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

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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