PCR - Marginal and Absorption costing, help needed!

System

Hi

Im just going through past exam papers to practice, sitting the PCR exam next week, having difficulty remembering the difference between these two, when being asked to flex a budget want to make sure im flexing it the correct way, any good points/breakdowns on remembering this would be much appreciated.

Thanks

Kelly

System

Re:PCR - Marginal and Absorption costing, help needed!

Hi there

I'm sure you're aware that when using Marginal Costing, you exclude Fixed Costs and when you use Total Absorption Costs, you include fixed costs.

When being asked to prepare a Flexible Budget, I've learned to prepare it as follows:

Draw 3 columns: one for Budget figures, one for Actual and the other for your variance.

You then slot in the volume for which you are reporting for i.e.


Volume

Turnover

Variable Cost of
Sales
Materials
Labour
Other

Total COS

Contribution
(Turnover less COS)

Fixed Costs
Depreciation
Etc

Total Fixed Costs

Profit/Loss
(Contribution less
Fixed Costs)

Remember that you wouldn't include Fixed Costs in a Marginal Flexed Budget and you would simply calculate to the Contribution.

Be careful to read if a cost is a semi variable cost i.e it has both variable and fixed costs for example electricity. Remember to split these costs out in the proforma!

Also, don't forget to say whether the variance is adverse or favourable.

I hope this helps!

Good luck!

PS For some reason I can't quite draw the table properly, so if you're still unsure, just let me know.

System

Re:PCR - Marginal and Absorption costing, help needed!

Thats great, thank you very much for your help!

System

Re:PCR - Marginal and Absorption costing, help needed!

you can find the help you need regarding the difference between absorption and marginal costin on October 2005 AAT magazine. Might help remembering: The difference in reporting profits for a single period under absorption and marginal costing principles is equal to the differenc ein closing stock values.
Absorption costing tries to charge all production costs including a fair share of fixed costs while marginal costing charges only variable cost to cost unit (fixed costs are treated as periodoc costs).
When using marginal costing to prepare the Operating system the formula to remember is Turnover - variable cost = contribution - fixed cost = profit. When using absorption costing is: Turnover - cost of sales [all costs - closing stock] = Profit
Hope it helps

System

Re:PCR - Marginal and Absorption costing, help needed!

Thank you very much!

That was of help!