ABSORPTION COSTING &

MARGINAL COSTING
• THE FOLLOWING DATA RELATE TO A COMPANY:
•
• Expected sales : 50,000 units
• Direct material cost : Rs. 2.50 per unit
• Direct labour cost : Rs. 2.00 per unit
• Variable Overhead : Rs. 1.50 per unit
• Fixed cost ( allocated ) : Rs. 1.50 per unit
• Selling price : Rs.10.00 per unit
• The firm expects to get a special export order for
10,000 units at a price of Rs. 7.25 per unit.
• Advise whether the export order should be
accepted or not.
• The company has a capacity to produce 60,000 units.
 INFERENCES:
• An organization has different costs
having different nature.
Example: Fixed, Variable, Mixed Cost
• These costs behave differently to
changes in the level of business activity.
• Understanding this relationship helps in
planning, control and developing
successful business strategies.
 Cost of a product / process can
be ascertained by :

• 1. Absorption costing
• 2. Marginal costing
 ABSORPTION COSTING

Traditional or full cost method: Cost of a product

= V. C. + F. C.
• Variable costs are directly charged to the
product.
• Fixed costs are apportioned on suitable basis.
 MARGINAL COSTING

• Direct Costing / Variable Costing

• A Technique of Costing
 Meaning
Ascertainment of marginal cost by
Differentiating between F.C. and V.C. and of
the effect on profit of changes in volume or
type of output.
– Cost of a product : Only VCs are
considered for Product cost
– FCs : Charged against the revenue of the
period. FC = Period costs
– Valuation of inventory at M.C.

– Contribution = C = S - V = F + P
– Price = M.C. + Contribution
MARGINAL COSTING Vs. ABSORPTION COSTING

• The following information relates to ABC

Company for the year 2007-08:
• Sales 10,000 units at Rs. 5 each;
• Production 15,000 units at the following
costs:
• Rs.
• Direct materials 15,000
• Direct labour 30,000
• Variable expenses 6,000
• Fixed expenses 12,000
• Determine net profit.
 Income Statement for the year
2007-08
Marginal Absorpotion
• Sales 50,000 50,000
• Cost of Production:
• Direct materials 15,000 15,000
• Direct labour 30,000 30,000
• Variable overhead 6,000 6,000
• Fixed overhead _ 12,000
• 51,000 63,000
Less Closing Stock 17,000 21,000
• Cost of goods sold 34,000 42,000
• Contribution
• (50,000- 34,000) 16,000
• Fixed overhead 12,000
• Profit 4,000 8,000