Absorption & Marginal Costing AAT Level 3 Absorption & Marginal Costing

Objectives Calculate the absorption cost of producing a unit Calculate the profit made using absorption costing techniques Explain the differences between absorption and marginal costing Prepare financial statements using absorption and marginal costing principles Reconcile differences between profits made using both methods Explain why there are differences between profits calculated using absorption and marginal costing methods

Absorption £ Direct Materials X + Direct Labour X +Direct Expenses X + Production OH * X Absorption Cost X Marginal £ Direct Materials X + Direct Labour X +Direct Expenses X + Production OH X Marginal Cost X * Remember that Overheads are absorbed throughout the period using the OAR Marginal Cost IS Variable Cost

Absorption Costing Activity 1 Swifts Ltd Swifts Ltd produce 50 sets each week and its costs are: Direct materials £30000 Direct labour £20000 Production overheads £5000 The selling price of each set is £1750.00 Total Cost = 55000 Units of Output 50 = 1100.00 per unit Total costs per week: £ Total cost Direct Materials 30000 Direct Labour 20000 Production Overheads 5000 55000

Profit for the week Selling Price (1750 x 50) £87500 Costs (1100 x 50) £55000 Profit £32500

Activity 2a

Activity 2a & b – Voles Vending - Answer   £ Sales revenue Direct materials Direct labour Fixed production overheads Total Cost Profit

Activity 2a & b – Voles Vending - Answer

Activity 3

Activity 3 – Wyvern Bike Company

Activity 4 – A Factory A factory produces a single product with the following budgeted costs: Direct Materials £4.50 per unit Direct Labour £7.85 per unit Variable overheads £1.60 per unit Fixed overheads £420,000   Overheads are absorbed on the machine hour basis and it is estimated that in the next accounting period, machine hours will total 105,000. Each unit requires 2 ½ hours of machine time. What is the cost per unit using Absorption costing?

Activity 4 – A Factory

Marginal Costing £ Direct Materials X + Direct Labour X +Direct Expenses X + Production OH X Marginal Cost X

Activity 5 Handout

Complete Activity 6 & 7

Activity 8 Remember AC is Variable AND Fixed costs   Marginal Costing Absorption Costing £ Sales at £110 each 495,000 Variable costs Direct Materials at £30 each 150,000 Direct labour at £40 each 200,000 350,000 Less Closing Stock (marginal cost) 500 chairs at £70 each (30 + 40) Fixed production overheads Less Closing stock (absorption costing) (500 chairs x £90) Less Cost of goods sold PROFIT (35,000) Remember AC is Variable AND Fixed costs Remember MC is just variable costs £315,000 £100,000 £100,000 £450,000 (£45,000) £415,000 £405,000 £80,000 £90,000

So 500 increase in stock x £20 per unit Activity 8b Reconciliation of profit April 2014 Absorption costing profit  90,000   Marginal costing profit  80,000 Remember with MC the unit cost does NOT include a share of Fixed Costs. Production of 5000 units Sold 4500 units So 500 increase in stock x £20 per unit = £10,000 Difference is increase in stock 10,000

Marginal Costing V Absorption Costing Costs split based on function – production or non-production Costs split based on behaviour – variable or fixed Inventory is valued at the full production cost (fixed & variable) Inventory is valued at the variable production cost only Sales – Cost of sales = gross profit Sales – variable costs = contribution Non-production overheads are deducted after gross profit Non-production overheads are deducted before contribution

Now try this! Activity 9 Marginal Costing Absorption Costing £   Marginal Costing Absorption Costing £ Sales at £8 each Variable costs Direct Materials at £ each Direct labour at £ each Less Closing Stock (marginal cost) Fixed production overheads Less Closing stock (absorption costing) Less Cost of goods sold PROFIT

To do list Complete tasks in BOTH workbooks Revision of labour progress test