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MODULE 3 Cost Classification

Marginal and Absorption Costing

Marginal Costing

The formula to obtain the marginal costing for a period is as follows:
Start with units sold X sales price per unit
LESS opening inventory units X variable cost per unit of opening  

LESS units produced in the period X variable production cost per unit produced in the period​ 
LESS units sold in the period X variable selling cost per unit 
ADD closing inventory units X variable production cost per unit produced in the period​
LESS all fixed costs
EQUALS budgeted profit under marginal costing

Absorption Costing

To determine the budgeted profit under absorption costing for a period please follow below steps:
​1) Calculate the budgeted profit under marginal costing
2) Calculate the costs of inventory under marginal costing = opening inventory + production costs for the period - closing inventory + production fixed costs + other fixed costs
​3) Calculate the costs of inventory under absorption costing = opening inventory + production costs for the period - closing inventory + other fixed costs
​4) Calculate the difference between marginal and absorption costs of inventory.
​5) Is the costs of inventory under marginal costing more than absorption costing? If yes, please skip to step 6. If no, please skip to step 7.
​6) budgeted profit under absorption costing = budgeted profit under marginal costing + difference calculated in step 4
​7) budgeted profit under absorption costing = budgeted profit under marginal costing - difference calculated in step 4

Go to Module 1
Go to Module 2

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