Marginal Costing and Absorption Costing Review

This set of flashcards covers key terms and concepts related to marginal costing and absorption costing, essential for understanding the differences in inventory valuation and profit calculations.

Marginal Costing

A costing method used for short-term decision-making that recognizes costs according to their behavior.

Contribution

The portion of revenue after subtracting variable costs which covers fixed costs and any remainder is profit.

Prime Costs

Costs that comprise direct materials, direct labour, and direct expenses.

Total Contribution Formula

Total contribution = Total revenue - Total variable cost.

Absorption Costing

A costing method where inventory is valued at total production costs including fixed production overheads.

Variable Costs

Costs that change in proportion to the level of goods or services produced.

Fixed Overheads

Costs that do not change with the level of production, absorbed into cost units under absorption costing.

Profit Reconciliation

The process of explaining the difference between absorption and marginal profit due to the treatment of fixed costs.

Sales Price - Marginal Cost Contribution

Calculation used to find the profit under marginal costing.

Inventory Valuation

The process of assigning a monetary value to the products in inventory, varying between marginal and absorption costing.

Total Cost of Production

The sum of all costs associated with manufacturing a product, affecting selling price under absorption costing.