1. Absorption & Marginal Costing
AAT Level 3
Absorption & Marginal Costing

2. 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

3. 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

4. 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 £
Total Cost =
Units of Output
= per unit
Total costs per week:
Total cost
Direct Materials
Direct Labour
Production Overheads
55000

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

6. Activity 2a

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

8. Activity 2a & b – Voles Vending - Answer

9. Activity 3

10. Activity 3 – Wyvern Bike Company

11. 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?

12. Activity 4 – A Factory

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

14. Activity 5
Handout

15. Complete Activity 6 & 7

16. 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 ( )
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

17. 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

18. 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

19. 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

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