THE INSTITUTE OF CHARTERED ACCOUNTANTS
OF SRI LANKA
POSTGRADUATE DIPLOMA IN BUSINESS AND
FINANCE - 2013/2014
Principles of Financial and Cost Accounting
Thilanka Warnakulasooriya
B.Com Special (Col), ACA
Absorption costing

It is costing system which treats all
manufacturing costs including both the
fixed and variable costs as product costs
Marginal costing

It is a costing system which treats only the
variable manufacturing costs as product
costs. The fixed manufacturing overheads
are regarded as period cost
2
Absorption costing
Cost
Non Manufacturing
cost
Manufacturing cost
Direct
Material
Direct
Labor
Finish Good
Overhead
Selling &
Distribution
Cost of good
sold
Admin
Profit & Loss
Account
Marginal costing
Cost
Non Manufacturing
cost
Manufacturing cost
Direct
Material
Direct
Labor
Finish Good
Variable
Overhead
Fixed
Overhead
Cost of good
sold
Selling &
Distribution
Admin
Profit & Loss
Account
Comparison of absorption costing &
Marginal Costing
Situation
Stock Level
Profit
1
No change
No difference
2
Increases
AC Profit is greater than MC Profit
3
Decreases
MC profit is greater than AC profit
Difference between absorption
and marginal costing
8
Treatment for
fixed
manufacturing
overheads
Absorption costing
Marginal costing
Fixed manufacturing
overheads are treated as
product costing. It is
believed that products
cannot be produced
without the resources
provided by fixed
manufacturing overheads
Fixed manufacturing
overhead are treated as
period costs. It is believed
that only the variable
costs are relevant to
decision-making.
Fixed manufacturing
overheads will be incurred
regardless there is
production or not
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Absorption costing
Value of closing
stock
Marginal costing
High value of closing
Lower value of closing
stock will be obtained as stock that included the
some factory overheads
variable cost only
are included as product
costs and carried forward
as closing stock
10
Absorption costing
Reported
profit
Marginal costing
If the production = Sales, AC profit = MC Profit
If Production > Sales, AC profit > MC profit
As some factory overhead will be deferred as product costs
under the absorption costing
If Production < Sales, AC profit < MC profit
As the previously deferred factory overhead will be released
and charged as cost of goods sold
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