Marginal And Absorption Costing Exam Questions Pdf

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To help make such decisions, costs can be classified in different ways: direct or indirect in relation to production product costs fixed, variable or semi-variable in relation to time period costs. The difference in the treatment of fixed and variable costs is often crucial in making these decisions. The way fixed and variable costs are treated can give substantially different valuations of stock and hence profits. Dividing costs into product costs or period costs is essential in considering cost elements in absorption and marginal costing.

Chapter 21 Absorption Costing or Full Costing

To browse Academia. Skip to main content. By using our site, you agree to our collection of information through the use of cookies. To learn more, view our Privacy Policy. Log In Sign Up. Download Free PDF. Chapter 21 Absorption Costing or Full Costing. Karim Uddin. Bill Gates. Download PDF. A short summary of this paper. In the absence of profits, in the long run, management is not interested to continue that product. Management wants to ensure a reasonable return on the investment made.

Absorption costing facilitates that objective. The objective of management, under absorption costing, is that each product recovers its full cost and leaves something towards profit as a return on investment. All products may not give equal contribution. Selling price of some products may cover the variable cost component, fully, while they may not cover the fixed cost component, totally.

Though full costs are not recovered, in the short run, management continues production as they leave certain amount in the form of contribution that would cover the fixed costs, at least, partly.

This is only short-term approach. In the long -run, every firm wants to recover full costs, both fixed and variable, and leave something towards planned profits, which is the objective of every firm to maximize.

This is a short-term objective. Any management for a long period, permanently, cannot sustain, ignoring recovery of fixed costs. Under absorption costing, management is concerned with recovery of total costs.

Unless total costs are recovered, management does not continue production of the concerned product. Basically, this is a long-term objective. The objectives of marginal costing and absorption costing are conflicting with each other. Marginal costing is appropriate in the short-run and for selecting special orders, while absorption costing is suited as a long-term objective.

The objectives of marginal costing and absorption costing are not one and the same, in respect of recovery of costs. Both Absorption Costing and Marginal Costing have their own role to play. If only variable costs are recovered by the unit cost, when and how fixed costs can be recovered? When a special export order is under consideration, application of absorption costing may result in rejection of the order when full cost is not recovered by the unit cost in the proposed export order.

Marginal costing is the right technique to decide on such special orders. Application of MarginalCosting results in acceptance of the special order as the same unit cost results in recovery of variable costs, totally, and leaves something towards contribution, which results in increased profits of the firm. The special order may be rejected, if absorption costing is applied for determining the cost. Depending on the context, suitable application is to be made. However, fixed costs are ignored in Marginal costing for valuation of cost of production and closing stock.

Profit calculated between Absorption costing would be different from the profit calculated under Marginal costing. The basis could be a percentage of direct material or percentage of direct labour or rate per article etc.

Whatever be the basis of apportionment of fixed cost to different products, it cannot be said that the apportionment is exact and definite. Charging of fixed costs creates certain problems.

Cost of production would be higher in Absorption Costing, compared to Marginal Costing, due to inclusion of fixed cost component in the former. A simple example would explain the picture better.

There is no increase in the price of raw materials or labour. However, the cost of production per unit has gone up by Rs. It appears illogical. Some people, therefore, argue that the fixed costs should not be considered, while computing the cost of product.

In Marginal costing, fixed costs are charged against a fund, arising out of excess of selling price over variable cost. This is the logic of marginal costing. When sales and production coincide no opening stock and closing stock situation , profit would be same under both Absorption costing and Marginal costing.

If closing stock were more than the opening stock, profit under Absorption Costing would be more than profit under Marginal Costing. This is, because, under Absorption Costing, a portion of fixed overhead is charged to the closing stock and carried over to the next year, instead of being charged to the current period. If closing stock is less than the opening stock, the profit shown under Absorption Costing will be lower than the profit under Marginal Costing.

This is because a portion of fixed cost relating to the previous year is charged to the current period. The following examples would explain. Illustration No. As there is no opening stock, the difference in profit is due to valuation of closing stock, alone. Thus, the profit under Absorption Costing System would be more as compared to Marginal Costing, if closing stock only exists, without any opening stock.

In case, there are no stocks Opening stock and closing stock whatsoever, the profits under both absorption costing and marginal costing will be the same. Details of cost of production shows variable costs are Rs. They are uniform for three months. The costs of their manufacture are as The total overheads are Rs. Out of which Rs. It is decided to apportion these costs over different products in the ratio of output. You are required to prepare separate statements, showing cost of each product and profit according to Absorption Costing and Marginal Costing.

Note: Net profit is same both in Absorption Costing and Marginal Costing, due to absence of closing stock and opening stock. However, production has been only 5, units. Hence, under absorbed overhead has been charged. However, total amount of profit is same Rs. So cumulative profit is same under both absorption costing and marginal costing. The total overheads are Rs. Compute the amount of profit under Marginal and Absorption Costing systems, in case the units sold of the products X, Y and Z are in each case.

