Marginal and Absorption costing

Poll

What is your knowledge of marginal and absorption costing

• Good

• No knowledge

• Very good

• Some knowledge

​Marginal costing is a method where the variable costs are considered as the product cost, and the fixed costs are considered as the costs of the period.

​

Absorption costing, on the other hand, is a method that considers both fixed costs and variable costs as product costs This costing method is essential, particularly for reporting purposes. Reporting purpose includes both financial reporting and tax reporting.

​Proforma for Marginal costing statement

​

​

​Revenue                                                                                                                                     £

Opening inventory            £

Materials                            £

Labour                                £        

Closing inventory             (£)                      

Cost of sales                                                                    (£)

Contribution              £                             Fixed costs                                                                       (£)

Net profit                                                                             £

​​Proforma for Absorpbtion costing statement

​

Revenue                                                            £

Opening inventory     £

Materials                     £

Labour                      £ 

Fixed production costs  £      

Closing inventory      (£)                      

Cost of sales                                  (£)

Gross Profit                              £

Non Production costs                                     (£)

Net profit                                                         £

​

Valuing opening and closing inventory for marginal costing

​

​1. Calculate difference between units produced and units sold to find number of units left in inventory

​

2 Total up the variable costs

​

​3. Divide total variable costs by number of units produced to find variable cost per unit

​

​4. Multiply the variable cost per unit by the number of units left in inventory

​Units produced 10,000

​Units sold 8,000

​Materials £120,000

​Labour£ 80,000

​Fixed costs £50,000

​

​Using the information above, we can see that 2,000 units will remain in stock.

​the value of these units will be;

200,000 (£120,000+ £80,000) / 10,000 ( units produced) x 2,000 (units remaining)

​

​Value of closing inventory = £40,000

​Valuing opening and closing inventory for absorption costing

​

​1. Calculate difference between units produced and units sold to find number of units left in inventory

​

2 Total up the variable costs PLUS FIXED PRODUCTION COSTS (non production costs are not included)

​

​3. Divide total variable and fixed costs by number of units produced to find total cost per unit

​

​4. Multiply the cost per unit by the number of units left in inventory

​​Units produced 10,000

​Units sold 8,000

​Materials £120,000

​Labour£ 80,000

​Fixed production costs £50,000

​

​Using the information above, we can see that 2,000 units will remain in stock.

​the value of these units will be;

250,000 (£120,000+ £80,000+ £50,000) / 10,000 ( units produced) x 2,000 (units remaining)

​

​Value of closing inventory = £50,00

​SO you can see that the value of the closing inventory under marginal costing is less than under absorption costing because the £50,000 fixed costs have been added to the unit cost

​(£50,000/10,000 units x 2,000 units = £10,000)

Multiple Choice

Based on the following information, calculate the value of the closing inventory under MARGINAL costing

Production 50,000

Sales 45,000

Materials £65,000

Labour £30,000

• £95,000

• £1.90

• £85,500

• £9,500

Multiple Choice

Based on the following information, calculate the value of the closing inventory under Absorption costing

Production 50,000

Sales 45,000

Materials £65,000

Labour £30,000

Fixed costs £22,000

• £9,500

• £11,700

• £2.34

• £27,000

Multiple Choice

Based on the following information, calculate the value of the closing inventory under MARGINAL costing

Production 30,000

Sales 22,000

Materials £35,000

Labour £30,000

Fixed costs £80,000

• £8,000

• £38,667

• £17,333

• £23,637

Multiple Choice

Based on the following information, calculate the value of the closing inventory under absorption costing

Production 30,000

Sales 22,000

Materials £35,000

Labour £30,000

Fixed costs £80,00

• £38,667

• £17,333

• £22,000

• £23,637

​Under marginal costing any variable production overheads will also be added to the prime cost. Fixed overheads will be subtracted from the contribution ( production AND non production)

​

​

​Under absorption costing, production overheads will be added to the prime cost and non production overheads will be subtracted from the gross profit

​

​PRIME COST IS TOTAL OF ALL VARIABLE COSTS

​CONTRIBUTION IS SELLING PRICE LESS VARIABLE COSTS

​Proforma for Marginal costing statement

​

Revenue                                                            £

Opening inventory    £

Materials                     £

Labour                       £    

Variable production costs     £ 

Closing inventory     (£)                      

Cost of sales                                (£)

Contribution                               £

Fixed production costs                                    (£)

​Fixed non production costs (£)

​

Net profit                                                         £

​​Proforma for Absorption costing statement

​

Revenue                                                            £

Opening inventory     £

Materials                     £

Labour                      £ 

​Variable production costs £

Fixed production costs  £      

Closing inventory      (£)                      

Cost of sales                                  (£)

Gross Profit                              £

Non Production costs                                      (£)

Net profit                                                         £

Open Ended

Using the following data, what is the profit under marginal costing?

Units produced 20,000, units sold 18,000, Selling price per unit £30, Direct material per unit £12 Direct labour per unit £8 Total fixed production overheads for the year £15,000  Total non production overheads for the year £80,000.

Open Ended

Using the following data, what is the profit under absorption costing?

Units produced 20,000, units sold 18,000, Selling price per unit £30, Direct material per unit £12 Direct labour per unit £8 Total fixed production overheads for the year £15,000  Total non production overheads for the year £80,000.

Poll

I know how to calculate the value of opening and closing inventory for marginal and absorption costing

• Yes

• No

• Not sure

Poll

I know how to prepare marginal and absorption costing statements

• Yes

• No

• Not sure