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 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 SalesXXX Minus : COGS : Opening stockXX Production CostXX - Closing Stock(XX) Minus : Variable Selling & Distribution OHXX Variable administration OHXX ( XXX ) Contribution MarginXXXX Minus : Fixed Cost Manufacturing OHXX Selling & DistributionXXXXX Profit/LossXXX Income Statement Presentation - Absorption Costing- Name of company Income Statement for year ended . RM SalesXXX Minus : COGS : Opening stockXX Production CostXX - Closing Stock(XX) Gross ProfitXXXX Minus : Administration (fixed & variable)XX Selling & Distribution (fixed & variable)XXXXX Profit/LossXXX Example 1 : Operational data for MTH Co : Opening stock- Production25,000 unit Sales20,000 unit Closing stock5,000 unit Manufacturing cost: Raw materialRM1.20/unit LabourRM2.00/unit Variable OHRM0.60/unit Selling & Admin: variableRM4,000 fixedRM7,500 Selling priceRM6.00/unit Fixed manufacturing OH was absorbed based on these budgeted data : Budgeted fixed OHRM20,000 Budgeted volume25,000 unit Prepare Income Statement by using the following costing methods: i. Marginal Costing ii. 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)19,00076,000 44,000 - Selling & Admin (variable)4,000 Contribution margin40,000 Minus : Fixed Cost Manufacturing OH20,000 Selling & Admin7,50027,500 Net profit12,500 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 profit28,000 Minus : Selling & Admin (variable)4,000 Selling & Admin (fixed )7,50011,500 Net profit16,500 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 Wheres the packed of peppercorns that Peter Piper Pipkin picked ? Example 2 : Operational data for MKG Co : Opening stock- Production36,000 unit Sales30,000 unit Closing stock6,000 unit Actual Cost: Raw materialRM1.80/unit LabourRM1.50/unit Variable manufacturing OHRM1.00/unit Fixed manufacturing OHRM12,000 Selling & Admin: variableRM8,200 fixedRM3,600 Selling priceRM6.00/unit Fixed manufacturing OH was absorbed based on these budgeted data : Budgeted fixed OHRM14,000 Budgeted volume35,000 unit Prepare Income Statement by using the following costing methods: i. Marginal Costing ii. Absorption Costing Solution: Unit cost : ACMC Raw material Labour VOH FOH0.40-___ Solution : (absorption ) MTH Co. Income Statement for year ended .. Sales(30000 x RM6)180,000 Minus : Cost of sales Opening stock- Production cost (36,000 x RM4.70) 169,200 - Closing stock (6000 x RM4.70)(28,200) 141,000 Gross profit 41,400 Minus : Selling & distribution variable8,200 - fixed3,600 11,800 Unadjusted net profit Over absorbed OH2 400 Net profit29,600