Calculating Marginal & Absorption Costing

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ShallowHartley
ShallowHartley Registered Posts: 5
in Management Accounting: Decisions and Control
Hi All,

Can anyone help with calculating Absorption & Marginal Costing? I think its the one thing I can't get my head around.

The inventory is my main concern as it is set out differently in the exams. I just need a formula that I will be able to memorise.

Any help would be greatly appreaciated!

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  • CornishPixie
    CornishPixie Registered Posts: 115 Dedicated contributor 🦉
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    Marginal is only direct costs. Absorption includes fixed costs
  • ShallowHartley
    ShallowHartley Registered Posts: 5
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    Much appreciated. Do you know the formula to value inventory?
  • CornishPixie
    CornishPixie Registered Posts: 115 Dedicated contributor 🦉
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    Are you by any chance doing task 3?
  • CornishPixie
    CornishPixie Registered Posts: 115 Dedicated contributor 🦉
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    If you are working on Assessment 1 task 3, then this is how you work out the inventory.

    So absorption costing first.

    For month 2
    Opening inventory: (450,000 / 10,000) + (230,000 /10,000) + 15 + 10 x Opening stock (10,000 - 8,000) = £186,000

    Closing inventory: (45 + 23 + 10 + 15) x (2,000 + 10, 000 - 9,000) = £279,000

    Now for month 3
    Opening inventory: is the same as the closing inventory for month 2 (£279,000)

    Closing inventory: (10 + 15 + 25 + 45) x (3,000 + 10,000 - 11,000) = £190,000

    For the marginal costing, you do everything exactly the same - however you do not include fixed costs in your calculation - as fixed costs are apportioned separately.
  • ShallowHartley
    ShallowHartley Registered Posts: 5
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    Can not thank you enough!
  • CornishPixie
    CornishPixie Registered Posts: 115 Dedicated contributor 🦉
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    That's ok - that's why this forum is here. Just look carefully at the information given in the table and don't assume that everything is the same unit of measurement.

    In the table the 10 and 15 is PER UNIT, whereas the 450,000 and 230,000 is for the whole 10,000 production. So you have to change your calculation accordingly. You will see from my answer above that for some calculations I've already divided by 10,000 for the closing inventory to illustrate the point. So make a mental note to yourself to check these things before you plough into the calculations during the exam! It will save you a lot of time.
  • LouboutinLou1
    LouboutinLou1 Registered Posts: 27 Regular contributor ⭐
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    Hi, is anyone able to help me out with this one? I can calculate absorption costing fine it's the marginal costing part that I'm struggling with. I still appear to be getting the incorrect answer even when I'm excluding fixed costs and it should be the same calculation as absorption so can't understand where I'm going wrong. Many thanks in advance :)

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