Costing Essay

3034 WordsAug 8, 201113 Pages
ABSORPTION COSTING AND MARGINAL COSTING Learning Objectives By the end of this chapter you should be able to: ❑ Prepare profit statements using absorption costing method ❑ Explain and illustrate the concept of contribution ❑ Discuss the usefulness of profit and contribution information respectively ❑ Prepare profit statements using the marginal costing method ❑ Compare and contrast the use of marginal costing for period profit reporting and inventory valuation ❑ Reconcile the profits reported by absorption and marginal costing ABSORPTION COSTING AND MARGINAL COSTING Absorption Costing ▪ Absorption costing sometimes known as full or total costing, which is the basis of all financial statements for routine profit reporting. ▪ All inventories are valued at full production cost, which include a share of fixed production overheads absorbed using any of the bases available. ▪ Fixed production costs (both the fixed and variable costs) are absorbed into production and inventories valuation. ▪ The operating (profit/income) statement does not distinguish between fixed and variable production costs. ▪ Fixed production overheads are absorbed on the basis of normal capacity, which is often the same as the budgeted capacity. ▪ If the production level is not equal to the normal capacity there will be over or under absorbed fixed production overhead. ▪ Absorption costing income statement: | |$ |$ | |Revenue/ Sales | |X | |Production costs of sales | | | |Opening inventory (valued at full production costs)

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