Marginal Costing vs Absorption Costing

Prepared by: Jessy Chong

Differences:Marginal Costing Absorption CostingCost Classification

•Based on cost behaviour• Variable Costs (VPC, VNPC)• Fixed Costs (FPC, FNPC)

• Stock Valuation• Prime Costs + VPOH

• Profit Reporting• Profit affected if sales volume

change

Cost Classification

•Based on cost function• Production Costs (VPC + FPC

absorbed)• Non-Production Costs (VNPC, FNPC)

• Stock Valuation• Prime Costs + VPOH + FPOH

absorbed• Profit Reporting• Profit affected by production

volume

Marginal CostingAdvantages DisadvantagesNo allocation & apportionment.

(No need to choose the basis of apportionment)

No over/under absorbed. Write off FC in the income statement.

Product cost = VPC, more realistic. No distortion

Profits varies depend to the sales volumes, not production volume.

Helpful in short term decision esp limiting factor. Identify the relevant costs.

Not conform of IAS 2 Stock valuation. Matching concept

Difficult to split the VC & FCNot recover full cost in the

production. May set wrong SPOnly can use for S/T decision.

For L/T still have to consider full costing principle.

Absorption CostingAdvantages DisadvantagesComply with IAS2 Stock

valuation. Cover all relevant production cost.

Set competitive and realistic SPOver/Under absorption can

identify inefficient utilisation of production resources

Emphasis all costs to be recover in the L/T DM.

Cost charge fairly to the product

Confusion in basis of apportionment. Argument of the basis used.

Have to adjust the over/under absorbed at the year end. Cannot absorbed correctly.

Profits are affected by the production volumes. Can be distorted.

Idle Time Idle FacilitiesIs not in the expectation.No budget plan for itIf happen, then cost increasedProfit is reducedExample: Machine break-down,

raw materials run out, power failure

Surplus capacityIs expected and within the

budget or planNo effect on cost and profitExample: spare capacity of

machinery or building

Pg 30Q1 Q2Define what is direct & indirect

wages.Determine the function of

rework dept whether it is a production cost centre or service cost centre.

Conclusion of this case

Identify the options to utilise the Idle Facilities.

Example: Sell, rent, increase the sales volume..etc

How it can helps to improve the profitability.

Pg 31(a) Advantages &

Disadvantages of AC Ps: 7 marks in totals,

therefore give 7 points

(b) Factors to consider when you choose the basis of apportionment.

- The services in between the service cost centres.

- The nature of the service cost centres.

- The nature of the service OH costs.- The data collected & recorded –

reputable & reliable. Can produce realistic apportionment.

- The cost, benefit and time involved – worthiness