Marginal Costing vs Absorption Costing

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