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%
Table of Contents
Aishath Farahanaaz
S12425427, BBA Batch 15
Purpose.................................................................................................................. 3
Introduction........................................................................................................... 3
Nestls 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 Nestl 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 46
Aishath Farahanaaz
S12425427, BBA Batch 15
Purpose
The purpose of this coursework is to analyse and evaluate different
product costing systems in a manufacturing company and its impact on
product pricing.
Introduction
With a mission, that is to be the worlds largest Nutrition, Health and
Wellness Company, Henri Nestl along with Charles Page and George Page,
incorporated Nestl in 1905 in the town of Vevey, Switzerland (Strategy,
2015).
Today, almost 110 years after, Nestle is the worlds 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
peoples 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 todays needs
without compromising the ability to meet future generations needs along
with a high profitable growth year by year (Strategy, 2015).
Nestls Products
Nestle 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 Nestls products range (Our Brands, 2015).
Baby foods: Cerelac, Gerber, Gerber Graduates, NaturNes, Nestum
Bottled water: Nestl Pure Life, Perrier, Poland Spring, S.Pellegrino
Cereals: Chocapic, Cini Minis, Cookie Crisp, Estrelitas, Fitness, Nesquik
Cereal
Chocolate confectionery:
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Aishath Farahanaaz
S12425427, BBA Batch 15
Aero,Butterfinger, Cailler, Crunch, KitKat, Orion, Smarties, Wonka

Coffee: Nescaf, Nescaf 3 in 1, Nescaf Cappuccino, Nescaf Classic,
Nescaf Decaff, Nescaf Dolce Gusto, Nescaf Gold, Nespresso
Culinary, chilled and frozen food: Buitoni, Herta, Hot Pockets, Lean
Cuisine, Maggi, Stouffer's,Thomy
Dairy: Carnation, Coffee-Mate, La Laitire, Nido
Drinks: Milo, Nesquik, Nestea
Food service: Chef, ChefMate, Maggi, Milo, Minors, Nescaf, Nestea, Sjora,Lean Cuisine, Stouffer's
Healthcare & nutrition: Boost, Nutren Junior, Peptamen, Resource
Ice cream : Dreyers, Extrme, Hagen-Dazs, Mvenpick, Nestl Ice
Cream
Petcare : Alpo, Bakers Complete, Beneful, Cat Chow, Chef Michaels
Canine Creations, Dog Chow, Fancy
Feast, Felix, Friskies,Gourmet, Purina, Purina ONE, Pro Plan
Table Extracted from: http://www.nestle.com/aboutus/ourbrands
Nestl 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. Nestl 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 Nestl has
dominated Indian food market vibrantly (Presence Across India, 2015).
However, for a rapid moving company like Nestl, 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 Nestl India, the Kit
Kat chocolate; is being selected and the costing system of the product is
Page 4 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15
analysed and evaluated through the impact it has on product pricing of Kit
Kat chocolates.
Product Costing Systems in manufacturing

Predominantly, 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 Costing
Absorption 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
Production
Cost
technique.
Direct
Materials
Direct
labour
Fixed
Manufacturi
ng
Overheads
Variable
Manufacturi
ng
overheads
Direct materials: direct materials are raw materials that are being
used to manufacture the product. For example, direct material for
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Aishath Farahanaaz
S12425427, BBA Batch 15
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.
Purpose of Absorption Costing/Advantages of Absorption Costing
The 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 Costing
Absorption costing can misleadingly inflate companys profit figures in the

provided accounting period. Since the company will not deduct their entire
Page 6 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15
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 Costing
Marginal 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.
Direct Labour
Margin
al
Costin
g
Direct
Material
Variable
Manufacturing
The principles
of Marginal Costing
Overheads
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.
Page 7 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15
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.

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
Page 8 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15
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
Discussion on the product costing system used by the

selected company
In Nestl 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 Nestl is a huge manufacturing company and produces in

bulk, it is important to accumulate all the production costs while
pricing the products.

