Marginal vs. Absorption Costing

This assignment delves into the concepts of marginal and absorption costing techniques. It provides a detailed explanation of each method, illustrated with calculations and examples. The assignment also includes a reconciliation statement demonstrating how net profits differ between the two methods. Students will gain a clear understanding of the nuances of these costing approaches and their impact on financial reporting.

P3
Marginal costing: this is one of the costing technique which helps to analyse the aspects
of all variable cost and production overheads which remain associated with production and
manufacturing process of marginal context. Marginal costing helps to analyse the cost of over all
production and manufacturing units. Direct material, direct labour and direct expensed are key
elements which are considered in marginal costing. This helps to analyse the strategic decision
which directly remain associated with production process. As per decision making perspective
marginal costing plays significant role. This costing remain the part of unit costing.
Abortion costing: absorption costing remain associated with overall cost of organisation.
This is also called as full costing calculation method which helps to analysing and measured the
cost of operations in sequential manner. All the direct and indirect parts are also considered in
this context subject to evaluating cost of product and services. This costing technique is remain
relevant for absorption costing subject to higher profit. One drawback of this costing technique is
that absorption costing do not remain the part of decision making process.
Calculation of profit by using absorption costing
technique
Particulars Calculation Amount
Sales 52500
Less: cost of goods sold (W/N 1)
Cost of opening inventory
Direct labour 10000
Direct material 16000
Variable production overheads 4000
Fixed overheads 10000
Less: cost of closing inventory -10000 -30000
Profit before deduction fixed overheads and selling and
distribution expenses 22500
Less: under/over absorption -5000
17500

Less: selling and distribution expense
fixed overheads -10000
variable overheads -7875
Net profit or loss -375
Calculation of profit by using marginal costing
technique
Particulars Amount
Sales 52500
Less: cost of goods sold
Cost of opening inventory
Direct labour 10000
Direct material 16000
Variable production overheads 4000
Less: cost of closing inventory (500*15) -7500 -22500
Profit before selling and distribution expenses 30000
Less: selling and distribution expense
variable overheads -7875
Net profit or loss 22125
Less: Fixed cost -25000
Profit/loss -2875
Working Notes:
1. Calculation of cost of goods sold under absorption
costing technique
Particulars Details Amount
Cost of opening inventory -
Direct labour (2000* 5) 10000

Direct material (2000*8) 16000
Variable production overheads (2000*2) 4000
Fixed overheads (2000*5) 10000
Less: cost of closing inventory (500*20) -10000
Cost of goods sold 30000
2. Calculation of selling and distribution expenses
Particulars Details Amount
fixed overheads 10000
variable overheads (52500*15%) 7875
Total selling and distribution expenses 17875
3. Calculation of cost of goods sold under marginal
costing technique
Particulars Details Amount
Cost of opening inventory -
Direct labour (2000* 5) 10000
Direct material (2000*8) 16000
Variable production overheads (2000*2) 4000
Less: cost of closing inventory (500*15) 7500
Cost of goods sold 22500
Reconciliation of profits
Absorption costing
Particular Amount
Net profits in marginal costing -2875
Less: Fixed cost difference in manufacturing units 7500
Net operating profits in marginal costing 4625