CIMA P1 Syllabus A. Cost Accounting For Decision And Control - Profit or Loss - Notes
Profit or loss
Profit or loss under absorption and marginal costing
In marginal costing, fixed production costs:
- are not included in the COS
- are treated as period costs (are written off as they are incurred)In absorption costing, fixed production costs
- are absorbed into the cost of units
- are included in the COSIn the long run, total profit for a company will be the same whether marginal costing or absorption costing is used.
Profit under Marginal costing
Marginal costing income statement | $ | $ | |
Sales | x | ||
LESS: | Variable cost of sales: | ||
Opening inventory | x | ||
Production costs | x | ||
Variable Production Overhead costs | x |
||
x | |||
LESS: | Closing inventory | (x) |
|
(x) |
|||
x | |||
LESS: | Variable selling, dist, admin costs | (x) |
|
Contribution | x | ||
LESS: | Fixed costs (actual incurred): | ||
Production | x | ||
Selling and distribution | x | ||
Administration | x |
||
(x) |
|||
Net profit | x |
Note that inventories are valued at variable production costs only.
Illustration 1
A company produced 1,000 units of Product A.
The opening and closing inventory was 100 units and 500 units respectively.
The selling price and production costs for Product A were as follows:
Selling price | $30 per unit |
Direct costs | $10 per unit |
Variable production overhead costs | $6 per unit |
Total Fixed production overhead costs | 4,000 |
What is the Gross profit for Product A, using marginal costing?
Solution
Number of units sold = (OP + Produced - CL) = (100 + 1,000 - 500) = 600 units
Contribution per unit = 30 - 10 - 6 = $14 per unit
Contribution = 600u x Contribution $14= $8,400
Gross Profit = $8,400 - Fixed OH $4,000 = $4,400
Profit under Absorption costing
Absorption costing income statement | $ | $ | |
Sales | x | ||
LESS | Cost of sales | ||
Opening inventory | x | ||
Production costs | x | ||
Variable production overhead costs | x | ||
Fixed overhead absorbed | x |
||
x | |||
LESS | Closing inventory | (x) |
(x) |
Fixed overhead (under)/over absorbed | x/(x) |
||
Gross profit | x | ||
LESS | Selling, admin etc costs | ||
(non production) | (x) |
||
Net profit | x |
Note that inventories are valued at full production cost
Illustration 2
A company produced 1,000 units of Product A.
The opening and closing inventory was 100 units and 500 units respectively.
There was no under or over absorption of fixed overheads.
The selling price and production costs for Product A were as follows:
$ per unit | |
Selling price | 30 |
Direct costs | 10 |
Variable production overhead costs | 6 |
Fixed production overhead costs (OAR) | 4 |
Gross profit | 10 |
What is the Gross profit for Product A, using absorption costing?
Number of units sold = (OP + Produced - CL) = (100 + 1,000 - 500) = 600 units
Gross Profit = 600u x Gross profit $10 = $6,000
Marginal costing | Absorption costing |
Closing inventories are valued at Marginal production cost | Closing inventories are valued at full Production cost |
Fixed costs are period costs | Fixed costs are absorbed into unit costs |
Cost of sales does not include a share Of fixed overheads | Cost of sales does include a share of fixed overheads |