in income statements under expenses in marginal costing

whereas in absorption costing, it is included in cost of production

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Discussion on the product costing system used by the selected companyIn Nestlé India, for the purpose of product costing, the opted technique is Absorption costing

as per the Financial Department. They have highlighted some valid reasons for the chosen

technique,

Since Nestlé is a huge manufacturing company and produces in bulk, it is important to

accumulate all the production costs while pricing the products.

Nestlé has large number of fixed assets in the manufacturing unit, and for day by day

some of them depreciates and increases fixed overheads, thus to account the cost, they

regard it is best to opt the total costing technique.

Since absorption costing is done for the purpose of external reporting, when fixed cost

is treated in cost of production, it doesn’t affect the net profit, instead shows the

higher profit figure. Therefore it is effective to impress stakeholders that way.

Apart from those, Absorption Costing technique matches with the standards of

Generally Accepted Accounting Principles, and is widely used across the globe.

As per the request Nestlé India has provided the details of cost, inventory and revenue of

Nestlé Kit Kat, for the year 2014, monthly wise. Since Nestlé has the strategy of clearing

stocks at the end of the year, there was no closing stock for the year 2013. This means that

the opening inventory for January 2014 is nil.

Further in this coursework, the Absorption and Marginal Costs will be analysed and

evaluated with income statements for 12 months of 2014.

The costs details provided by Nestlé India for Kit Kat are attached in Appendix 1.

Page 9 of 37


Absorption Costing Calculations of Nestlé Kit Kat

January 2014

Details Total Cost (Rs.) No: of Units Cost Per UnitTotal Direct Material (Rs.) 273,000,000 13,000,000 21Total Direct Labour (Rs.) 130,000,000 10Total Variable Overheads (Rs.) 52,000,000 4Total Fixed Overheads (Rs.) 208,000,000 16Absorption Cost per unit 51

Income Statement- January 2014INR

Sales 1,018,560,000Less cost of goods sold 641,560,000(Opening Inventory 0 Add Absorption Cost of production 663,000,000

663,000,000Less Closing Inventory) 21,440,000

641,560,000Gross Profit 377,000,000Less Expenses 248,598,400

Sales & Administration 104,000,000Insurance 2,000,000Tax 142,598,400

248,598,400Net Profit 128,401,600

With total production of 13 million Kit Kat and no opening inventory, Nestlé sold 12,732,000

Kit Kat @ Rs.80 and revenue totalled to Rs. 1,018,560,000. The absorption cost per unit was

Rs.51; hence the cost of production was 663,000,000. The fixed overheads are treated while

calculating absorption cost per unit; total fixed overheads per month were 208,000,000. There

was closing inventory of 21,440,000. The net profit for the month was 128,401,600, after

deduction of expenses. Profit per unit is Rs.9.9 (128,401,600/13,000,000) after deduction of

absorption cost per unit and other expenses per unit.

Likewise, for the rest of the months the calculations are done, and profit is accumulated

below.

Page 10 of 37


February 2014

Details Total Cost (Rs.) No: of Units Cost Per UnitTotal Direct Material (Rs.) 242,250,000 12,750,000 19Total Direct Labour (Rs.) 140,250,000 11Total Variable Overheads (Rs.) 178,500,000 14Total Fixed Overheads (Rs.) 208,000,000 16.31372549Absorption Cost per unit 60.31372549

Income Statement- February 2014INR

Sales 1,041,400,000Less cost of goods sold 790,400,000(Opening Inventory 21,440,000 Add Absorption Cost of production 769,000,000

790,440,000Less Closing Inventory) 40,000



249,796,000Net Profit 1,204,000

March 2014

Details Total Cost (Rs.) No: of Units Cost Per UnitTotal Direct Material (Rs.) 252,000,000 14,000,000 18Total Direct Labour (Rs.) 126,000,000 9Total Variable Overheads (Rs.) 294,000,000 21

Page 11 of 37


Total Fixed Overheads (Rs.) 208,000,000 14.8571429Absorption Cost per unit 62.857

Income StatementINR

Sales 1,110,040,000Less cost of goods sold 870,040,000(Opening Inventory 40,000 Add Absorption Cost of production 880,000,000




213,405,600Net Profit 26,594,400

April 2014

Details Total Cost (Rs.) No: of Units Cost Per UnitTotal Direct Material (Rs.) 306,000,000 17,000,000 18Total Direct Labour (Rs.) 187,000,000 11Total Variable Overheads (Rs.) 255,000,000 15Total Fixed Overheads (Rs.) 208,000,000 12.23529412