Nestl has large number of fixed assets in the manufacturing unit,
and for day by day some of them depreciates and increases fixed
Page 9 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15
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 doesnt
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 Nestl India has provided the details of cost, inventory
and revenue of Nestl Kit Kat, for the year 2014, monthly wise. Since
Nestl 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 Nestl India for Kit Kat are attached in
Appendix 1.
Absorption Costing Calculations of Nestl Kit Kat

January 2014
Details
Total Cost
(Rs.)
No: of
Units
Cost Per
Unit
Page 10 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15
Total Direct Material

273,000,000
(Rs.)
Total Direct Labour
130,000,000
(Rs.)
Total Variable
52,000,000
Overheads (Rs.)
Total Fixed Overheads
208,000,000
(Rs.)
Absorption Cost per
unit
Income
StatementJanuary
2014
13,000,000
21
10
4
16
51
INR
1,018,560,
000
641,560,00
0
Sales
Less cost of goods sold
(Opening Inventory
Add Absorption Cost of
production
0
663,000,
000
663,000,
000
21,440,0
00
Less Closing
Inventory)
641,560,
000
377,000,00
0
248,598,40
0
Gross Profit
Less Expenses
Sales & Administration

Insurance
Tax
104,000,
000
2,000,00
0
142,598,
400
248,598,
400
Net Profit
128,401,60
0
Page 11 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15
With total production of 13 million Kit Kat and no opening inventory,

Nestl 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.
February 2014
Details
(Rs.)
Total Direct Labour
(Rs.)
Total Variable
Overheads (Rs.)
(Rs.)
Absorption Cost per
unit
Total Cost
(Rs.)
242,250,000
No: of
Units
12,750,000
Cost Per
Unit
19
140,250,000
11
178,500,000
14
208,000,000
16.31372549
60.31372549
Income
StatementFebruary
2014
INR
1,041,400,0
00
790,400,00
0
Sales
(Opening Inventory
Add Absorption Cost of production
Less Closing Inventory)
21,440,00
0
769,000,0
00
790,440,0
00
40,000
790,400,0
Page 12 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15
00
251,000,00
0
249,796,00
0
Gross Profit
Less Expenses

Insurance
Tax
102,000,0
00
2,000,000
145,796,0
00
249,796,0
00
Net Profit
1,204,000
March 2014
Details
Total Cost
(Rs.)

(Rs.)
Total Direct Labour
(Rs.)
Total Variable
Overheads (Rs.)
(Rs.)
Absorption Cost per
unit
252,000,000
No: of
Units
14,000,000
Cost Per
Unit
18
126,000,000
294,000,000
21
208,000,000
14.8571429
62.857
Income Statement
INR
Page 13 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15
1,110,040,
000
870,040,00
0
Sales
(Opening Inventory
production
40,000
880,000,
000
880,040,
000
10,000,0
00
Less Closing
Inventory)
870,040,
000
240,000,00
0
213,405,60
0
Gross Profit
Less Expenses
Insurance
Tax
56,000,0
00
2,000,00
0
155,405,
600
213,405,
600
Net Profit
26,594,400
April 2014
Page 14 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15
Total Cost
Details
(Rs.)
Total Direct Material (Rs.) 306,000,000
Total Direct Labour (Rs.)
187,000,000
Total Variable Overheads
(Rs.)
255,000,000
(Rs.)
208,000,000
Cost Per
Unit
18
11
No: of Units
17,000,000
15
12.2352941
2
56.2352941
2
Absorption Cost
Income Statement
INR
1,360,000,0
00
956,000,00
0
Sales
Less cost of goods
sold
10,000,0
00
956,000,
000
966,000,
000
10,000,0
00
(Opening Inventory
production
Less Closing
Inventory)
956,000,
000
404,000,00
0
328,400,00
0
Gross Profit
Less Expenses
Sales &
Administration
Insurance
Tax
136,000,
000
2,000,00
0
190,400,
000
328,400,
000
Net Profit
75,600,000
Page 15 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15
May 2014
Total Cost
Details
(Rs.)
Total Direct Material (Rs.) 171,000,000
63,000,000
(Rs.)
90,000,000
(Rs.)
208,000,000
No: of Units
9,000,000
Absorption Cost
Cost Per
Unit
19
7
10
23.1111111
1
59.1111111
1
Income Statement
INR
725,200,0
00
537,200,0
00
Sales
10,000,00
0
532,000,0
00
542,000,0
00
4,800,000
(Opening Inventory
production
537,200,0
00
188,000,0
00
139,528,0
00
Gross Profit
Less Expenses
36,000,00
0
Page 16 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15
Insurance
2,000,000
101,528,0
00
Tax
139,528,0
00
48,472,00
0
Net Profit
June 2014
Details
Total Direct Material (Rs.)
(Rs.)
Total Fixed Overheads (Rs.)
Total Cost
(Rs.)
246,620,00
0
147,500,00
0
94,400,000
No: of Units
11,800,000
208,000,00
0
Absorption Cost
Cost Per
Unit
20.9
12.5
8
17.62711
864
59.02711
864
Income Statement
Sales
INR
946,000,0
00
Page 17 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15
698,520,0
00
(Opening Inventory
production
4,800,000
696,520,0
00
701,320,0
00
2,800,000
698,520,0
00
Gross Profit
247,480,0
00
217,040,0
00
Less Expenses

