Explain the technique of Marginal Costing and Absorption Costing. Taki

Question

Explain the technique of Marginal Costing and Absorption Costing. Taking a suitable example prepare a Profit and Loss Account according to Marginal Costing and Absorption Costing.

26 Apr 2023

Answer :

Word Count : 584

Marginal costing and absorption costing are two methods of cost accounting used to calculate the cost of production and determine the selling price of goods. Each method has its own unique approach, which can result in different outcomes. In this answer, we will explain the differences between marginal costing and absorption costing and then prepare a profit and loss account using each method.

Marginal Costing: Marginal costing is a technique of cost accounting where only variable costs are considered when calculating the cost of production. Variable costs are costs that change in proportion to the level of production, such as raw material, labor, and electricity. Fixed costs, such as rent and depreciation, are treated as period ___ ________ ______ ____ _____ _______.
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Particulars	As at 1-1-2021	As at 31-12-2021
Assets
Cash and bank balances	50,000	40,000
Sundry debtors	77,000	73,000
Short-term investments	1,10,000	84,000
Prepaid expenses	1,000	2,000
Stock-in-trade	92,000	1,06,000
Freehold land and sheds	1,00,000	1,00,000
Plant and machinery	72,000	80,000
	5,02,000	4,85,000
Liabilities and Capital
Sundry creditors	1,03,000	96,000
Outstanding expenses	13,000	22,000
5% Debentures	90,000	70,000
Depreciation fund	40,000	44,000
Reserve for contingencies	60,000	50,000
Profit and loss account	16,000	23,000
Share capital	1,80,000	1,80,000
	5,02,000	4,85,000