1. ABSORPTION & MARGINAL COSTING
CHAPTER 9
ABSORPTION & MARGINAL COSTING
BY 章意宏 龚铭杨 赵一凝 李宸昊

2. CHAPTER PREVIEW DL Variable cost DM Variable PHD Marginal costing
Fixed cost as a period cost
Contribution
Methods of costing
Principles
Variable cost
Absortion costing
Fixed costs are absorbed into unit costs
Inventory level
Marginal costing
Reconciling profit
Inventory valuation
Absortion costing
Arguments in favour of both marginal and abortion costing

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IPSUM DOLOR LOREM IPSUM

4. 1.1 Marginal cost and marginal costing
Marginal cost is the variable cost of one unit of product or service.
Marginal costing only variable costs are charged to production cost,closting stocks are valued at marginal production cost,and fixed cost are treated as a period cost.
Marginal cost
Variable production overheads
Direct materials
Direct labour

5. 1.2 Contribution
Contribution is an important measure in marginal costing, and it is calculated as the difference between sales value and marginal or variable cost of sales.
Contribution is really short for 'contribution towards covering fixed overheads and making a profit'.
Contribution information is more useful for decision making than profit information.
Contribution=Sales – Marginal costs
Profit=Contribution – fixed costs

6. 1.3 The principles
Period fixed costs are the same, for any volume of sales and production.
If the volume of sales falls by one item, the profit will fall by the amount of contribution.
Profit measurement should therefore be based on an analysis of total contribution.
When a unit of product is made, the extra costs incurred in its manufacture are the variable production costs,and no extra fixed costs are incurred when output is incresed.

7. The calculation of profit02
The calculation of profit

8. Marginal costing DM Product DL Production Cost 01 Variable
Sales and administration overheads
PHD
Non-Product
Product
PHD
Period Cost
Fixed
Sales and administration overheads
Non-Product

9. Absorption Costing DM Product DL Production Cost Total PHD Non-Product
Sales and administration overheads
Period Cost

10. Compare Marginal costing Absorption costing
Closing inventories are valued at marginal production cost.
Closing inventories are valued at full production cost.
Fixed costs are absorbed into unit costs.
Fixed costs are period costs
Cost of sales does not include a share of fixed overheads.
Cost of sales does include a share of fixed overheads

11. Formula Budgeted fixed overheads
Overhead absorption rate =
Budgeted units
A Total cost per unit = Variable cost + fixed production cost
M Total cost per unit =Variable cost per unit
Closing inventory = Opening inventory + production - sales
Under–production
overheads
= (Budgeted – Actual production) × OAR
Statements of profit or loss

12. Statements of profit or loss

13. No changes in inventory Production = Sales
You will notice that there are no difference between the two profits.

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Reconciling profit

15. Introduction Profit Inventory level Inventory level Profit
Reported profit figures using marginal costing or absorption costing will differ if there is any change in the level of inventories in the period.But once the inventory is equal to zero,different costing methods will calculate the same answer
Using absorption costing
Inventory level
Profit
Inventory level
Profit

16. Reconciling profit——a shortcut
Marginal cost
Cost of sales doesn’t include a share of fixed overhead
Absorption cost
Cost of sales does include a share of fixed overhead
Differences in profits = change in inventory level X overhead absorption rate per unit
Points
Distinguish which one can get higher profit when inventory level changes

17. The calculation of profit04
The calculation of profit

18. Arguments in favour of both marginal and absorption costing
It is 'fair' to share fixed production cost between units of production as such costs are incurred in order to make output
Closing inventories valued in accordance with IAS 2 principles
It is easier to determine the profitability of several products by charging a share of fixed overheads to them
Where building up inventory is necessary fixed costs should be included in inventory valuations in order to prevent a series of losses from occurring

19. Arguments in favour of both marginal and abortion costing
Marginal costing
Simple to operate
No appointments of fixed costs
Fixed costs = period costs unchanged at all output volumes
Closing inventory realistically valued at variable production cost per unit
Size of contribution provides management with useful information about expected profits
Absorption costing encourages management to produce goods in order to absorb allocated overheads instead of meeting market demands
Under/over absorption of overheads is avoided
It is a great aid to decision making