THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA POSTGRADUATE DIPLOMA IN BUSINESS AND FINANCE - 2013/2014 Principles of Financial and Cost Accounting Thilanka Warnakulasooriya B. Com Special (Col), ACA, MBA-Fin

Absorption costing �It is costing system which treats all manufacturing costs including both the fixed and variable costs as product costs Marginal costing �It is a costing system which treats only the variable manufacturing costs as product costs. The fixed manufacturing overheads are regarded as period cost 2

Absorption costing Cost Non Manufacturing cost Direct Material Direct Labor Finish Good Overhead Selling & Distribution Cost of good sold Admin Profit & Loss Account

Marginal costing Cost Non Manufacturing cost Direct Material Direct Labor Finish Good Variable Overhead Fixed Overhead Cost of good sold Selling & Distribution Admin Profit & Loss Account

Trading and profit & loss account Absorption costing Sales Less: Cost of goods sold Gross profit Less: Expenses Selling expenses X Admin. expenses X Other expenses X Marginal costing $ X X Variable and fixed manufacturing X Net Profit X Sales Less: Variable cost of Goods sold Product contribution margin Less: variable non- manufacturing expenses Variable selling expenses Variable admin. expenses Other variable expenses Total contribution expenses Contribution Less: Expenses Fixed selling expenses Fixed admin. expenses Other fixed expenses Net Profit $ X X X 5

Comparison of absorption costing & Marginal Costing Situation Stock Level Profit 1 No change No difference 2 Increases AC Profit is greater than MC Profit 3 Decreases MC profit is greater than AC profit