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.
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Company A manufacture and sell a new product. The following information is given:
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Selling price
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$9.00 per unit
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Variable production costs
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$3.60 per unit
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Variable non-production costs
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5% of sales revenue
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Fixed production costs
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$5,900 per month
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Fixed non-production costs
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$3,600 per month
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Expected production and sales:
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Month 1
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Production (units)
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2,000
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Sales (units)
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1,200
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Based on MARGINAL Costing Method to get the Forecasted Profit Statement at Month 1
Profit Statement at Month 1
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Marginal Costing Approach
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$
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$
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$
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Sales
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(1,200x$9)
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10,800
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Less:
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Variable production cost of sales
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(1,200 x$3.60)
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(4,320)
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Gross Contribution
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6,480
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Less: Variable non-production costs
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(540)
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NET CONTRIBUTION
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5,140
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Less:
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Fixed production costs
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5,900
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Fixed non-production costs
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3,600
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9,500
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Loss Under Marginal Costing Method
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(3,560)
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Based on ABSORPTION Costing Method to get the Forecasted Profit Statement at Month 1
Profit Statement at Month 1
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Absorption Costing Approach
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$
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$
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$
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Sales
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(1,200x$9)
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10,800
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Less:
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Production cost of sales
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1,200 x [($3.60+ $5,900/2000)=$6.55]
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(7,860)
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2,940
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Less:
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Non-production costs
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Variable
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(540)
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Fixed non production costs
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(3,600)
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(4,140)
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Loss reported Under Absorption Costing Method
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(1,200)
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RECONCILIATION STATEMENT
BETWEEN MARGINAL COSTING METHOD AND ABSORPTION COSTING METHOD BASED ON ABOVE FIGURES
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Loss per marginal costing
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($3,560)
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Increase in Stock Level
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2,000 -1,200 units
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800 units
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Multiply (x)
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Difference in Stock Valuation
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Marginal costing approach
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$3.60
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Absorption costing approach
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$6.55
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Difference
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2.95
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2,360
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Loss per absorption costing
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($1,200)
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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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