| Marginal Costing Versus Absorption Costing | ||||||||||||||||||||||||||||||||||||||||
| The MAIN DIFFERENCE is the treatment of FIXED COSTS. This treatment can produce different profit figures.The two methods of costing produce different profit levels dependent upon the net change in the level of stock during the period.This is due to the VALUATION of the net change in stock during the period.In summary: the effects of the net change in stock on profitability is as follows:
Net change in stockNet profit Nil Marginal=Absorption Increase Absorption>Marginal DecreaseMarginal>Absorption |
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| Illustration: | ||||||||||||||||||||||||||||||||||||||||
Company A manufacture product X. The selling price per unit is $75.00. This product consumes material costing $10 and 2 hours’ direct labor. Fixed overheads are normally absorbed based on materials usage.
Question: Compute an Income Statement For Company A using: (b)The marginal costing approach. (c)Explain why the two methods produce different results.
Solution: (a)Income Statement Under The Absorption Approach:
(b) Income Statement -Marginal Costing Approach
© Reconciliation between marginal & absorption costing Profit per absorption costing$305,500 Profit per marginal costing$320.500 Difference in profit$15,000 The difference of $15,000 profit between the two method is a result of the valuation of the net change in stock during the period. The actual amount of the fixed overhead in the net change in stock over the period is $15,000 [1,500 unit x $10 fixed overhead per unit] Absorption costing net change in stock$42,000 Marginal costingnet change in stock$27,000 Difference in stock value$15,000 |
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| Please go to my earlier articles on the advantages and disadvantages of absorption costing and marginal costing. | ||||||||||||||||||||||||||||||||||||||||