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Marginal
Costing
Definition
Absorption costing
Marginal costing
Absorption costing
It is costing system which treats all
manufacturing costs including both the
fixed and variable costs as product
costs.
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.
Presentation of
costs on income
statement
Marginal costing
Sales
X Sales
X
Less: Cost of goods sold
X Less: Variable cost of
Goods sold
X
Gross profit
X Product contribution margin X
Less: Expenses
Selling expenses X
Admin. expenses X
Other expenses X
Net Profit
Less: Expenses
Fixed selling expenses X
Fixed admin. expenses X
Other fixed expenses
X
X Net Profit
X
Difference between
absorption and marginal
costing
Absorption costing
Treatment for Fixed
fixed
manufacturing
manufacturing overheads are
overheads
treated as product
costing. It is
believed that
products cannot be
produced without
the resources
provided by fixed
manufacturing
overheads
Marginal costing
Fixed manufacturing
overhead are treated
as period costs. It is
believed that only the
variable costs are
relevant to decisionmaking.
Fixed manufacturing
overheads will be
incurred regardless
there is production or
not
8
Value of
closing stock
Absorption costing
High value of
closing stock will be
obtained as some
factory overheads
are included as
product costs and
carried forward as
closing stock
Marginal costing
Lower value of
closing stock that
includes the variable
cost only
Absorption costing
Marginal costing
Reported If the production = Sales, AC profit = MC Profit
profit
If Production > Sales, AC profit > MC profit
As some factory overhead will be deferred as
product costs under the absorption costing
If Production < Sales, AC profit < MC profit
As the previously deferred factory overhead
will be released and charged as cost of goods
sold
10
Arguments for
marginal
costing
11
12
Types of Costs
Variable
Fixed
Semi Variable
Minutes Talked
Per Minute
Telephone Charge
Minutes Talked
24
18
12
6
0 1 2 3 4 5
Volume
(Thousands of passengers)
Monthly Basic
Telephone Bill
Your monthly
basic
telephone bill
probably
does not change
when
you make more
local calls.
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Variable
Utility Charge
Fixed Monthly
Utility Charge
Activity
Assumptions of CVP
Analysis
Expenses can be classified as either
variable or fixed.
CVP relationships are linear over a wide
range of production and sales.
Sales prices, unit variable cost, and total
fixed expenses will not vary within the
relevant range.
Assumptions of CVP
Analysis
Volume is the only cost driver.
Inventory levels will be unchanged.
The sales mix remains unchanged
during the period.
Contribution Margin
Income Statement
Sales
- Variable Costs
Contribution Margin
- Fixed Costs
Operating Income