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Answer to Management Accounting Question No TCA1 re: Marginal Vs Absorption Costing
Published by slang November 23rd, 2007 in Managerial AccountingNotes:
The traditional techniques of profit reporting are marginal costing and absorption cost. These two techniques have different impacts on profit (and stock) because of the way they treat fixed costs.
In marginal costing:
- Fixed costs are treated as period cost and is written off to the Income Statement in the period incurred.
- Marginal costing involves ascertaining marginal cost and then contribution can be computed
- Fixed costs are treated as product costs.
- It involves ascertaining total costs which enables profit to be calculated.
Solution:
Company X
(a) Marginal Income Statement For the Year Ended 31/12/2006
|
Sales(10,000 x$20) |
200,000 |
|
|
Less: |
||
|
Variable Cost of Goods Sold |
||
|
Production cost (11,000 x $12) |
132,000 |
|
|
Closing Stock(1,000 x 12) |
(12,000) |
(120,000) |
| GROSS MARGIN |
80,000 |
|
|
Less: |
||
|
Variable non-production overheads |
||
|
Variable selling and distribution expenses (10,000 x $1.50) |
(15,000) |
|
| CONTRIBUTION MARGIN |
65,000 |
|
|
Less: |
||
|
Fixed Costs |
||
|
Fixed production overhead |
22,000 |
|
|
Fixed selling and distribution expense |
20,000 |
|
|
Fixed general expenses |
15,000 |
(57,000) |
| NET INCOME |
8,000 |
(b) Income Statement For the Year Ended 31/12/2006 Under Absorption Costing Approach
|
Sales(10,000 x$20) |
200,000 |
|
|
Less: |
||
|
Cost of Goods Sold |
||
|
Production cost (11,000 x $14) |
154,000 |
|
|
Closing Stock(1,000 x 14) |
(14,000) |
(140,000) |
| GROSS PROFIT |
60,000 |
|
|
Less: |
||
|
Operating expenses |
||
|
Selling and distribution expenses (10,000 x $1.50) |
(15,000) |
|
| CONTRIBUTION MARGIN |
65,000 |
|
|
Less: |
||
|
Fixed Costs |
||
|
Fixed production overhead |
22,000 |
|
|
Fixed selling and distribution expense |
20,000 |
|
|
Fixed general expenses |
15,000 |
(50,000) |
| NET INCOME |
10,000 |
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