Website development company in

Ghaziabad

By:
http://www.cssfounder.com/

Absorption and marginal costing

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Introduction

Before we allocate all manufacturing costs

to products regardless of whether they are
fixed or variable. This approach is known
as absorption costing/full costing
However, only variable costs are relevant
to decision-making. This is known as
marginal costing/variable costing

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Definition

Absorption costing
Marginal costing

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Absorption costing

It is costing system which treats all

manufacturing costs including both the
fixed and variable costs as product costs

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Marginal costing

It is a costing system which treats only the

variable manufacturing costs as product
costs. The fixed manufacturing overheads
are regarded as period cost

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Absorption Costing

Cost

Manufacturing cost
Direct
Materials

Direct
Labour

Non-manufacturing cost

Overheads

Finished goods

Cost of goods sold

Marginal Costing

Direct
Labour

Profit and loss account

Cost

Manufacturing cost
Direct
Materials

Period cost

Variable
Overheads

Non-manufacturing cost
Fixed
overhead

Finished goods
Cost of goods sold
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Period cost
Profit and loss account
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Presentation of costs on income

statement

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Trading and profit ans loss account

Absorption costing
Sales
Less: Cost of goods sold
Gross profit
Less: Expenses
Selling expenses X
Admin. expenses X
Other expenses X

Marginal costing
$
X
X
X

Variable and fixed manufacturing

Net Profit
X
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Sales
Less: Variable cost of
Goods sold
Product contribution margin

$
X
X
X

Less: variable non- manufacturing

expenses
Variable selling expenses
Variable admin. expenses
Other variable expenses
Total contribution expenses

X
X
X
X

Less: Expenses
Fixed selling expenses
Fixed admin. expenses
Other fixed expenses
Net Profit

X
X
X
X

A company started its business in 2005. The following information

Was available for January to March 2005 for the company that produced
A single product:
$
Selling price pre unit
100
Direct materials per unit
20
Direct Labour per unit
10
Fixed factory overhead per month
30000
Variable factory overhead per unit
5
Fixed selling overheads
1000
Variable selling overheads per unit
4
Budgeted activity was expected to be 1000 units each month
Production and sales for each month were as follows:
Jan
Feb
March
Unit sold
1000
800
1100
Unit produced
1000
1300
900

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Required:

Prepare absorption and marginal costing

statements for the three months

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Absorption costing

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January
$
Sales
100000
Less: cost of good sold ($65) 65000
Adjustment for Over-/(under)
Absorption of factory overhead
Gross profit
35000
Less: Expenses
Fixed selling overheads 1000
Variable selling overheads 4000
Net profit
30000

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February
$
80000
52000
28000

March
$
110000
71500
38500

9000
37000

(3000)
35500

1000
3200
32800

1000
4400
30100

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