Transcript

Good morning everyone. First of all, let me thank you all for coming here
today. Let me just start by introducing myself. My name is Ha Cam Binh. I’m
from group 2. As you can see on the screen, today our group will present about
Absorption costing versus Marginal costing. By the end of this talk, you will be
very familiar with these two types of costing.
Our group is include 7 members:
• Phạm Thị Quỳnh Anh
• Hà Cẩm Bình
• Trần Thị Diệu
• Nguyễn Thuỳ Giang
• Nguyễn Thị Thúy Hiền
• Lê Thị Thu Thảo
• Nguyễn Thị Hà Trang
The presentation has 3 main parts. Firstly, we are going to start with introducing
the two costs. Next, we will give you an example and compare these two costs
and the last we will talk about the advantages and disadvantages of Absorption
and Marginal costing.
(Because the group 1 is explaining about the definition of these two types of
costs and we accidentally have the same example but I still move to an
example)

(The first, we will start with the introduce of these costs:

As you probably know: Marginal costing is an alternative costing system to
absorption costing. With marginal costing, only variable production costs are
included in the valuation of units. All fixed costs are treated as period costs and
are charged in full against the sales revenue for the period.
- The marginal production cost per unit usually consists of the following:
+ Variable materials.
+ Variable labour. and
+ Variable production overheads.
- The principle of marginal costing:
+ Period fixed costs are the same, for any volume of sales and production.
+ Profit measurement should therefore be based on an analysis of total
contribution.
+ When a unit of product is made, the extra costs incurred in its manufacture
are the variable costs. Fixed costs are unaffected, and no extra fixed costs
are incurred when output is increased.

For Absorption costing:

- The total cost allocation method is a management accounting method for
capturing all the costs involved in producing a particular product.
- Absorption Costing is processed through 3 stages:
+ Allocation
+ Apportionment
+ Overhead absorption
- The objective of absorption costing is to include in the total cost of a
product an appropriate share of the organisation's total overhead. )

(Next, we should turn into an example:)

Galway Plc manufactures and sells a single product. The following budgeted/
actual information is provided in relation to the production of this product:
The value of this subject is shown in the table

Selling price per unit 50.00

Direct materials per unit 8.00

Direct labour per unit 5.00

Variable production overheads per unit 3.00

Details for the months of May in 20X1 are as follows:

May

Production of Product 500

A(units)

Sales of Product A (units) 300

Fixed production overheads are budgeted at $4,000 per month and are absorbed
on a unit basis. The normal level of production is budgeted at 400 units per
month.

Other costs is shown in this table:

Fixed selling $4,000 per month

Fixed administration $2,000 per month

Variable sale commission 5% of sales revenue

There was no opening inventory of Product A at the start of May. And the
subject required us to use the marginal cost and absorption cost to calculate.

We already know, to calculate the sales we use the formula:

1, unit sales multiplited by unit selling price equal sales
( unit sales x unit selling price = sales)
❖ The sales of absorption costing is $50 x 300 = $15,000

2, Fixed production overheads are budgeted at $4,000 per month and are
absorbed on a unit basis. The normal level of production is budgeted at 400
units per month.
Fixed overhead production per unit = fixed production overheads divided level
of production, so the value of its is
= 4,000/ 400 = $10
➔ Production of Absorption costing is include fixed production cost so it
can be calculated as (8+5+3+10)*500 = $13,000

3, There was no opening inventory so the value of opening inventory in

Absorption costing is 0

4, To calculate the closing inventory we should calculate the closing inventory

in unit first, and then we can calculate the value of closing inventory
Closing inventory in unit is 500 - 300 = 200 (units)
The total value of Closing inventory for :
 ➔ Absorption costing is (8+5+3+10)*200 = $5,200

5, Variable cost of sales formula is opening inventory + Production cost - value

of closing inventory
➔ Absorption costing = 0 + 13,000 - 5,200 = $7,800

6, For Under/ Over absorbed overhead of

➔ Absorption costing include
Budgeted Overhead = 500*10 = $5,000
Actual Overhead = $4,000 ( shown in the subject)
Under/ Over absorbed = 5,000 - 4,000 = $1,000
=> Over absorbed

7, Gross profit formula = sales - cost of sales ( +/ - Over/ under absorbed)

➔ Absorption costing = 15,000 - 7,800 + 1,000 = $8,200

8, We do not have to calculate variable commission individually in Absorption

costing

9, Absorption costing do not have to calculate contribution

10, Others cost ( Fixed cost)

➔ Absorption costing includes ( Fixed selling + fixed administration +
variable sale commision) = 4,000 + 2,000 + 750 (Variable commision) =
$6,750

At the end of the subject we will calculate the

11, Profit of
➔ Absorption costing = Gross profit + another income - others cost
= 8,200 - 6,750 = $1,450

Next, for The Marginal costing method

1, The sales of Marginal costing is the same with absorption costing and equal
$15,000
2, Production of Marginal costing can be calculated as (8+5+3)*500 = $8,000
3, As the same as Absorption costing, there was no opening inventory for
Marginal costing
4, The value of closing inventory of Marginal costing is (8+5+3)*200 = $3,200
5, Variable cost of sale of Marginal costing = 0 + 8,000 - 3,200 = $4,800
6, There is no under/ over absorption of overhead so the value of under/over
absorbed overhead at Marginal costing is 0
7, Marginal costings do not have gross profit, too

8, Variable sales commision

Marginal costing = 15,000 * 5% = $750 because the value of variable sales
commission is shown in the subject

Variable sale commission 5% of sales revenue

9, Contribution = Sales - variable cost

➔ Marginal costing = 15,000 - 4,800 - 750 = $9,450
Because Variable cost includes variable cost of sales and variable sales
commision

10, Others cost

➔ Marginal costing = (fixed production + fixed selling + fixed
administration) = 4,000, + 2,000 + 4,000 = $10,000

11, Profit
Marginal costing = Contribution - others cost ( Fixed cost)
= 9,450 - 10,000 = $(550) => negative number
=> Therefore Marginal costing doesn't have profit

Next, we will compare these costs so Miss Quynh Anh will present this: