MANAGEMENT ACCOUNTING – Absorption & Marginal Costing Prepared by: Yaeesh Yasseen, Jade Jansen, Rashied Small & Lucinda Smidt Reviewed by: Achmad Joseph MANAGEMENT ACCOUNTING FRAMEWORK 1
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MANAGEMENT ACCOUNTING
– Absorption & Marginal CostingPrepared by: Yaeesh Yasseen, Jade Jansen, Rashied Small &
Lucinda Smidt
Reviewed by: Achmad Joseph
MANAGEMENT ACCOUNTING FRAMEWORK
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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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