Comments

  1. avatar says

    Mr. Moffat,

    I’m having some difficulty on question 4 in the test for this chapter. The answer explains that in the case that closing inventory is greater than opening inventory, then closing inventory should be subtracted (rather than added) and opening inventory added to the profit under absorption costing in order to get to Marginal Costing. In example 1 of this chapter, don’t we have a similar situation where closing inventory for January is greater than opening (4000 vs 0) but we added it in that case. What’s the difference between the two scenarios?

    Rachel

    • avatar says

      Mr Moffat,

      I actually figured it out. In example one you essentially subtract the $4000 to get the profit under marginal cost even though it’s positive when calculated. Similarly, you add the 4000 to profit under absorption costing to get to the profit under marginal costing in February even though the 4000 is negative. I hope I got the logic right! Thanks

      Rachel

  2. avatar says

    Hello sir,
    I’m having a difficulty in answering these two questions.

    Question 1:
    A company manufactures a single product which is sold for $70.00 per unit. Unit costs are:

    $ / Unit
    Variable production 29.50
    Fixed production 21.00
    Variable selling 4.80
    Fixed selling 9.00

    20,000 units of the product were manufactured in a period during which 19,700 units were sold.
    Using marginal costing, what was the total contribution made in the period?

    Question 2:
    A company manufactures a single product. Unit costs of the product are:

    $ per unit
    Variable production 14.75
    Fixed production 8.10
    Variable selling 2.40
    Fixed selling 5.35

    400,000 units of the product were manufactured in a period, during which 394,000 units were sold. There was no inventory of the product at the beginning of the period.
    Using marginal costing, what is the total value of the finished goods inventory at the end of the period?

    Looking forward to the reply. Thank you for the help. :)

  3. avatar says

    Sir, could you please help me understand over-absorbed & under-absorbed overheads with regard to budgeted &/or absorbed &/or actual Overheads? Getting really confused as to when it is over-absorbed or under-absorbed.
    You can explain w.r.t the test question 8.

    Thank You.

    • Profile photo of John Moffat says

      The fixed overhead absorption rate is based on the budgeted total and the budgeted level of activity. Since the budget (normal) production is 10,000 and the absorption rate is $12 per unit, the budgeted total must be $120,000.

      In the profit statement the amount absorbed is the actual production multiplied by the absorption rate. Since they actually produced 11500 units, the amount absorbed is 11500 x $12 = 138,000. The actual total is as budgeted, and so is 120,000.
      So the absorbed 18,000 too much – i.e. they over-absorbed.

  4. avatar says

    Dear Sir,

    As per the two method in Feb the difference will be less 4000 (Feb Profit in Marginal Costing Method: 81500- Absorption Costing Method 77500= 4000 More)

    It means that in Absorption Costing Method the Closing Inventory is always high valued.

    The more accurate way is Marginal Costing method as the inventory is valued at its production cost only and the fixed overhead being charged to PNL correctly.

    Can you tell me which is the best way?

    BTW I love your lectures….Thanks for your support.

    • Profile photo of John Moffat says

      There is no best way. The management account does it whichever way is more useful for the decisions he/she is making.

      For deciding on a selling price, then absorption costing is more useful – we need the price to cover all the costs if we are to make a profit.
      On the other hand, if the selling price is fixed (because of competitors) then marginal costing is useful because we can calculate how many we need to sell to start being profitable (the contribution has to be more than the fixed costs).

      Although not relevant for F2, in financial accounting the valuation of inventory has to include all costs of production (including fixed costs) per IAS 2.

  5. avatar says

    Dear sir,

    I have a question that I just don’t understand how it’s resolved:

    “A company operates a standard marginal costing system. Last month its actual fixed overhead expenditures was 10% above budget resulting in a fixed overhead expenditure variance of $36,000.
    What was the actual expenditure on fixed overheads last month?”

    Thank you.

    • Profile photo of John Moffat says

      If the actual figure was 10% above budget, then it means that the variance must have been 10% of the budget figure.

      So the budget figure must have been 36,000 / 10% = 360,000.

      So the actual expenditure must have been 360,000 + 36,000 = 396,000

      (I don’t know if you have watched the lectures on variances yet, because this does need knowledge of variances)

      PS You started your question ‘Dear Sir’. If you want me to answer you then it is best to ask in the F2 Ask the ACCA Tutor Forum, then I am sure to see it.

  6. avatar 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

    • Profile photo of John Moffat 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

    • Profile photo of Satiam says

      Hello Miss NM

      What John said is totally right… but I try to remember it in a systematic way that is through a statement like below..

      Profit reconciliation statement $
      Profits as per marginal costing xxx
      Difference in o.inventory (xx)
      Difference in c.inventory xx
      Profit as per absorption costing xxx

      This is how i do it, i use this format and i’am okay… Maybe Mr. John can correct me or add anything to it..
      Miss NM, try it and u’ll see, it works… n it is easy to remember

      • Profile photo of John Moffat says

        Gokool:

        What you are doing is correct (provided you multiply the difference in inventory by the fixed overheads per unit).

        However, many questions do not tell you the amount of the opening and closing inventory – they just tell you the production and the sales, so you know the change in inventory which is all that is needed.

        That is why it is safer to learn it the way that I have written it above.

        You only need to remember two things:
        1) The difference between absorption and marginal profits = the change in inventory x fixed overheads per unit.
        2) If inventories increase then absorption gives the higher profit (and vice versa)

      • Profile photo of Farzana sultana says

        dear sir,

        I have a question on this basis.
        what does it mean by change in inventory?
        example, in a question there was an opening inventory of 4000,production was 30000 and sales was 25000.so while calculating for inventory change ,the change in inventory should b 1000 in my sense .but the solution shown that it is 5000.i can not understand y n how they find 5000 as it is closing inventory not the change in inventory.

        thank you.

