Absorption and marginal costing

a) Explain the importance of, and apply, the concept of contribution

Under absorption costing, the total cost of a product will include:

 Direct costs only
 Variable costs only
 All direct and indirect costs excluding a share of fixed overhead
 All direct and indirect costs

b) Demonstrate and discuss the effect of absorption and marginal costing on inventory valuation and
profit determination.[S]

c) Calculate profit or loss under absorption and marginal costing.[S]

Cost and selling price details for product Z are as follows.
$ per unit
Direct materials 6.00
Direct labour 7.50
Variable overhead 2.50
Fixed overhead absorption rate 5.00
21.00
Profit 9.00
Selling price 30.00
Budgeted production for the month was 5,000 units although the company managed to produce 5,800 units,
selling 5,200 of them and incurring fixed overhead costs of $27,400.

Inventory meningkat  Marginal costing profit < Absorption costing profit

Selisihnya: Kenaikan inventory x Fixed overhead absorption rate
(5800 – 5200) x $5 = 600 x $5 = $3000

Inventory menurun  production < selling  marginal costing profit > absorption costing profit
7b.4 What is the marginal costing profit for the month?
 $45,400
 $46,800
 $53,800
 $72,800

Contribution per unit = Sales per unit – Variable Cost per unit = $30 – (6 + 7.5 + 2.5) = $30 - $16 = $14
Contribution for the month = $14 x 5200 units = $72800

Marginal costing profit = Contribution – Actual Fixed Cost overhead = $72800 - $27400 = $45400

What is the absorption costing profit for the month?

 $45,200
 $45,400
 $46,800
 $48,400

Absorption cost profit:

(Sales – VC) for the month = $72800

Fixed cost absorbed ($5 x 5200) = ($26000)
Over/underabsorbed = $1600
--------------
Absorption costing 48400

Over/underabsorbed:
Overhead yg diabsorbed vs actual overhead
Overhead yg diabsorbed = 5800 units x $5 = $29,000
Actual overhead = $27400
Overabsorbed 1600
d) Reconcile the profits or losses calculated under absorption and marginal costing.[S]

The following budgeted information relates to a manufacturing company for next period:
 
Units $
Production 14,000 Fixed production costs 63,000
Sales 12,000 Fixed selling costs 12,000
 
The normal level of activity is 14,000 units per period. Using absorption costing the profit for
next period has been calculated as $36,000.
What would be the profit for next period using marginal costing?
27000
$ 

Inventory meningkat  production > sales: Marginal costing profit < Absorption
costing profit

Selisihnya:
Kenaikan inventory x Fixed overhead absorption rate
(14000-12000) x $4.5 per unit
2000 x $4.5 = $9000

Absorption costing = 36000

Marginal costing lebih rendah 9000 = 36000 – 9000 = 27000

A company manufactures and sells a single product. In two consecutive months the
following levels of production and sales (in units) occurred:
 
Month 1 Month 2
Sales 3,800 4,400
Production 3,900 4,200
 
The opening inventory for Month 1 was 400 units. Profits or losses have been calculated for
each month using both absorption and marginal costing principles.
Which of the following combinations of profits and losses for the two months is
consistent with the above data?
Absorption costing profit/(loss) Marginal costing profit/(loss)
Month 1: $(400) Month 2: $4,400 Month 1: $200 Month 2: $3,200

Absorption costing profit/(loss) Marginal costing profit/(loss)

Month 1: $200 Month 2: $3,200 Month 1: $(400) Month 2: $4,400

Absorption costing profit/(loss) Marginal costing profit/(loss)

Month 1: $200 Month 2: $4,400 Month 1: $(400) Month 2: $3,200
 Absorption costing profit/(loss) Marginal costing profit/(loss)
Month 1: $(400) Month 2: $3,200 Month 1: $200 Month 2: $4,400

e) Describe the advantages and disadvantages of absorption and marginal costing.