Comments

  1. 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)

    • Avatar 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.

  2. 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.

    • Avatar 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)

  3. 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

    • Avatar 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.

  4. 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

    • Avatar 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.

    • Avatar 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.

      • Avatar 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.

  5. 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?

  6. 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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