摘要:The difference between absorption costing and marginal costing
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The difference between absorption costing and marginal costing
----Relevant to Paper F5
Absorption costing is a method of product costing which aims to include in the total cost of a product (unit, job, and so on) an appropriate share of an organisation’s total overhead, which is generally taken to mean an amount which reflects the amount of time and effort that has gone into producing the product. In other words, absorption costing is a mean of incorporating a fair share of these costs into the cost of a unit of product or service provided.
Product costs are built up using absorption costing by a process of allocation, apportionment and overhead absorption. The first stage of overhead apportionment involves sharing out (or apportioning) the overheads within general overhead cost centers between the other cost centers using a fair basis of apportionment (such as floor area occupied by each cost center for heating and lighting costs). The second stage of overhead apportionment is to apportion the costs of service cost centers (both directly allocated and apportioned costs) to production cost centers. The final stage in absorption costing is the absorption into product costs (using overhead absorption rates) of the overheads which have been allocated and apportioned to the production cost centers.
Marginal costing is an alternative to absorption costing. Only variable costs (marginal costs) are charged as a cost of sales. Fixed costs are treated as period costs and are charged in full against the profit of the period in which they are incurred.
When we calculate the profit using different method, the answers are not the same. An example can illustrate:
Example:
Selling price per unit $10
Variable costs per unit
Direct materials $2
Direct labour $3
Production overhead $1
Selling and distribution $1
Fixed costs:
Production: budgeted $8,000
Actual $8,500
Selling and distribution:
(budged and actual) $2,000
Activity levels:
Year 1 year2
Units Units
Budgeted production 4,000 4,000
Actual sales 4,200 4,000
Actual production 4,400 3,800
There is no opening inventory in year 1.
Required:
Prepare an income statement under absorption costing for years 1 & 2.
Prepare an income statement under marginal costing for year 1 & 2
Using absorption costing:
Year 1 Year 2
$ $
Sales 42,000 40,000
Cost of sales:
Opening inventory 1600
Production:
Variable costs 26,400 22,800
Fixed costs 8,800 7,600
Closing inventory (1600)
(over)/under absorption (300) 900
Gross profit 8,700 7,100
Variable selling & distribution (4200) (4,000)
Fixed selling & distribution (2,000) (2,000)
Net profit 2500 1100
Workings :
1. OAR= $8,000/4000=$2/unit
2. year1 year 2
Actual overhead 8,500 8,500
Fixed overhead absorbed 8,800 7,600
(over)/under absorption (300) 900
3. year1 year2
Opening inventory - 200
Add: production 4400 4000
Less:sales (4200) (3800)
Closing inventor 200 -
Valued at full cost/unit$8 $1,600 $ 0
Using marginal costing:
Year 1 Year 2
$ $
Sales 42,000 40,000
Variable production costs:
Opening inventory 1,200
Production: 26,400 22,800
Closing inventory (1,200)
Variable selling & distribution (4200) (4,000)
Contribution 12,600 12,000
Fixed costs
Production (8,500) (8,500)
Selling & distribution (2,000) (2,000)
Profit 2,100 1,500
Workings
1. year 1 year 2
Opening inventory - 200
Add:production 4,400 4,000
Less sales (4,200) (3,800)
Closing inventory 200 -
Valued at full cost/unit $6 $1,200 $0
AC profit year 1 year 2
Add: fixed overhead in opening inventory 2,500 1,100
Less: fixed overhead in closing inventory - 400
MC profit 400 -
200*$2 2,100 1,500
The difference in profits reported under the two costing systems is due to the different inventory valuation methods used. In the example, the difference $400 (2500-2100=400) is due to the difference in inventory.
If inventory levels increase between the beginning and end of a period, absorption costing will report the higher profit bacause some of the fixed production overhead incurred during the period will be carried forward in closing inventory (which reduces cost of sales) to be set against sales revenue in the following period instead of being written off in full against profit in the period concerned.
If inventory levels decrease, absorption costing will report the lower profit bacause as well as the fixed overhead incurred, fixed production overhead which had been carried forward in opening inventory is released and is also included in cost of sales.
The difference between the figures will effectively be the OAR/unit * movement in inventory.
In all, we can conclude:
1.Production=sales (so inventory is constant)
AC profit = MC profit
2.Production<sales (so inventory is constant)
AC profit< MC profit
3.Production>sales (so inventory is constant)
AC profit > MC profit
——高顿研究中心 Vincent Zhao