Insurance
Tax
82,600,00
0
2,000,000
132,440,0
00
217,040,0
00
Net Profit
30,440,00
0
July 2014
Details
Total Cost
(Rs.)
No: of Units
Cost Per
Unit
Page 18 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15

(Rs.)
462,000,00
0
273,000,00
0
294,000,00
0
208,000,00
0
21,000,000
22
13
14
9.9047619
05
58.904761
9
Absorption Cost
Income Statement
INR
1,681,280,
000
1,238,280,
000
Sales
Less cost of goods
sold
(Opening Inventory
production
2,800,000
1,237,000,
000
1,239,800,
000
1,520,000
Less Closing
Inventory)
1,238,280,
000
Gross Profit
443,000,0
00
384,379,2
00
Less Expenses
Sales &
Administration
Insurance
Tax
147,000,
000
2,000,00
0
235,379,
200
384,379,2
00
Net Profit
58,620,80
0
Page 19 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15
August 2014
Details
(Rs.)
Total Cost
(Rs.)
288,000,00
0
208,000,00
0
176,000,00
0
208,000,00
0
Absorption Cost
No: of Units
16,000,000
Cost Per
Unit
18
13
11
13
55
Income
Statement
INR
1,583,760
,000
869,520,0
00
Sales
Less cost of goods
sold
(Opening Inventory
production
Less Closing
Inventory)
1,520,00
0
880,000,
000
881,520,
000
12,000,0
00
Page 20 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15
869,520,
000
Gross Profit
714,240,0
00
307,732,8
00
Less Expenses
Sales &
Administration
Insurance
Tax
128,000,
000
2,000,00
0
177,732,
800
307,732,
800
Net Profit
406,507,
200
September 2014
Details
(Rs.)
Total Cost
(Rs.)
492,500,00
0
216,700,00
0
256,100,00
0
No: of Units
19,700,000
Cost Per
Unit
25
11
13
Page 21 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15
208,000,00
0
10.558375
63
59.558375
63
Absorption Cost
Income Statement
INR
1,583,760,
000
1,181,060,
000
Sales
Less cost of goods
sold
(Opening Inventory
12,000,00
0
1,173,300,
000
1,185,300,
000
4,240,000

