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Cost & Management

Accounting

Absorption & Marginal Costing


Lecture-28
Mian Ahmad Farhan (ACA)

Example
Absorption Costing

Marginal Costing

Produced units =
Units sold

Same Profit

Same Profit

Produced units >


Units sold

More Profit

Less Profit

Produced units <


Units sold

Less Profit

More Profit

Reconciliation
B- 80 units sold & 20 units in stock
Absorption Profit

4,800

Less Closing Stock @ Fixed FOH Rate


20
x
20

(400)

Marginal Costing Profit

4,400

Reconciliation
No. of units sold 110
Absorption Profit
Adds Closing Stock @ Fixed FOH Rate
10
x
20
Marginal Costing Profit

6,600
200
6,800

Example
Selling price

Rs. 20 per unit

Units produced

30,000

Units sold

20,000

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
Selling & administrative expenses

Rs 1,20,000
15,000

Per Unit Cost

Absorption Costing
Fixed FOH Rate

Marginal Costing
Variable FOH Rate

= 1,20,000 / 30,000 =

Variable FOH Rate


Direct Material

Direct Labor

FOH

1
9
13

Direct Material
Direct Labor
FOH

5
3
1
9

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

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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

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Solution (Absorption Costing)


Sales (20,000 x 20)
4, 00,000
Less Cost of goods sold
Opening stock
0
Add Production cost
(13 x 30,000)
3,90,000
Less Closing stock (13 x 10,000)
1,30,000
2,60,000
Gross Profit

1,40,000

Less Operating expenses


Selling & Administrative expenses
Variable expenses (20,000 x 2) = 40,000
Fixed expenses
15,000
55,000
Net profit

85,000

Solution (Marginal Costing)


Sales

4, 00,000
Less Variable cost of goods sold
Opening stock
0
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


2,20,000
Less Variable Selling & Admin Expenses (2 x 20,000)
40,000
Contribution margin
1,80,000
Less Fixed expenses
Production
Selling & Admin Expenses

1,20,000
15,000
1,35,000

Net Profit

45,000

Reconciliation
Profit as absorption costing
Less Closing stock (10,000 x 4)
Marginal costing

85,000
40,000
45,000

Reconciliation
Profit as absorption costing
Add opening stock @ fixed FOH cost per unit
Less Closing stock @ fixed FOH cost per unit

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Absorption Costing & Marginal Costing


Absorption
Costing
100 units

Marginal Costing
100 units

Direct Material
Rs. 80 per unit

8,000

8,000

Direct Labor
Rs. 50 per unit

5,000

5,000

Factory Overhead
Variable FOH
Fixed FOH
Product Cost
Fixed Cost
(Period Expenses)

3,000
2,000

3,000
----5,000
18,000

16,000
(2,000)
18,000

Cost Per Unit


Absorption Costing = 18,000 / 100 = Rs. 180
Marginal Costing = 16,000 / 100 = Rs. 160

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