Marginal and absorption costing
General:
Product cost = Unit cost
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Production
cost
CGS
Inventory
Marginal Cost
1. Unit cost
Direct material
Direct Labour
Direct expenses
Variable production overheads
2. CGS
= Units sold X unit cost
3. Inventory
= units X unit cost
(Production units - Sales units)
4. Contribution per unit
= Selling price per unit – unit cost – variable non production cost
Absorption costing
1. Unit cost
Unit cost as per marginal costing
Fixed production overheads (OAR per unit) 5. Total contribution
= units sold X contribution per unit
5. Total Gross profit
= units sold X Gross profit per unit
Or
Total sales – CGS
6. Profit
= total GP ± over/ (under absorption)
– Non Production costs
7. Over/ (under absorption)
= Absorbed FOH – Actual FOH
6. Profit
= Total contribution – Fixed costs
7. Fixed costs
= Actual Production FOH + Non production
8. Non production costs
Admin + selling + distribution etc.
2. CGS
= Units sold X unit cost
3. Inventory
= units X unit cost
(Production units - Sales units)
4. Gross profit per unit
= Selling price per unit – unit cost
DIFFERENCE IN PROFIT
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Difference in profit is due to difference in unit cost. You might have noticed that difference is
OAR/ unit.
In marginal costing fixed production overheads are treated as period cost. Hence not included in inventory valuation and made expense in a period. (Same like non production cost in an income statement). www.financedoctors.net ACCA F 2
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So value of inventory is always higher under absorption costing.
So difference in profit = (Closing inventory units – Opening inventory units) X OAR/ unit
