Marginal costing and Absorption costing Flashcards
What is definition of marginal costing?
The extra cost arising as a result of producing one more unit.
What kind of costs are included n Marginal costing ?
Only variable production costs are included in the valuation of units.
How is basic marginal cost calculated ?
Marginal cost = prime cost + variable production costs
How is contribution per unit (CPU) calculated ?
CPU = Selling price per unit - ALL unit variable costs
How is Total contribution calculated ?
Total contribution = CPU x units sold.
What is contribution ?
Once fixed costs have been covered, any extra contribution ‘contributes’ to profit.
What is a big advantage of Marginal costing ?
It helps with short-term decision making.
What is the main difference between MC and TAC ?
Under MC, fixed production costs are PERIOD costs.
Under TAC, fixed production costs are PRODUCT costs.
What will be affected if MC or TAC is adopted ?
- Inventory valuation and therefore cost of sales and profit in a particular period.
- The format of a P&L account.
What is the quickest way to calculate MC profit ?
Total contribution -fixed costs as a period charge.
How is inventory valued under MC ?
MC values inventories at variable production cost.
(MC expenses all fixed costs in the period they are incurred)
How is inventory valued under TAC ?
TAC values inventories at full production cost.
(TAC expenses fixed production costs in period inventory is sold)
What is the format of the profit or loss account under MC ?
Sales
Less: COS
Opening inventory
Variable production costs
(Closing inventory)
=
Less: (Variable non production costs)
= Contribution
Less: fixed costs
(production)
(non production)
= Net profit
What is the format of the profit or loss account under TAC ?
Sale
Less: COS
Opening inventory
Variable production costs
Fixed production overhead absorbed *
Under/ (over) absorbed production OH
(Closing inventory)
=
= Gross profit
Less: non production costs
(fixed)
(variable)
= Net profit
What causes differences between reported profit figures ?
Fixed production overheads contained in inventory.
What is the Profit reconciliation statement ?
MC profit
(cl inv - op inv) x fixed OAR
= TAC profit
Fixed OAR = fixed production overheads / Budgeted
What are the advantages of TAC (absorption costing) ? (3)
- Fixed production costs can be a significant part of total costs.
- Required for financial reporting.
- Under / (over) absorption can identify inefficient utilization.
What are the advantages of MC (marginal costing) ? (4)
- Simple
- Avoids arbitrary allocation / absorption of overheads.
- Better for short-term decision making.
- Profits only rise if sales rise (not production).
How do you calculate difference in profit between MC and TAC?
Difference in profit =
change in inventory x fixed production overhead per unit.
What is the proforma for working out total cost for TAC (product cost) ?
Direct materials
Direct labor
Production overheads
= Total production costs
General overheads
= Total cost
