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AAT Level 3Absorption & Marginal Costing
Objectives•Calculate the absorption cost of producing a unit•Calculate the profit made using absorption costing techniques•Explain the differences between absorption and marginal costing•Prepare financial statements using absorption and marginal costing principles•Reconcile differences between profits made using both methods•Explain why there are differences between profits calculated using absorption and marginal costing methods
Absorption£
Direct Materials X+ Direct Labour
X+Direct Expenses X+ Production OH *
XAbsorption Cost
X
Marginal£
Direct Materials X+ Direct Labour
X+Direct Expenses X+ Production OH
XMarginal Cost X
* Remember that Overheads are absorbed
throughout the period using the OAR
Marginal CostIS
Variable Cost
Activity 1 Swifts LtdAbsorption Costing
Swifts Ltd produce 50 sets each week and its costs are:Direct materials £30000Direct labour £20000Production overheads £5000The selling price of each set is £1750.00
Total costs per week: £
Total cost
Direct Materials 30000
Direct Labour 20000
Production Overheads 5000
55000
Total Cost = 55000Units of Output 50
= 1100.00 per unit
Profit for the week
Selling Price (1750 x 50) £87500
Costs (1100 x 50) £55000
Profit £32500
Activity 2a
Activity 2a & b – Voles Vending - Answer
£ £
Sales revenue
Direct materials
Direct labour
Fixed production overheads
Total Cost
Profit
Activity 2a & b – Voles Vending - Answer
Activity 3
Activity 3 – Wyvern Bike Company
Activity 4 – A FactoryA factory produces a single product with the following budgeted costs:
Direct Materials £4.50 per unitDirect Labour £7.85 per unitVariable overheads £1.60 per unitFixed overheads £420,000
Overheads are absorbed on the machine hour basis and it is estimated that in the next accounting period, machine hours will total 105,000. Each unit requires 2 ½ hours of machine time. What is the cost per unit using Absorption costing?
Activity 4 – A Factory
Marginal Costing£
Direct Materials X+ Direct Labour X+Direct Expenses X+ Production OH XMarginal Cost X
Activity 5
Handout
Complete Activity 6 & 7
Activity 8 Marginal Costing Absorption
Costing £ £ £ £Sales at £110 each 495,000 495,000Variable costs Direct Materials at £30 each 150,000 150,000 Direct labour at £40 each 200,000 200,000 350,000 Less Closing Stock (marginal cost) 500 chairs at £70 each (30 + 40) £ Fixed production overheads £ £ Less Closing stock (absorption costing) (500 chairs x £90)
£
Less Cost of goods sold PROFIT
Remember MC is just variable
costs
(35,000)
£315,000
£100,000
£415,000
£80,000
£100,000
£450,000
(£45,000)
Remember AC is
Variable AND Fixed
costs£405,000
£90,000
Activity 8b
Reconciliation of profit April 2014
Absorption costing profit 90,000
Marginal costing profit 80,000
Difference is increase in stock 10,000
Remember with MC the unit cost does NOT
include a share of Fixed Costs.
Production of 5000 unitsSold 4500 units
So 500 increase in stock x £20 per unit
= £10,000
Marginal Costing V Absorption Costing
Absorption Costing Marginal Costing
Costs split based on function – production or non-production
Costs split based on behaviour – variable or fixed
Inventory is valued at the full production cost (fixed &
variable)
Inventory is valued at the variable production cost
only
Sales – Cost of sales = gross profit
Sales – variable costs = contribution
Non-production overheads are deducted after gross profit
Non-production overheads are deducted before contribution
Now try this!Activity 9
Marginal Costing
Absorption Costing
£ £ £ £Sales at £8 each Variable costs Direct Materials at £ each Direct labour at £ each Less Closing Stock (marginal cost)
Fixed production overheads
Less Closing stock (absorption costing)
Less Cost of goods sold PROFIT
To do list
Complete tasks in BOTH workbooks
Revision of labour progress test