Page 12 of 37


Absorption Cost 56.23529412

Income StatementINR





328,400,000Net Profit 75,600,000

May 2014

Details Total Cost (Rs.) No: of Units Cost Per UnitTotal Direct Material (Rs.) 171,000,000 9,000,000 19Total Direct Labour (Rs.) 63,000,000 7Total Variable Overheads (Rs.) 90,000,000 10Total Fixed Overheads (Rs.) 208,000,000 23.11111111Absorption Cost 59.11111111

Page 13 of 37


Income StatementINR

Sales 725,200,000Less cost of goods sold 537,200,000(Opening Inventory 10,000,000 Add Absorption Cost of production 532,000,000




139,528,000Net Profit 48,472,000

June 2014

Details Total Cost (Rs.)

No: of Units Cost Per Unit

Total Direct Material (Rs.) 246,620,000 11,800,000 20.9Total Direct Labour (Rs.) 147,500,000 12.5Total Variable Overheads (Rs.) 94,400,000 8Total Fixed Overheads (Rs.) 208,000,000 17.62711864

Page 14 of 37


Absorption Cost 59.02711864

Income StatementINR





217,040,000Net Profit 30,440,000

July 2014



Total Direct Material (Rs.) 462,000,000 21,000,000 22Total Direct Labour (Rs.) 273,000,000 13Total Variable Overheads (Rs.) 294,000,000 14Total Fixed Overheads (Rs.) 208,000,000 9.904761905Absorption Cost 58.9047619

Page 15 of 37


Income StatementINR

Sales 1,681,280,000

Less cost of goods sold 1,238,280,000

(Opening Inventory 2,800,000 Add Absorption Cost of production 1,237,000,00

01,239,800,000

Less Closing Inventory) 1,520,0001,238,280,000

Gross Profit 443,000,000Less Expenses 384,379,200

Sales & Administration 147,000,000

Insurance 2,000,000Tax 235,379,20

0384,379,200

Net Profit 58,620,800

August 2014

Page 16 of 37




Total Direct Material (Rs.) 288,000,000 16,000,000 18Total Direct Labour (Rs.) 208,000,000 13Total Variable Overheads (Rs.) 176,000,000 11Total Fixed Overheads (Rs.) 208,000,000 13Absorption Cost 55

Income StatementINR


0881,520,000

Less Closing Inventory) 12,000,000869,520,000



307,732,800


Page 17 of 37


September 2014




Income StatementINR

Sales 1,583,760,000

Less cost of goods sold 1,181,060,000

(Opening Inventory 12,000,000 Add Absorption Cost of production 1,173,300,00

01,185,300,000



Sales & Administration 177,300,000

Insurance 2,000,000Tax 221,726,40

0401,026,400


Page 18 of 37


October 2014



Total Direct Material (Rs.) 229,500,000 15,300,000 15Total Direct Labour (Rs.) 206,550,000 13.5Total Variable Overheads (Rs.) 244,800,000 16Total Fixed Overheads (Rs.) 208,000,000 13.59477124Absorption Cost 58.09477124

Income StatementINR


0893,090,000




288,311,600


Page 19 of 37


November 2014




Income StatementINR





129,706,400Net Profit 111,293,600

Page 20 of 37


December 2014




Income StatementINR





98,410,000Net Profit 42,190,000

Page 21 of 37


Evaluation on the impact on the product pricing in the selected companySometimes, there arise situations where the companies might need to change the price

proposed, in order to increase revenues, or to minimise excess inventories kept at godown.

Therefore only one technique of costing is not effective, or the currently used technique of

costing is not reliable. Hence, in this part of coursework, the alternate costing system is being

proposed for the Kit Kat production and its impact on pricing is evaluated.

Marginal Costing Calculations for Nestle Kit Kat

January 2014

Details Total Cost (Rs.) No: of Units Cost Per UnitTotal Direct Material (Rs.) 273,000,000 13,000,000 21Total Direct Labour (Rs.) 130,000,000 10Total Variable Overheads (Rs.)