Comment on the reasons for the difference in profit between Absorption Costing and Marginal Costing. What would be the impact of closing stock and opening stock on the profits shown between Absorption Costing and Marginal Costing?

This is on account of the difference in valuation of closing Stock on account of fixed costs. The closing stock under Absorption Costing System is Rs. The difference in profit Rs. In second month, the closing stock is more than the opening stock. Profit in absorption costing is Rs. If opening stock is more than the closing stock, profit in marginal costing would be more than the profit in absorption costing. Stock in absorption costing always contain fixed costs component.

As opening stock is more than the closing stock, profit would be less in absorption costing, compared to marginal costing. It may be noted that fixed costs would not be apportioned in marginal costing. This situation is evident in the third month, with a profit of Rs. The profit determined under Marginal Costing is a linear function of sales. In other words, contribution is exactly proportional to sales.

Changes in production and sales do not have any impact on contribution. See all the four columns in Marginal Costing. Profit determined under Absorption Costing is influenced by both production and sales. All costs are treated as product costs. Under absorption costing, all costs, both variable and fixed, are charged to the products for cost determination.

Name the main difference between 'Absorption Costing' and 'Marginal Costing'. In 'Absorption costing', there is no difference between fixed costs and variable costs for treatment.

Both are charged to production in the year in which they are incurred. Fixed costs are apportioned to different products on a suitable basis.

In other words, all costs are charged to production for determining the selling price. However, in 'Marginal costing', fixed costs are ignored and only variable costs are considered for determining the selling price. Orders that may be refused in absorption costing may be accepted in marginal costing. Explain the reasoning. Yes, orders that may be refused in absorption costing may be accepted in marginal costing.

Chapter 21 Absorption Costing or Full Costing

Marginal Costing is one of five Management Accounting topics asked as Questions 8 and 9 in Section 3 of the accounting examination over the years as follows:. Mooney Ltd. Three differences in focus between Management Accounting and Financial Accounting. The choice in Section 3 is to answer either Question 8 or Question 9 80 marks each. Outline three differences in focus between Management Accounting and Financial Accounting. Financial Accounting records past events and provides information in the form of a profit and loss account, balance sheet and cash flow statement. Management Accounting has an internal focus and provides information to aid planning and decision making.

ABSORPTION AND MARGINAL COSTING

Business climate is changing rapidly in current scenario therefore management needs every day and accurate information about the business and costs incurred to take wise decisions to avoid all possible wastages and losses and to augment the effectiveness of the business. The management must to make proper assessment of the productivity and performance of the personnel only if it uses effective costing methods. It is recommended to consider a particular costing method because costing methods that a business adopts can play vital roles in the development of advanced manufacturing technologies and business philosophies. Marginal costing and absorption costing are the basic two methods of costing that are used for managerial decision making.

What is absorption costing? (Step by Step guide)

Absorption costing statement assumes that fixed costs attach to products so all the production costs, whether fixed or variable should become part of product cost. Marginal cost statement offers an alternative layout to the traditional income statement prepared under absorption costing.

Marginal Costing And Absorption Costing

Inventory values using absorption costing are therefore greater than those calculated using marginal costing. Absorption and Marginal Costings. The effect of absorption and marginal costing on inventory valuation and profit Marginal costing values inventory at the total variable production cost of a product.

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The marginal cost of an item is its variable cost. The marginalproduction cost of an item is the sum of its direct materials cost,direct labour cost, direct expenses cost if any and variableproduction overhead cost. So as the volume of production and salesincreases total variable costs rise proportionately. Fixed costs, in contrast are cost that remain unchanged in a time period, regardless of the volume of production and sale. Marginal production cost is the part of the cost of one unit of productor service which would be avoided if that unit were not produced, orwhich would increase if one extra unit were produced. From this we can develop the following definition of marginal costing as used in management accounting:.

Definition:

Managerial Accounting. Absorption costing is the process of linking all production costs to the cost unit to calculate a full cost per unit of inventories. This costing method treats all types of production costs as costs of the product regardless of fixed cost or variance cost. It is sometimes called the full costing method because it includes all types of cost to get a cost unit. Those costs include direct costs, variable overhead costs, and fixed overhead costs. In this articles, we will discuss only above the definition of absorption costing, but we will also discus about the formula, calculation, example, advantages and disadvantages.

The following data relates to the performance of the entity during October. Profit Rs. All overhead costs are fixed costs. Required Calculate: a the actual production overhead cost for October b the profit that would have been reported in October if Entity T had used marginal costing. Currently, it uses absorption costing to measure profits and inventory values. The budgeted production cost per unit is as follows: Rs. Direct labour 3 hours at Rs.

The following data relates to the performance of the entity during October. Profit Rs. All overhead costs are fixed costs. Required Calculate: a the actual production overhead cost for October b the profit that would have been reported in October if Entity T had used marginal costing. Currently, it uses absorption costing to measure profits and inventory values. The budgeted production cost per unit is as follows: Rs.

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4 Response
  1. Vick L.

    Exam guide. Look out for questions in your examination which require you to calculate profit or losses using absorption and marginal costing. 1 Marginal cost.

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