Page 94 - BA2 Integrated Workbook STUDENT 2018
P. 94
Chapter 5
Comparing marginal and absorption
costing profits
4.1 Comparing absorption and marginal costing
In the previous example, the differences between the two methods can be seen.
Marginal costing highlights the contribution per unit and treats fixed production
overheads as a period cost, deducting these in total from the total contribution.
Absorption costing treats fixed production overhead as a product cost and each unit
of ABC and XYZ absorbs a share of the fixed overhead.
The total profit is the same under both methods.
4.2 Changes on inventory levels
In our example there was no inventory, as the volumes produced and the volumes
sold in the period were the same.
In cases where we produce more or less that we sell in a period, inventory
levels will change and the profits under marginal and absorption costing will
differ.
Marginal costing values inventory at the total variable production cost of a
unit of product while absorption costing values inventory at the full production
cost of a unit of product.
Inventory values will be different at the beginning and end of a period under
marginal and absorption costing.
If inventory values are different, then this will have an effect on the cost of sales
and therefore on the profits reported in the statement of profit or loss in a period
under both methods.
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