Marginal costing Vs Absorption Costing

Q1- Marginal (or variable) costing

Subject: Understanding Marginal Costing and Its Benefits for Botswana Safari Holidays

Dear Sir,

I hope that this email find you in best health

The purpose of this email is to explain the benefits of marginal costing as a financial management approach that would help Botswana Safari Holidays with their dynamic operations.

What is Marginal Costing?

Costing Technique where variable cost is charged to units of cost while the fixed cost for the entire period is completely written off against the contribution done by the organization (Tombazos & Yang, 2006).

Advantages for Botswana Safari Holidays:

1. The profitability assessment of tour packages along with destinations will be able to assess which packages provide the biggest contribution to offset fixed expenses and create profit.
2. When demand decreases you can comfortably implement promotional prices or discounts because variable expenses will be compensated and fixed expenditures remain unaffected in the short run (Wald & Watt, 1996).
3. The system shows service performance indicators that let you distribute your resources among high-profitability areas for vehicles guides and marketing campaigns.
4. Short-term break-even assessments become more efficient through marginal costing since it allows companies to respond quickly to market shifts and cost variations.
5. A focus on variable costs enables better spending control and cost-saving detection during operations such as accommodation services and transport provisions and food service.

If you need further assistance, Please let me know

Warm Regards

Mr X.

Q2- Absorption (or full) costing

Subject: Understanding Absorption Costing and Its Relevance to Singh Box Manufacturing

Dear Sir,

I hope that this email find you in best health.

I would like to explain the accounting approach of absorption costing which many businesses use to gain valuable control and insights for manufacturing operations at Singh Box Manufacturing.

What is Absorption Costing?

The production of each manufactured box gets assigned costs stemming from direct production expenses (Direct labour, direct material, variable) along with expenses that are indirectly related to production (Lakmal, 2014).

When is Absorption Costing Useful?

1. It enables businesses to determine inventory valuation which satisfies general accounting standards
2. Companies can achieve higher profit numbers when production levels eclipse sales because fixed costs that stayed in inventory reduce current expense levels.
3. The set price strategy under this approach enables steady production businesses to maintain costs and avoids selling their products below market value (Sutherland & Canwell, 2004).
4. Businesses need to use absorption costing for external reporting and tax purposes.

Example:

The complete manufacturing cost of packaging units at Tetra Pak is determined through absorption costing practices. Moreover the distribution method allows manufacturing expenses to transfer fully into carton costs thus sustaining correct pricing and meeting financial statement needs.

The application of absorption costing at Singh Box Manufacturing results in comprehensive box cost understanding by including all expenses such as cardboard and ink costs and factory employee wages and equipment costs which enables better pricing decisions and resource and profitability assessments.

Warm Regards,

Mr X

Q3- Budgetary Control

Subject: The Role of Budgets in Business Planning and Their Limitations

Dear Sir,

I hope that this email find you in best health

Drone Lighting Events Ltd who operate as a creative and operationally demanding company needs to understand why budgets work as organizational planning tools.

Why Do Organisations Use Budgets?

1. The planning process through budgets lets companies establish monetary goals while directing money flow throughout departments which also covers event implementation and project expenses (Piercy & Thomas, 1984).
2. Organisations track their performance through budget analysis which helps businesses detect overspending incidents and find ways to enhance operational efficiency.
3. The financial framework used for budget planning helps organizations decide between implementing new client events and acquiring advanced drone technology and other strategic choices.
4. Organizations enhance their departments’ coordination when budgets unite their financial objectives with operational expectations which enables efficient project execution.
5. The forecast of cash flow is crucial for event-oriented businesses because budgets demonstrate when revenue peaks and dips so organizations can track their cash availability.

