Absorption Costing - All costs are absorbed - inclusive of Fixed Costs
Marginal Costing - Fixed costs are accounted separetely
I'll give you an example for O. Inventory;
Opening Inventory for Absorption Costing;
3,000 units - Now we need to find out how much Fixed Costs + Other variable costs are per unit (we already know Direct Materials + Direct Labour) we simply take £230,000 and divide by number of units made (production units). We do exactly the same with fixed costs.
Please bare in mind that when you working out production costs for Month 3 the variable other overheads increased from £230,000 to £250,000 so cost per unit will actually be £95.00 for Month 3.
Closing inventory @ month 3 will be £190,000 (£95.00 x 2,000 units).
I believe you know how to work our cost of sales now, fixed costs will be 0.
Opening Inventory for Marginal Costing;
You do everything exactly the same however you do not include fixed costs in your per unit calculation - as fixed costs are apportioned separately.
So Opening Inventory for Month 3 would be; £144,000 ( £15.00 + £10.00 + £23.00 = £48.00 x 3,000).
The only difference in this is that Fixed costs are included in absorption calculation - as all costs are absorbed to find out cost per unit.
BDavi95
Registered Posts: 3
Answers
Norvydas Valavicius.
Absorption Costing - All costs are absorbed - inclusive of Fixed Costs
Marginal Costing - Fixed costs are accounted separetely
I'll give you an example for O. Inventory;
Opening Inventory for Absorption Costing;
3,000 units - Now we need to find out how much Fixed Costs + Other variable costs are per unit (we already know Direct Materials + Direct Labour) we simply take £230,000 and divide by number of units made (production units). We do exactly the same with fixed costs.
Our total Variable Costs are; £15.00 + £10.00 + £23.00 + £45.00 = £93.00 p/u
Opening inventory is 3,000 x £93.00 = £279,000
Please bare in mind that when you working out production costs for Month 3 the variable other overheads increased from £230,000 to £250,000 so cost per unit will actually be £95.00 for Month 3.
Closing inventory @ month 3 will be £190,000 (£95.00 x 2,000 units).
I believe you know how to work our cost of sales now, fixed costs will be 0.
Opening Inventory for Marginal Costing;
You do everything exactly the same however you do not include fixed costs in your per unit calculation - as fixed costs are apportioned separately.
So Opening Inventory for Month 3 would be; £144,000 ( £15.00 + £10.00 + £23.00 = £48.00 x 3,000).
The only difference in this is that Fixed costs are included in absorption calculation - as all costs are absorbed to find out cost per unit.
Norvydas Valavicius.