52,000,000 4

Marginal Cost per unit 35

Income Statement- January 2014INR

Sales 1,018,560,000Less cost of goods sold 433,560,000(Opening Inventory 0 Add Marginal Cost ofproduction

455,000,000

455,000,000


0Gross Profit 585,000,000Less Expenses 456,598,400

Page 22 of 37


(Fixed Overheads208,000,00

0Sales & Administration 104,000,00

0Insurance 2,000,000Tax 142,598,40

0456,598,40

0Net Profit 128,401,600

February 2014

Details Total Cost (Rs.) No: of Units Cost Per UnitTotal Direct Material (Rs.) 242,250,000 12,750,000 19Total Direct Labour (Rs.) 140,250,000 11Total Variable Overheads (Rs.) 178,500,000 14Marginal Cost per unit 44

Income Statement- February 2014INR

Sales 1,041,400,000Less cost of goods sold 582,400,000(Opening Inventory 21,440,000 Add Marginal Cost of production

561,000,000

582,440,000

Less Closing Inventory) 40,000582,400,00



0

Sales & Administration102,000,00

0Insurance 2,000,000

Tax145,796,00

0457,796,00

0

Page 23 of 37



March 2014


Income Statement- March 2014INR

Sales 1,110,040,000Less cost of goods sold 662,040,000(Opening Inventory 40,000 Add Marginal Cost of production 672,000,000


662,040,000Gross Profit 448,000,000Less Expenses 421,405,600(Fixed Overheads 208,000,000Sales & Administration 56,000,000Insurance 2,000,000Tax 155,405,600

421,405,600Net Profit 26,594,400

Page 24 of 37


April 2014


Income StatementINR


748,000,000

758,000,000




0

Sales & Administration136,000,00

0

Page 25 of 37


Insurance 2,000,000

Tax190,400,00

0536,400,00

0Net Profit 75,600,000

May 2014


Income StatementINR

Sales 725,200,000Less cost of goods sold 329,200,000(Opening Inventory 10,000,000 Add Marginal Cost of production

324,000,000

334,000,000



Page 26 of 37



0Sales & Administration 36,000,000Insurance 2,000,000Tax 101,528,00

0347,528,00

0Net Profit 48,472,000

June 2014

Details Total Cost (Rs.) No: of Units Cost Per Unit

Total Direct Material (Rs.) 246,620,000 11,800,000 20.9Total Direct Labour (Rs.) 147,500,000 12.5Total Variable Overheads (Rs.)

94,400,000 8

Marginal Cost per unit 41.4

Income StatementINR


488,520,000

493,320,000

Page 27 of 37



Gross Profit 455,480,000Less Expenses 425,040,000(Fixed Overheads 208,000,000Sales & Administration 82,600,000Insurance 2,000,000Tax 132,440,000

425,040,000Net Profit 30,440,000

July 2014

Details Total Cost (Rs.) No: of Units Cost Per UnitTotal Direct Material (Rs.) 462,000,000 21,000,000 22Total Direct Labour (Rs.) 273,000,000 13Total Variable Overheads (Rs.)

294,000,000 14


Income StatementINR

Sales 1,681,280,000Less cost of goods sold 1,030,280,000(Opening Inventory 2,800,000 Add Marginal Cost of production

1,029,000,0001,031,800,000

Page 28 of 37



Gross Profit 651,000,000Less Expenses 592,379,200(Fixed Overheads 208,000,00

0Sales & Administration 147,000,00

0Insurance 2,000,000Tax 235,379,20

0592,379,200


August 2014


Total Direct Material (Rs.) 288,000,000 16,000,000 18Total Direct Labour (Rs.) 208,000,000 13Total Variable Overheads (Rs.)

176,000,000 11


Income StatementINR

Sales 1,583,760,000

Page 29 of 37


Less cost of goods sold 661,520,000(Opening Inventory 1,520,000 Add Marginal Cost of production

672,000,000


661,520,000


515,732,800Net Profit 406,507,200

September 2014



256,100,000 13


Income StatementINR

Page 30 of 37



965,300,000


973,060,000


609,026,400Net Profit 1,673,600

October 2014


Total Direct Material (Rs.) 229,500,000 15,300,000 15Total Direct Labour (Rs.) 206,550,000 13.5Total Variable Overheads (Rs.)

244,800,000 16

Marginal Cost per unit 44.5

Income Statement

Page 31 of 37


INRSales 1,225,440,000Less cost of goods sold 682,290,000(Opening Inventory 4,240,000 Add Marginal Cost of production

680,850,000



496,311,600Net Profit 46,838,400

November 2014



89,800,000 10


Page 32 of 37


Income StatementINR


269,400,000272,200,000


Gross Profit 449,000,000Less Expenses 337,706,400(Fixed Overheads 208,000,00

0Sales & Administration 26,940,000Insurance 2,000,000Tax 100,766,40

0337,706,400


December 2014


Total Direct Material (Rs.) 132,800,000 8,300,000 16Total Direct Labour (Rs.) 107,900,000 13

Page 33 of 37


Total Variable Overheads (Rs.)

