Cost Management Accounting Absorption Marginal Costing Lecture28 Mian

Cost & Management Accounting Absorption & Marginal Costing Lecture-28 Mian Ahmad Farhan (ACA)

Example Absorption Costing Marginal Costing Produced units = Units sold Same Profit Produced units > Units sold More Profit Less Profit Produced units < Units sold Less Profit More Profit

Reconciliation B- 80 units sold & 20 units in stock Absorption Profit 4, 800 Less Closing Stock @ Fixed FOH Rate 20 x 20 (400) Marginal Costing Profit 4, 400

Reconciliation No. of units sold 110 Absorption Profit Adds Closing Stock @ Fixed FOH Rate 10 x 20 Marginal Costing Profit 6, 600 200 6, 800

Example Selling price Rs. 20 per unit Units produced 30, 000 Units sold 20, 000 Opening stock 0 Variable cost Direct material Rs. 5 per unit Direct labor Rs. 3 per unit F. O. H Rs. 1 per unit Selling & administrative expenses Rs. 2 per unit Fixed cost F. O. H Selling & administrative expenses Rs 1, 20, 000 15, 000

Per Unit Cost Absorption Costing Fixed FOH Rate Marginal Costing Variable FOH Rate = 1, 20, 000 / 30, 000 = 4 Variable FOH Rate Direct Material 5 Direct Labor 3 FOH 1 9 13 Direct Material Direct Labor FOH 5 3 1 9

Format Absorption Costing Sales Less Cost of goods sold Opening stock Add Production cost Less Closing stock Gross Profit Less Operating expenses Administrative expenses Selling expenses Net profit *** *** (***) ***

Format Marginal Costing Sales Less Variable cost of goods sold Opening stock Add Variable production cost Less Closing stock Gross contribution margin Less Variable operating expenses Contribution margin Less Fixed expenses Production Operating Net Profit *** *** (***) *** *** (***)

Solution (Absorption Costing) Sales (20, 000 x 20) Less Cost of goods sold Opening stock Add Production cost (13 x 30, 000) Less Closing stock (13 x 10, 000) 4, 000 0 3, 90, 000 1, 30, 000 Gross Profit 2, 60, 000 1, 40, 000 Less Operating expenses Selling & Administrative expenses Variable expenses (20, 000 x 2) = 40, 000 Fixed expenses 15, 000 55, 000 Net profit 85, 000

Solution (Marginal Costing) Sales 4, 000 Less Variable cost of goods sold Opening stock Add Variable production cost (9 x 30, 000) Less Closing stock (9 x 10, 000) 0 2, 70, 000 90, 000 Gross contribution margin Less Variable Selling & Admin Expenses (2 x 20, 000) Contribution margin Less Fixed expenses Production Selling & Admin Expenses Net Profit 1, 80, 000 2, 20, 000 40, 000 1, 80, 000 1, 20, 000 15, 000 1, 35, 000 45, 000

Reconciliation Profit as absorption costing Less Closing stock (10, 000 x 4) Marginal costing 85, 000 40, 000 45, 000

Reconciliation Profit as absorption costing Add opening stock @ fixed FOH cost per unit Less Closing stock @ fixed FOH cost per unit *** (***) ***

Absorption Costing & Marginal Costing Absorption Costing 100 units Marginal Costing 100 units Direct Material Rs. 80 per unit 8, 000 Direct Labor Rs. 50 per unit 5, 000 Factory Overhead Variable FOH Fixed FOH Product Cost Fixed Cost (Period Expenses) 3, 000 2, 000 3, 000 5, 000 18, 000 ----16, 000 (2, 000) 18, 000

Cost Per Unit Absorption Costing = 18, 000 / 100 = Rs. 180 Marginal Costing = 16, 000 / 100 = Rs. 160