Cost & Management Accounting Absorption & Marginal Costing Lecture-28 Mian Ahmad Farhan (ACA)

Example Absorption Costing Marginal Costing Produced units = Units sold Same Profit Produced units > Units sold More Profit Less Profit Produced units < Units sold

Reconciliation B- 80 units sold & 20 units in stock Absorption Profit 4,800 Less Closing Stock @ Fixed FOH Rate 20 x 20 (400) Marginal Costing Profit 4,400

Reconciliation No. of units sold 110 Absorption Profit 6,600 Adds Closing Stock @ Fixed FOH Rate 10 x 20 200 Marginal Costing Profit 6,800

Example Selling price Rs. 20 per unit Units produced 30,000 Units sold 20,000 Opening stock 0 Variable cost Direct material Rs. 5 per unit Direct labor Rs. 3 per unit F.O.H Rs. 1 per unit Selling & administrative expenses Rs. 2 per unit Fixed cost F.O.H Rs 1,20,000 Selling & administrative expenses 15,000

Per Unit Cost Absorption Costing Marginal Costing Fixed FOH Rate = 1,20,000 / 30,000 = 4 Variable FOH Rate Direct Material 5 Direct Labor 3 FOH 1 9 13 Variable FOH Rate Direct Material 5 Direct Labor 3 FOH 1 9

Format Absorption Costing *** (***) Sales Less Cost of goods sold Opening stock Add Production cost Less Closing stock Gross Profit Less Operating expenses Administrative expenses Selling expenses Net profit

Format Marginal Costing Sales Less Variable cost of goods sold Opening stock Add Variable production cost Less Closing stock Gross contribution margin Less Variable operating expenses Contribution margin Less Fixed expenses Production Operating Net Profit *** (***)

Solution (Absorption Costing) Sales (20,000 x 20) 4, 00,000 Less Cost of goods sold Opening stock 0 Add Production cost (13 x 30,000) 3,90,000 Less Closing stock (13 x 10,000) 1,30,000 2,60,000 Gross Profit 1,40,000 Less Operating expenses Selling & Administrative expenses Variable expenses (20,000 x 2) = 40,000 Fixed expenses 15,000 55,000 Net profit 85,000

Solution (Marginal Costing) Sales 4, 00,000 Less Variable cost of goods sold Opening stock 0 Add Variable production cost (9 x 30,000) 2,70,000 Less Closing stock (9 x 10,000) 90,000 1,80,000 Gross contribution margin 2,20,000 Less Variable Selling & Admin Expenses (2 x 20,000) 40,000 Contribution margin 1,80,000 Less Fixed expenses Production 1,20,000 Selling & Admin Expenses 15,000 1,35,000 Net Profit 45,000

Reconciliation Profit as absorption costing 85,000 Less Closing stock (10,000 x 4) 40,000 Marginal costing 45,000

Reconciliation Profit as absorption costing *** Add opening stock @ fixed FOH cost per unit *** Less Closing stock @ fixed FOH cost per unit (***) ***

Absorption Costing & Marginal Costing 100 units Marginal Costing Direct Material Rs. 80 per unit 8,000 5,000 3,000 2,000 Direct Labor Rs. 50 per unit Factory Overhead Variable FOH Fixed FOH Product Cost Fixed Cost (Period Expenses) ----- 5,000 16,000 18,000 (2,000) 18,000

Cost Per Unit Absorption Costing = 18,000 / 100 = Rs. 180 Marginal Costing = 16,000 / 100 = Rs. 160