74,700,000 9


Income StatementINR


315,400,000



306,410,000Net Profit 42,190,000

The income statements and cost per unit is constructed using marginal costing technique for

12 months of 2014. Since there was no opening inventory at the beginning of the year, profit

for the months were same in two methods of costing.

However, fixed overheads are separately treated in income statement and doesn’t account

while calculating cost per unit, the cost of production is different from the cost of production

of absorption costing, thus gross profit and total expense figure too.

Impact on product pricingThe below table illustrates the cost per unit per month by two costing techniques; marginal and absorption.

Months Absorption Cost Per Unit Marginal Cost Per unitJanuary 51 35

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February 60.31372549 44March 62.857 48April 56.23529412 44May 59.11111111 36June 59.02711864 41.4July 58.9047619 49August 55 42September 59.55837563 49October 58.09477124 44.5November 53.16258352 30December 63.06024096 38

Currently proposed price of the Kit Kat by Nestlé India is Rs.80 per unit.

Suppose if the company wants to reduce the price to Rs.55 per unit, the impact that the

absorption costing will have on this decision is a must to evaluate by using marginal costing

of the product.

Since there was no opening inventory at the beginning as mentioned earlier, the profit

accumulated was same in two methods of costing. However, the cost per unit is different in

both of the methods. Therefore, the decision of reducing price to Rs.55 is not applicable when

the cost per unit is more than that in almost all the months in absorption costing technique.

The table above indicates that except for January, August and November, all the other months

exceeds the cost over price of Rs.55 proposed.

However, when marginal costing is done for the product, it shows that Nestlé can reduce the

price to Rs.55, and is profitable.

Example:

In February, absorption cost per unit is Rs.60.314 and marginal cost per unit is 44. With the

proposed price of Rs.55, marginal costing indicates that the company will have Rs.11 for

profit with the same amount of costs and expenses incurred, while absorption cost shows that

they will have a loss of Rs.5.314.

Likewise, in August, absorption cost per unit is Rs.55 and marginal cost per unit is Rs.42. It

clearly indicates that the absorption costing doesn’t generate any profit and is in breakeven

point but marginal costing generated profit of Rs.13.

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Therefore, in marginal costing, with added other expenses per unit (selling and

administration, tax, insurance), the profit will still be there and in absorption costing it will

show the loss incurred is increased.

ConclusionNestlé is a globally recognised manufacturing company which produces food, beverages, and

nutritional products. The company is a multi-nationally operated one, and is leading in food

and beverages industry. In this coursework, the costing technique used by the company in

product pricing is analysed. Absorption costing and marginal costing are two main techniques

of product costing. While absorption costing accumulates total costs incurred by the

company; marginal costing only accounts variable costs. Like any other large organisation,

Nestlé practices absorption costing technique for product pricing.

However, the calculated results indicated that absorption costing is not always applicable for

product pricing. In the given scenario before, if Nestlé is to reduce price in order to improve

units sold, Nestlé cannot only rely on absorption costing. Therefore, it is wise and effective

for Nestlé to accumulate both of the costing technique for the better results and knowledge.

BibliographyOur Brands. (2015). Retrieved from Nestle: http://www.nestle.com/aboutus/ourbrands

Page 36 of 37


Presence Across India. (2015). Retrieved from Nestle: https://www.nestle.in/aboutus/presenceacrossindia

Strategy. (2015). Retrieved from Nestle: http://www.nestle.com/aboutus/strategy

Investopedia. (2015). What are some of the advantages and disadvantages of absorption costing? Retrieved from Investopedia: http://www.investopedia.com/ask/answers/052715/what-are-some-advantages-and-disadvantages-absorption-costing.asp

Jamal, N. m. (2007). Cost management accounting : an introduction. Skudai, Johor : Penerbit Universiti Teknologi Malaysia.

Johnston, K. (2015). Advantages & Disadvantages of Using Absorption Vs. Variable Costing. Retrieved from Chron: http://smallbusiness.chron.com/advantages-disadvantages-using-absorption-vs-variable-costing-34282.html

Lucey, T. (2002). Marginal and Absorption Costing. In T. Lucey, Costing (p. 296). Cengage Learning EMEA.

Marginal and Absorption Cost. (n.d.). Retrieved October 16, 2015, from http://www.iccpreuni.org/: http://www.iccpreuni.org/attachments/179_Marginal%20and%20absorption.pdf

Appendix 1

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Account Assignment

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