Marginal Costing

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					                                                                                Management Accounting

                            Marginal and absorption costing

Product cost = Unit cost
                                                                                                          Page | 1


                         CGS                                                Inventory

                     Marginal Cost                                 Absorption costing
    1. Unit cost                                         1. Unit cost
       Direct material                                      Unit cost as per marginal costing
       Direct Labour                                        Fixed production overheads (OAR per
       Direct expenses                                      unit)
       Variable production overheads
    2. CGS                                               2. CGS
       = Units sold X unit cost                             = Units sold X unit cost
    3. Inventory                                         3. Inventory
       = units X unit cost                                  = units X unit cost
       (Production units - Sales units)                     (Production units - Sales units)
    4. Contribution per unit                             4. Gross profit per unit
       = Selling price per unit – unit cost – variable      = Selling price per unit – unit cost
       non production cost

    5. Total contribution                                5. Total Gross profit
       = units sold X contribution per unit                 = units sold X Gross profit per unit
                                                            Total sales – CGS
    6. Profit                                            6. Profit
       = Total contribution – Fixed costs                   = total GP ± over/ (under absorption)
                                                            – Non Production costs
    7. Fixed costs                                       7. Over/ (under absorption)
       = Actual Production FOH + Non production             = Absorbed FOH – Actual FOH
    8. Non production costs
       Admin + selling + distribution etc.


•     Difference in profit is due to difference in unit cost. You might have noticed that difference is
      OAR/ unit.
•     In marginal costing fixed production overheads are treated as period cost. Hence not
      included in inventory valuation and made expense in a period. (Same like non production
      cost in an income statement).

        ACCA F 2

        •    So value of inventory is always higher under absorption costing.
        •    So difference in profit = (Closing inventory units – Opening inventory units) X OAR/ unit


Page | 2 •   Absorption costing profit = Marginal costing profit + difference in profit

        Saima Iqbal

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