However, Budgets Also Have Limitations:

1. Budget constraints often create unbending financial restrictions that limit teams from adapting to new circumstances. Creative drone events benefit from budget flexibility because unexpected situations often pop up but strong adherence to financial planning can reduce innovative problem resolution.
2. Forecasting errors exist in budgets because unpredictable elements such as severe weather unpredictable client behavior and updated drone regulation laws can influence financial projections (Lidia, 2014).
3. Detailed budget preparation and updating needs extensive time commitment because dealing with sophisticated event plans coupled with recent client requirement changes.
4. Staff members tend to avoid taking risks that could exceed spending limits since it discourages innovation and limits creative expansion.

I would gladly support your efforts to set up or evaluate your budgeting approach.

Best Regards,

Q 4 Variance

Subject: Variance Analysis for June – Insights and Possible Causes

Dear Sir,

I hope that this email find you in best health

I will interpret the variances to understand their impact on performance and provide possible explanations for these variations.

1. Sales Variances

• Volume Variance – £73,800 Favourable

The actual numbers demonstrate 4,000 additional units sold than planned production quantities reached 58,000 units rather than 54,000 units. Tent orders likely increased due to emergency situations and effective marketing strategies as well as rising demand in the market.

• Price Variance – £87,000 Adverse

The actual product prices amounted to £46.50 which fell under the standard selling price of £48.00. The reduction could stem from discounting practices to obtain contracts as well as enhanced market competition and emergency-related market pressures.

2. Material Variances

• Price Variance – £47,560 Favourable

A favourable material cost reduction occurred when suppliers sold materials for £1.85 per meter instead of the expected price of £1.95. A lower supplier price combined with reduced costs per unit through discount benefits and beneficial currency rates likely explains this situation

• Usage Variance – £22,620 Adverse

The actual consumption reached 8.2 metres per unit instead of the established measurement of 8 metres. The additional fabric usage resulted in increased costs which could be due to material waste or substandard materials or deficits in cutting or production method efficiency (Chen et al., 2022).

3. Labour Variances

• Rate Variance – £8,700 Adverse

Actual hourly labor rate stood at £3.10 which exceeded the standard rate of £3.05 thus increasing the total hourly labor expenses. The office has possibly utilized overtime work and recruited more skilled personnel and readjusted their wage system.

• Efficiency Variance – £88,450 Favourable

The workforce completed each unit in 2.5 hours rather than the planned 3 hours thus bettering production speed. Extended productivity measures underline better training methods and better processes and wage incentives.

4. Variable Overhead Variances

• Rate Variance – £17,400 Favourable

The company applied overhead costs at a rate of £1.50 per hour whereas the standard set this cost at £1.60 which may demonstrate financial optimization efforts and resource management effectiveness.

• Efficiency Variance – £46,400 Favourable

During the period of decreasing labour hours per unit i. e (2.5 hour per unit to 3 hour per unit) the company experienced a decrease in labor-related overhead expenses. Another evidence of efficient operational management appears through these results (Hasan & Lu, 2022).

Warm Regards,

Mr X

Q5       Capital Investment Appraisal

Subject: Overview of Investment Appraisal Methods

Dear Sir,

I hope that this email find you in best health

The below details presents a concise description of the four investment appraisal approaches businesses use to determine project viability through capital investments.

1. Accounting Rate of Return (ARR)

ARR uses the initial investment values to determine profit percentage on a yearly basis. Good profitability interests the method rather than cash flow fluctuations (Czipf, 2025).

Advantages:

• Simple to understand and calculate
• Uses readily available accounting data
• Useful for comparison of returns target

Disadvantages:

• It fails to take into consideration when exactly cash flows happen.
• Accounting profit takes precedence over actual cash inflows for determining the investment evaluation method.
• It do not incorporate the concept of time value of money

2. Payback Period

The payback period method determines when recovering the original funding through incoming cash streams will be achieved (Rugthaicharoencheep et al., 2024).

Advantages:

• Easy to use and understand
• Focuses on liquidity and risk
• It provides beneficial information when businesses need to achieve quick return on investment.

