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ACOF 014                          Introduction to Costing                          Semester 2 2008/ 2009                  ...
expenses                g overhead                     overhead              direct labour                                ...
CM                           RM   400,000    Available to cover the FC of RM300,000.  Fixed costs                         ...
Units manufactured and units sold:     Number of units manufactured (all completed by June                                ...
   INCOME STATEMENT FORMATS     Marginal Costing/Marginal Costing/Direct Costing          the CVP format:              ...
 Example Questions:1. Zeera Limited manufactures a single product, the budgeted selling price and     Marginal cost detai...
1.   NyumNyum Ltd. starts business on 1 July, making product Roro. The standard     cost for Roro is as follows:          ...
3. A company, “Macam-Macam Ada” Enterprise which located in Taman Setiawangsa,manufactures and sells supplement product, “...
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24533935 topic-7-absorption-marginal-costing

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24533935 topic-7-absorption-marginal-costing

  1. 1. ACOF 014 Introduction to Costing Semester 2 2008/ 2009 TOPIC 7: ABSORPTION AND MARGINAL COSTINGOutline:1. Learning Objectives2. Differences between absorption and variable costing3. Impact on profit under each costing technique1. Learning objectives a. Explaining the differences between absorption costing and marginal costing b. Explaining the impact on stock valuation & profit under each costing system c. Explaining the impact on under each costing system d. Preparing multi-period absorption and marginal costing profit statements2. Explaining the differences between absorption costing and Marginal costing 298) Flow of Costs under Full Absorption & Marginal Costing FULL ABSORPTION COSTINGPERIOD COST PRODUCT COSTS Selling and Fixed Variable Directadministrative manufacturin manufacturing materials and expenses g overhead overhead direct labour Work in process inventory Cost of Expenses for Closing goods the period inventories sold MARGINAL COSTINGPERIOD COST PRODUCT COSTS Selling and Fixed Variable Directadministrative manufacturin manufacturing materials and 1
  2. 2. expenses g overhead overhead direct labour Work in process inventory Cost of Expenses for Closing goods the period inventories soldAbsorption Costing = full costing- DM + DL + Marginal + fixed manufacturing OH  product cost- Non-manufacturing cost  period costMarginal Costing (Variable/ Direct Costing) DM + DL + Marginal manufacturing OH  product cost Fixed manufacturing OH + non-manufacturing cost  period costWhich method should be used?External reporting  use absorption Costing Match costs against revenues.** absorption costing  may have under/over recovery of fixed overheads  charged to I/S as period costs (refer Topic #4 on OH)Internal reporting  debatable  both useful in different waysThe Concept of Contribution Margin MARGINAL VARIABLE DIRECT LABOUR COST = COST = + DIRECT MATERIAL + DIRECT EXPENSE + VARIABLE OVERHEADS CONTRIBUTION MARGIN = SALES – MARGINAL COST the contribution margin (CM) is the excess of sales revenues over varibale costs in other words, CM is the amount available to cover the fixed costs, once they are covered, any remaining amounts adds directly to the income form the operations.CM could also be expressed in total or per unit of product.Illustration 1: Contribution Margin Income Statement Sales RM 1,000,000 Variable costs 600,000 2
  3. 3. CM RM 400,000 Available to cover the FC of RM300,000. Fixed costs 300,00 Income from operations RM 100,000(note: think of the fixed costs as a bucket and the CM is water filling the bucket. Once the bucket is filled, the overflow represents income from operations. Up until the point of overflow, however, the CM contributes to fixed costs (filling the bucket)).3. Preparing multi-period absorption and marginal costing profit statementsIllustration 2:The unit cost of production for a firm which produces a single product is: Direct materials 2.60 Direct labour 3.00 Variable overhead 0.40 Fixed overhead 1.00 7.00The fixed overhead calculation is based on a budgeted level of activity of 150,000units and budgeted manufacturing fixed overheads f RM150,000 for each quarter. Thebudgeted selling and administration overheads are RM100,000 per quarter (all fixed).The selling price for the product is RM10 per unit. The production and sales for eachquarter were: Quarter 1 Quarter 2 Quarter 3 Quarter 4Production (units) 150,000 170,000 140,000 150,000Sales (units) 150,000 140,000 160,000 160,000There was no opening stock in Quarter 1 and you should assume that actual costswere identical to estimated costs.You are required to: a) produce in columnar format, absorption and variable costing profit statements b) comment on the results for each quarter and the year as a wholeIllustration 3:Assume, for example, that on June 1, Hamilton Manufacturing Company opened a newplant in Nashville. Data for the plants first month of operations are as follows: 3
