MARGINAL & ABSORPTION
COSTING
Learning Objectives :
1.Understand the marginal costing and absorption costing
2. Illustrate Income Statement using marginal and absorption costing
What is Marginal Costing ?• One of the accounting system used to determine the
product cost
• Also known as direct costing or variable costing because it only considers variable costs or direct costs in the computation of cost of a product
• It will show how a changes in output will effect the cost & profit
Absorption Costing• All cost ( variable & fixed cost ) is considered
in determining unit cost.
Production Cost Production Cost
Marginal Costing
Direct Labour
Direct Expenses
Variable Manufacturing OH
Fixed manufacturing OH
Raw Materials
Sales & Administration Expenses
Absorption Costing
Income Statement Presentation- Marginal Costing-
Name of company ……Income Statement for year ended …….
RM RM
Sales XXX
Minus : COGS :
Opening stock XX
Production Cost XX
- Closing Stock (XX) ( XX )
Minus : Variable Selling & Distribution OH XX
Variable administration OH XX
( XXX )
Contribution Margin XXXX
Minus : Fixed Cost
Manufacturing OH XX
Selling & Distribution XX XXX
Profit/Loss XXX
Income Statement Presentation- Absorption Costing-
Name of company ……Income Statement for year ended …….
RM RM
Sales XXX
Minus : COGS :
Opening stock XX
Production Cost XX
- Closing Stock (XX) ( XX )
Gross Profit XXXX
Minus :
Administration (fixed & variable) XX
Selling & Distribution (fixed & variable) XX XXX
Profit/Loss XXX
Example 1 :• Operational data for MTH Co :
Opening stock -Production 25,000 unitSales 20,000 unitClosing stock5,000 unitManufacturing cost:Raw material RM1.20/unitLabour RM2.00/unit Variable OH RM0.60/unitSelling & Admin : variable RM4,000
fixed RM7,500 Selling price RM6.00/unit
• Fixed manufacturing OH was absorbed based on these budgeted data :Budgeted fixed OH RM20,000Budgeted volume 25,000 unit
Prepare Income Statement by using the following costing methods:i. Marginal Costingii. Absorption Costing
Solution : ( marginal …)MTH Co.
Income Statement for year ended …..Sales (20,000 x RM0.60) 120,000
Minus : Cost of sales
Opening stock -
Production cost ( 25,000 x RM3.80) 95,000
- Closing stock (5,000 x RM3.80) 19,000 76,000
44,000
- Selling & Admin (variable) 4,000
Contribution margin 40,000
Minus : Fixed Cost
Manufacturing OH 20,000
Selling & Admin 7,500 27,500
Net profit 12,500
How did u derived this figure ?
Solution : (absorption …)MTH Co.
Income Statement for year ended …..Sales (20,000 x RM6.00) 120,000
Minus : Cost of sales
Opening stock -
Production cost ( 25,000 x RM4.60) 115,000
- Closing stock (5,000 x RM4.60) (23,000) 92,000
Gross profit 28,000
Minus :
Selling & Admin (variable) 4,000
Selling & Admin (fixed ) 7,500 11,500
Net profit 16,500
How did u derived this figure ?
Have a break• Peter Piper Pipkin picked a packed of
peppercorns• If Peter Piper Pipkin picked a packed of
peppercorns• Where’s the packed of peppercorns that Peter
Piper Pipkin picked ?
Example 2 :• Operational data for MKG Co :
Opening stock -Production 36,000 unitSales 30,000 unitClosing stock6,000 unitActual Cost:Raw material RM1.80/unitLabour RM1.50/unit Variable manufacturing OHRM1.00/unit
Fixed manufacturing OH RM12,000Selling & Admin : variable RM8,200
fixed RM3,600 Selling price RM6.00/unit
• Fixed manufacturing OH was absorbed based on these budgeted data :Budgeted fixed OH RM14,000Budgeted volume 35,000 unit
Prepare Income Statement by using the following costing methods:i. Marginal Costingii. Absorption Costing
Solution:• Unit cost :
AC MCRaw material 1.80 1.80Labour 1.50 1.50VOH 1.00 1.00FOH 0.40 -___
4.70 4.30
Solution : (absorption …)MTH Co.
Income Statement for year ended …..
Sales(30000 x RM6) 180,000Minus : Cost of sales
Opening stock -Production cost (36,000 x RM4.70) 169,200- Closing stock (6000 x RM4.70) (28,200)
141,000Gross profit 41,400
• Minus : Selling & distribution – variable 8,200
- fixed 3,600 11,800Unadjusted net profit 27 200
+ Over absorbed OH 2 400Net profit 29,600
