Marginal and Absorption Costing Methods

Marginal and Absorption Costing Methods

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Marginal and Absorption Costing Methods

The main difference between marginal costing and absorption costing is that Under Marginal costing all the fixed cost is treated as period cost whereas under Absorption costing the fixed cost is treated as product cost.

 

Marginal Costing Absorption Costing
 

Direct Material + Direct Labor + Variable FOH

 

Manufacturing cost (other than fixed part of Overheads) treated as cost for stock valuation and non-manufacturing plus fixed part of overheads cost charged to income statement

 

SaleXXX

Less- Cost of Goods Sold:

Direct Material XXX

Direct Labor XXX

Variable Factory Overhead Applied XXX(XXX)

Variable Cost of Good Manufactured XXX

Add – Opening Finished GoodsXXX

Less – Closing Finished Goods (XXX)

Gross ContributionXXX

Less – Variable selling & administration overhead (XXX)

Net Contribution XXX

Less – Operating Expenses:

Selling overhead (Fixed) XXX

Factory overhead (Fixed) XXX

Administration overhead (Fixed) XXX(XXX)

Operating Profit/ Net Profit XXX

 

 

Direct Material + Direct Labor + Total FOH

Manufacturing cost treated as cost for stock valuation and non-manufacturing cost charged to income statement

 

Sale XXX

Less- Cost of Goods Sold:

Direct Material                                (XXX)

Direct Labor                                (XXX)

Factory Overhead Applied (Fixed + Variable)(XXX)

Cost of Good Manufactured XXX

Add – Opening Finished Goods XXX

Less – Closing Finished Goods (XXX)

Cost of Goods Sold XXX

Add – Under Applied XXX

Less –Over Applied (XXX)

Gross Profit                                XXX

Less – Operating Expenses:

Selling overhead (Fixed + Variable) XXX

Administration overhead (Fixed + Variable) XXX(XXX)

Operating Profit/ Net Profit XXX

 

 

RECONCILIATION

 

Net income (Absorption costing)                                                       XXX

Less- Difference in closing stock                                                         (XX)

Add- Difference in opening stock                                                       XXX

Net income (Marginal costing)                                                           XXX

 

If closing inventory figure is greater than opening inventory, then absorption costing profit will be greater than marginal costing profit due to fixed overhead  in the closing stock. If closing inventory figure is less than opening inventory, then absorption costing profit will be less than marginal costing profit. If closing inventory figure equals opening inventory then absorption costing profit will be equal to marginal costing profit

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