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Absorption Costing & Marginal Costing ADM PGDM I

The document provides information about a company's expected sales, costs, and a special export order offer. It discusses absorption costing and marginal costing methods. Under absorption costing, all costs including fixed costs are allocated to products. Marginal costing only includes variable costs in product costs and treats fixed costs as period costs. To determine whether to accept the export order, marginal costing would be more appropriate since it shows the relevant costs and contribution of the special order. A decision can be made by comparing the order price to the marginal cost per unit.

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Sanjay Sharma
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33 views

Absorption Costing & Marginal Costing ADM PGDM I

The document provides information about a company's expected sales, costs, and a special export order offer. It discusses absorption costing and marginal costing methods. Under absorption costing, all costs including fixed costs are allocated to products. Marginal costing only includes variable costs in product costs and treats fixed costs as period costs. To determine whether to accept the export order, marginal costing would be more appropriate since it shows the relevant costs and contribution of the special order. A decision can be made by comparing the order price to the marginal cost per unit.

Uploaded by

Sanjay Sharma
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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ABSORPTION COSTING &

MARGINAL COSTING
ADM
PGDM I

THE FOLLOWING DATA RELATE TO A COMPANY:

Expected sales
: 50,000 units

Direct material cost


: Rs. 2.50 per unit

Direct labour cost


: Rs. 2.00 per unit

Variable Overhead
: Rs. 1.50 per unit

Fixed cost ( allocated ) : Rs. 1.50 per unit

Selling price
: Rs.10.00 per unit
The firm expects to get a special export order for
10,000 units at a price of Rs. 7.25 per unit.
Advise whether the export order should be
accepted or not.
The company has a capacity to produce 60,000 units.

INFERENCES:
An organization has different costs
having different nature.
Example: Fixed, Variable, Mixed Cost
These costs behave differently to
changes in the level of business activity.
Understanding this relationship helps in
planning, control and developing
successful business strategies.

Cost of a product / process can


be ascertained by :

1. Absorption costing
2. Marginal costing

ABSORPTION COSTING
Traditional or full cost method: Cost of a product
= V. C. + F. C.
Variable costs are directly charged to the
product.
Fixed costs are apportioned on suitable basis.

MARGINAL COSTING
Direct Costing / Variable Costing
A Technique of Costing

Meaning
Ascertainment of marginal cost by
Differentiating between F.C. and V.C. and of
the effect on profit of changes in volume or
type of output.
Cost of a product : Only VCs are
considered for Product cost
FCs : Charged against the revenue of the
period.
FC = Period costs
Valuation of inventory at M.C.
Contribution = C = S - V = F + P
Price = M.C. + Contribution

MARGINAL COSTING Vs. ABSORPTION COSTING


The following information relates to ABC
Company for the year 2007-08:
Sales 10,000 units at Rs. 5 each;
Production 15,000 units at the following
costs:

Rs.
Direct materials
15,000
Direct labour
30,000
Variable expenses
6,000
Fixed expenses
12,000
Determine net profit.

Income Statement for the year


2007-08
Marginal

Sales
50,000
Cost of Production:
Direct materials
15,000
Direct labour
30,000
Variable overhead
6,000
Fixed overhead
_

51,000
Less Closing Stock
17,000
Cost of goods sold
34,000
Contribution
(50,000- 34,000)
16,000
Fixed overhead
12,000
Profit
4,000

Absorpotion

50,000
15,000
30,000
6,000
12,000
63,000
21,000
42,000

8,000

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