Conversion of Income Statement - Assignment Example

If the contribution margin costing approach is taken into consideration, the overall costs of the company are divided into 1) variable cost, and 2) fixed cost. Variable costs are the ones that increase or decrease with the number of units sold but remain constant on a per-unit basis. However, fixed costs are the ones that remain the same regardless of the number of units sold, but for a certain capacity (Kinney and Raiborn, 2009).

Cumulatively, the net effect of these two approaches is the same under the given information. However, the breakup of the costs under both approaches can be observed distinctly. The second quarter performance for the division is the same because several units sold are same as the last year. Although, the overall production cost has been increased because of increasing the number of units, but since the sales units are the same, therefore production cost of units that are sold, has been taken into account which has caused the same result for both approaches under both quarters.

Suggestion on Appropriate Reporting System

From the given information, there are a few suggestions to be made. The clear difference between the absorption and marginal costing approach can only be observed clearly if there is comprehensive information provided especially regarding the level of inventory. In that case, it would be a rather better approach to make a clear point regarding which costing approach provides better results. For better results, Mr. Roses is advised to not only increase the production units but also increase the sales volume as well. This will substantiate better performance rather than focusing on the reporting approach to demonstrate better results which are not more than a complacent view.

Shortcomings of the Absorption Costing Approach

There are various shortcomings of absorption costing as a method of internal decision making which are as follows:

1. Absorption costing cannot provide per unit cost which increases, decreases, or remains the same as the sales volume.
2. Absorption costing cannot provide the fixed element of costs which are mandatory for an organization whether there is a production or not.
3. Absorption costing cannot be helpful for the performance appraisal of the managers because these managers do not have control over every type of cost being incurred (Horngren et al, 2009). However, under other costing approaches, the managers are responsible only for the costs which come under their domain. In this way, it becomes very difficult to assess their performance under the absorption costing approach as it does not provide allocate the costs to the respective manager responsible for that cost.