production
Less Closing
Inventory)
1,181,060,
000
Gross Profit
402,700,0
00
401,026,4
00
Less Expenses
Sales &
Administration
Insurance
Tax
177,300,
000
2,000,00
0
221,726,
400
401,026,4
00
Net Profit
1,673,600
Page 22 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15
October 2014
Details
(Rs.)
Total Cost
(Rs.)
229,500,00
0
206,550,00
0
244,800,00
0
208,000,00
0
No: of Units
15,300,000
Cost Per
Unit
15
13.5
16
13.59477
124
58.09477
124
Absorption Cost
Income
Statement
INR
1,225,440
,000
890,290,0
00
Sales
Less cost of goods
sold
(Opening Inventory
production
Less Closing
Inventory)
4,240,00
0
888,850,
000
893,090,
000
2,800,00
0
890,290,
000
Gross Profit
Less Expenses
335,150,0
00
288,311,6
00
Page 23 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15
Sales &
Administration
Insurance
Tax
114,750,
000
2,000,00
0
171,561,
600
288,311,
600
Net Profit
46,838,40
0
November 2014
Details
Total
Total
Total
(Rs.)
Total
Direct Material (Rs.)

Direct Labour (Rs.)
Variable Overheads
Fixed Overheads (Rs.)
Total Cost
(Rs.)
98,780,000
80,820,000
89,800,000
No: of Units
8,980,000
208,000,00
0
Absorption Cost
Cost Per
Unit
11
9
10
23.16258
352
53.16258
352
Income Statement
INR
Page 24 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15
Sales
719,760,0
00
478,760,0
00

(Opening Inventory
production
2,800,000
477,400,0
00
480,200,0
00
1,440,000
Less Closing
Inventory)
478,760,0
00
Gross Profit
241,000,0
00
129,706,4
00
Less Expenses

Insurance
Tax
26,940,00
0
2,000,000
100,766,4
00
129,706,4
00
Net Profit
111,293,6
00
Page 25 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15
December 2014
Details
(Rs.)
Total Cost
(Rs.)
132,800,00
0
107,900,00
0
74,700,000
No: of Units
Cost Per
Unit
16
8,300,000
13
9
208,000,00
0
25.06024
096
63.06024
096
Absorption Cost
Income Statement
INR
664,000,0
00
523,400,0
00
Sales
(Opening Inventory
production
1,440,000
523,400,0
00
524,840,0
00
1,440,000
523,400,0
00
Gross Profit
140,600,0
00
98,410,00
0
Less Expenses

Insurance
Tax
3,450,00
0
2,000,00
0
92,960,0
00
98,410,00
0
Net Profit
42,190,00
0
Page 26 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15
Evaluation on the impact on the product pricing in the

selected company
Sometimes, 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
(Rs.)
Total Direct Labour
(Rs.)
Total Variable
Overheads (Rs.)
Marginal Cost per
unit
Total Cost
(Rs.)
273,000,000
No: of
Units
13,000,000
Cost Per Unit

21
130,000,000
10
52,000,000
4
35
Page 27 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15
Income Statement- January

2014
INR
1,018,560,00
0
Sales
Less cost of goods
sold
(Opening Inventory
Add Marginal Cost
of
production
433,560,000
0
455,000,
000
455,000,
000
21,440,0
00
Less Closing
Inventory)
433,560,
000
Gross Profit
Less Expenses
(Fixed Overheads
Sales &
Administration
Insurance
Tax
585,000,000
456,598,400
208,000,
000
104,000,
000
2,000,00
0
142,598,
400
456,598,
400
Net Profit
128,401,600
February 2014
Total Cost
Details
(Rs.)
242,250,00
(Rs.)
0
140,250,00
0
178,500,00
(Rs.)
0
Marginal Cost per unit
No: of
Units
12,750,000
Cost Per Unit

19
11
14
44
Page 28 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15
Income Statement- February

