ABSORPTION COSTING &

MARGINAL COSTING
ADM
PGDM I

 THE FOLLOWING DATA RELATE TO A COMPANY:

Expected sales
: 50,000 units

Direct material cost

: Rs. 2.50 per unit

Direct labour cost

: Rs. 2.00 per unit

Variable Overhead
: Rs. 1.50 per unit

Fixed cost ( allocated ) : Rs. 1.50 per unit

Selling price
: Rs.10.00 per unit
The firm expects to get a special export order for
10,000 units at a price of Rs. 7.25 per unit.
Advise whether the export order should be
accepted or not.
The company has a capacity to produce 60,000 units.

INFERENCES:
An organization has different costs
having different nature.
Example: Fixed, Variable, Mixed Cost
These costs behave differently to
changes in the level of business activity.
Understanding this relationship helps in
planning, control and developing
successful business strategies.

Cost of a product / process can

be ascertained by :

1. Absorption costing
2. Marginal costing

ABSORPTION COSTING
Traditional or full cost method: Cost of a product
= V. C. + F. C.
Variable costs are directly charged to the
product.
Fixed costs are apportioned on suitable basis.

MARGINAL COSTING
Direct Costing / Variable Costing
A Technique of Costing

Meaning
Ascertainment of marginal cost by
Differentiating between F.C. and V.C. and of
the effect on profit of changes in volume or
type of output.
Cost of a product : Only VCs are
considered for Product cost
FCs : Charged against the revenue of the
period.
FC = Period costs
Valuation of inventory at M.C.
Contribution = C = S - V = F + P
Price = M.C. + Contribution

MARGINAL COSTING Vs. ABSORPTION COSTING

The following information relates to ABC
Company for the year 2007-08:
Sales 10,000 units at Rs. 5 each;
Production 15,000 units at the following
costs:

Rs.
Direct materials
15,000
Direct labour
30,000
Variable expenses
6,000
Fixed expenses
12,000
Determine net profit.

Income Statement for the year

2007-08
Marginal

Sales
50,000
Cost of Production:
Direct materials
15,000
Direct labour
30,000
Variable overhead
6,000
Fixed overhead
_

51,000
Less Closing Stock
17,000
Cost of goods sold
34,000
Contribution
(50,000- 34,000)
16,000
Fixed overhead
12,000
Profit
4,000

Absorpotion

50,000
15,000
30,000
6,000
12,000
63,000
21,000
42,000

8,000