ABSORPTION &
MARGINAL COSTING:
This
is a costing system where the total manufacturing costs (fixed and variable
costs) are charged against the product and are treated as product cost. It sets
out each unit of inventory at the total cost to produce it, which will include
the fixed production overheads.
This
can be represented as below;
Marginal costing
This
is a costing system where each unit of product is valued at the total variable
costs of producing each unit. The unit cost will include the cost of direct
materials, direct labour, direct expenses and variable production overheads.
The fixed costs are charged in full in the statement of profit or loss.
This
can be represented as below;
Exercise:
The
following budgeted figures relate to a factory that produces a single product.
Overheads are absorbed on a budget production basis and inventory is valued on
a FIFO basis.
Month 1
|
Month 2
|
Month 3
|
|
Opening
inventory (units)
|
0
|
||
Selling
price (£)
|
160
|
150
|
150
|
Production
(units)
|
6,000
|
6,000
|
5,000
|
Sales
(units)
|
5,500
|
4,200
|
5,500
|
Direct
materials per unit (£)
|
22
|
22
|
22
|
Direct
labour per unit (£)
|
20
|
20
|
20
|
Variable
production costs (£)
|
126,000
|
129,000
|
112,500
|
Fixed
production costs (£)
|
186,000
|
186,000
|
186,000
|
You
are required to prepare the cost statements under absorption and marginal
costing systems for months 2 and 3.
Yours Sincerely,
The Friendly Team
The Training Place of Excellence Limited
The Training Place of Excellence Limited
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