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Absorption and Marginal Costing (Reconciling Profits (Difference in…
Absorption and Marginal Costing
Marginal Costing
Marginal Cost
: the variable cost of one unit of product or services
Direct materia ✅
Direct labor ✅
Variable OH ✅
Fixed OH ❌
为了决策
Contribution
= sale value - variable/marginal cost of sales
Calculation of Profit
Reconciling Profits
Difference in Profits = change in inventory level * OAR
MC + OAR * (closing-opening) = AC
inventory level goes down >> AC < MC
AC vs MC
AC
Routine profit reporting
Must be used: Financial accounting process
Limitations
Profit can be manipulated by changing production level
MC
Better management info
Limitations
Danger if contribution fails to cover fixed cost
Doesn't comply with IAS 2