ABSORPTION & MARGINAL COSTING:
Absorption costingThis is a costing system where the total manufacturing costs (fixed and variable costs) are charged against the product and are treated as product cost. It sets out each unit of inventory at the total cost to produce it, which will include the fixed production overheads.
This can be represented as below;
Marginal costing
This is a costing system where each unit of product is valued at the total variable costs of producing each unit. The unit cost will include the cost of direct materials, direct labour, direct expenses and variable production overheads. The fixed costs are charged in full in the statement of profit or loss.
This can be represented as below;
Exercise:
The following budgeted figures relate to a factory that produces a single product. Overheads are absorbed on a budget production basis and inventory is valued on a FIFO basis.
|
Month 1
|
Month 2
|
Month 3
|
|
|
Opening
inventory (units) |
0
|
||
|
Selling
price (£) |
160
|
150
|
150
|
|
Production
(units) |
6,000
|
6,000
|
5,000
|
|
Sales
(units) |
5,500
|
4,200
|
5,500
|
|
Direct
materials per unit (£) |
22
|
22
|
22
|
|
Direct
labour per unit (£) |
20
|
20
|
20
|
|
Variable
production costs (£) |
126,000
|
129,000
|
112,500
|
|
Fixed
production costs (£) |
186,000
|
186,000
|
186,000
|
You are required to prepare the cost statements under absorption and marginal costing systems for months 2 and 3.
Yours Sincerely,
The Friendly Team
The Training Place of Excellence Limited
The Training Place of Excellence Limited