Reconciliation Statement Between Profit Reporting Based on Marginal Costing Method And The Absorption Costing Methodprof

September 23rd, 2008 Comments off
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Earlier article dealt with the features and difference between marginal costing and absorption costing method.

This article seeks to provide the readers with further understanding between these two costing methodologies by showing an illustration using a Reconciliation Statement.

Company A manufacture and sell a new product. The following information is given:

Selling price

$9.00 per unit

Variable production costs

$3.60 per unit

Variable non-production costs

5% of sales revenue

Fixed production costs

$5,900 per month

Fixed non-production costs

$3,600 per month

Expected production and sales:

Month 1

Production (units)

2,000

Sales (units)

1,200

Based on MARGINAL Costing Method to get the Forecasted Profit Statement at Month 1

Profit Statement at Month 1

Marginal Costing Approach

$

$

$

Sales

(1,200x$9)

10,800

Less:

Variable production cost of sales

(1,200 x$3.60)

(4,320)

Gross Contribution

6,480

Less: Variable non-production costs

(540)

NET CONTRIBUTION

5,140

Less:

Fixed production costs

5,900

Fixed non-production costs

3,600

9,500

Loss Under Marginal Costing Method

(3,560)

Based on ABSORPTION Costing Method to get the Forecasted Profit Statement at Month 1

Profit Statement at Month 1

Absorption Costing Approach

$

$

$

Sales

(1,200x$9)

10,800

Less:

Production cost of sales

1,200 x [($3.60+ $5,900/2000)=$6.55]

(7,860)

2,940

Less:

Non-production costs

Variable

(540)

Fixed non production costs

(3,600)

(4,140)

Loss reported Under Absorption Costing Method

(1,200)

RECONCILIATION STATEMENT

BETWEEN MARGINAL COSTING METHOD AND ABSORPTION COSTING METHOD BASED ON ABOVE FIGURES

Loss per marginal costing

($3,560)

Increase in Stock Level

2,000 -1,200 units

800 units

Multiply (x)

Difference in Stock Valuation

Marginal costing approach

$3.60

Absorption costing approach

$6.55

Difference

2.95

2,360

Loss per absorption costing

($1,200)

Note:

In this case, the lower loss under absorption costing method is because the balance of closing stock (2,000-1,200)=800 units includes the fixed production cost re: 800/2000 x $5,900= $2,360 which is not charged out during this period of Month 1.

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