Management & cost accounting - SE 4.pdf · PROFIT CALCULATION : MARGINAL COSTING Marginal costing...
Transcript of Management & cost accounting - SE 4.pdf · PROFIT CALCULATION : MARGINAL COSTING Marginal costing...
INTRODUCTION TO AN INCOME STATEMENT
Income statement is prepared to assess the profit or loss derived by an organisation.
It includes three main elements;
Revenues/ Turnover : refers to a company’s actual or promised cash inflows resulting from
completed sale of the company’s products or the satisfactory delivery of its services.
Expenses : refers to the benefits consumed or used up in the process of earning revenues.
When preparing income statement, all the expenses are required to be deducted from
revenues to determine profit or loss of the accounting period.
Gains and losses : A gain is the net revenue of a company earned as a result of a business
transaction and vice versa.
GENERAL FORMAT OF AN INCOME STATEMENT
Revenue/ Turnover xx
- Cost of sales (xx)
Gross profit xx
- Operating expenses
General administration xx
Selling & distribution xx (xx)
Profit before interest & tax xx
LESS: Interest expenses (xx)
Profit before tax xx
LESS:Tax (xx)
Net profit/ (loss) xxx / (xxx)
PROFIT CALCULATION : MARGINAL COSTING
Marginal costing is an alternative method of costing to
absorption costing.
In marginal costing ONLY variable costs are charged as cost of
sale and contribution is calculated i.e. Sales revenue –Variable
cost of sales.
THE PRINCIPLES OF MARGINAL COSTING
Overheads are divided into two parts, variable and fixed
Fixed overheads are not related to the end product, but rather only to the time
period. Hence, all FIXED COSTS are taken as end period costs.
Units (production and stocks) are valued at VARIABLE PRODUCTION COST
(DM+DL+VPOH).
With marginal costing the concern is about segregating cost into variable and fixed,
even the non production cost is now divided into two parts where the VARIABLE
NON PRODUCTION COST is separately taken to calculate the contribution.
MARGINAL COSTING : CONCEPT
The MARGINAL PRODUCTION COST per unit of an item usually consists the
following.
Direct materials
Direct labour
Variable PRODUCTION overheads
MARGINAL COSTING PROFIT CALCULATION : FORMAT
SALES REVENUE xxx
LESS: COST OF SALES
Opening stock (DM+DL+VPOH) xx
Production (DM+DL+VPOH) xx
Closing stock (DM+DL+VPOH) (xx) (xx)
VARIABLE NON PRODUCTION COST xx
CONTRIBUTION XX
LESS : FIXED PRODUCTION COST (xx)
LESS : FIXED NON PRODUTION COST (xx)
NET PROFIT XX
ABSORPTION COSTING PROFIT CALCULATION
End products (production and stock) are valued at full production cost
(DM+DL+VPOH+FPOH)
Fixed overheads are related using OAR which is a predetermined rate, thus
giving rise to under/over absorption
Absorption costing does not handle non production costs, so the only option
available is to take it as an end period cost.
ABSORPTION COSTING PROFIT CALCULATION : FORMAT
SALES REVENUE xxx
LESS: COST OF SALES
Opening stock (DM+DL+VPOH+FPOH) xx
Production (DM+DL+VPOH+FPOH) xx
Closing stock (DM+DL+VPOH+FPOH) (xx) (xx)
GROSS PROFIT xx
ADJUSTMENT (UNDER)/ OVER ABSORPTION (xx)/xx
LESS : NON PRODUCTION
-VARIABLE COST (xx)
- FIXED COST (xx)
NET PROFIT XX
ADJUSTMENT OF UNDER/OVER ABSORPTION
Over absorption Cost Profit Add back
Under absorption Cost Profit Deduct
RECONCILIATION OF ABSORPTION AND MARGINAL COSTING
PROFITS
In spite of the fact the same information was used in arriving at the profit
figure, under MC and AC two different profit figures are achieved.
This is because of the two different techniques being applied
RECONCILIATION FORMAT
Marginal costing based profit = xx
Increase/ decrease in stocks x FPOAR = xx/ (xx)
Absorption costing based profit = xx
The above format indicates that only two reasons
(change in stocks and FPOAR) impact the reconciliation
RECONCILIATION OF ABSORPTION AND MARGINAL COSTING
PROFITS
All the other values considered in both the techniques would be same;
1) Absorption/marginal, sales value is the same. So there is NO impact from sales to
this profit difference.
2) Variable non-production or fixed non-production costs, to calculate
absorption/marginal costing profit, the same values are taken. So there is no impact
from those items to profit difference.
3) In absorption/marginal costing, if the total actual production cost is taken we arrive
at the same values.
THE REASON FOR PROFIT DIFFERENCE
The difference between absorption and marginal costing profits occurred due to
a timing difference.
In absorption costing FPOH are travelling with stocks to the next period.
But in marginal costing FPOH is taken out in TOTAL within the period itself.
THREE POSSIBLE SITUATIONS OF PROFIT RECONCILIATION
1. Increase in stocks
ABSORPTION MARGINAL
Opening stock 0 x 34 0 x 25
Closing stock 100 x 34 100 x 25
(3,400) (2,500)
In absorption costing when the closing stocks is more it means stocks will carry the
FPOAR into the next period and this period cost will be less. Thus, the profits will be
increased. However, in marginal costing the profit will be considered at the end of the
time period : Hence, the AC profit is higher than the MC profit
THREE POSSIBLE SITUATIONS OF PROFIT RECONCILIATION
II. Decrease in stocks
ABSORPTION MARGINAL
Opening stock 200 x 34 200 x 25
Closing stock 100 x 34 100 x 25
3,400 2,500
Cost
Profit
Cost
Profit
THREE POSSIBLE SITUATIONS OF PROFIT RECONCILIATION
III. Change in stocks
ABSORPTION MARGINAL
Opening stock 200 x 34 200 x 25
Closing stock 200 x 34 200 x 25
0 0
Cost = Cost
Profit = Profit