MANAGEMENT ACCOUNTING Absorption & Marginal Costing · Absorption & Marginal Costing MANAGEMENT ACCOUNTING FRAMEWORK 19 Cost Absorption Marginal Direct material costs 25.00 25.00

MANAGEMENT ACCOUNTING

– Absorption & Marginal CostingPrepared by: Yaeesh Yasseen, Jade Jansen, Rashied Small &

Lucinda Smidt

Reviewed by: Achmad Joseph

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Job & Process Costing

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Job costing:Applied when producing of

customized (products with unique

features) or different items within

the production cycles

Process costing:

Applied when producing of

homogeneous products on a continuous basis over a long

period of time

GROUP WORK – ACTIVITY 4: ABRAM[Selection of system – Job vs Process costing]

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GROUP WORK – ACTIVITY 4: JOEDINE[Selection of system – Job vs Process costing]

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Process Costing Systems

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Cost object

Allocation of Manufacturing Fixed Costs

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Allocation of Manufacturing costs:Manufacturing costs are indirect costs and

should allocated to the cost object –allocation is based on pre-determined

overhead rate.

POR = Estimate manufacturing costs Estimated units of allocation basis

The allocation basis is the cost driver that cause the manufacturing costs

Basis of Allocation

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Labour intensive business:

Basis of allocation = labour hours

Capital intensive business:

Basis of allocation = machine hours

Mass production business:

Basis of allocation = output

Applied of Manufacturing Costs

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Labour Intensive Capital Intensive

Overhead costs 562,500 Overhead costs 562,500

Labour hours 90,000 Machine hours 100,000

Pre-determine overhead rate 6.25 Pre-determine overhead rate 5.625

Actual labour hours 50,000 Actual machine hours 50,000

Applied overhead costs 312,500 Applied overhead costs 281,250

GROUP WORK – ACTIVITY 5: UNIQUE[Pre-determined overhead rate]

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Fixed Cost Allocation

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Traditional Service Cost Allocation

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Direct Service Cost Allocation

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Service 1 Service 2 Dept. A Dept. B

Total cost 120,000 200,000 250,000 390,000

Dept. A 30% 60%

Dept. B 70% 40%

Service 1 (120,000) 36,000 84,000

Service 2 (200,000) 120,000 80,000

Product cost nil nil 406,000 554,000

No relationship between service departments – direct allocation to

production departments

Step-down Cost Allocation

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Service 1 Service 2 Dept. A Dept. B

Total cost 120,000 200,000 250,000 390,000

Dept. A 30% 60%

Dept. B 50% 40%

Service 2 20%

Service 1 (120,000) 24,000 36,000 60,000

Subtotal 224,000

Service 2 (224,000) 134,400 89,600

Product cost nil nil 420,400 539,600

Reciprocal Service Cost Allocation

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Service 1 Service 2 Dept. A Dept. B

Total cost 120,000 200,000 250,000 390,000

Dept. A 30% 40%

Dept. B 60% 40%

Service 1 20%

Service 2 10%

Product cost

Activity Based Costing

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Activity-based costing (ABC) is a costing methodology that identifies activities in an

organization and assigns the cost of each activity with resources to all products and services

according to the actual consumption by each.

GROUP WORK – ACTIVITY 6: DOLSAL[Allocation of Service Cost]

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Product Costing

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Absorption & Marginal Costing

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ABSORPTION COSTING MARGINAL COSTING

Absorption & Marginal Costing

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Cost Absorption Marginal

Direct material costs 25.00 25.00

Direct labour costs 10.00 10.00

Variable overhead costs 3.00 3.00

Fixed overhead costs 5.00 -

Product cost 43.00 38.00

Overhead Absorption Rate

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OAR = Budgeted fixed overhead costs .Estimated normal production capacity

OAR must reflect the allocation of fixed operating costs under normal business

activities

Under/Over Absorbed Overhead Costs

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Actual overhead

costs

Allocated overhead

costs

Under /over

absorbed costs

Allocated costs represents the flexible budgeted cost based on the

actual level of output

Under/Over Absorbed Costs

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GROUP WORK – ACTIVITY 8: DAYAN Mnf[Under/over absorbed costs]

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Reconciliation of Profit

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Reconciliation of Profit

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The OAR was R 5.00 and the variable production costs were R 25.00. The actual production was 100,000 units of which 20,000 were unsold; and the total fixed production costs of R 480,000.

Absorption Marginal

Sales (selling price of R 50,00) 4,000,000 4,000,000

Variable production costs 2,500,000 2,500,000

Fixed production costs (applied) 500,000 NIL

Inventory on hand (R 30,00 & R 25.00) (600,000) (500,000)

Gross profit 1,600,000 2,000,000

Manufacturing costs NIL 480,000

Over absorbed costs (500,000 – 480,000) 20,000 NIL

Profit 1,620,000 1,520,000

OAR including in inventory (20,000 x 5) 100,000

Reconciliation of Profit

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Absorption & Marginal Costing

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GROUP WORK – ACTIVITY 7: RETRIX[Application of Absorption & Marginal costing]

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GROUP WORK – ACTIVITY 7: BOKSTORM[Application of Absorption & Marginal costing]

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Wastages in Production

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Wastages in Production

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