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Miss NM says

thank you Sir.. i’ve understood now

Miss NM says

Hi Sir. I’m not able to work out test no 4 which is as follows:

Glossop Limited reported an annual profit of $47,500 for the year ended 31 March 2000. The company uses

absorption costing. One product is manufactured, the Rover, which has the following standard cost per unit.

$

Direct material (2 kg at $5/kg) 10

Direct labour (4 hours at $6.50/hour) 26

Variable overheads (4 hours at $l /hour) 4

Fixed overheads (4 hours at $3/hour) 12

52

The normal level of activity is 10,000 units although actual production was 11,500 units. Fixed costs were as

budgeted.

Inventory levels at 1 April 1999 were 400 units and at the end of the year were 600 units.

What would be the profit under marginal costing?

A $44,300

B $45,100

C $49,900

D $50,700

johnmoffat says

The difference between marginal and absorption profits is the change in inventory multiplied by the fixed overheads per unit.

Here, the inventory changes by 200 units. The fixed overheads per unit are $12, and so the profit will be different by 200 x 12 = $2,400.

Because the inventory increases, absorption will give the higher profit.

So the marginal profit is 47500 – 2400 = $45100

Temperance says

@ JohnMoffat

Hi Sir,

If the question just gives you variable non-production costs p.u. are these to be included in the cost card?

Also, if the question just says non-production costs are for eg, $3 p.u. are these considered fixed non-production costs or not?

Thanking you for your response

johnmoffat says

Only production costs are relevant in calculating the cost per unit for inventory valuation.

If a question gives a cost per unit then it is a variable cost.

Temperance says

Oh I see. Noted!Thank you Sir, for the quick response, its quite encouraging:)

devikaramlugun says

In Chapter 9. Example 3. – Can you please tell me what will be the effect on profit when comparing Absorption Costing against Marginal Costing, if Production = Sales?

Please help.

Thanks in advance.

johnmoffat says

The profits will be the same (because the level of inventory will not change).

This is covered in my lecture.

Edgar says

Many thanks John Moffat for you lectures. May I ask you for some help please as I’m stuck.

The question is : B Co makes a product which has a variable production cost at $21 per unit and a sales price of $39 per unit. At the beginning of 20X5, there was no op.inventory and sales during the year were 50,000 units. Fixed costs (production, administration, sales and distribution) totalled $328,000. Production was 70,000.

The value of closing inventory is $ ?

Solution:

The contribution per unit is $39-$21 = $18

Closing inventory volume = 70,000 units – 50,000 units = 20,000 units

Value of closing inventory = 20,000 units x $18 = $360,000

My question is: shouldn’t we use absorption costing as Production > Sales therefore closing it will give us a higher profit. Why marginal costing if we haven’t been told and in my opinion Absorption is the right one.

Edgar says

Sorry I got it now. Marginal costing is the only solution here.

Thank you anyway

Mohammed says

Hi all, i seem to have hit a wall in trying to understand Question 9 of the test questions. Correct me if i’m wrong (though quite certain i am but not sure why), but if we write out the cost card and carry out the profit calculation using an absorption system, we end up with £59,500 profit, yet this would be incorrect, and i’m not sure why? Could someone shed some light on this please? If we were not given the Marginal Costing derived profit, could we still not calculate the Absorption costing derived profit? What piece of information would be/is missing?

Thank you very much

johnmoffat says

The reason is because of over/under absorption of fixed overheads.

Using marginal costing, the contribution per unit is $12 and so the total contribution from sales of 8500 units is $102,000. Since the marginal costing profit is $60,000, it means that the total fixed overheads must be $42,000.

Using absorption costing, sales of 8500 units at a standard profit of $7 per unit gives a total of $59,500.

However this would be absorbing/charging fixed overheads of 8,000 units (production) x $5 per unit = $40,000.

So……since actual total fixed overheads are $42,000, it means they will have been under absorbed by 42,000 – 40,000 = $2,000, and therefore the absorption profit will be $59,500 – $2,000 = $57,500.

I hope that answers your question (although in the exam it is obviously quicker for this sort of question to simply adjust the profit by the fixed overheads in inventory, as per the answer).

Mohammed says

Thank you for your helpful reply. I understand the concept behind the working now, just a matter of wrapping my head around it all.

johnmoffat says

Great

I am pleased that you are sorted out with it.

raymond says

dear john , i have one question plz help

production > sales

production < sales

what will happen to both absorption and marginal profits

johnmoffat says

This is actually covered in the lectures and the course notes.

If production > sales, then inventories will increase and so absorption will give the higher profit.

If production < sales, then inventories will fall and so marginal will give the higher profit.

raymond says

thank you am grateful Sir

sooner says

Thank you again johnmoffat. I am going to follow ur instruction and work it through

johnmoffat says

Great

sooner says

I need some help with this question , thank you

A Co. uses a standard marginal costing system: the following figures are available for the last accounting period

in which actual profit was 124000

sales volume contributiion variance 9000 favourable

Sale price Variance 8000 Adverse

Total variable cost variance 13000 favourable

Fixed Cost Expenditure variance 4000 adverse

What was the standard profit for the actual sales in the last accounting period

johnmoffat says

To get the standard profit for the actual sales, you need to adjust the actual profit for the sales price variance, the variable cost variance, and the fixed cost variance.

(The sales volume variance is not relevant because you are asked for the standard profit for the actual sales – not for the budgeted sales)

sooner says

thank u very much John.