MARGINAL & ABSORPTION

COSTING

Learning Objectives :

1.Understand the marginal costing and absorption costing

2. Illustrate Income Statement using marginal and absorption costing

What is Marginal Costing ?• One of the accounting system used to determine the

product cost

• Also known as direct costing or variable costing because it only considers variable costs or direct costs in the computation of cost of a product

• It will show how a changes in output will effect the cost & profit

Absorption Costing• All cost ( variable & fixed cost ) is considered

in determining unit cost.

Production Cost Production Cost

Marginal Costing

Direct Labour

Direct Expenses

Variable Manufacturing OH

Fixed manufacturing OH

Raw Materials

Sales & Administration Expenses

Absorption Costing

Income Statement Presentation- Marginal Costing-

Name of company ……Income Statement for year ended …….

RM RM

Sales XXX

Minus : COGS :

Opening stock XX

Production Cost XX

- Closing Stock (XX) ( XX )

Minus : Variable Selling & Distribution OH XX

Variable administration OH XX

( XXX )

Contribution Margin XXXX

Minus : Fixed Cost

Manufacturing OH XX

Selling & Distribution XX XXX

Profit/Loss XXX

Income Statement Presentation- Absorption Costing-

Name of company ……Income Statement for year ended …….

RM RM

Sales XXX

Minus : COGS :

Opening stock XX

Production Cost XX

- Closing Stock (XX) ( XX )

Gross Profit XXXX

Minus :

Administration (fixed & variable) XX

Selling & Distribution (fixed & variable) XX XXX

Profit/Loss XXX

Example 1 :• Operational data for MTH Co :

Opening stock -Production 25,000 unitSales 20,000 unitClosing stock5,000 unitManufacturing cost:Raw material RM1.20/unitLabour RM2.00/unit Variable OH RM0.60/unitSelling & Admin : variable RM4,000

fixed RM7,500 Selling price RM6.00/unit

• Fixed manufacturing OH was absorbed based on these budgeted data :Budgeted fixed OH RM20,000Budgeted volume 25,000 unit

Prepare Income Statement by using the following costing methods:i. Marginal Costingii. Absorption Costing

Solution : ( marginal …)MTH Co.

Income Statement for year ended …..Sales (20,000 x RM0.60) 120,000

Minus : Cost of sales

Opening stock -

Production cost ( 25,000 x RM3.80) 95,000

- Closing stock (5,000 x RM3.80) 19,000 76,000

44,000

- Selling & Admin (variable) 4,000

Contribution margin 40,000

Minus : Fixed Cost

Manufacturing OH 20,000

Selling & Admin 7,500 27,500

Net profit 12,500

How did u derived this figure ?

Solution : (absorption …)MTH Co.

Income Statement for year ended …..Sales (20,000 x RM6.00) 120,000

Minus : Cost of sales

Opening stock -

Production cost ( 25,000 x RM4.60) 115,000

- Closing stock (5,000 x RM4.60) (23,000) 92,000

Gross profit 28,000

Minus :

Selling & Admin (variable) 4,000

Selling & Admin (fixed ) 7,500 11,500

Net profit 16,500

How did u derived this figure ?

Have a break• Peter Piper Pipkin picked a packed of

peppercorns• If Peter Piper Pipkin picked a packed of

peppercorns• Where’s the packed of peppercorns that Peter

Piper Pipkin picked ?

Example 2 :• Operational data for MKG Co :

Opening stock -Production 36,000 unitSales 30,000 unitClosing stock6,000 unitActual Cost:Raw material RM1.80/unitLabour RM1.50/unit Variable manufacturing OHRM1.00/unit

Fixed manufacturing OH RM12,000Selling & Admin : variable RM8,200

fixed RM3,600 Selling price RM6.00/unit

• Fixed manufacturing OH was absorbed based on these budgeted data :Budgeted fixed OH RM14,000Budgeted volume 35,000 unit

Prepare Income Statement by using the following costing methods:i. Marginal Costingii. Absorption Costing

Solution:• Unit cost :

AC MCRaw material 1.80 1.80Labour 1.50 1.50VOH 1.00 1.00FOH 0.40 -___

4.70 4.30

Solution : (absorption …)MTH Co.

Income Statement for year ended …..

Sales(30000 x RM6) 180,000Minus : Cost of sales

Opening stock -Production cost (36,000 x RM4.70) 169,200- Closing stock (6000 x RM4.70) (28,200)

141,000Gross profit 41,400

• Minus : Selling & distribution – variable 8,200

- fixed 3,600 11,800Unadjusted net profit 27 200

+ Over absorbed OH 2 400Net profit 29,600