4
Definition

Absorption costing Marginal costing

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Absorption costing

It is costing system which treats all manufacturing costs including both the fixed and variable costs as product costs
10
Key points

It’s important to appreciate the possible implications that a chosen costing approach may have on profit reporting, product pricing,performance evaluation, and decision – making
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Marginal costing

It is a costing system which treats only the variable manufacturing costs as product costs. The fixed manufacturing overheads are regarded as period cost The marginal cost of a product –“ is its variable cost”. This is normally taken to be; direct labour, direct material, direct expenses and the variable part of overheads.
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OAR

Overhead absorption rate is achieved by means of a predetermned overhead absorption rate.

OAR = Budgeted overheads Budgeted level of activity
Departmental

These overheads are usually treated as period costs and written off against profit in the period they arise
8
Review
Full cost of sales In costing a small product made by a manufacturing organisation, direct costs are usually restricted to some of the production costs. A commonly found build-up of costs is therefore as follows: $ Production costs Direct materials Direct wages Direct expenses Prime cost Production overheads Full factory cost( product) Administration costs Selling and distribution costs Full cost of sales
2
Introduction



Two main costing method for stock valuation in manufacturing business,effect on Balance Sheet and Income Statement Before we allocate all manufacturing costs to products regardless of whether they are fixed or variable. This approacห้องสมุดไป่ตู้ is known as absorption costing/full costing However, only variable costs are relevant to decision-making. This is known as marginal costing/variable costing
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Contribution


Marginal costing technique has given birth to a very useful concept of contribution where contribution is given by: Sales revenue less variable cost (marginal cost) Contribution may be defined as the profit before the recovery of fixed costs. Thus, contribution goes toward the recovery of fixed cost and profit, and is equal to fixed cost plus profit (C = F + P).
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Reason?


The costs that vary with a decision should only be included in decision analysis. For many decisions that involve relatively small variations from existing practice and/or are for relatively limited periods of time, fixed costs are not relevant to the decision This is because either fixed costs tend to be impossible to alter in the short term or managers are reluctant to alter them in the short term.
vs blanket
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Exercise 1
A company makes 2 products in 3 departments. Relevant product information is: Product A Direct material cost $15 Direct labour cost in Department X $12 Direct labour cost in Department Y $15 Direct labour cost in Department Z $6 Budgeted number of units 10,000 Product B $25 $18 $15 $0 8,000
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Marginal costing

High low method Exercise 4
output( units) 200 total cost($) 7,000
Month 1
2 3
a)
b)
c)
300 8,000 400 9,000 Find the variable cosst per unit Find the total fixed cost per month Estimate the total cost if output is 250 units in a month
Different costing methods produce different measurements of profit
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Key points

Overheads are allocated/apportioned to cost centres using any” reasonable basis”. Costs accumulated in service cost centres are then re-apportioned to production cost centres. The total costs in these are finally absorbed into cost units using an appropriate absorption rate
Overhead cost clssification
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Overhead analysis

Production overhead ( manufacturing overhead) Administration overhead Selling and distribution overhead R&D overhead
A B C A+B+C D A+B+C+D E F A+B+C+D+E+F
9
Review
In absorption costing, overhead costs will be added to each unit of product manufactured and sold Sometimes, but not always, the overhead costs of administration, selling and distribution are also added to unit costs, to obtain a full cost of sales See your manual page 161 The difference of factory COS and full COS