# ACCA F2 Revision part 3 Marginal and Absorption Costing

#### Index of all ACCA Paper F2 Management Accounting / FIA FMA Revision Lectures >>

1. says

This too :
A company uses standard absorption costing. Its fixed overhead absorption rate is \$8 per machine hour and each unit of production should take 3 machine hours. Last year there was an opening inventory of finished goods of 4000 units. They produced 30,000 units and sold 25,000 units. The actual profit last year was \$526K.

What profit would have been earned under a standard marginal costing system?

my workings are : 4K + 30K – 25K = 9K x \$8 = \$27,000. \$526,000 – \$27,000 = \$499K. I do not know where did i go wrong.

• says

The only difference between marginal and absorption costing profits is the fixed overheads in opening and closing inventory.

Here, the inventory increases by 5000 units. The fixed overheads per unit are 3 x \$8 = \$24.
So the profits will be different by 5000 x \$24 = \$120,000.

Because inventory is increasing, absorption profit will be higher than marginal profit, so the marginal profit is 526,000 – 120,000 = \$406,000

• says

So here, we totally don’t look at opening inventory of finished goods 4000 units?

• says

You are only interested in the change in the inventory.

2. says

Sir, how do you work this out?
A company uses standard absorption costing. Its fixed overhead absorption rate is \$8 per machine hour and each unit of production should take 3 machine hours. Last year there was an opening inventory of finished goods of 4000 units. They produced 30,000 units and sold 25,000 units. 90,000 machine hours were used for production, and the total fixed overheads were \$700,000. What was the amount of the over or under absorption of fixed overheads?

• says

As you will know from the lectures, the over or under absorption is the difference between the actual fixed overheads and the amount absorbed (i,e, actual hours x standard cost per hour).

The amount absorbed is 90,000 hours x \$8 per hour = \$720,000.

So the amount over-absorbed is \$20,000.

• says

So there’s nothing gotta to do with the opening inventory, production and closing?

• says

Yes it has. It is the change in inventory that is relevant.
If they produce more than they sell, the inventory will increase. If they sell more than the produce, then inventory will decrease.

3. says

Thank you soo much its helping a lot and this is the best source i have found for my revision thank you

4. says

very helpful , been having problems understanding the difference between marginal costing and absorption costing

5. says

6. says

sir can you please tell me that when inventory level decreases marginal gives a higher profit but will the valuation of inventory also give a higher value then absorption costing?

• says

@faaezam, The value of inventory is lower with marginal costing than with absorption costing (because the absorption cost includes fixed overheads whereas the marginal cost does not)

7. says

where can i find the question that you are doing in this particular lecture?

• says

@mnyahwe, The lectures are not available for downloading – it is the only way that we can keep this site going.

8. says

These revision are much more helpful than attending classes… No disturbance, i can rewind and replay in case i didn’t understand.. Zat’s perfect… Very clear explanation, covering details of all chapters!!
Thanks a lot!!