# marginal and absorption costing

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Registered Posts: 218 Beyond epic contributor 🧙‍♂️
Hi all.

I have been set a question for homework on marginal and absorption costing but I'm a bit stuck on one part.

My variable costs are £23 per unit, fixed costs are £27000 per month and sales price £30 per unit.

The first month 6500 units were produced and 5000 sold so I have worked out my marginal costing as 23 x 5000 =115,000, sales as 30 x 5,000 = 150,000 so contribution is 35,000, minus my fixed costs of £27,000 so my profit is £8,000. Do I have to account for the 1,500 units produced but not sold in this month or next?

I also have figures for the next 2 months of
Sales in month 2 of 8,500 and production of 9,000
Sales in month 3 of 9,500 and production of 10,000

Again, not sure where to and how to account for these unsold units. I'm guessing to work out the unit price x difference but don't know which months & if it carries over from month before. Would absorption costing be similar? (i have a budgeted output figure of £9,000 but no budgeted fixed Costs to work out an oar unless I use the actual fixed overheads?

Thanks in advance for any help. I promise to check out the level 3 section & help out where I can.

Xxx

• Registered Posts: 782
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Follow the calculation through logically by remembering that your profit equals revenue minus cost of sales minus fixed costs. The cost of sales part (opening inventory plus production minus closing inventory) will ensure that unsold production is accounted for in the right period.
• Registered Posts: 782
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This way of dealing with the excess production will be the same for both absorption and marginal costing. The only difference is how the fixed costs are dealt with. In marginal costing, the full £27, 000 will be charged in each period, but in absorption costing it will be split amongst all production so only the proportion of fixed costs contained in the actual sold items will end up being accounted for in each period (the rest will be carried forward in the inventory).

Would explain with figures but on phone and it's hard enough typing letters let alone calculations!
• Registered, Moderator Posts: 2,034 mod
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Dear Kelly7

Everything that you have done so far is fine.
This question doesn't specify whether the example business uses FIFO or AVCO to value inventory. In addition, you are not told the "normal" production which would be needed to calculate the overhead per unit (and the subsequent under/over absorbed overhead).

I can see that this is your homework question, so rather than offend your ethics I'll re-write it and show you how to answer a similar question.
Sandy
sandy@sandyhood.com
www.sandyhood.com
• Registered, Moderator Posts: 2,034 mod
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Kelly7 is a company producing accountancy text books. The price per book is £15 and the variable cost per book is £12. Each month the company incurs fixed overhead costs of £8,000.
Month ..........Sales (units) ....... Production (units)
January ......-...4000 .................. 5000
February .........6000 .................. 8000
March .............8000 .................. 9000

This is sufficient information to find the marginal costing profit each month.
Now let me add, under absorption costing the “normal” production level is 5,000 units per month. And Kelly7 applies any under/over absorbed overhead after calculating the cost of sales and applies this when calculating the profit each month.
This gives you the information you need to find the absorption costing profit each month.
Sandy
sandy@sandyhood.com
www.sandyhood.com
• Registered, Moderator Posts: 2,034 mod
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Marginal Costing profit calculations

Marginal Costing profit calculations for Kelly7 company
Sandy
sandy@sandyhood.com
www.sandyhood.com
• Registered, Moderator Posts: 2,034 mod
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Absorption Costing Profit Calculation

Absorption Costing Profit Calculation for Kelly7 Company
Sandy
sandy@sandyhood.com
www.sandyhood.com
• Registered, Moderator Posts: 2,034 mod
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In terms of inventory (for a monthly balance sheet/statement of financial position)

Month .................... Marginal Costing .................... Absorption Costing

January .................... £12 x 1000.......................................... £13.60 x 1000
................................... £12,000.......................................... £13,600

February .................... £12 x 3000.......................................... £13.60 x 3000
................................... £36,000.......................................... £40,800

March ........................ £12 x 4000.......................................... £13.60 x 4000
................................... £48,000.......................................... £54,400
Sandy
sandy@sandyhood.com
www.sandyhood.com
• Registered Posts: 218 Beyond epic contributor 🧙‍♂️
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Thank you both so much for your replies. Bless you Sandy, can't believe you typed out a scenario for me.

From your attachment on marginal costsing do I not have to account for the units produced but not sold?

I have had a read through your absorption costing attachment and I think.I get what to do, have had to come out but I'm going to have. Go at that tomorrow.

Thanks again both.

Kelly xxx
• Registered, Moderator Posts: 2,034 mod
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Dear Kelly

To calculate the marginal costing profit, you don't need the inventory so sales less cost of sales is sufficient. Obviously, any asset valuation at the end of each month would need inventory value.

The scenario here is fine and ducks the FIFO/AVCO issue. But if the production cost per unit changed from one month to another, then it would become significant. FIFO is generally easier as your sales in February would be made up of all the opening inventory of finished goods at the end of January, and some from February leaving the closing inventory all valued at the February production cost per unit.

You have my email, I run revision courses up and down the country. If you are interested in attending one, let me know where you are based or able to get to.
Sandy
sandy@sandyhood.com
www.sandyhood.com