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

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

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

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

5. Example Selling price Rs. 20 per unit Units produced 30,000
Units sold ,000
Opening stock
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 ,000

6. 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 9 13
Variable FOH Rate
Direct Material 5
Direct Labor 3
FOH 9

7. 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

8. 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
***
(***)

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

10. Solution (Marginal Costing)
Sales , 00,000
Less Variable cost of goods sold
Opening stock
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 ,20,000
Less Variable Selling & Admin Expenses (2 x 20,000) ,000
Contribution margin ,80,000
Less Fixed expenses
Production 1,20,000
Selling & Admin Expenses ,000
1,35,000
Net Profit ,000

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

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

13. 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

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