2014
INR
1,041,400,00
0
Sales
Less cost of goods
sold
582,400,000
21,440,0
00
561,000,
000
582,440,
000
(Opening Inventory
Add Marginal Cost of
production
Less Closing
Inventory)
40,000
582,400,
000
Gross Profit
Less Expenses
(Fixed Overheads
Sales &
Administration
Insurance
Tax
459,000,000
457,796,000
208,000,
000
102,000,
000
2,000,00
0
145,796,
000
457,796,
000
Net Profit
1,204,000
Page 29 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15
March 2014
Total Cost
(Rs.)
Details
(Rs.)
252,000,000
126,000,000
Total Variable
Overheads (Rs.)
294,000,000
Income
StatementMarch 2014
Cost Per
Unit
No: of Units
14,000,000
18
9
21
48
INR
1,110,040,000
Sales
Less cost of goods
sold
(Opening Inventory
production
662,040,000
40,000
672,000,0
00
672,040,0
00
10,000,00
0
Less Closing
Inventory)
662,040,0
00
Gross Profit
Less Expenses
(Fixed Overheads
Sales &
Administration
Insurance
Tax
448,000,000
421,405,600
208,000,0
00
56,000,00
0
2,000,000
155,405,6
00
421,405,6
00
Net Profit
26,594,400
Page 30 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15
April 2014
Details
(Rs.)
Total Direct Labour
(Rs.)
Total Variable
Overheads (Rs.)
Total Cost
(Rs.)
306,000,000
No: of Units
17,000,000
Cost Per
Unit
18
187,000,000
11
255,000,000
15
44
Income Statement
INR
1,360,000,00
0
Sales
Less cost of goods
sold
748,000,000
10,000,0
00
748,000,
000
758,000,
000
10,000,0
00
(Opening Inventory
Add Marginal Cost
of production
Less Closing
Inventory)
748,000,
000
Gross Profit
Less Expenses
(Fixed Overheads
Sales &
Administration
Insurance
612,000,000
536,400,000
208,000,
000
136,000,
000
2,000,00
0
Page 31 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15
Tax
190,400,
000
536,400,
000
Net Profit
75,600,000
May 2014
Details
(Rs.)
Total Direct Labour
(Rs.)
Total Variable
Overheads (Rs.)
Total Cost
(Rs.)
No: of Units
171,000,000
9,000,000
Cost Per
Unit
19
63,000,000
90,000,000
10
36
Income Statement
INR
725,200,000
Sales
Less cost of goods
sold
(Opening Inventory
Add Marginal Cost
of production
Less Closing
329,200,000
10,000,0
00
324,000,
000
334,000,
000
4,800,00
Page 32 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15
Inventory)
0
329,200,
000
Gross Profit
Less Expenses
(Fixed Overheads
Sales &
Administration
Insurance
Tax
396,000,000
347,528,000
208,000,
000
36,000,0
00
2,000,00
0
101,528,
000
347,528,
000
Net Profit
48,472,000
June 2014
Details
(Rs.)
Total Direct Labour
(Rs.)
Total Variable
Overheads (Rs.)
Total Cost
(Rs.)
246,620,000
No: of Units
11,800,000
Cost Per
Unit
20.9
147,500,000
12.5
94,400,000
8
41.4
Page 33 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15
Income Statement
INR
946,000,000
490,520,000
Sales
Less cost of goods
sold
(Opening Inventory
production
4,800,000
488,520,0
00
493,320,0
00
2,800,000
Less Closing
Inventory)
490,520,
000
Gross Profit
Less Expenses
(Fixed Overheads
Sales &
Administration
Insurance
Tax
455,480,000
425,040,000
208,000,0
00
82,600,00
0
2,000,000
132,440,0
00
425,040,0
00
Net Profit
30,440,000
July 2014
Page 34 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15
Details
(Rs.)
Total Direct Labour
(Rs.)
Total Variable
Overheads (Rs.)
Total Cost
(Rs.)
462,000,000
No: of Units
Cost Per
Unit
22
21,000,000
273,000,000
13
294,000,000
14
49
Income Statement
INR
1,681,280,00
0
1,030,280,00
0
Sales
Less cost of goods
sold
(Opening Inventory
Add Marginal Cost
of production
2,800,000
1,029,000,
000
1,031,800,
000
1,520,000
Less Closing
Inventory)
1,030,280,
000
Gross Profit
Less Expenses
(Fixed Overheads
Sales &
Administration
Insurance
Tax
651,000,000
592,379,200
208,000,
000
147,000,
000
2,000,00
0
235,379,
200
592,379,2
00
Net Profit
58,620,800
Page 35 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15
August 2014
Details
(Rs.)
Total Direct Labour
(Rs.)
Total Variable
Overheads (Rs.)
Total Cost
(Rs.)
288,000,000
No: of Units
16,000,000
Cost Per
Unit
18
208,000,000
13
176,000,000
11
42
Income Statement
INR
1,583,760,00
0
661,520,000
Sales
Less cost of goods
sold
(Opening Inventory
production
1,520,000
672,000,0
00
673,520,0
00
12,000,00
0
Less Closing
Inventory)
661,520,
000
Gross Profit
Less Expenses
(Fixed Overheads
Sales &
Administration
922,240,000
515,732,800
208,000,0
00
128,000,0
00
Page 36 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15
Insurance
Tax
2,000,000
177,732,8
00
515,732,8
00
Net Profit
406,507,200
September 2014
Details
(Rs.)
Total Direct Labour
(Rs.)
Total Variable
Overheads (Rs.)
Total Cost
(Rs.)
492,500,000
No: of Units
19,700,000
Cost Per
Unit
25
216,700,000
11
256,100,000
13
49
Income Statement
INR
1,583,760,00
0
973,060,000
Sales
Less cost of goods
sold
(Opening Inventory
production
12,000,0
00
965,300,
000
Page 37 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15
977,300,
000
4,240,00
0
Less Closing
Inventory)
973,060,
000
Gross Profit
Less Expenses
(Fixed Overheads
Sales &
Administration
Insurance
Tax
610,700,000
609,026,400
208,000,
000
177,300,
000
2,000,00
0
221,726,
400
609,026,
400
Net Profit
1,673,600
October 2014
Details
(Rs.)
Total Direct Labour
(Rs.)
Total Variable
Total Cost
(Rs.)
229,500,000
No: of Units
15,300,000
Cost Per
Unit
15
206,550,000
13.5
244,800,000
16
Page 38 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15
Overheads (Rs.)
44.5
Income Statement
INR
1,225,440,00
0
682,290,000
Sales
Less cost of goods
sold
(Opening Inventory
4,240,00
0
680,850,
000
685,090,
000
2,800,00
0

