Absorption and Marginal Costing

1154 WordsMay 2, 20145 Pages
Absorption and marginal costing (Relevant to AAT Examination Paper 3: Management Accounting) Li Tak Ming, Andy Deputy Head, Department of Business Administration, Hong Kong Institute of Vocational Education (Kwai Chung) Introduction Absorption costing and marginal costing are alternative cost accumulation systems used to ascertain product or job costs for inventory valuation and cost of sales. Absorption costing Absorption costing includes both variable and fixed production costs in the cost units. Under absorption costing, closing inventory and production cost of sales are valued at full production cost. An absorption costing system is required by Hong Kong Accounting Standard (HKAS) 2 “Inventories” for valuation of inventory…show more content…
Budgeted operating statement for the year ended 31 December (absorption costing system) 2010 2011 $’000 $’000 Sales 16,000 28,000 Less: Production costs of sales Opening inventory 2,200 Add: Variable production overhead costs (W1) 10,000 12,000 Fixed production overhead costs 1,000 1,200 11,000 15,400 Less: Closing inventory 2,200 8,800 15,400 Under/(Over) absorbed fixed production costs (W2) 80 (120) 8,880 15,280 Gross profit 7,120 2 12,720 Less: Variable non-production overhead costs (W3) Fixed non-production overhead costs 400 2,000 2,400 700 2,000 2,700 Net profit 4,720 10,020 Budgeted operating statement for the year ended 31 December (marginal costing system) 2010 2011 $’000 $’000 Sales 16,000 28,000 Less: Variable production costs of sales Opening inventory 2,000 Add: Variable production overhead costs (W1) 10,000 12,000 10,000 14,000 Less: Closing inventory 2,000 8,000 14,000 Variable non-production overhead costs (W3) 400 700 8,400 14,700 Contribution 7,600 13,300 Less: Fixed production overhead costs Fixed non-production overhead costs 1,080 2,000 3,080 1,080 2,000 3,080 Net profit 4,520 10,220 Workings: (W1) 2010: $(50 + 120 + 30) × 50,000 = $10,000,000 2011: $(50 + 120 + 30) × 60,000 = $12,000,000 (W2) 2010: (54,000 – 50,000) x $20 = $80,000 2011: (54,000 –
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