Disadvantages:

• It does not analyse cash flow situations which occur after its payback duration.
• Doesn’t measure overall profitability
• It fails to evaluate monetary worth across time periods.

3. Net Present Value (NPV)

NPV determines the current worth of future cash flows from operations combined with the discount rate for investments through evaluating the initial funding amount (Su, 2024).

Advantages:

• It includes complete payment examination with money value appreciation calculations
• It uses a specific formula to determine added value accurately.
• It provides the ranking and comparison capability.

Disadvantages:

• More complex to calculate
• It requires selection of a discount rate that might generate subjective outcomes.
• The technique remains unclear for those who lack financial management understanding.

4. Internal Rate of Return (IRR)

In order to achieve zero NPV value IRR serves as the discount rate which evaluates investment output. The resulting figure demonstrates the estimated profit margin that an upcoming project is expected to achieve (Bae et al., 2024).

Advantages:

• It takes into account both time value of money principles in conjunction with complete examination of the project cash flows.
• Individuals find percentage return data straightforward to measure against their desired target rates
• Useful for comparing different-sized projects

Disadvantages:

• Projects using non-conventional cash flows may generate multiple or manipulated results.
• It does not display the total value gain much like NPV calculations.
• Requires complex calculations or software

Warm Regards,

References

• Bae, G., Yoon, A. and Kim, S. (2024) ‘Incentive determination for demand response considering internal rate of return’, Energies, 17(22), p. 5660. doi:10.3390/en17225660.
• Chen, W.-H. et al. (2022) ‘A comprehensive review of thermoelectric generation optimization by statistical approach: Taguchi Method, analysis of variance (ANOVA), and response surface methodology (RSM)’, Renewable and Sustainable Energy Reviews, 169, p. 112917. doi:10.1016/j.rser.2022.112917.
• Czipf, C. (2025) ‘The impact of changing energy prices, interest rates, and investment costs on the net present value and internal rate of return for alternative energy projects’, Discover Sustainability, 6(1). doi:10.1007/s43621-025-00921-7.
• Hasan, M. and Lu, M. (2022) ‘Variance analysis on regression models for estimating labor costs of prefabricated components’, Journal of Computing in Civil Engineering, 36(5). doi:10.1061/(asce)cp.1943-5487.0001037.
• Lakmal, D. (2014) ‘Cost analysis for decision making and control: Marginal costing versus absorption costing’, SSRN Electronic Journal [Preprint]. doi:10.2139/ssrn.2417024.
• Lidia, T.G. (2014) ‘Difficulties of the budgeting process and factors leading to the decision to implement this management tool’, Procedia Economics and Finance, 15, pp. 466–473. doi:10.1016/s2212-5671(14)00484-5.
• Piercy, N. and Thomas, M. (1984) ‘Corporate planning: Budgeting and integration’, Journal of General Management, 10(2), pp. 51–66. doi:10.1177/030630708401000204.
• Rugthaicharoencheep, N., Ruangsap, N. and Nedphokaew, S. (2024) ‘Shortening the payback period of greenhouse gas reduction benefits from photovoltaic rooftop systems’, Energies, 17(23), p. 6159. doi:10.3390/en17236159.
• Su, C. (2024) ‘Literature review on The net present value method of project investment decision’, Advances in Economics, Management and Political Sciences, 60(1), pp. 60–66. doi:10.54254/2754-1169/60/20231156.
• Sutherland, J. and Canwell, D. (2004) ‘AA’, Key Concepts in Business Practice, pp. 1–23. doi:10.1007/978-0-230-21179-7_1.
• Tombazos, C. and Yang, X. (2006) ‘Inframarginal contributions to development economics’, Increasing Returns and Inframarginal Economics [Preprint]. doi:10.1142/6026.
• Wald, N. and Watt, H. (1996) ‘When marginal costs and benefits should be used in screening’, BMJ, 312(7037), pp. 1041–1042. doi:10.1136/bmj.312.7037.1041b.