production
Less Closing
Inventory)
682,290,
000
Gross Profit
Less Expenses
(Fixed Overheads
Sales &
Administration
Insurance
Tax
543,150,000
496,311,600
208,000,
000
114,750,
000
2,000,00
0
171,561,
600
496,311,
600
Net Profit
46,838,400
Page 39 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15
November 2014
Details
Total Cost
(Rs.)
98,780,000

(Rs.)
Total Direct Labour
80,820,000
(Rs.)
Total Variable
89,800,000
Overheads (Rs.)
No: of Units
8,980,000
Cost Per
Unit
11
9
10
30
Income Statement
INR
719,760,000
270,760,000
Sales
Less cost of goods
sold
(Opening Inventory
2,800,00
0
269,400,
000
272,200,
000
1,440,00
0
Add Marginal Cost

of production
Less Closing
Inventory)
270,760,
000
Gross Profit
Less Expenses
(Fixed Overheads
Sales &
Administration
Insurance
Tax
449,000,000
337,706,400
208,000,
000
26,940,0
00
2,000,00
0
100,766,
400
337,706,
400
Net Profit
111,293,600
Page 40 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15
December 2014
Details
(Rs.)
Total Direct Labour
(Rs.)
Total Variable
Overheads (Rs.)
Total Cost
(Rs.)
132,800,000
No: of Units
8,300,000
Cost Per
Unit
16
107,900,000
13
74,700,000
9
38
Income Statement
Sales
Less cost of goods
sold
(Opening Inventory
production
Less Closing
Inventory)
INR
664,000,000
315,400,000
1,440,000
315,400,0
00
316,840,0
00
1,440,000
315,400,
000
Page 41 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15
Gross Profit
Less Expenses
(Fixed Overheads
Sales &
Administration
Insurance
Tax
348,600,000
306,410,000
208,000,0
00
3,450,000
2,000,000
92,960,00
0
306,410,0
00
Net 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
doesnt 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 pricing

