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1. Presentation ontopic:methodofincome
determinationundermarginalandabsorption
costing.
Presented by : Sangeeta Saini
M. Com (P)
641

2. Contents
🟒MeaningofMarginalcost.
🟒MeaningofMarginalcosting.
🟒Meaningofabsorptioncosting.
🟒Calculationofprofitunderabsorptioncostingandmarginal
costing.
🟒Differencebetweenmarginalcostingandabsorptioncosting.
🟒Illustrationofabsorptioncostingandmarginalcosting.
🟒Advantagesofmarginalcosting.
🟒Disadvantagesofmarginalcosting.
🟒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. Calculationofprofitundermarginalcosting.
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. Calculationofprofitunderabsorptioncosting.
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
variablecostistreatedasproductcost
,fixedcostis treatedasperiodcostand
is charged to profit &loss account for
thatperiod.
• Inmarginalcosting, stocksarevalued
atmarginalcost(variablecost)only.
• Inmarginalcosting,managerial
decisionsarebasedupon
‘Contribution’whichistheexcessof
salesvalueovervariablecost.
Absorption costing
• Absorptioncostingistotalcost
technique. Underabsorptioncosting
,allcostswhetherfixedorvariableare
treatedasproductcost.
• Inabsorptioncosting,thestocksare
valuedattotalcostwhichincludesboth
variableandfixedcost.
• Inabsorptioncosting, managerial
decisionsarebasedupon‘profit’which
istheexcessofsalesvalueovertotal
cost.

11. Illustration
• Thefollowinginformationrelatedtoacompany:
Sales =30,000units
Directmaterials=Rs.5perunit
Production
Sellingprice
Directlabour
=40,000units ,
=Rs.30perunit,
=Rs.4perunit
Factoryoverheads
Variable
Fixed
=Rs.3perunit
=Rs.1,00,000
Selling&distributionoverheads:
Variable
Fixed
=Rs.1perunit
=Rs.45,000
Calculate: 1.Netprofitunderabsorptioncosting.
2.Netprofitundermarginalcosting.

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) 2,00,000
9,00,000
Direct labour (40,000 * 4) 1,60,000
Factory overhead: Variable (40,000* 3) 1,20,000
4,80,000
Less : closing stock (10000units *4,80,000/40000) 1,20,000
3,60,000
Add : selling and distribution overhead
Variable(30,000* 1) 30,000 3,90,000
CONTRIBUTION 5,10,000
Less : Fixed cost:
factory overhead 1,00,000
selling and distribution overheads 45,000 1,45,000
NET PROFITS 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 ?