Friday, 20 January 2017

ABSORPTION & MARGINAL COSTING: Part 1

ABSORPTION & MARGINAL COSTING:

Absorption costing
This is a costing system where the total manufacturing costs (fixed and variable costs) are charged against the product and are treated as product cost. It sets out each unit of inventory at the total cost to produce it, which will include the fixed production overheads.

This can be represented as below;
 

 






Marginal costing
This is a costing system where each unit of product is valued at the total variable costs of producing each unit. The unit cost will include the cost of direct materials, direct labour, direct expenses and variable production overheads. The fixed costs are charged in full in the statement of profit or loss.

This can be represented as below;









 Exercise:
The following budgeted figures relate to a factory that produces a single product. Overheads are absorbed on a budget production basis and inventory is valued on a FIFO basis.

Month 1
Month 2
Month 3
Opening inventory (units)
       0


Selling price (£)
   160
   150
   150
Production (units)
6,000
6,000
5,000
Sales (units)
5,500
4,200
5,500
Direct materials per unit (£)
    22
    22
    22
Direct labour per unit (£)
    20
    20
    20
Variable production costs (£)
126,000
129,000
112,500
Fixed production costs (£)
186,000
186,000
186,000


You are required to prepare the cost statements under absorption and marginal costing systems for months 2 and 3.

Yours Sincerely,
The Friendly Team

The Training Place of Excellence Limited


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