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Absorption & Marginal costing - Coggle Diagram
Absorption & Marginal costing
Absorption costing
Allocation
Cost to cost centres
Direct labours
Direct expenses
Direct materials
Overheards associated directly and only to the centre
Apportionment
Costs shared by more than one cost centres
Rent and rates
Insurance
Salaries of overseers
Using a pre-determind basis
Production volume
Machine hours
Labour hours
Survive and production
Production cost centres
Survive cost centres
Must be share amongst the production cost centres
Absorption
Production centre into each of its products
Rate basis
Under and Over absourption
Non-production overheads
Not directly related to the production process
For external reporting
For internal reporting
Advantages
Fair to share fixed production costs between units of production
Closing inventory valued in accordance accounting principles
Easier to determine the profittability of several products by charging a share of fixed overheads to them
Where inventory building is necessary, fixed costs should be included in inventory valuations to prevent a series of losses
Marginal costing
Cost bookkeeping system
Integrated system
Notional cost
Interlocking system
Financial ledger
Cost ledger
Only calculate variable cost to calculate a contribution
Contribution = (Sale value ) – ( Marginal cost of sales )
Advantages
Simple to operate
No apportionment of fixed cost
Fixed cost = Period cost
Unchanged at all output volumes
Closing inventory valued at variable production cost per unit
Size of contribution provides management with useful information about
expected profits
Absorption costing encourages management to produce goods in order to absorb allocated overheads insead of meeting market demands
Under / Over absorption of overhead is avoided
Great aid decision making ( Unlike absorption costing )