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ACC 416 Absorption Costing Vs Marginal Costing

Absorption costing includes both variable and fixed production overhead costs as product costs, while marginal costing only includes variable production overhead costs as product costs and treats fixed production overhead costs as period costs. Absorption costing is used for external reporting as it complies with GAAP, while marginal costing is used more for internal reporting purposes. The net profit under absorption costing and marginal costing will be the same if production volume equals sales volume, but absorption costing net profit will be higher than marginal costing if production exceeds sales and lower if production is less than sales due to the treatment of fixed overhead costs.

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71 views

ACC 416 Absorption Costing Vs Marginal Costing

Absorption costing includes both variable and fixed production overhead costs as product costs, while marginal costing only includes variable production overhead costs as product costs and treats fixed production overhead costs as period costs. Absorption costing is used for external reporting as it complies with GAAP, while marginal costing is used more for internal reporting purposes. The net profit under absorption costing and marginal costing will be the same if production volume equals sales volume, but absorption costing net profit will be higher than marginal costing if production exceeds sales and lower if production is less than sales due to the treatment of fixed overhead costs.

Uploaded by

NUR IZZATY ALIAH SAMIA'AN
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© © All Rights Reserved
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ACC 416

ABSORPTION
COSTING vs
MARGINAL COSTING
Notes Prepared by:
Prof Madya Khashiah Yusof
Faculty of Accountancy
UiTM Shah Alam
Sources:
Drury, Cost & Management Accounting
Brewer, Garrison, Noreen, Introduction to Managerial Accounting
Weygandt, Kimmel, Kieso, Managerial Accounting
Nor Aziah, Rozita, Rozainun, Che Hamidah, Management Accounting
 What is AC
 What is MC

 Differences between AC and MC

 Income Statement for AC


 Income Statement for MC

 Net Income Effect (Net Profit) for AC


 Net Income Effect (Net Profit) for MC
Direct Materials
Direct Labour
Variable Prod OH

 Absorption Costing  Marginal Costing


 all production overhead costs  only variable production overhead
(variable and fixed) are charged to costs are charged to the product
the product  fixed production overhead costs
Fixed Prod OH is treated as Product Cost
are treated as period costs
(operating expenses)

Fixed Prod OH is treated as Period Cost

NOTE: Under both methods, Selling & Admin Expenses are Period Costs
 Absorption Costing  Marginal Costing
 Fixed production overhead costs  Fixed production overhead costs
are product costs (put into COGS) are period costs (put after
calculating CM)
 Emphasizes on gross profit
 Emphasizes on contribution margin

 Stock is valued at variable cost


 Stock is valued at full cost i.e.
only.
variable cost and fixed cost

 Used for external reporting as it  Used for internal reporting


complies with GAAP purposes because it does not
comply with GAAP.
Net Income Effects (effects on NP) under AC and MC

Net Income Effects (effects on NP) under AC and MC


if production volume is the same as sales volume
if production volume is more than sales volume
if production volume is less than sales volume

Units Produced = Units Sold AC NP = MC NP


Units Produced > Units Sold AC NP > MC NP
Units Produced < Units Sold AC NP < MC NP
Net Income Effects (effects on NP) under AC and MC

Units Produced = Units Sold


AC NP = MC NP

Units Produced > Units Sold


AC NP > MC NP by the amount of Fixed Production OH costs included
in the closing stock that results from units produced but not sold during the
period

Units Produced < Units Sold


AC NP < MC NP by the amount of the Fixed Production OH costs
included in the units sold during the period that were not produced during
the period

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