MANAGEMENT ACCOUNTING Absorption & Marginal Costing 1 Prepared by: Yaeesh Yasseen, Jade Jansen, Rashied Small & Lucinda Smidt Reviewed by: Achmad Joseph
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 GROUP WORK ACTIVITY 4: ABRAM [Selection of system Job vs Process costing]
4 GROUP WORK ACTIVITY 4: JOEDINE [Selection of system Job vs Process costing]
5 Process Costing Systems Cost object
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 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 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 5.625 Actual labour hours 50,000 Actual machine hours 50,000 Applied overhead costs 312,500 Applied overhead costs 281,250
9 GROUP WORK ACTIVITY 5: UNIQUE [Pre-determined overhead rate]
10 Fixed Cost Allocation
11 Traditional Service Cost Allocation
12 Direct Service 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. 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
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. 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
14 Reciprocal Service Cost Allocation 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
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 GROUP WORK ACTIVITY 6: DOLSAL [Allocation of Service Cost]
17 Product Costing
18 Absorption & Marginal Costing ABSORPTION COSTING MARGINAL COSTING
19 Absorption & Marginal Costing 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
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 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 Under/Over Absorbed Costs
23 GROUP WORK ACTIVITY 8: DAYAN Mnf [Under/over absorbed costs]
24 Reconciliation of Profit
25 Reconciliation of Profit 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
26 Reconciliation of Profit
27 Absorption & Marginal Costing
28 GROUP WORK ACTIVITY 7: RETRIX [Application of Absorption & Marginal costing]
29 GROUP WORK ACTIVITY 7: BOKSTORM [Application of Absorption & Marginal costing]
30 Wastages in Production
31 Wastages in Production