View all ACCA F2 / FIA FMA lectures >> | This ACCA F2 / FIA FMA lecture is based on OpenTuition course notes, view or download here>> |

### Comments

### Leave a Reply

You must be logged in to post a comment.

OpenTuition.com Free resources for accountancy students

Free ACCA lectures and course notes | ACCA AAT FIA resources and forums | ACCA Global Community

Vu 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.

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.

Vu says

Thank you for your reply.

And next time I’ll post my queries in the right place.

John Moffat says

You are welcome, and no problem

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

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

Gokool 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

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)

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

John Moffat 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.

John Moffat 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

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).

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.

John Moffat 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

John Moffat 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

John Moffat 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

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)

sooner says

thank u very much John.