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MARGINAL COSTING AND ABSORPTION COSTING

MARGINAL COSTING AND ABSORPTION COSTING

LEARNING OBJECTIVE

  1. PRODUCTION AND NON PRODUCTION OVERHEADS
  2. THE CONCEPT OF CONTRIBUTION
  3. ABSORPTION COSTING AND MARGINAL COSTING

1.PRODUCTION AND NON PRODUCTION OVERHEADS

Under and over absorption of production overhead:

It is very unlikely that the forecasts for production overhead and activity levels used to determine the absorption rate will be 100% accurate. There will almost certainly be a different amount of overhead actually incurred a different level of activity achieved.

Note: under-absorbed overhead as expense

Non-production overheads:

  • Selling and distribution overheads
  • Administration overheads
  • Finance overheads.

It is also possible to include as part of cost of product ( not a particularly common practice) if organization wish use suitable absorption basis such as per unit basis or perhaps a percentage of production cost of product.

2.THE CONCEPT OF CONTRIBUTION

Fixed and Variable costs:

In previous chapter a distinction was drawn between fixed cost and variable costs.

If all costs of a business (fixed and variable) are deducted from sales revenue, the remaining amount is known as profit.

Contribution:

Contribution is sales less variable costs.

Contribution can be calculated on a per unit basis or alternatively on a total basis.

3. ABSORPTION COSTING AND MARGINAL COSTING

Absorption costing is a cost accounting system that changes both fixed and variable production overheads to cost units.

Marginal costing is an accounting system in which variable costs are charged to cost units and fixed costs are not absorbed into cost units but written off in the income statement for the period to which they relate.

Inventory Valuation: Under marginal costing inventory is valued at variable production cost. This is in contrast to    absorption costing where fixed production overhead costs are also include in inventory valuation using the predetermined absorption rate.

Source:

  1. KAPLAN
  2. BPP
  3. Phnom Penh HR

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