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
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
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