AC114: Chapter 3 - Marginal costing and absorption

contribution

What is marginal costing?

Only variable costs included; fixed costs are period expenses.

Calculating marginal cost

exclude all fixed costs

What is absorption costing?

Variable + fixed production costs included in unit cost.

Formula for OAR?

Budgeted fixed overhead ÷ Budgeted activity level

Unit cost (marginal)?

Direct materials + labour + variable OH

Unit cost (absorption)?

Direct materials + labour + variable OH + absorbed fixed OH

Absorption (Reconcile) profits formula

Absorption profit = Marginal profit + (Δ inventory × OAR/unit)

Inventory ↑ → profit comparison?

Absorption profit > marginal profit

Inventory ↓ → profit comparison?

Marginal profit > absorption profit

What is RIAM?

Rising Inventory → Absorption More profit

Closing inventory (marginal)?

Units × variable cost/unit

Closing inventory (absorption)?

Units × (variable + absorbed fixed OH/unit)

Under/over absorption?

Positive = over, negative = under

Why absorption profit can be higher?

Unsold inventory holds onto cost making profit look higher

Absorption costing advantages?

Charges all production costs; meets accounting standards.

Marginal costing advantages?

Simple, no arbitrary fixed cost apportionment, useful for decisions.

How are fixed costs treated in marginal costing?

Charged in full to the period (period cost)

Contribution

Revenue remaining after variable costs to cover fixed costs and profit

Contribution formula?

Contribution = Sales revenue – Variable Costs

Difference in unit cost?

Marginal = variable only; Absorption = variable + fixed

Why use marginal costing for decisions?

Focuses on variable costs that change with production

Profit under marginal costing?

Profit = Total Contribution – Fixed Costs