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Accounting and Finance for Engineers Part One Unit 5: Cost Analysis: Marginal and Absorption Costing

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Unit overview

In this unit we look at how companies determine the costs of making their products. At first sight this may seem obvious, it is the cost of the materials used plus the labour cost of assembling them, testing them and packaging them ready for shipment. This is one way of looking at costing products. However, this method does not take into account overheads, the indirect costs of the company. Before any company can make a profit it needs to recover enough profit to enable it to pay all its overheads. Clearly here I am talking about gross profit. Only when all of the direct and indirect costs are covered does the company make any profit. We saw this when we looked at the direct and indirect costs.

To illustrate how absorption and marginal costing works, I will be looking at a case study which will show you how the theory behind costing works and interesting things that can happen in practice. As usual we will start with the unit learning objectives and definitions of some of the key terms.

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Professor  Tony Ward

Tony is Professor of Engineering Management in the Department of Electronics at the University of York where he has worked for 25 years. Prior to that he spent 18 years in Industry as an electronic design engineer, technical manager and programme manager for a number of different companies.  Within York he has held the position of Provost of Alcuin College and Director of the Centre for Excellence in Teaching and Learning in Enterprise.  Externally he has been President of the European Association for Education in Electrical and Information Engineering and managed or participated in over 20 research projects.  He has published 17 journal papers, over 100 conference papers, given over 20 invited lectures or keynotes and written or contributed to 8 books or formally published reports. His research is in area of Engineering Education and Entrepreneurship.  He is the founder and Chairman of Skillsforge Ltd. A competence management and course booking spinout business from the University of York.

Type Unit
What you will learn
• Introduce you to profit and cost centres;
• Introduce you to apportionment and absorption;
• Introduce you to marginal and fully absorbed product costs;
• Enable you to understand how fully absorbed product costs can be determined;
• Identifying what information you need to calculate product costs;
• Determining the fully absorbed product cost from given company information;
• Enable you to see the implications of different indirect cost apportionment methods.
Who should learn
• Junior managers who aspire to more senior positions
• Engineers who aspire to management positions
• Non-financial employees who want to learn the basics of accounting and finance
• Individuals wishing to start their own business
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