1. Chapter 9 Absorption and Marginal Costing

2. Study guide
Explain the importance of, and apply, the concept of contribution. [s]
Demonstrate and discuss the effect of absorption and marginal costing on inventory valuation and profit determination. [s]
Calculate profit or loss under absorption and marginal costing. [s]
Reconcile the profits or losses calculated under absorption and marginal costing. [s]
Describe the advantages and disadvantages of absorption and marginal costing. [k]

3. 1. Marginal cost and marginal costing

4. 1.1 Marginal cost 边际成本
Marginal cost is the variable cost of one unit of product or service.
P.176

5. 1.2 Contribution 边际贡献 Contribution = - sales revenue
variable (marginal)
cost of sales
Contribution =
It is short for contribution towards covering fixed overheads and making a profit
Contribution per unit is constant at all levels of output and sales

6. 1.3 Marginal costing（边际成本法）
Absorption costing recognises fixed costs （fixed production cost） as part of the cost of a unit of output, ie as product costs
Marginal costing on the other hand treats all fixed costs as period costs.

7. 2. The principles of marginal costing

8. Fixed costs are treated as a period cost,
Only variable costs are charged as a cost of sale and contribution is calculated.
Closing inventories of work in progress or finished goods are valued at marginal production cost.
Fixed costs are treated as a period cost,
Period cost are charged in full to the profit and loss account of the accounting period in which they are incurred. （Period costs are charged in full to income statement）

9. P.268
Period fixed costs are the same, for any volume of sales and production. Therefore, by selling an extra item of product or service the following will happen：
Revenue will increase by the sales value of the item sold.
Costs will increase by the variable cost per unit.
Profit will increase by the amount of contribution earned from the extra item.

10. Profit measurement should therefore be based on an analysis of total contribution.
When a unit of product is made, the extra costs incurred in its manufacture are the variable production costs.

11. Marginal production cost
Total cost
Direct
material
Variable cost
Direct
labour
Production cost
Marginal production cost
Direct expense
variable PO
Production
overhead
Fixed PO
Non-production cost
Period cost
variable A O
Administration
overhead
Fixed A O
General overhead
Selling/
distribution
overhead
variable SD O
Fixed SD O

12. Year 1
Year 2
Sales
Less: cost of sales:
Opening inventory
Add: variable production cost
Available for sale
less: vale of closing inventory (at marginal cost)
Cost of sales
Less: Variable selling cost
Contribution
Less: Fixed cost:
Fixed factory overhead
Fixed Selling cost
Total fixed cost
Net profit/loss

13. 3. Marginal costing versus absorption costing

14. Inventoried costs on Balance Sheet Expense on Income Statement
Marginal costing
Inventoried costs on Balance Sheet
Expense on Income Statement
Initially applied to inventory as product costs
Direct material
Become expenses when the inventory is sold
Direct labor
As goods are sold
Variable MO
Fixed MO
Become expenses immediately
Treated as period cost
Non factory cost
MO：Manufacturing overhead

15. Inventoried costs on Balance Sheet Expense on Income Statement
Absorption costing
Marginal costing
Inventoried costs on Balance Sheet
Expense on Income Statement
Initially applied to inventory as product costs
Direct material
Become expenses when the inventory is sold
Direct labor
As goods are sold
Variable MO
Fixed MO
Become expenses immediately
Treated as period cost
Non factory cost
MO：Manufacturing overhead

16. 共同的期间成本 共同的产品成本 吸收成本法做为产品成本处理 固定性制造费用（固定生产成本） 边际成本法做为期间成本处理 非生产成本
变动生产成本
直接材料
直接人工
变动制造费用
共同的产品成本
吸收成本法做为产品成本处理
固定性制造费用（固定生产成本）
边际成本法做为期间成本处理

17. Overhead absorption rate per unit:
Budgeted fixed production overhead
OAR =
Budgeted units

18. Absorption-costing method
Year 1
Year 2
Sales
Less: Cost of sales:
Opening inventory
Add: production cost
Less: vale of closing inventory
Over/under absorption
Gross profit / gross margin
Less: Selling and administrative cost
Variable
Fixed
Net profit

19. 4. Reconciling profits

20. Marginal costing and absorption costing give rise to different profit figures which can be reconciled [‘rekənsail] 和好，一致
Under marginal costing closing inventories are valued at marginal production cost
Under absorption costing closing inventories are valued at full production cost (including production overheads)

21. P183
If inventory levels increase between the beginning and end of a period, absorption costing will report higher profit.
If inventory levels decrease, absorption costing report the lower profit.
The difference in profits is the difference between fixed production overhead included in the opening and closing inventory valuations using absorption costing

22. RECONCILIATION 【rekənsili'eiʃən]
＝ （ ）
吸收成本法当期利润
边际成本法当期利润
全部成本法期
末存货中固定
性制造费用
期初存货
中固定性
制造费用
RECONCILIATION 【rekənsili'eiʃən]
Marginal costing profit xx
Adjust for fixed overheads in inventory:
+ increase / – decrease x/(x)
Absorption costing profit xx
Change in inventory level x
overhead absorption rate per unit

23. 5 Marginal costing versus absorption costing

24. Advantages to using absorption costing
Fixed production costs are incurred making the output and so it is only 'fair' to charge all output with a share of these costs
Recognises that selling price must cover all cost.
Closing inventory will be valued in accordance with IAS 2

25. Advantages to using marginal costing
Absorption costing information is irrelevant when making short-run decisions – contribution is most important
It is simple to operate
There are no arbitrary fixed cost apportionments
Fixed costs in a period will be the same regardless of the level of output and so they should be charged as a period cost

26. Profit depends on sales and efficiency not production level (absorption costing encourages management to produce goods in order to absorb allocated overheads)
It is realistic to value closing inventory items at the (directly attributable) cost to produce an extra unit – marginal cost
Under/over absorption is avoided

27. Chapter roundup
Marginal cost is the variable cost of one unit of product or service.
Contribution is an important measure in marginal costing, and it is calculated as the difference between sales value and marginal or variable cost of sales.
In marginal costing, fixed production costs are treated as period costs and are written off as they are incurred. In absorption costing, fixed production costs are absorbed into the cost of units and are carried forward in inventory to be charged against sales for the next period. Inventory values using absorption costing are therefore greater than those calculated using marginal costing.

28. Reported profit figures using marginal costing or absorption costing will differ if there is any change in the level of inventories in the period. If production is equal to sales, there will be no difference in calculated profits using these costing methods.
Absorption costing is most often used for routine profit reporting and must be used for financial accounting purposes. Marginal costing provides better management information for planning and decision making. There are a number of arguments both for and against each of the costing systems,