MANAGEMENT ACCOUNTING Absorption & Marginal Costing

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1 MANAGEMENT ACCOUNTING Absorption & Marginal Costing 1 Prepared by: Yaeesh Yasseen, Jade Jansen, Rashied Small & Lucinda Smidt Reviewed by: Achmad Joseph

within the production cycles Process costing: Applied when

2 2 Job & Process Costing 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

3 3 GROUP WORK ACTIVITY 4: ABRAM [Selection of system Job vs Process costing]

4 4 GROUP WORK ACTIVITY 4: JOEDINE [Selection of system Job vs Process costing]

5 5 Process Costing Systems Cost object

6 6 Allocation of Manufacturing Fixed Costs Allocation of Manufacturing costs: Manufacturing costs are indirect costs and should allocated to the cost object allocation is based on pre-determined overhead rate. POR = Estimate manufacturing costs Estimated units of allocation basis The allocation basis is the cost driver that cause the manufacturing costs

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

8 8 Applied of Manufacturing Costs 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 Actual labour hours 50,000 Actual machine hours 50,000 Applied overhead costs 312,500 Applied overhead costs 281,250

9 9 GROUP WORK ACTIVITY 5: UNIQUE [Pre-determined overhead rate]

10 10 Fixed Cost Allocation

11 11 Traditional Service Cost Allocation

12 12 Direct Service Cost Allocation Service 1 Service 2 Dept. A Dept. B Total cost 120, , , ,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 No relationship between service departments direct allocation to production departments

13 Step-down Cost Allocation Service 1 Service 2 Dept. A Dept. B Total cost 120,000 200,000 250,000 390,000 Dept. A 30% 60% Dept.

13 13 Step-down Cost Allocation Service 1 Service 2 Dept. A Dept. B Total cost 120, , , ,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, ,600

14 14 Reciprocal Service Cost Allocation Service 1 Service 2 Dept. A Dept. B Total cost 120, , , ,000 Dept. A 30% 40% Dept. B 60% 40% Service 1 20% Service 2 10% Product cost

organization and assigns the cost of each activity with

15 15 Activity Based Costing Activity-based costing (ABC) is a costing methodology that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each.

16 16 GROUP WORK ACTIVITY 6: DOLSAL [Allocation of Service Cost]

17 17 Product Costing

18 18 Absorption & Marginal Costing ABSORPTION COSTING MARGINAL COSTING

19 Absorption & Marginal Costing Cost Absorption Marginal Direct material costs 25.00 25.

19 19 Absorption & Marginal Costing Cost Absorption Marginal Direct material costs Direct labour costs Variable overhead costs Fixed overhead costs Product cost

20 20 Overhead Absorption Rate OAR = Budgeted fixed overhead costs. Estimated normal production capacity OAR must reflect the allocation of fixed operating costs under normal business activities

21 21 Under/Over Absorbed Overhead Costs Actual overhead costs Allocated overhead costs Under /over absorbed costs Allocated costs represents the flexible budgeted cost based on the actual level of output

22 22 Under/Over Absorbed Costs

23 23 GROUP WORK ACTIVITY 8: DAYAN Mnf [Under/over absorbed costs]

24 24 Reconciliation of Profit

25 25 Reconciliation of Profit The OAR was R 5.00 and the variable production costs were R 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) 20,000 NIL Profit 1,620,000 1,520,000 OAR including in inventory (20,000 x 5) 100,000

26 26 Reconciliation of Profit

27 27 Absorption & Marginal Costing

28 28 GROUP WORK ACTIVITY 7: RETRIX [Application of Absorption & Marginal costing]

29 29 GROUP WORK ACTIVITY 7: BOKSTORM [Application of Absorption & Marginal costing]

30 30 Wastages in Production

31 31 Wastages in Production

Revision of management accounting

1 Revision of management accounting The following topics are covered in this chapter: Standard costing Flexible budgeting Absorption and marginal costing 1.1 STANDARD COSTING LEARNING SUMMARY After studying