# Management Accounting

Topics: Variable cost, Marginal cost, Costs Pages: 15 (2802 words) Published: March 7, 2013
Management Accounting
Absorption vs Marginal Costing Report
20813287

Absorption vs. Marginal Costing (Atmospheric Ltd)

Contents Page No
Memorandum 3
Marginal (Variable) Costing 4
Absorption Costing 7
* Marginal Costing 10 * Absorption Costing 11

Numerical Examples 12
Reconciliation 16
Bibliography 17
Reflective Journal 18

Memorandum
To: Finance Director
From: Assistant Management Accountant
Date: 28 November 2012
Subject: Marginal vs. Absorption Costing

Enclosed are the research findings that you may use towards the presentation on the subject of marginal and variable costing. Should you require any other information that you need for the presentation please don’t hesitate to contact me on extension 2543.

Many Thanks
Sarah Jones
S. Jones

Marginal (Variable) Costing
Marginal costing is an accounting system in which variable costs are changed to cost units and fixed costs for the period are written off in full to the income statement (ACCA, 2010). In other words the best way to describe marginal costing is in this equation:

Fixed costs + Variable costs= Marginal costing
Absorption costing is an alternative in the costing system to marginal costing. A margin cost is the extra cost which will arise from results of production of one more unit, or it can be the cost which is saved when we produce one less unit. This can be compromised of: * Variable expenses

* Direct expenses
* Direct materials
* Direct labour
A concept that lies at the centre of this type of costing is called CONTRIBUTION. “Contribution on margin is equal to sales minus variable expenses. Because the variable cost per unit and the selling price per unit are assumed to be constant the contribution margin per unit is also assumed to be constant” (Drury 2004). Just to illustrate what tis all means here is an example:

Atmospheric Ltd is company that sells scented candles
Sales price £60
Direct labour £20
Direct materials £15
Fixed overheads are £ 6000. Output and sales are 2000 units
Calculate:
* the contribution per unit using marginal costing
* profit per unit using marginal costing
* Calculate profit per unit were output and sales are 3000 units

£ £
Sales 2000 units x £60 120000
Direct labour 2000 units x £20 40000
Direct materials 2000 units x £15 30000
PRIME COST 70000
Variable overheads 2000 units x £5...