CIMA C1Fundamentals Of Management AccountingOverheads, Absorption & Marginal Costing

Marginal Costing What is Marginal Costing? This takes place where Overhead Costs are

written off in full to the period in which they occur.

Production Overheads under this method are NOT added to Prime Cost as is the case with Absorption Costing

Direct Materials Direct Labour Variable Costs Direct Expenses = Prime Cost Production Overheads - Fixed Costs via OAR

= Total Production (Absorbed Cost) Non-production Overheads = Total Cost

Absorption Costing template

Direct Materials Direct Labour Variable Costs Direct Expenses = Prime Cost Production Overheads – Fixed Costs Non-production Overheads - Fixed Costs = Total Cost

Marginal Costing template

Sales Less Production Costs = Gross Profit Gross Profit Less Expenses (Non-Production) = Net Profit

Absorption Costing template

Sales Less Variable Costs (Prime) = Contribution Contribution Less Fixed Costs: Fixed Production Costs Fixed Non-Production Costs = Net Profit

Marginal Costing template

Write down the data I have, we can practice Marginal AND Absorption Costing techniques:

Sales Price: £20 Direct Materials £6 Direct Labour £3 Variable overheads £4 All above are PER UNIT Fixed Overheads £20,000 Budgeted each

month: Budgeted Production 20,000 units

Marginal Costing Example

Actual Production & sales was 20,000 Units in a particular month:

Calculate:1. Contribution per Unit2. Total Contribution for the month3. Total Profit for the Month – ALL using

MARGINAL COSTING4. Profit for the month using Absorption

Costing

Marginal Costing Example

In the exercise, the Profit achieved were the same under Marginal & Absorption methods

Why? Because SALES = PRODUCTION, both

volumes are 20,000 Units IF Sales & Production quantities differ, the

profits WILL DIFFER!. Accountants expect this & need to reconcile

the difference.

Marginal Costing Example

The reconciliation can be made simpler by working to a method:

Note: This is an exam favourite topic Learn the next slide well: We can then tackle a second question:

Marginal Costing

If Op Stock > Close Stock

If Op Stock = Close Stock

If Op Stock < Close Stock

Absorption & Marginal Costing:

MC Profit > AC Profit

MC Profit = AC Profit

MC Profit < AC Profit

These are KEY Rules: remember them –

Re-work Exercise 2 Make the following adjustment: Actual Production = 6,000 Units Actual Sales = 4,800 units Reconcile the difference in profits:

Exercise 3

Sales Price £10 Direct Materials £3 Direct Labour £2 Variable overheads £1 Fixed Overheads £10,000 per month Budgeted Production 5000 units per month Actual Production & Sales = 4800 units Work out Marginal & Absorption Profits

Exercise 2