Technician Units 8 and 9

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
I am studying at home and I am so stuck on Marginal costing versus absorption costing. I can work out the required figures but I just don't understand the principals of either.<BR><BR>I feel like such an idiot.........<BR><BR>Can anyone help????????<BR><BR>S x

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  • System
    System Posts: 100,534 🤖 Admin 🤖
    Technician Units 8 and 9

    Hi<BR><BR>I studied form home, and found the text alittle vague on this but its kinda staright forward once you get your head around it.<BR><BR>You need to be aware of the various cost behaviours:<BR><BR>-fixed costs (don't changed with production, such as factory rent)<BR><BR>-semi-variable costs (have a fixed element that stays the same plus an that changes directly with production with production, such as electricty having a basic charge that stays the same regardless of prodcution plus a charge a charge for the electricuty itself that will change in line with production)<BR><BR>-variable costs (the entire variable cost will change directly with production, i.e. labour)<BR><BR>With absorption costing, all cost are absorbed against the product. With marginal costing the variable costs and the variable elements of any semi-variable costs, are costed directly to the product. All fixed costs (including the fixed elements of semi-varaible costs) are shown seperately.<BR><BR>Hope this helps, if not just ask<BR><BR>Neil
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Technician Units 8 and 9

    Hi Sue<BR><BR>What you also need to bear in mind is the effect of both types of costing with respect of closing stock valuations.<BR><BR>Absorption costing - includes variable and fixed costs<BR>Marginal costing - includes only variable costs<BR><BR>This is a big part of unit 9 with the flexed budget, where there is a closing stock amount. (Sorry not sure about unit 8 as yet, as only just starting to study that!)<BR><BR>Where absorption costing has been used to draw up a operating statement/profit, and there is a closing stock, because there is an element of fixed costs included in the closing stock, this cost is in effect being carried forward in the closing stock amount to the next period. When you use marginal costing then there is no fixed costs inluded in the closing stock and so ALL fixed costs have been charged in that period. Under absorption costing with carrying forward a part of the fixed cost you will have increased profits compared to when using a marginal costing system.<BR><BR>Sorry if I have added to the confusion but I know that it is often asked, why there is a difference in profits under both costing systems<BR><BR>Craig
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Technician Units 8 and 9

    In addition to fixed costs being carried forward in closing stock, they are also brought forward in opening stock. This also affects profit. The difference between profit using absorption as opposed to marginal is the movement in fixed costs in stock. If closing stock valuation is higher than opening, then absorption profit is higher and vice versa.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Technician Units 8 and 9

    Hi<BR><BR>Just to re add to any confusion!<BR><BR>Fixede costs are only carried or brought forward with stocks in absorption costing, marginal costing of stock only includes variable costs - fixed costs being charged in the period they were incurred.<BR><BR>Neil
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Technician Units 8 and 9

    And to further add confusion ...<BR><BR>If there are no closing stocks then the profit will be the same for both ways of costing, so eventually, assuming all stock is sold, the profit will even out.<BR><BR>Annette

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