CIMA BA2 Syllabus B. COSTING - Absorption and Marginal Costing - Notes ^{5 / 9}

Absorption and Marginal Costings

Inventory Valuation

Marginal Costing
values inventory at the total VARIABLE production cost
Absorption Costing

values inventory at the FULL production cost (including FIXED production overheads)
Inventory values using absorption costing are therefore greater than those calculated using marginal costing.
Since inventory values are different, profits reported in the Income statement (I/S) will also be different.

Inventory Valuation for Absorption and Marginal Costing

Absorption Costing	Marginal Costing
Direct Materials	Direct Materials
Direct Labour	Direct Labour
Direct Expenses	Direct Expenses
Indirect variable overheads	Indirect variable overheads
Indirect fixed overheads		Notice that the marginal costing does not absorb the fixed overheads into the product cost.
Total product cost	Total product cost
	The actual fixed cost will be subtracted in the end - but for marginal costing, it is not included in the product cost

Illustration

The cost of Product A:

Direct materials $10
Direct labour $5
Direct expenses $2
Variable production overhead $6
Fixed production overhead $8

What will the inventory valuations be according to marginal and absorption costing?

Solution

Marginal costing:
Direct materials $10
Direct labour $5
Direct expenses $2
Variable production overhead $6
Value of 1 unit of Product A = 10 + 5 + 2 + 6 = $23
Absorption costing
Direct materials $10
Direct labour $5
Direct expenses $2
Variable production overhead $6
Fixed production overhead $8
Value of 1 unit of product A = 10 + 5 + 2 + 6 + 8 = $31