# Marginal Costing - Do you include Fixed OH?

UK Discussion in 'Exams and Studying' started by cheesus182, Dec 2, 2016.

1. ### cheesus182

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Hey guys,

sorry for the really simple question but I really need to make sure I get this right.
I was asked to create a absorption and marginal profit statement for the following data:

December 2014:
Direct materials: \$300
Direct Labour: \$200
Variable Manf OH per unit: \$100
Variable distribution cost per unit: \$50

Total Fixed Manf OH = \$200,000
Total fixed Admin cost = \$67,000

Production = 1200 units
Sales = 900 units
Sales Prices per unit = \$1000

For the example above I got a profit of 10.895%
Can anyone confirm that is correct?

The more important one for me is the marginal costing one.
Using the same data, I got a profit of 27.5%. That is without considering Fixed OH. which I think is wrong. However, if I use Fixed OH in the marginal calculation I would get a profit of 5.3% which is very low, right?

The exercise continues into December 2015 with the following data:

Direct materials: \$300
Direct Labour: \$200
Variable Manf OH per unit: \$100
Variable distribution cost per unit: \$50

Total Fixed Manf OH = \$200,000
Total fixed Admin cost = \$67,000

Production = 800 units
Sales = 1000 units
Sales price per unit = \$1000

Opening inventory would be 300, less 100 closing stock I suppose and by my calculations I got a profit of 5.802%
Is that right?

For the marginal costing calculation also for year 2015, I got 23.302% which again, does not include fixed OH. so I am really unsure about that.

Can anyone explain where I went wrong here and how I include the Fixed OH in the marginal costing calculation?

I really appreciate the help.

Thanks!

cheesus182, Dec 2, 2016

2. ### Triest123VIP Member

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Messages:
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Under marginal costing, only the variable manufacturing overhead costs are treated as inventoriable costs while the fixed manufacturing overhead costs are recognised as expense.

Marginal costing
For the year 2014
Sales (\$1,000 x 900 ) -------------------------------------> 900,000
Less : Variable costs of goods sold
Opening inventory-------------------------------------------> -
Direct materials (\$300 x 1,200)--------------------------> 360,000
Direct labour (\$200 x 1,200)------------------------------> 240,000
Variable Manuf OH (\$100 x 1,200)----------------------> 120,000
Less:Closing inventory [(\$300+\$200+\$100) x 300]-> (180,000)
--------------------------------------------------------------------> 540,000
Less : Variable distribution cost (\$50 x 900)----------> 45,000
Contribution----------------------------------------------------> 315,000
Less : Fixed Manf OH---------------------------------------> 200,000
Less : Fixed Admin cost-------------------------------------> 67,000
Net profit ----------------------------------------------------- > 48,000
Net Profit margin 5.3%

For the year 2015
Sales (\$1,000 x 1,000)---------------------------------------> 1,000,000
Less : Variable costs of goods sold
Opening inventory----------------------------------------------> 180,000
Direct materials (\$300 x 800)--------------------------------> 240,000
Direct labour (\$200 x 800)------------------------------------> 160,000
Variable Manuf OH (\$100 x 800)----------------------------> 80,000
Less : Closing inventory [(\$300+\$200+\$100) x 100]---> (60,000)
-----------------------------------------------------------------------> 600,000
Less : Variable distribution cost (\$50 x 1000) -----------> 50,000
Contribution-------------------------------------------------------> 350,000
Less : Fixed Manf OH------------------------------------------> 200,000
Less : Fixed Admin cost---------------------------------------> 67,000
Net profit------------------------------------------------------------> 83,000
Net Profit margin 8.3%

Last edited: Dec 3, 2016
Triest123, Dec 3, 2016

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