ASAccountingCambridge (CIE)Revision NotesCost and Management AccountingMarginal CostingReconciliation between Profit Statements

Reconciliation between Profit Statements (Cambridge (CIE) AS Accounting): Revision Note

Exam code: 9706

Seina Murakami

Written by: Seina Murakami

Reviewed by: Dan Finlay

Updated on

Profit statements using marginal costing

What are profit statements?

  • Profit statements show the profit or loss made from selling a product/service 

How do I prepare a profit statement using marginal costing? 

  • STEP 1

    Calculate the sales revenue

    • Selling price per unit × number of units sold

  • STEP 2

    Calculate the cost of sales

    • Start with opening inventory

    • Add production cost

      • Excluding the fixed costs

    • Subtract closing inventory

  • STEP 3
    Calculate the contribution

    • Revenue - variables

  • STEP 4
    Subtract the fixed costs

Profit statement
Layout of a profit statement using marginal costing

Worked Example

Jane manufactures a single product. She uses a system of marginal costing.

The following budgeted data is available for one unit of the product.

$

Selling price

14

Direct materials

4

Direct labour

3

On 1 August, Jane held 2 000 units.

The following actual results are available.

Sales: 12 000 units

Production: 18 000 units

Fixed overheads: $25 000

Prepare the profit statement for the month of August to calculate the profit or loss.

Answer:

  • Sales revenue

    $14 × 12 000 = $168 000

  • Production cost

    • Direct materials

      $4 × 18 000 = $72 000

    • Direct labour

      $3 × 18 000 = $54 000

    • Total

$72 000 + $54 000 = $126 000

  • Opening inventory

    ($4 + $3) × 2 000 = $14 000

  • Closing inventory

    Opening inventory + Production - Sales

    = 2 000 + 18 000 - 12 000

    = 8 000 units

    ($4 + $3) × 8 000 = $56 000

Profit statement for the month of August

$

Revenue

168 000

Cost of sales:

Opening inventory

14 000

Production costs

126 000

Less: Closing inventory

(56 000)

(84 000)

Contribution

84 000

Less: Fixed overheads

(25 000)

Profit for the month

59 000

Profit for August is $57 000

Reconciliation between absorption and marginal costing

How is reconciliation between absorption and marginal costing done? 

  • A statement reconciling the reported profits using absorption and marginal costing is prepared

  • A difference arises because of fixed manufacturing overheads being treated differently 

    • In marginal costing, fixed manufacturing overheads are charged fully to the period 

    • In absorption costing, fixed manufacturing overheads are absorbed into product cost and can be carried forward in closing inventory or released from opening inventory 

  • When opening inventory is greater than the closing inventory

    • Marginal profit is higher than absorption profit 

  • When closing inventory is greater than opening inventory

    • Absorption profit is higher than marginal profit 

How is inventory valued using absorption and marginal costing?

  • In absorption costing, fixed costs are absorbed into inventory

    • Fixed manufacturing overheads are included when calculating the value of inventory

    • When calculating value of opening inventory:

      Opening スペース units スペース かける 開き括弧 Total スペース direct スペース costs スペース たす スペース Variable スペース manufacturing スペース overheads スペース たす スペース Fixed スペース manufacturing スペース overheads 閉じ括弧

    • When calculating value of closing inventory:

      Closing スペース units スペース かける スペース 開き括弧 Total スペース direct スペース costs スペース たす スペース Variable スペース manufacturing スペース overheads スペース たす スペース Fixed スペース manufacturing スペース overheads 閉じ括弧

  • In marginal costing, fixed costs are excluded from inventory

    • Only variable costs are included when calculating the value of inventory

    • When calculating value of opening inventory:

      Opening スペース units スペース かける スペース 開き括弧 Total スペース direct スペース costs スペース たす スペース Variable スペース manufacturing スペース overheads 閉じ括弧

    • When calculating value of closing inventory:

      Closing スペース units スペース かける 開き括弧 Total スペース direct スペース costs スペース たす 狭い空白文字 Variable スペース manufacturing スペース overheads 閉じ括弧

How is a reconciliation statement prepared?

  • STEP 1

    Calculate profit as per absorption costing

    • Start with sales revenue

    • Subtract production cost which includes:

      • Direct materials

      • Direct labour

      • Other direct costs

      • Variable manufacturing overheads

      • Fixed manufacturing overheads

    • Subtract operating expenses

      • Administration costs

      • Selling & distribution costs

  • STEP 2

    Add the difference in opening inventory

    • Calculate opening inventory for absorption costing

    • Calculate opening inventory for marginal costing

    • Calculate the difference in opening inventory value

  • STEP 3

    Subtract the difference in closing inventory

    • Calculate closing inventory for absorption costing

    • Calculate closing inventory for marginal costing

    • Calculate the difference in closing inventory value

  • STEP 4

    Check that the value equals the profit as per marginal costing

    • Start with sales revenue

    • Subtract production costs which includes:

      • Direct materials

      • Direct labour

      • Other direct costs

      • Variable manufacturing overheads

    • Subtract operating expenses

      • Administration costs

      • Selling & distribution costs

Reconciliation statement
Example of a cost reconciliation statement

Worked Example

With absorption costing: 

  • Profit: $9 200

  • Opening inventory: $1 600 

  • Closing inventory: $2 000

With marginal costing: 

  • Profit: $9 100

  • Opening inventory: $1 500

  • Closing inventory: $1 800

Prepare a statement reconciling the profit from absorption costing and marginal costing. 

Answer: 

Calculate the difference in the inventory values

Difference in opening inventory: 1 600 - 1 500 = 100 

Difference in closing inventory: 2 000 - 1 800 = 200 

$

Profit from absorption costing

9 200

Difference in opening inventory

100

Less: Difference in closing inventory

(200)

Profit from marginal costing

9 100

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Author
Reviewer
Seina Murakami

Author: Seina Murakami

Expertise: Accounting Content Creator

Seina studied Pharmacology at UCL, though her professional passion lies deeply in the world of accounting and finance. With an A* in CIE A-Level Accounting and extensive experience tutoring IGCSE and IAL students, she specializes in making complex financial concepts accessible. From developing comprehensive revision resources to collaborating with faculty on lesson materials, Seina is dedicated to helping students bridge the gap between struggling with content and mastering it.

Dan Finlay

Reviewer: Dan Finlay

Expertise: Maths Subject Lead

Dan graduated from the University of Oxford with a First class degree in mathematics. As well as teaching maths for over 8 years, Dan has marked a range of exams for Edexcel, tutored students and taught A Level Accounting. Dan has a keen interest in statistics and probability and their real-life applications.