Marginal Costing and Absorption Costing: An Analysis of Product and Period Costs, Study notes of Business

Download Marginal Costing and Absorption Costing: An Analysis of Product and Period Costs and more Study notes Business in PDF only on Docsity!

Professional^ Development

Programme on

Enriching

Knowledge^ of^ the

Business,^ Accounting

and^ Financial^ Studies

(BAFS)^ Curriculum

<Elective^ Part>

Course Title: Marginal and Absorption Costing 1

Learning

Outcomes

Upon^ completion

of^ this^ course,

teacher participants

should^ be^

able^ to:

• compare^ and contrast between

marginal costing^ and

absorption

costing;

• calculate^ and

present net

profit^ under

marginal

costing^ and

absorption

costing;^ and

• explain^ and evaluate the

uses^ of^ marginal costing^ and

absorption

costing. 2

Contents

-^ Segregation

of^ cost^ into^ variable

and^ fixed^ elements (Illustration^ 1) • Marginal^ costing

vs.^ absorption

costing^ (Illustrations

2 ‐5)

-^ Normal^ absorption

costing^ (Illustration

-^ Overhead^ absorption

rate^ (Illustration

-^ Calculation

and^ treatment

of^ overhead^ over‐ absorbed/under

‐absorbed^ (Illustration

-^ Advantages

and^ disadvantages

of^ marginal^ costing

and

absorption^ costing • Case^ study^ – integrated

illustrative^ question 4

Prior^ Knowledge

Required

5

Illustration^1 Segregation^

of^ Cost^ into^ Variable^ and

Fixed^ Elements

The^ manufacturing

cost^ varies

with^ production volumes^ as

follows: Production 7 Volume^

Total^ Manufacturing

Cost

1,000^ units^

$400, 1,800^ units^

$600,

Illustration^1 Segregation^

of^ Cost^ into^ Variable^ and

Fixed^ Elements

Total^ fixed^ cost

=^ $400,

‐^ $250^ x^ 1,

=^ $150, or $600,000^ ‐^ $

x^ 1,800^ =^ $150, 8

Direct^ MaterialsDirect^ MaterialsDirect^ LabourDirect^ LabourDirect^ ExpensesDirect^ ExpensesVariable^ Manufacturing

Overheads Variable^ Manufacturing

Overheads

Fixed^ Manufacturing

Overheads Fixed^ Manufacturing

Overheads Total^ CostTotal^ Cost Product^ Cost^ Product^ Cost

Period^ CostPeriod^ Cost Variable Non‐Manufacturing^ OverheadsVariable Non‐Manufacturing^ OverheadsFixed Non‐Manufacturing^ OverheadsFixed Non‐Manufacturing^ Overheads

10

Absorption

Costing

(also^ known

as^ “Full

Costing”)

11

Illustration^2 Marginal^ Costing

vs.^ Absorption

Costing

A^ manufacturing

company^ produces

a^ single^ product.

During^ the

year^ ended^31 December

2009,^ 10,000^ units

were^ produced

and

sold.^ There^ was^

no^ opening^ inventory.

The^ costs^ of^ manufacturing during^ the^ year^

were^ shown^ as^ follows: All^ the^ 10,000^ units

were^ sold^ at^ $

each.

Costs^

Direct^ Materials

Direct^ Labour^

Variable^ Manufacturing

Overheads^

Fixed^ Manufacturing

Overheads^

Variable^ Selling^

Overheads^

Fixed^ Selling^ and

Administrative^

Overheads^ 250,

13

Illustration^2

- Marginal^ Costing

Product^ Cost^ under

Marginal^ Costing

Direct^ Materials

Direct^ Labour^

Variable^ Manufacturing

Overheads^

Total^ Product^ Costs

14

Illustration^2

- Marginal^ Costing

Operating^ Statement

under^ Marginal

Costing

for^ the^ year^ ended

31 December^

Sales^ (10,000^ units

at^ $200^ each)^

Less:^ Variable^ Cost

of^ Sales^

Product^ Contribution

Margin^

Less:^ Variable^ Selling

Overheads^

Total^ Contribution

Margin^

Less: Fixed^ Manufacturing

Overheads^

Fixed^ Selling^ and

Administrative^

Overheads^

Net^ Profit^

16

Illustration^2

- Absorption

Costing

Product^ Cost^ under

Absorption^ Costing

Direct^ Materials

Direct^ Labour^

Variable^ Manufacturing

Overheads^

Fixed^ Manufacturing

Overheads^

Total^ Product^ Costs

17

Illustration^2

- Absorption

Costing

Operating^ Statement

under^ Absorption

Costingfor^ the^ year^ ended

31 December^

Sales^ (10,000^ units

at^ $200^ each)^

Less:^ Cost^ of^ Sales

Gross^ Profit^

Less: Variable^ Selling

Overheads^

Fixed^ Selling^ and

Administrative^

Overheads^

Net^ Profit^

19

Illustration^2 Marginal^ Costing

and^ Absorption

Costing:^ Implications Hence,^ profits

under^ marginal

costing^ and absorption

costing^ will

be^ the^ same

when

• there^ is^ no

opening^ inventory

and

• there^ is^ no

closing^ inventory. 20