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Absorption costing alternative to marginal costing (Why two approaches,…
Absorption costing alternative to marginal costing
Absorption cost
Absorb all production cost
No single method calcul
Direct labour hours, direct production hours, units produced, % of sales value, % of direct cost, activity consumption (ABC)
Fixed cost / units produced
Overheads indirect cost
Marginal costing
Absorption costing FS external users
Marginal costing internal purposes
Short-term decision making
Cost behaviour at levels of activity & difference variable & fixed
Absorption costing covers variable cost
Contribution = marginal costing & decision making
Changes in volume on contribution & profit
Why two approaches
Absorption costing could mislead results
Contribution of each product can effect overall net profit
Absorption costing = revenue generated & inventory & work-in-progress
Changes in volume = over-or-under fixed costs
Marginal costing recognises changes volumes
MC = not know full impact of fixed cost
Overcoming the disadv, analysis cost data
Good practice contribution being made fixed & profits
Income statement use absorption costing
Non-production cost after gross profit
Absorption costing (FIFO)
AC & MC show different profit
Under/over ab indirect cost
Absorption rate
Absorption rate replaces fixed cost
Difference in closing inventory AR x CI
L + M + AR = new pro cost
Difference in profits are from inventory
P. 49 notes very important :red_flag:
Allocation of indirect cost
All departments will have overheads (indirect)
Hard to allocate to units
Indirect cost to non-production departments
Total indirect cost,= a full cost per unit
Reciprocal allocation
Indirect cost = linear equations
Pricing decisions
Profit margins will change to each method
Absorption cost = cost-plus price = sales price
Profit / sales x 100
Profit margin for example 25%, costs / 75 x 100
Make up for example cost / 100 x 100 + mark-up
Return on investments ROI 10% x 100000= 10000
Total cost 60000 + 10000 = 70000 / number units
No account to customers & competitors
Cost-plus approach long-term
Marginal costing short-term