THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA POSTGRADUATE DIPLOMA IN BUSINESS AND FINANCE - 2013/2014 Principles of Financial and Cost Accounting Thilanka Warnakulasooriya B.Com Special (Col), ACA, MBA-Fin
Absorption costing Marginal costing It is costing system which treats all manufacturing costs including both the fixed and variable costs as product costs Marginal costing It is a costing system which treats only the variable manufacturing costs as product costs. The fixed manufacturing overheads are regarded as period cost
Non Manufacturing cost Selling & Distribution Absorption costing Cost Manufacturing cost Non Manufacturing cost Selling & Distribution Admin Direct Material Direct Labor Overhead Finish Good Cost of good sold Profit & Loss Account
Non Manufacturing cost Selling & Distribution Marginal costing Cost Manufacturing cost Non Manufacturing cost Admin Selling & Distribution Direct Material Direct Labor Variable Overhead Fixed Overhead Finish Good Cost of good sold Profit & Loss Account
Trading and profit & loss account Absorption costing Marginal costing $ $ Sales X Sales X Less: Cost of goods sold X Less: Variable cost of Goods sold X Gross profit X Product contribution margin X Less: Expenses Less: variable non- manufacturing Selling expenses X expenses Admin. expenses X Variable selling expenses X Other expenses X X Variable admin. expenses X Other variable expenses X Total contribution expenses X Contribution X Less: Expenses Fixed selling expenses X Fixed admin. expenses X Other fixed expenses X Net Profit X Net Profit X Variable and fixed manufacturing
Comparison of absorption costing & Marginal Costing Situation Stock Level Profit 1 No change No difference 2 Increases AC Profit is greater than MC Profit 3 Decreases MC profit is greater than AC profit