Prepared by: Jessy Chong

Differences:
Marginal Costing Absorption Costing
Cost Classification Cost Classification
Based on cost behaviour Based on cost function
Variable Costs (VPC, VNPC) Production Costs (VPC + FPC
Fixed Costs (FPC, FNPC) absorbed)
Stock Valuation Non-Production Costs (VNPC,
Prime Costs + VPOH FNPC)
Profit Reporting Stock Valuation
Profit affected if sales volume Prime Costs + VPOH + FPOH
change absorbed
Profit Reporting
Profit affected by production
volume
Marginal Costing
Advantages
No allocation & apportionment.
(No need to choose the basis of
apportionment)
No over/under absorbed. Write
off FC in the income statement.
Product cost = VPC, more realistic.
No distortion
Profits varies depend to the sales
volumes, not production volume.
Helpful in short term decision esp
limiting factor. Identify the
relevant costs.
Disadvantages
Not conform of IAS 2 Stock
valuation. Matching concept
Difficult to split the VC & FC
Not recover full cost in the
production. May set wrong SP
Only can use for S/T decision.
For L/T still have to consider
full costing principle.
Absorption Costing
Advantages
Comply with IAS2 Stock
valuation. Cover all relevant
production cost.
Set competitive and realistic SP
Over/Under absorption can
identify inefficient utilisation of
production resources
Emphasis all costs to be
recover in the L/T DM.
Cost charge fairly to the
product
Disadvantages
Confusion in basis of
apportionment. Argument of
the basis used.
Have to adjust the over/under
absorbed at the year end.
Cannot absorbed correctly.
Profits are affected by the
production volumes. Can be
distorted.
Idle Time
Is not in the expectation.
No budget plan for it
If happen, then cost increased
Profit is reduced
Example: Machine break-down,
raw materials run out, power
failure
Idle Facilities
Surplus capacity
Is expected and within the
budget or plan
No effect on cost and profit
Example: spare capacity of
machinery or building
Pg 30
Q1
Define what is direct & indirect
wages.
Determine the function of
rework dept whether it is a
production cost centre or
service cost centre.
Conclusion of this case
Q2
Identify the options to utilise
the Idle Facilities.
Example: Sell, rent, increase
the sales volume..etc
How it can helps to improve
the profitability.
Pg 31
(a) Advantages & Disadvantages of (b) Factors to consider when you
AC choose the basis of
Ps: 7 marks in totals, therefore give 7 apportionment.
points - The services in between the
service cost centres.
- The nature of the service cost
centres.
- The nature of the service OH
costs.
- The data collected & recorded
reputable & reliable. Can produce
realistic apportionment.
- The cost, benefit and time
involved worthiness