How is stock valued under the Absorption and Marginal costing systems?
Overhead Absorption Rate
Are the budgeted overhead rates based on estimated figures and then compared in a second OAR calculation
which is based on actual year end figures?
Under absorption costing, stock is valued at its full cost, including overheads. Under marginal costing it is valued at the total of the variable costs only. This includes direct materials, direct labour, direct expenses and the variable production overheads only - not the fixed overheads, which are treated as a period cost and are deducted lower down in the SOP/L.
Overhead absorption rates are always calculated using budgeted figures, and then the rate is applied to the actual output to find the total overheads to be absorbed. There could be under- or over-absorption of overheads depending on how the actual output compares to the budgeted output.