Absorption and Variable

Costing
Revenue of a manufacturing Concern:
• An institution engaged in manufacturing goods with a
view to sell the final product is manufacturing
concern.
• Since the aim of manufacturing concern is to earn
from sales. The main source of Revenue is Sales
Revenue for these firms.
• Sales Revenue = Sales units X Selling price per
unit(SPPU)
 Cost of Manufacturing Concern:
Total Cost

Variable Cost Fixed Cost

Non- Non-
Manufacturing Manufacturing
Manufacturing Manufacturing

Factory overheads are Manufacturing overheads where as Selling &

Distribution and Office & Administrative overheads are non-
manufacturing overheads.
 Specimen of Cost Statement:
Particulars Amount
Sales XXX
LessDirect Material
Direct Expenses
Direct Wages
PRIME COST XXX
Add: Factory overheads XXX
FACTORY COST XXX
LessOffice and administrative overheads Xxx
COST OF PRODUCTION XXX
Lessopening stock of Finished goods Xxx
(units x cost per unit)
Less: Closing stock of finished goods Xxxx
(units x Cost per unit)
COST OF GOODS SOLD XXX
Add : Selling and distribution overhead Xxx
Total profit Xxxx
 Method of Costing

Variable costing Absorption Costing

Sales Sales
Direct Expenses Direct Expenses
Variable Cost Manufacturing cost
(mfg and non-mfg) (Variable and Fixed )
Fixed Cost Non Manufacturing Cost
(Mfg and non-mfg) (Variable and Fixed)
 Income Statement under Variable costing Variable costing, Marginal Costing,
Particulars Details Amt.(Rs) Direct Costing, Internal Reporting system
Sales( SPPU X units sold) XXX In absence of any units among
Less:Variable Cost of Goods sold:
Direct material(PUC x Production unit) XXX
production, sales, opening stock and
Direct labour (PUC x Production unit) XXX closing stock
Direct Expenses(PUC x Production unit) XXX Sales = Production + Opening - Closing
Variable mfg expenses( PUC x Pro. Unit) XXX
PUC = Production Per unit
Variable mfg. cost of production @ Rs. # XXX # = Cost of production/ Production
Add: Opening Stock ( Rs # x units) XXX
Less: Closing Stock (Rs# x units) (XXX) units
Variable mfg. cost of goods sold (XXX)
Gross contribution Margin XXX
Less: Non- mfg variable cost
Variable office & Adm (CPU x sales unit) XXX
Variable selling and adm(CPU x Sales unit) XXX XXX
Net Contribution Margin XXX
Less: Periodic Cost/Fixed Cost
Fixed overheads Xxx XXX
Net Income before Tax XXX
 A manufacturing company provided you the
following information:
• Normal Capacity……….. 50,000 units Selling Price per unit……. Rs. 15
• Prime Cost per unit……. Rs. 5 Production overhead(fixed):Rs 1,50,000
• Production overhead(Variable)…Rs 2 per unit
• Selling & Distribution overhead:
• Fixed: ….Rs. 90,000 Variable :……..Rs 1.5 per unit
• Production units : 60,000 units Sales unit: 40,000 units
• Opening Stock: 5,000 units
• Required: Income Statement under Marginal costing.
 Income Statement
(Under Variable Costing)
 Opening Stock = 5000 units
Particulars Details Amount  Production = 60,000 units
Sales (40,000 x 15) 6,00,000  Sales = 40,000 units
 We have,
Less: VariableManufacturing Cost of goods sold:
 Sales = prod + o/s – c/s
Prime Cost ( 5 x 6,0000) 3,00,000
 40,000 = 60,000 + 5000 – c/s
Variable production overhead @ Rs. 2 1,20,000
 C/S = 25,000 units
Variable Mfg cost of production @ Rs 7 4,20,000 • Normal Capacity……….. 50,000 units
Add: Opening Stock ( 5000 x 7) 35,000 • Selling Price per unit……. Rs. 15
Less: Closing Stock ( 25000 x 7) (1,75,000) • Prime Cost per unit……. Rs. 5
Variable mfg cost of goods sold 2,80,000 • Production overhead(fixed):…..Rs 1,50,000
• Production overhead(Variable)…Rs 2 per unit
Gross Contribution Margin 3,20,000
• Selling & Distribution overhead:
Less: Variable non Mfg. Cost
• Fixed: ….Rs. 90,000 Variable :……..Rs 1.5 per unit
Variable selling and adm( 40000 x 1.5) 60,000 (60,000)
• Production units : 60,000 units Sales unit:
Net Contribution Margin 2,60,000 40,000 units
Less: Period/fixed cost: • Opening Stock: 5,000 units
Fixed Selling and adm overhead 90,000 • Required: Income Statement under Marginal
Fixed Production overhead 1,50,000 (2,40,000) costing.
Net Income before Tax 20,000
 Variable Costing
Sales

