Presentation of Cost Data under Marginal Costing and Absorption Costing

Marginal costing is not a method of costing but a technique of presentation of sales and cost data with a view to guide management in decision-making.

The traditional technique popularly known as total cost or absorption costing technique does not make any difference between variable and fixed cost in the calculation of profits. But marginal cost statement very clearly indicates this difference in arriving at the net operational results of a firm.

Following presentation of two Performa shows the difference between the presentation of information according to absorption and marginal costing techniques:

MARGINAL COSTING PRO-FORMA

	£	£
Sales Revenue		xxxxx
Less Marginal Cost of Sales
Opening Stock (Valued @ marginal cost)	xxxx
Add Production Cost (Valued @ marginal cost)	xxxx
Total Production Cost	xxxx
Less Closing Stock (Valued @ marginal cost)	(xxx)
Marginal Cost of Production	xxxx
Add Selling, Admin & Distribution Cost	xxxx
Marginal Cost of Sales		(xxxx)
Contribution		xxxxx
Less Fixed Cost		(xxxx)
Marginal Costing Profit		xxxxx

ABSORPTION COSTING PRO-FORMA

	£	£
Sales Revenue		xxxxx
Less Absorption Cost of Sales
Opening Stock (Valued @ absorption cost)	xxxx
Add Production Cost (Valued @ absorption cost)	xxxx
Total Production Cost	xxxx
Less Closing Stock (Valued @ absorption cost)	(xxx)
Absorption Cost of Production	xxxx
Add Selling, Admin & Distribution Cost	xxxx
Absorption Cost of Sales		(xxxx)
Un-Adjusted Profit		xxxxx
Fixed Production O/H absorbed	xxxx
Fixed Production O/H incurred	(xxxx)
(Under)/Over Absorption		xxxxx
Adjusted Profit		xxxxx

Reconciliation Statement for Marginal Costing and Absorption Costing Profit

	$
Marginal Costing Profit	xx
ADD (Closing stock – opening Stock) x OAR	xx
= Absorption Costing Profit	xx

Where OAR( overhead absorption rate) =

Budgeted fixed production overhead Budgeted levels of activities