Marginal and Absorption Cost

ACOF 014 Introduction to Costing Semester 2 2008/ 2009 TOPIC 7: ABSORPTION
AND

MARGINAL COSTING

Outline: 1. Learning Objectives 2. Differences between absorption and variable costing 3. Impact on profit under each costing technique 1. Learning objectives a. Explaining the differences between absorption costing and marginal costing b. Explaining the impact on stock valuation & profit under each costing system c. Explaining the impact on under each costing system d. Preparing multi-period absorption and marginal costing profit statements 2. Explaining the differences between absorption costing and Marginal costing 298) Flow of Costs under Full Absorption & Marginal Costing PERIOD COST Selling and administrative expenses FULL ABSORPTION COSTING PRODUCT COSTS Fixed manufacturin g overhead Variable manufacturing overhead Direct materials and direct labour

Work in process inventory

Expenses for the period

Cost of goods sold

Closing inventories

PERIOD COST Selling and administrative

MARGINAL COSTING PRODUCT COSTS Fixed manufacturin Variable manufacturing Direct materials and
1

expenses

g overhead

overhead

direct labour

Work in process inventory

Expenses for the period

Cost of goods sold

Closing inventories

Absorption Costing = full costing - DM + DL + Marginal + fixed manufacturing OH  product cost - Non-manufacturing cost  period cost Marginal Costing (Variable/ Direct Costing) DM + DL + Marginal manufacturing OH  product cost Fixed manufacturing OH + non-manufacturing cost  period cost Which method should be used? External reporting  use absorption Costing Match costs against revenues. ** absorption costing  may have under/over recovery of fixed overheads  charged to I/S as period costs (refer Topic #4 on OH) Internal reporting  debatable  both useful in different ways The Concept of Contribution Margin MARGINAL COST = VARIABLE COST = DIRECT LABOUR + DIRECT MATERIAL + DIRECT EXPENSE + VARIABLE OVERHEADS