Absorption vs. Marginal Costing Example
Bright Start Inc. makes a single product called the Agama, the following data has been obtained:
Jan-Feb
- Production volume: 1,100 units 900 units
- Sales volume 900 units 1,000 units
Production costs were as follows:
- Direct materials £5
- Direct labour £12
- Variable production overhead £8
- Fixed production overhead £15
- Variable Sales and Distribution £2
- Total £42
Each unit of Agama was sold for £105.
Annual fixed production overheads were budgeted to be £180,000 and annual production output was budgeted to be 12,000 units, production output was expected to be even throughout the year. Actual fixed production overheads for January and February was £15,000, fixed selling costs were £10,000
Required
1. Prepare the income statements for January and February by applying a
- Absorption costing approach
- Marginal costing approach
2. Reconcile the reported profits under both systems
Click below for the solution:
Absorption Costing (TAC) and Marginal Costing (MC) are distinguished by how fixed costs are treated, this is of greater relevance in a manufacturing environment. This illustration shows the impact on reported profit of these two systems.
