A Revised Income Statement, The Contribution Margin Approach - Research Paper Example

The per unit fixed manufacturing overhead is computed by dividing the total fixed overhead cost with the budgeted units produced. In the mentioned question, the total fixed overhead cost was calculated by dividing $1.6 million with the production capacity of 400,000 units. Thus, every unit produced has fixed manufactured absorbed at $4 per unit. In the discussed scenario the units produced and budgeted units are assumed to be same thus, the question of over and under absorption of overhead does not arises.

As apparent from the above analysis, under the marginal costing method, both the net profit and the contribution margin will increase by $229,000 if the company decides to sell additional 10,000 units. This represents an increase of 4.49% of the current profit. Whereas, in the income statement as per the absorption costing method, the net profit increases by $189,000 and the gross profit shows an increase of $201,000. The following table also highlights the revised net profit percentages. Absorption costing method is usually discouraged due to the fact that in this system of costing a portion of fixed cost is subsequently carried over to the next accounting period as part of the closing stock.

This can distort the profitability presentation of the period by including fixed cost of the prior period in the current period. In addition, absorption costing also depends on the on the levels of output and if the output changes, its consequent impact is on the per unit cost of the product. From the managerial perspective, the marginal costing is the more relevant method for the analysis of cost and revenue information. This method of costing significantly assists the management in decision making process.

In addition, the presentation of marginal costing is easily understandable by all the managers. Keeping all the above factors into consideration, it is more relevant for the CFO of