Manufacturing Variable Cost

Gross Contribution Margin

Non- Mfg Variable Cost

Net Contribution Margin

Period / Fixed Cost

Net Income Before Tax

 Income Statement
(under Absorption costing)  Full costing , external reporting ,full costing
Particulars Details Amount
Sales XXX  Production unit >Normal capacity :under absorption
Less: Manufacturing Cost of goods sold:  Production unit< Normal capacity: Over Absorption
Direct material XXX  Amount = Difference in units x MFCPU
Direct labour cost XXX  MFCPU =
Variable manufacturing cost XXX
Fixed manufacturing Cost XXX
 If Fixed manufacturing overhead is given in unit,
Manufacturing Cost of Production @ Rs. # XXX
(MFCPU), multiply with either normal capacity or
Add: Opening Stock (Rs. # x unit) XXX
production unit to get the total amount of fixed
Less : Closing Stock &(Rs # x unit) (XXX)
cost.
Manufacturing Cost of Goods sold (XXX)
Gross profit margin before adjustment XXX
Add: Over absorption of Mfg fixed cost XXX
Less: Under absorption of Mft. Fixed Cost (XXX)
Gross profit after adjustment XXX
Less: Non Manufacturing Cost
Fixed selling , office overhead XXX
Variable selling, office overhead XXX XXX
Net Income before tax XXX
 Income statement
(under absorption costing)
Following information are provided to you:
Particulars Details Amount Beginning Inventory 15,000 u Production units 45000
Sales units 50,000 Ending Inventory 10,000
Sales (50,000 x 2) 10,00,000 Normal capacity 50,000 Selling price per unit Rs. 20
Less: Mfg. cost of goods sold: Variable cost per unit: Fixed cost per year:
Direct material (45000 x 3) 1,35,000 Direct Materials 3 per unit
Direct labour 2 per unit Mfg overhead 150000
Direct labour ( 45000 x 2) 90,000 Mfg. overhead 1 per unit Office overhead 50,000
Variable mfg O/H ( 45,000 x 1) 45,000 Selling overhead 1 per unit Selling overhead 2,00,000
Fixed Mfg. O/H (45000 x 3) 1,35,000
Mfg. Cost of production @ Rs. 9 4,05,000
Add: Opening stock (15000x9) 1,35,000
Less: Closing Stock (10000 x 9) (90,000)
Mfg . Cost of goods sold (4,50,000)  SFOR =

Gross Profit before adjustment 5,50,000
 = = Rs. 3
Less: under absorption of Fixed
 Absorbed fixed cost = 45,000 x 3 = 1,35,000
Mfg. overhead (15,000)
 Actual fixed cost = Rs. 1,50,000
Gross profit after adjustment 5,35,000  Under absorbed fixed cost = 1,50,000 – 1,35,000
Less: Non- mfg cost : = 15,000
Fixed office overhead 50,000
Fixed selling overhead 2,00,000
Variable selling (50,000 x 1) 50,000 3,00,000
Net profit before tax 2,35,000
Reconciling the difference in profit:
Particular Amount
Net income as per absorption costing xxx
Net income as per Variable costing xxx
Difference in Net profit XXX
Fixed Manufacturing cost per unit xxx
X Difference in stock (C/s – O/s) xxx
Difference in profit xxx

Particular Amount
Net profit as per variable costing xxx
+ fixed Mfg. overhead in closing stock xxx
- Fixed Mfg. overhead in Opening stock
Net profit as per absorption costing XXX

Particular Amount
Net profit as per Absorption costing xxx
+ fixed Mfg. overhead in Opening stock xxx
- Fixed Mfg. overhead in closing stock xxx
Net profit as per absorption costing XXX