  4. 4. Units manufactured and units sold: Number of units manufactured (all completed by June 11,000 30) Number of units sold 101,000 Units in inventory of finished goods at June 30 1,000 Sales revenue and selling and administrative expenses: Net sales (10,000 units sold @ $20) RM 200,000 Selling and administrative expenses: Variable (RM2 per unit sold) RM 20,000 Fixed RM 30,000Required: (a) Prepare manufacturing costs (per unit manufactured) statement under both costing systems (b) Prepare partial income statement under both costing systems4. Explaining the impact on stock valuation & profit under each costing systemImpact on Profit:Production = sales  Absorption costing π = Marginal costing π(i.e. stocks value do not ↑ or ↓, ( same amount of FOH included as expense and asclosing stock)Production > sales  Absorption costing π > Marginal costing π(i.e. when there are units produced that become closing stock)AC: closing stock ↑ as FOH included  higher closing stock  ↑πVC: closing stock ↓ as FOH NOT includedProduction < sales  Absorption costing π < Marginal costing π(i.e. when part of the units sold covered by opening stock)AC: closing stock ↓ because less FOH charged to production  ↓ closing stock ↓πProblems: under Absorption Costing  profit decrease even though sales up and SP and cost structure unchangedWhy? Due to under/ over recovery of FOH in AC 4
  5. 5.  INCOME STATEMENT FORMATS  Marginal Costing/Marginal Costing/Direct Costing  the CVP format: <company name> Income Statement for the <period> ended xx/xx/xxxx_____________________________________________________________________________________________Sales ………………………………………………………………….............. xxxxxMarginal expenses: Beginning inventory ……………………………………………............xxx Marginal manufacturing costs …………………………………….......xxx Cost of goods available for sale …………………………………....... xxx Closing inventory …………………………………………………..........(xxx) Marginal cost of goods sold ……………………………………….......xxx Marginal selling and administrative expenses ……………………. xxx Total Marginal expenses ………………………………………...... (xxxx)Contribution margin …………………………………………………............ xxxxxFixed expenses: Manufacturing overhead ………………………………………….........xxx Selling and administrative ……………………………………….........xxx Total fixed expenses …………………………………………. ....... (xxxx)Net Profit (Loss) from operations ……………………………………........ xxxx Absorption Costing/Full Costing <company name> Income Statement for the <period> ended xx/xx/xxxxSales ………………………………………………………………….............. xxxxxLess: Cost of Goods Sold: Beginning inventory ……………………………………………............ xxx Total production cost ……………………………………………...........xxx Cost of goods available for sale ………………………………….......xxx Closing inventory …………………………………………………..........(xxx)Cost of goods sold ……………………………………………………........... (xxxx)Adjustments for (Under)/Over recovery of overheads …………….. (xxxx)Gross Profit …………………………………………………………................ xxxxxNon-manufacturing overheads/expenses ……………………………..... (xxxx)Net Profit (Loss) from operations ……………………………………........ xxxx 5
  6. 6.  Example Questions:1. Zeera Limited manufactures a single product, the budgeted selling price and Marginal cost details of which are as follows: RM Selling price 15.00 Marginal costs per unit: Direct materials 3.50 Direct labour 4.00 Marginal overhead 2.00 Budgeted fixed overhead costs are RM60,000 per annum, charged at aconstant rate each month. Budgeted production is 30,000 units per annum. In a month when actual production is 2,400 units and exceeded sales by 180units the profit reported under absorption costing was:a. RM6,660b. RM7,570c. RM7,770d. RM8,200e. RM8,4002. A company made 10,000 units at a total cost of RM20 each. Three-quarters of the costs were Marginal and one-quarter fixed. 8,000 units were sold at RM30 each. There were no opening stocks. Calculate the profits under both the absorption and marginal costing system.Tutorial Questions: 6
  7. 7. 1. NyumNyum Ltd. starts business on 1 July, making product Roro. The standard cost for Roro is as follows: RM Direct labour 5 Direct material 8 Variable production overhead 2 Fixed production overhead 5 Total standard production 20 cost The fixed production overhead figure has been calculated on the basis of a budgeted normal output of 36,000 units per annum. You are to assume that all budgeted fixed expenses are incurred evenly over the year. Selling, distribution and administration expenses are: Fixed RM120,000 per annum Variable 15% of the sales value The selling price per unit is RM35 and the number of units produced and sold was: July August (units) (units) Production 2,000 3,200 Sales 1,500 3,000 Required: Prepare profit statements for each of the months of July and August using: a) marginal costing b) absorption costing 2. The data below relate to Buat Taktau Company which makes and sells one product. There was no stock at the beginning of August. August September Units Units Sales 4,000 6,000 Production 8,000 2,000 RM RM Selling price per unit 80 80 Variable production costs per unit 40 40 Fixed production overhead incurred 96,000 96,000 Fixed production overhead cost per unit, being the predetermined overhead absorption rate 12 12 Fixed selling, distribution and administration costs 40,000 40,000Required: a) Prepare comparative profit statements for each month using: (i) Absorption costing; (ii) Marginal costing. 1. Give two examples where marginal costing is used. 7
  8. 8. 3. A company, “Macam-Macam Ada” Enterprise which located in Taman Setiawangsa,manufactures and sells supplement product, “E-Nergy”. The company provides thestandard production costs of which is as follows for one unit of product:- RM Direct Materials (4 kg x RM5/kg) 20 Direct Labour (2 hours x r5/hr) 10 Variable production overhead 8 Selling Price 60Fixed production overhead for the company is RM32,000, which is constantthroughout the year. The company has normal capacity of production units at 16,000units per annum.Other expenditures which relating to selling and distribution are as follows:- Variable : 10% of Sales Values Fixed : RM18,000 per annumSince this is the first year of company’s operations of its business, therefore there isno opening stock for the year 2006. 2006 2007Sales (units) 7,000 8,500Production (units) 9,000 11,000Rquired: a) Prepare profit statement using Marginal Costing for BOTH years. b) Prepare profit statement using Absorption Costing for BOTH years.4. Textbook Drury: Question 8.16 (page 234-235). 8

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