DIFFERENCE BETWEEN MARGINAL COSTING AND ABSORPTION COSTING

CIMA EXAM GUIDE:
The difference between marginal costing and absorption costing

The difference exists between marginal costing and absorption costing. This falls within their treatment of fixed production overhead.

With absorption costing the fixed production overhead cost is absorbed into the cost of units. All stock items are valued at their full production cost.

In marginal costing all stocks are valued at their variable or marginal cost only. Fixed costs are treated as period costs and are written off in full against the profit for the period.

Since two methods are used to value the stocks in different manner, each method will report different profit figures.

There are different profit statements developed using the above two methods.

Data set for each method is as follows:

Assume that a company produces goods as follows:

Standard cost per unit

Direct material: 10
Direct wages: 3
Variable production overhead: 2

Budgeted and actual cost per month:

Fixed production overhead: 75,000
Fixed selling expenses: 12 000
Fixed administration expenses: 23,000

Variable selling expenses: 10% of sale value

Normal capacity: 10,000 units per month

The company sells a unit at 40

Number of units produced and sold is as follows:

Months: Jan 2006 Feb 2006
Sales 11,000 (Jan 2006) 9,000 (Feb 2006)
Production 13,000 (Jan 2006) 10,000 (Feb 2006)

Create the profit statements using marginal costing and absor[tion costing.

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