Marginal Costing
Marginal and absorption costing
Topic list 1 Marginal cost and marginal costing 2 The principles of marginal costing 3 Marginal costing and absorption costing and the calculation of profit 4 Reconciling profits 5 Marginal costing versus absorption costing
Syllabus reference D4 (a) D4 (a) D4 (b), (c) D4 (d) D4 (e)
Introduction
This chapter defines marginal costing and compares it with absorption costing. Whereas absorption costing recognises fixed costs (usually fixed production costs) as part of the cost of a unit of output and hence as product costs, marginal costing treats all fixed costs as period costs. Two such different costing methods obviously each have their supporters and so we will be looking at the arguments both in favour of and against each method. Each costing method, because of the different inventory valuation used, produces a different profit figure and we will be looking at this particular point in detail.
225
PART D
COST ACCOUNTING TECHNIQUES
Study guide
Intellectual level D4 (a) (b) (c) (d) (e) Marginal and absorption costing Explain the importance and apply the concept of contribution Demonstrate and discuss the effect of absorption and marginal costing on inventory valuation and profit determination Calculate profit or loss under absorption and marginal costing Reconcile the profits or losses calculated under absorption and marginal costing Describe the advantages and disadvantages of absorption and marginal costing 1 2 2 2 1
Exam guide
Look out for questions in your examination which require you to calculate profit or losses using absorption and marginal costing.
1 Marginal cost and marginal costing
1.1 Introduction
FAST FORWARD
Marginal cost is the variable cost of one unit of product or service. Marginal costing is an alternative method of costing to absorption costing. In marginal costing, only variable costs are charged as a cost of sale and a contribution is calculated (sales revenue minus variable
Topic list 1 Marginal cost and marginal costing 2 The principles of marginal costing 3 Marginal costing and absorption costing and the calculation of profit 4 Reconciling profits 5 Marginal costing versus absorption costing
Syllabus reference D4 (a) D4 (a) D4 (b), (c) D4 (d) D4 (e)
Introduction
This chapter defines marginal costing and compares it with absorption costing. Whereas absorption costing recognises fixed costs (usually fixed production costs) as part of the cost of a unit of output and hence as product costs, marginal costing treats all fixed costs as period costs. Two such different costing methods obviously each have their supporters and so we will be looking at the arguments both in favour of and against each method. Each costing method, because of the different inventory valuation used, produces a different profit figure and we will be looking at this particular point in detail.
225
PART D
COST ACCOUNTING TECHNIQUES
Study guide
Intellectual level D4 (a) (b) (c) (d) (e) Marginal and absorption costing Explain the importance and apply the concept of contribution Demonstrate and discuss the effect of absorption and marginal costing on inventory valuation and profit determination Calculate profit or loss under absorption and marginal costing Reconcile the profits or losses calculated under absorption and marginal costing Describe the advantages and disadvantages of absorption and marginal costing 1 2 2 2 1
Exam guide
Look out for questions in your examination which require you to calculate profit or losses using absorption and marginal costing.
1 Marginal cost and marginal costing
1.1 Introduction
FAST FORWARD
Marginal cost is the variable cost of one unit of product or service. Marginal costing is an alternative method of costing to absorption costing. In marginal costing, only variable costs are charged as a cost of sale and a contribution is calculated (sales revenue minus variable