Example of Marginal Costing and Closing inventory

Example of Marginal Costing and Closing inventory

Closing inventory in marginal costing is valued at variable cost. Due to valuation at variable cost the profit under marginal costing differ from profit under absorption costing because under absorption costing stock valuation is performed at full production cost.

Example

Sales Price	500 per unit
Direct Material	200 per unit
Direct Labor	50  per unit
Direct Expenses	50  per unit
Rent of Factory	60,000
Rent of warehouse	60,000
Output produced and Sold	1,800 & 1500 units

Calculated profit and stock valuation under Marginal Costing

Solution

This example can be solved by two methods

Method 1

Under this method variable production cost of unit sold is deducted from the sales price and closing inventory is separately valued for inclusion in balance sheet. Closing inventory valuation under this method does not form part of profit/contribution calculation.

1. Profit Calculation

	Units	Rate	Total
Sales	1500	500	750,000
Less: Variable Cost	1500	(200+50+50)=300	(450,000)
Contribution			300,000
Less: Fixed Cost		(60,000+60,000)	(120,000)
Profit			180,000

2. Stock Valuation

	Unit	Rate	Amount
Closing Stock	300 units	300	90,000

Method 2

Under this method variable production cost of unit sold is calculated and closing inventory therefore form part of profit /contribution calculation.

 Profit Calculation

	Units	Rate	Total	Total
Sales	1500	500		750,000
Production Cost	1800	(200+50+50)=300	540,000
Less Closing Stock	300	300	(90,000)
Variable Production Cost				(450,000)
Contribution				300,000
Fixed Cost				(120,000)
Profit				180,000