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

September 23rd, 2008 / 2 comments

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.

What Is Absorption Costing, Its Advantages And Disadvantages

Comparing Absorption Costing To Marginal Costing

Marginal Costing: Its Features, Advantages And Disadvantages.

Comments RSS

jaquin
Thank you for this simple notes. it cuts alot of unness time in the jungle of books.

Merci ton …beaucoup.
sohrab
this amount is wrong typed.
NET CONTRIBUTION 5,140

correct amount is :

NET CONTRIBUTION 5,940

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