Marginal and Absorption Costing

Question 1

Chapter summary

1. Overview
2. Contribution
3. Calculating a profit or loss under marginal costing
4. Calculating a profit of loss under absorption costing
5. Reconiciliation of absorption and marginal costing profits
6. Absorptions costing vs. marginal costing

Answer 1

Chapter summary

1. The marginal cost is the variable production cost of one unit.
2. Contribution is the amount that a unit contributes towards fixed costs when it is sold. It is calculated as selling price less all variable costs.
3. In marginal costing fixed are treated as period costs.
4. In absorption costing fixed costs are absorbed into the units and carried forwards with closing inventory.
5. The difference in AC and MC can be reconcilled by x change in inventory by the OAR

Question 2

Absorption costing.

Give two advantages and disadvantages to absorption costing.

Answer 2

Advantages:

1) Recognise that selling price must cover all the costs.
2) Complies with IAS 2.

Disadvantages:

1) Profits can be manipulated by changing production levels.
2) Based on the assumption that overheads are volume related.

Question 3

Give three advantages and disadvantages to marginal costing

Answer 3

Advantages