This document summarizes the key differences between marginal costing and absorption costing. It outlines how they classify and value costs, calculate profit, and their advantages and disadvantages. It also discusses how idle time and idle facilities are treated differently. Some example questions are provided at the end to test understanding of costing concepts.

1. Prepared by: Jessy Chong

2. Differences:
Marginal Costing Absorption Costing
Cost 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

3. Marginal Costing
Advantages Disadvantages
 No 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 & FC
 Not recover full cost in the
production. May set wrong SP
 Only can use for S/T decision.
For L/T still have to consider
full costing principle.

4. Absorption Costing
Advantages Disadvantages
 Comply with IAS2 Stock
valuation. Cover all relevant
production cost.
 Set competitive and realistic SP
 Over/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.

5. Idle Time Idle Facilities
 Is not in the expectation.
 No budget plan for it
 If happen, then cost increased
 Profit is reduced
 Example: Machine break-down,
raw materials run out, power
failure
 Surplus capacity
 Is expected and within the
budget or plan
 No effect on cost and profit
 Example: spare capacity of
machinery or building

6. Pg 30
Q1 Q2
 Define 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.

7. 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