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  • ACC 416 Absorption Costing Vs Marginal Costing

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    NUR IZZATY ALIAH SAMIA'AN
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    Absorption costing includes both variable and fixed production overhead costs as product costs, while marginal costing only includes variable production overhead costs as product costs and treats fixed production overhead costs as period costs. Absorption costing is used for external reporting as it complies with GAAP, while marginal costing is used more for internal reporting purposes. The net profit under absorption costing and marginal costing will be the same if production volume equals sales volume, but absorption costing net profit will be higher than marginal costing if production exceeds sales and lower if production is less than sales due to the treatment of fixed overhead costs.

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    Absorption costing includes both variable and fixed production overhead costs as product costs, while marginal costing only includes variable production overhead costs as product costs and treats fixed production overhead costs as period costs. Absorption costing is used for external reporting as it complies with GAAP, while marginal costing is used more for internal reporting purposes. The net profit under absorption costing and marginal costing will be the same if production volume equals sales volume, but absorption costing net profit will be higher than marginal costing if production exceeds sales and lower if production is less than sales due to the treatment of fixed overhead costs.

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    16 views6 pages

    ACC 416 Absorption Costing Vs Marginal Costing

    Uploaded by

    NUR IZZATY ALIAH SAMIA'AN
    Absorption costing includes both variable and fixed production overhead costs as product costs, while marginal costing only includes variable production overhead costs as product costs and treats fixed production overhead costs as period costs. Absorption costing is used for external reporting as it complies with GAAP, while marginal costing is used more for internal reporting purposes. The net profit under absorption costing and marginal costing will be the same if production volume equals sales volume, but absorption costing net profit will be higher than marginal costing if production exceeds sales and lower if production is less than sales due to the treatment of fixed overhead costs.

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    of 6

    ACC 416

    ABSORPTION
    COSTING vs
    MARGINAL COSTING
    Notes Prepared by:
    Prof Madya Khashiah Yusof
    Faculty of Accountancy
    UiTM Shah Alam
    Sources:
    Drury, Cost & Management Accounting
    Brewer, Garrison, Noreen, Introduction to Managerial Accounting
    Weygandt, Kimmel, Kieso, Managerial Accounting
    Nor Aziah, Rozita, Rozainun, Che Hamidah, Management Accounting
     What is AC
     What is MC

     Differences between AC and MC

     Income Statement for AC


     Income Statement for MC

     Net Income Effect (Net Profit) for AC


     Net Income Effect (Net Profit) for MC
    Direct Materials
    Direct Labour
    Variable Prod OH

     Absorption Costing  Marginal Costing


     all production overhead costs  only variable production overhead
    (variable and fixed) are charged to costs are charged to the product
    the product  fixed production overhead costs
    Fixed Prod OH is treated as Product Cost
    are treated as period costs
    (operating expenses)

    Fixed Prod OH is treated as Period Cost

    NOTE: Under both methods, Selling & Admin Expenses are Period Costs
     Absorption Costing  Marginal Costing
     Fixed production overhead costs  Fixed production overhead costs
    are product costs (put into COGS) are period costs (put after
    calculating CM)
     Emphasizes on gross profit
     Emphasizes on contribution margin

     Stock is valued at variable cost


     Stock is valued at full cost i.e.
    only.
    variable cost and fixed cost

     Used for external reporting as it  Used for internal reporting


    complies with GAAP purposes because it does not
    comply with GAAP.
    Net Income Effects (effects on NP) under AC and MC

    Net Income Effects (effects on NP) under AC and MC


    if production volume is the same as sales volume
    if production volume is more than sales volume
    if production volume is less than sales volume

    Units Produced = Units Sold AC NP = MC NP


    Units Produced > Units Sold AC NP > MC NP
    Units Produced < Units Sold AC NP < MC NP
    Net Income Effects (effects on NP) under AC and MC

    Units Produced = Units Sold


    AC NP = MC NP

    Units Produced > Units Sold


    AC NP > MC NP by the amount of Fixed Production OH costs included
    in the closing stock that results from units produced but not sold during the
    period

    Units Produced < Units Sold


    AC NP < MC NP by the amount of the Fixed Production OH costs
    included in the units sold during the period that were not produced during
    the period

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