Absorption & Marginal Costing Prepared by: Yaeesh Yasseen, Jade - - PowerPoint PPT Presentation

MANAGEMENT ACCOUNTING – Absorption & Marginal Costing

Prepared by: Yaeesh Yasseen, Jade Jansen, Rashied Small & Lucinda Smidt Reviewed by: Achmad Joseph

MANAGEMENT ACCOUNTING FRAMEWORK

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Job & Process Costing

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2 2 Job costing: Applied when producing of customized (products with unique features) or different items within the production cycles Process costing: Applied when producing of homogeneous products on a continuous basis over a long period of time

GROUP WORK – ACTIVITY 4: ABRAM

[Selection of system – Job vs Process costing]

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GROUP WORK – ACTIVITY 4: JOEDINE

[Selection of system – Job vs Process costing]

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Process Costing Systems

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Cost object

Allocation of Manufacturing Fixed Costs

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Allocation of Manufacturing costs:

Manufacturing costs are indirect costs and should allocated to the cost object – allocation is based on pre-determined

• verhead rate.

POR = Estimate manufacturing costs Estimated units of allocation basis

The allocation basis is the cost driver that cause the manufacturing costs

Basis of Allocation

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7 Labour intensive business: Basis of allocation = labour hours Capital intensive business: Basis of allocation = machine hours Mass production business: Basis of allocation = output

Applied of Manufacturing Costs

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Labour Intensive Capital Intensive

Overhead costs 562,500 Overhead costs 562,500 Labour hours 90,000 Machine hours 100,000 Pre-determine overhead rate 6.25 Pre-determine overhead rate 5.625 Actual labour hours 50,000 Actual machine hours 50,000 Applied overhead costs 312,500 Applied overhead costs 281,250

GROUP WORK – ACTIVITY 5: UNIQUE

[Pre-determined overhead rate]

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Fixed Cost Allocation

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Traditional Service Cost Allocation

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Direct Service Cost Allocation

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12 Service 1 Service 2

• Dept. A
• Dept. B

Total cost 120,000 200,000 250,000 390,000

• Dept. A

30% 60%

• Dept. B

70% 40% Service 1 (120,000) 36,000 84,000 Service 2 (200,000) 120,000 80,000 Product cost nil nil 406,000 554,000 No relationship between service departments – direct allocation to production departments

Step-down Cost Allocation

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13 Service 1 Service 2

• Dept. A
• Dept. B

Total cost 120,000 200,000 250,000 390,000

• Dept. A

30% 60%

• Dept. B

50% 40% Service 2 20% Service 1 (120,000) 24,000 36,000 60,000 Subtotal 224,000 Service 2 (224,000) 134,400 89,600 Product cost nil nil 420,400 539,600

Reciprocal Service Cost Allocation

MANAGEMENT ACCOUNTING FRAMEWORK

14 Service 1 Service 2

• Dept. A
• Dept. B

Total cost 120,000 200,000 250,000 390,000

• Dept. A

30% 40%

• Dept. B

60% 40% Service 1 20% Service 2 10% Product cost

Activity Based Costing

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15 Activity-based costing (ABC) is a costing methodology that identifies activities in an

• rganization and assigns the cost of each activity

with resources to all products and services according to the actual consumption by each.

GROUP WORK – ACTIVITY 6: DOLSAL

[Allocation of Service Cost]

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Product Costing

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Absorption & Marginal Costing

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ABSORPTION COSTING MARGINAL COSTING

Absorption & Marginal Costing

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19 Cost Absorption Marginal Direct material costs 25.00 25.00 Direct labour costs 10.00 10.00 Variable overhead costs 3.00 3.00 Fixed overhead costs 5.00

• Product cost

43.00 38.00

Overhead Absorption Rate

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OAR = Budgeted fixed overhead costs . Estimated normal production capacity

OAR must reflect the allocation of fixed operating costs under normal business activities

Under/Over Absorbed Overhead Costs

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21 Actual

• verhead

costs Allocated

• verhead

costs Under /over absorbed costs Allocated costs represents the flexible budgeted cost based on the actual level of output

Under/Over Absorbed Costs

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GROUP WORK – ACTIVITY 8: DAYAN Mnf

[Under/over absorbed costs]

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Reconciliation of Profit

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Reconciliation of Profit

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The OAR was R 5.00 and the variable production costs were R 25.00. The actual production was 100,000 units of which 20,000 were unsold; and the total fixed production costs of R 480,000. Absorption Marginal Sales (selling price of R 50,00) 4,000,000 4,000,000 Variable production costs 2,500,000 2,500,000 Fixed production costs (applied) 500,000 NIL Inventory on hand (R 30,00 & R 25.00) (600,000) (500,000) Gross profit 1,600,000 2,000,000 Manufacturing costs NIL 480,000 Over absorbed costs (500,000 – 480,000) 20,000 NIL Profit 1,620,000 1,520,000 OAR including in inventory (20,000 x 5) 100,000

Reconciliation of Profit

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Absorption & Marginal Costing

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GROUP WORK – ACTIVITY 7: RETRIX

[Application of Absorption & Marginal costing]

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GROUP WORK – ACTIVITY 7: BOKSTORM

[Application of Absorption & Marginal costing]

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Wastages in Production

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Wastages in Production

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