      • Profile photo of John Moffat says

        If production is 30,000 and sales are 25,000 then the inventory will change by 5,000 – it will increase by 5,000. So the closing inventory will be 9,000.

        If you are asking because the question wants you to calculate marginal profit when you know the absorption profit (or vice versa) then it is the change of inventory (5,000) that matters.

  7. avatarTemperance 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

  8. avatar 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.

  9. avatar 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

    • Profile photo of John Moffat 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).

  10. avatar 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

    • Profile photo of John Moffat 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)

  11. avatar says

    May I ask why would we deduct the production costs of units left in our inventory during the month of January? Technically, we have already paid for the production of those items, so it would seem bizarre to me to calculate it for the following month, when we already paid for it this month. I would have expected the calculation to be:

    315,000$ – 275,000$ = 40,000$

    that’s what we would be seeing in our bank account at the end of January, no? (disregarding other costs at the moment)

    • Profile photo of John Moffat says

      To calculate the profit we need to compare the sales revenue with the cost of what we sold.
      Any inventory at the end of the month means that those items were not sold and so the cost of what was sold is the cost of what was purchased less the cost of what was still left.
      (What was left – the closing inventory – would be sold in the following month and so it is then that we would get the profit)

      OK – the money will certainly have left our bank account, but if we have not sold it then we cannot say that we have made any profit on it.

  12. avatar says

    Hi,

    Can you please explain the following question (taken from ACCA pilot paper):
    A company manufactures and sells a single product. In two consecutive months the following levels of production and sales (in units) occurred:

    Sales
    Month 1 – 3,800
    Month 2 – 4,400

    Production
    Month 1 – 3,900
    Month 2 – 4,200

    The opening inventory for Month 1 was 400 units. Profits or losses have been calculated for each month using both absorption and marginal costing principles.

    Which of the following combination of profits and losses for the two months is consistent with the above data?

    A)
    Absorption costing profit/(loss)
    Month 1: ($400)
    Month 2: $3,200
    Marginal costing profit/(loss)
    Month 1: $200
    Month 2: $4,400

    B)
    Absorption costing profit/(loss)
    Month 1: $200
    Month 2: $4,400

    Marginal costing profit/(loss)
    Month 1: ($400)
    Month 2: $3,200

    C)
    Absorption costing profit/(loss)
    Month 1: ($400)
    Month 2: $4,400

    Marginal costing profit/(loss)
    Month 1: $200
    Month 2: $3,200

    D)
    Absorption costing profit/(loss)
    Month 1: $200
    Month 2: $3,200

    Marginal costing profit/(loss)
    Month 1: ($400)
    Month 2: $4,400

    Thanks.

    • Profile photo of John Moffat says

      In month 1, production is higher than sales and so inventory will be increasing and therefore absorption costing will give the higher profit.
      In month 2 production is lower than sales and so inventory will be decreasing and so marginal costing will give the higher profit.
      Only one choice is consistent with that (D)
      (Note that you are not asked if the profits are correct – it is not possible to calculate the profits)

  13. avatar says

    Dear Tutor

    i have a problem and hope that you can help me to make it more clear

    in chapter 9 , for quetion 4 , about caculating marginal cost i haven’t now understood when we add or minus opening & closing inventory value to determine marginal costing profit. is there any rule for this?
    I know that marginal costing doesnot include fixed o/h, and we need to subtract or plus when we identify marginal costing. in this question, i still be unclear.

    lookforward to receive yr soon reply

    • Profile photo of hmanjiche says

      khan the idea is to calculate the cogs by adding inventory at hand(begining of period) to production and subtracting closing inventory at the end of the period. no pun intended, take this example, suppose you love to eat apples everyday, and today you woke up with 2 apples, and bought 10 more but when go off to sleep you have 4 remainining. how do we calculate what you ate, its 2 plus ten less 4 you still have meaning you ate 8.actually there is an accounting principle called the matching concept, that dictates that closing inventory should not be charged to the cogs because it has not been sold.

  14. avatar says

    thanx i know this concept but i dont know how to apply it in bbp guide
    i got one question plz explain soo i willl able to use this way
    in july the marginal coting profit of tommyinc for production of the bumper was $78000.inventory at the end of june was 1250 units &1000 units at the end of july.
    calculate the absorption costing profit for july if the overhead absorption rate was $8 perunit

    • Profile photo of John Moffat says

      @admirableprinces, For the valuation of inventory we only include production costs.
      However if you are asked for the contribution then this is the selling price less all variable costs – variable production costs and variable selling costs.

    • Profile photo of John Moffat says

      @admirableprinces, The only reason why the profits will be different is because of the way we value inventories. Absorption costing includes fixed overheads in the valuation of inventories, but marginal costing does not include fixed overheads.

      • Profile photo of mario123 says

        Sir. Do you mean to imply that profit under absorption costing system would be more as compared to marginal costing if the production > sales? I couldn’t find the answers to example 3. I’d appreciate if you can help please.

  15. avatar says

    thank you for the lecture. i really appreciate that surely. i got an easy problem is after practicing example 3, i wanted to check my answer but i couldn’t find it on the lecture note. Would it because this example 3 out of exam’s syllabus?

  16. avatar says

    The lecture notes are not readily available yet they are of great importance when one is revising the course notes. Is there any way you can improve on this because everytime i try to load the system stops responding- your server cannot be accessed at that instant. However the same does not happen with course notes.

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