Module 5 Flashcards
What is the difference between marginal and absorption costing?
Absorption includes fixed production costs in value of stock
Marginal writes fixed production costs off
How to calculate value of closing stock in absorption costing?
(Opening stock + actual production units - actual sales units) x (variable production cost per unit + OAR)
How to calculate value of closing stock in marginal costing?
(Opening stock units + actual production units - actual sales units) x total variable production cost per unit
How are the methods used in allocating costs to stock selected? IAS2
Fairest possible approximation to the expenditure actually incurred in normal course of business bringing product to its present location and condition
Difference in profits calculated by?
Stock movements x OAR
When stock is stable?
Absorption and marginal costing is the same
When is absorption and marginal costing the same?
When stock is stable
When stock is rising?
Profit under absorption cost is higher- some fixed are not written off but are carried forwards within value of stock. Costs lower so profit higher.
Profit under marginal costing is lower
All fixed costs are written off so costs are higher and profit is lower
Why could it be argued that absorption costing is better?
Distinction between production and non-production costs
Production units in a period should bear a share of all costs
Method by which prod costs are charged should be consistently applied
IAS2 requires full cost approach to stock valuation
Compatible with calculation of total unit costs as the basis for setting product prices
Why can it be argued that marginal costing is better?
Key distinction between variable and fixed costs- profit varies with sales and is not dependent on production levels.
Consistency so better for monitoring performance
Fixed costs are period costs so should be written off
Profit planning
Decision making should focus on relevant costs
Problem of allocation avoided
Control of fixed costs is better achieved
