Let's delve into the differences between absorption and marginal costing, and then calculate the necessary values using the provided data.
### Definitions:
Marginal Costing - also known as variable costing, includes only variable production costs (direct materials, direct labor, and variable overheads) in the cost of a unit of product. Fixed costs are treated as period costs and are charged against the revenue of the period in which they are incurred.
Absorption Costing - also known as full costing, includes all direct costs and all production overheads (both variable and fixed) in the cost of a unit of product. This means that each unit of product absorbs a portion of the fixed production overheads.
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### Given Data:
- Selling Price per unit: GHC 25
- Direct material cost per unit: GHC 10
- Direct labor cost per unit: GHC 4
- Total production overhead cost: GHC 400,000
- Expected production units per annum: 320,000 units
- Variable selling and distribution cost per unit: GHC 1.50
- Fixed selling and distribution cost per annum: GHC 80,000
### Calculations:
#### Marginal Costing:
1. Marginal Cost per Unit:
- Direct material cost per unit: GHC 10
- Direct labor cost per unit: GHC 4
- Variable selling and distribution cost per unit: GHC 1.50
[tex]\[
\text{Marginal Cost per Unit} = 10 + 4 + 1.5 = \text{GHC 15.50}
\][/tex]
2. Total Marginal Cost:
- Expected production units: 320,000 units
- Marginal cost per unit: GHC 15.50
[tex]\[
\text{Total Marginal Cost} = 15.50 \times 320,000 = \text{GHC 4,960,000}
\][/tex]
#### Absorption Costing:
1. Absorption Cost per Unit:
- Direct material cost per unit: GHC 10
- Direct labor cost per unit: GHC 4
- Variable selling and distribution cost per unit: GHC 1.50
- Fixed production overhead cost allocation per unit: Total production overhead cost / Expected production units
[tex]\[
\text{Fixed Production Overhead Cost per Unit} = \frac{400,000}{320,000} = \text{GHC 1.25}
\][/tex]
[tex]\[
\text{Absorption Cost per Unit} = 10 + 4 + 1.5 + 1.25 = \text{GHC 16.75}
\][/tex]
2. Total Absorption Cost:
- Expected production units: 320,000 units
- Absorption cost per unit: GHC 16.75
[tex]\[
\text{Total Absorption Cost} = 16.75 \times 320,000 = \text{GHC 5,360,000}
\][/tex]
### Summary:
- Marginal Cost per Unit: GHC 15.50
- Total Marginal Cost: GHC 4,960,000
- Absorption Cost per Unit: GHC 16.75
- Total Absorption Cost: GHC 5,360,000
These calculations illustrate the different approaches in marginal and absorption costing methods, highlighting how fixed production overheads are treated differently in each method.
