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.
Absorption
Costing
Marginal Costing
Raw Materials
Direct Labour
Production Cost
Direct Expenses
Variable
Manufacturing OH
Fixed
manufacturing OH
Sales & Administration
Expenses
Production Cost
Income Statement Presentation
- Marginal CostingName of company ……
Income Statement for year ended …….
RM
Sales
RM
XXX
Minus : COGS :
Opening stock
XX
Production Cost
XX
- Closing Stock
(XX)
Minus : Variable Selling & Distribution OH
Variable administration OH
( XX )
XX
XX
( XXX )
Contribution Margin
XXXX
Minus : Fixed Cost
Manufacturing OH
XX
Selling & Distribution
XX
Profit/Loss
XXX
XXX
Income Statement Presentation
- Absorption CostingName of company ……
Income Statement for year ended …….
RM
Sales
RM
XXX
Minus : COGS :
Opening stock
XX
Production Cost
XX
- Closing Stock
(XX)
Gross Profit
( XX )
XXXX
Minus :
Administration (fixed & variable)
XX
Selling & Distribution (fixed & variable)
XX
Profit/Loss
XXX
XXX
Example 1 :
• Operational data for MTH Co :
Opening stock Production
25,000 unit
Sales
20,000 unit
Closing stock
5,000 unit
Manufacturing cost:
Raw material
RM1.20/unit
Labour
RM2.00/unit
Variable OH
RM0.60/unit
Selling & 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
RM20,000
Budgeted volume
25,000 unit
Prepare Income Statement by using the following
costing methods:
i. Marginal Costing
ii. Absorption Costing
Solution : ( marginal …)
How did u derived this figure ?
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
Net profit
27,500
12,500
Solution : (absorption …)
How did u derived this figure ?
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)
Gross profit
92,000
28,000
Minus :
Selling & Admin (variable)
4,000
Selling & Admin (fixed )
7,500
Net profit
11,500
16,500
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 unit
Sales
30,000 unit
Closing stock
6,000 unit
Actual Cost:
Raw material
RM1.80/unit
Labour
RM1.50/unit
Variable manufacturing OH
Fixed manufacturing OH
Selling & Admin : variable
fixed
Selling price
RM1.00/unit
RM12,000
RM8,200
RM3,600
RM6.00/unit
• Fixed manufacturing OH was absorbed based on
these budgeted data :
Budgeted fixed OH
RM14,000
Budgeted volume
35,000 unit
Prepare Income Statement by using the following
costing methods:
i. Marginal Costing
ii. Absorption Costing
Solution:
• Unit cost :
Raw material
Labour
VOH
FOH
AC
1.80
1.50
1.00
0.40
4.70
MC
1.80
1.50
1.00
-___
4.30
Solution : (absorption …)
MTH Co.
Income Statement for year ended …..
Sales(30000 x RM6)
Minus : Cost of sales
Opening stock
Production cost (36,000 x RM4.70)
- Closing stock (6000 x RM4.70)
Gross profit
180,000
169,200
(28,200)
141,000
41,400
• Minus :
Selling & distribution – variable 8,200
- fixed 3,600
Unadjusted net profit
+ Over absorbed OH
Net profit
11,800
27 200
2 400
29,600