The below table illustrates the cost per unit per month by two costing
techniques; marginal and absorption.
Months
January
February
March
April
May
June
July
August
Absorption Cost Per Marginal

Unit
unit
51
35
60.31372549
44
62.857
48
56.23529412
44
59.11111111
36
59.02711864
41.4
58.9047619
49
55
42
Cost
Per
Page 42 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15
Septembe
r
October
Novembe
r
Decembe
r
59.55837563
49
58.09477124
53.16258352
44.5
30
63.06024096
38
Currently proposed price of the Kit Kat by Nestl 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
Nestl 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 doesnt
generate any profit and is in breakeven point but marginal costing
generated profit of Rs.13.
Page 43 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15
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.
Conclusion
Nestl is a globally recognised manufacturing company which produces
food, beverages, and nutritional products. The company is a multinationally 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, Nestl 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
Nestl is to reduce price in order to improve units sold, Nestl cannot only
rely on absorption costing. Therefore, it is wise and effective for Nestl to
accumulate both of the costing technique for the better results and
knowledge.
Page 44 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15
Bibliography
Our Brands. (2015). Retrieved from Nestle:
http://www.nestle.com/aboutus/ourbrands
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-someadvantages-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-usingabsorption-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
Page 45 of 46
Aishath Farahanaaz
S12425427, BBA Batch 15
Appendix 1
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FACULTY OF BUSINESS MANAGEMENT

15th September 2015

14th October 2015

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

Product Costing Systems in manufacturing

while preparing chocolates.

the people who are directly involved in making the products.

Purpose of Absorption Costing/Advantages of Absorption Costing

The main purpose of absorption costing is external reporting. This

Since absorption costing consider all manufacturing costs, unlike

Limitations of Absorption Costing

Absorption costing can misleadingly inflate companys profit figures in the

fixed overhead if they haven't sold all of their manufactured products,

For any specific timeframe, fixed overheads remain unchanged for

the additional item (Marginal and Absorption Cost).

Absorption costing in this way is deceptive, and it is more

Since marginal costing clearly distinguishes variable manufacturing

overheads are clearly shown in income statement under expenses.

absorption costing, for the managers.

Difference between Marginal Costing and Absorption Costing

One of the main differences between marginal costing and

Marginal Costing accounts all the variable overheads, however

overheads, in product costing

Discussion on the product costing system used by the

highlighted some valid reasons for the chosen technique,

Since Nestl is a huge manufacturing company and produces in

pricing the products.

total costing technique.

Therefore it is effective to impress stakeholders that way.

Absorption Costing Calculations of Nestl Kit Kat

Total Direct Material

Sales & Administration

With total production of 13 million Kit Kat and no opening inventory,

Less Closing Inventory)

Sales & Administration

Total Direct Material

Less cost of goods sold

Less Closing Inventory)

Sales & Administration

Total Direct Material (Rs.)

Total Fixed Overheads (Rs.)

Add Absorption Cost of

Direct Material (Rs.)

Less cost of goods sold

Sales & Administration

Less Closing Inventory)

Sales & Administration

Evaluation on the impact on the product pricing in the

Marginal Costing Calculations for Nestle Kit Kat

Cost Per Unit

Income Statement- January

Cost Per Unit

Income Statement- February

Add Marginal Cost of

Total Direct Material

Add Marginal Cost

Impact on product pricing

Absorption Cost Per Marginal

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