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Marginal Costing & Absorption

Marginal costing is a technique that assigns variable costs to units while treating fixed costs as period expenses, aiding in decision-making through contribution analysis. Absorption costing, on the other hand, calculates full production costs by including both fixed and variable costs, using an overhead absorption rate based on budgeted figures. The document provides examples for calculating profit and production costs under both costing methods.

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15 views3 pages

Marginal Costing & Absorption

Marginal costing is a technique that assigns variable costs to units while treating fixed costs as period expenses, aiding in decision-making through contribution analysis. Absorption costing, on the other hand, calculates full production costs by including both fixed and variable costs, using an overhead absorption rate based on budgeted figures. The document provides examples for calculating profit and production costs under both costing methods.

Uploaded by

kumarbrama1
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Marginal Costing

Marginal costing is a costing technique wherein the marginal cost,


i.e., variable cost is charged to units. It is the accounting system in
which variable production costs are charged to cost units and fixed
costs of the period are written off in full against the aggregate
contribution.
Product Cost under Marginal Costing The variable production cost
per unit of an item usually consists of the following:
− Direct material
− Direct labour
− Direct expense
− Variable production overheads

Contribution
Contribution is the difference between sales and variable cost.
Contribution is more useful for decision-making.
Contribution = Total Sales Revenue – Total Variable Cost
Example 1
Details of a product are as follows
Variable cost per unit $20 per unit
Selling price $60 Total
fixed cost $25,000
Total sales units 12,000 units
Required: Calculate the total profit.

1
Absorption Costing
The aim of traditional absorption costing is to determine the full
production cost per unit. This is a method of calculating the cost of a
product or enterprise by taking into account indirect expenses
(overheads) as well as direct costs.
In absorption costing product cost Includes fixed and variable
elements.
Full Cost per unit = Variable cost per unit + Fixed Cost per unit
Overheads are absorbed into products using an appropriate
absorption rate based on budgeted costs and budgeted cost and
budgeted activity levels.
Overhead Absorption Rate (OAR) = 𝐁𝐮𝐝𝐠𝐞𝐭𝐞𝐝 𝐭𝐨𝐭𝐚𝐥 𝐨𝐯𝐞𝐫𝐡𝐞𝐚𝐝 /
𝐁𝐮𝐝𝐠𝐞𝐭𝐞𝐝 𝐭𝐨𝐭𝐚𝐥 𝐚𝐜𝐭𝐢𝐯𝐢𝐭𝐲

Example 2
Details of a product are as follows:
Direct material cost per unit $6
Direct labour cost per unit $4
Total production overhead $2,000
Total units 1,000 units
Required: Calculate full production cost per unit.

2
Example 3
Details of a product are as follows:
Material usage per unit 5 Kg
Material price per kg $10 per Kg
Labour hours per unit 3 Hours
Labour cost per hour $2 per hour
Estimated overheads $6,000
Estimated total labour hours 3,000 hours
Required: Calculate full production cost per unit.

Example 4
A company makes two products, the A and B.
A
B
Labour hours per unit 2
5
Total production units 10,000
6,000
Total overhead $100,000
Total direct labour hours 50,000
Required: What is the overhead cost per unit for A and B
respectively if overheads are absorbed on the basis of labour
hours?

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