Income Conception Cost Vs. Marginal Costing

735 Words 3 Pages
There are two methods uses(are used) to presenting(present) the income statement which is(are) the marginal costing and the absorption costing, the net profit difference will be reconciled between these two methods after the income statement is complete. Marginal and absorption costing are two different approaches to dealing with fixed manufacturing overheads and whether or not they are included in valuing inventory. The marginal cost is the total variable cost of the product, it consists of direct labour hours, direct materials and direct expenses, therefore when the production units increase, the total variable cost will increase proportionately. In other word, the marginal cost can be avoid if there are no any unit to be produced and will …show more content…
The profit of reconciled will be different between this two methods if there have changes in the value of the …show more content…
Thus, it resulted the cost of sales is being deducted and rising the net profit. But in marginal costing, the manufacturing overhead will be written off in the period cost section no matter how the value of the inventories had changes. Consequently, the net profit reported by the absorption costing will higher than the marginal costing. Conversely, when the inventories is decrease, the net profit by marginal costing will be higher than the absorption costing, this is because the fixed manufacturing overhead that brought forward in the opening inventories had been released, thus increase the cost of sales and reduced the net profit. But if the inventories level is constant, both methods will reported the same amount of net profit. For example, under the absorption costing, the variable and fixed manufacturing overhead is put under the product cost instead of the expenses on the income statement. If the product cost increase during the time, the fixed manufacturing overhead of the current period will be extended to the closing inventories under the absorption

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