Mc 105 accounting for managerial decisions

1. Presentation on topic : method of income
determination under marginal and absorption
costing.
Presented by : Sangeeta Saini
M. Com (P)
641

2. Contents
Meaning of Marginal cost .
Meaning of Marginal costing.
Meaning of absorption costing.
Calculation of profit under absorption costing and marginal
costing.
Difference between marginal costing and absorption costing.
Illustration of absorption costing and marginal costing.
Advantages of marginal costing.
Disadvantages of marginal costing .
Conclusion .

3. Meaning of marginal cost
Marginal cost is the change in the total cost
due to change in output by one unit.
Example : for the production of 1,000 units
of a product ,the variable cost is Rs. 5 per
unit and fixed cost is Rs. 5,000 per annum .
If the production is increased by one unit ,
marginal cost will be:

4. Hence, marginal cost is Rs.5
• Total cost of 1,000
units :
Fixed cost = Rs. 5,000
Variable cost = Rs.
5,000
(1,000 units * Rs. 5)
Total cost = Rs. 10,000
• Total cost of 1,001
units:
Fixed cost = Rs. 5,000
Variable cost = Rs.
5,005
(1,001 units * Rs. 5)
Total cost = Rs. 10,005
• Marginal cost =Rs.
10,005-Rs. 10,000 =
Rs.5

5. Meaning of marginal costing
• Marginal costing is a technique which
is concerned with the change in cost
and profits result from change in the
volume of output . Marginal costing is
also known as ‘variable costing’ and
‘direct costing’.

6. Assumptions of marginal
costing
All
elements of
cost can be
segregated
into fixed
and
variable
component
s.
Fixed cost
remains
constant
for the
entire
volume of
output.
Variable
cost
remains
constant
per unit of
output
irrespective
of the level
of output .
Selling
price
remains
constant at
all level of
activities.
The
volume of
output is
only factor
which
influence
the cost.

7. Calculation of profit under marginal costing.
Particulars Rs. Rs.
(a) Sales
(b) Less :variable cost of goods sold :
(1) Direct material cost
(2) Direct labour cost
(3) Direct expenses
(4) Variable production overheads
Variable cost of goods produced
Add: opening stock
Less: Closing stock
Variable cost of goods sold
Add : variable administration overheads
Add : variable selling & distribution overheads
variable cost of sales
(c) Contribution (a)-(b)
(d) Less : fixed administration , production , selling &
distribution overheads
(e) Profit under marginal costing
xxx
xxx
xxx
xxx
XXX
xxx
xxx
XXX
xxx
xxx
XXX
XXX
XXX
xxx
XXX

8. Absorption costing
• Absorption costing is the total
cost technique. Under absorption
costing all costs whether variable
or fixed are treated as product
costs . It is also known as ‘full
costing technique’.

9. Calculation of profit under absorption costing.
Particulars Rs. Rs.
(a) Sales
(b) Less :manufacturing cost of goods sold :
(1) Direct material cost
(2) Direct labour cost
(3) Direct expenses
(4) fixed Variable production overheads
Total cost of goods produced
Add: opening stock
Less: Closing stock
Cost of goods sold
Add : under absorbed fixed production overheads
Add : over absorbed fixed production overheads
manufacturing cost of goods sales
(c) Gross profit (a)-(b)
(d) Less : variable & fixed administration , selling & distribution
overheads
(e) Profit under absorption costing
xxx
xxx
xxx
xxx
XXX
xxx
xxx
XXX
xxx
xxx
XXX
XXX
XXX
xxx
XXX

10. Difference between marginal
costing and absorption costing
Marginal costing
• In marginal costing technique only
variable cost is treated as product cost
,fixed cost is treated as period cost and
is charged to profit & loss account for
that period.
• In marginal costing , stocks are valued
at marginal cost (variable cost) only.
• In marginal costing ,managerial
decisions are based upon
‘Contribution’ which is the excess of
sales value over variable cost.
Absorption costing
• Absorption costing is total cost
technique . Under absorption costing
,all costs whether fixed or variable are
treated as product cost.
• In absorption costing ,the stocks are
valued at total cost which includes both
variable and fixed cost.
• In absorption costing , managerial
decisions are based upon ‘profit’ which
is the excess of sales value over total
cost.

11. Illustration
• The following information related to a company:
Production = 40,000 units , Sales = 30,000 units
Selling price = Rs. 30 per unit , Direct materials= Rs. 5 per unit
Direct labour = Rs. 4 per unit
Factory over heads
Variable = Rs. 3 per unit
Fixed = Rs. 1,00,000
Selling & distribution overheads:
Variable = Rs. 1 per unit
Fixed =Rs. 45,000
Calculate : 1. Net profit under absorption costing.
2. Net profit under marginal costing.

12. Income statement (absorption costing)
Particulars Rs. Rs.
Sales(30,000* 30)
Less : cost of goods sold :
Direct material(40,000* 5)
Direct labour (40,000 * 4)
Factory overheads
Fixed
Variable (40,000* 3)
Less : closing stock (10000units *5,80,000/40000)
GROSS PROFIT
Less : selling and distribution overheads
Fixed
Variable(30,000* 1)
NET PROFITS
2,00,000
1,60,000
1,00,000
1,20,000
1,45,000
45,000
30,000
9,00,000
5,10,000
5,80,000
4,35,000
3,90,000

13. Income statement (Marginal costing)
Particulars Rs. Rs.
Sales(30,000* 30)
Less : cost of goods sold :
Direct material(40,000* 5)
Direct labour (40,000 * 4)
Factory overhead: Variable (40,000* 3)
Less : closing stock (10000units *4,80,000/40000)
Add : selling and distribution overhead
Variable(30,000* 1)
CONTRIBUTION
Less : Fixed cost:
factory overhead
selling and distribution overheads
NET PROFITS
2,00,000
1,60,000
1,20,000
1,20,000
30,000
1,00,000
45,000
9,00,000
3,90,000
1,45,000
4,80,000
3,60,000
5,10,000
3,65,000

14. Advantages of marginal costing
Helpful in decision making .
Simple to operate and easy to understand.
Profit planning.
Complimentary to standard costing and
budgetary control.
Stock valuation.

15. Disadvanta
-ges of
marginal
costing
Based on
number of
assumptions
Selling price
do not
remain
constant
Not applied
in industries
Cost control
All costs are
not divisible
into fixed
and variable
cost

16. Conclusion
• Marginal costing is very useful tool in
hands of management and is extensively
used for cost control ,decision making and
profit planning . At last ,we can say that
absorption costing is total cost technique
and marginal costing is variable cost
technique.

18. Any
Query ?