# Marginal Costing

1. 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

• 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).

• 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.

• says

Great
I am pleased that you are sorted out with it.

2. says

dear john , i have one question plz help

production > sales
production < sales

what will happen to both absorption and marginal profits

• 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.

• says

thank you am grateful Sir

3. says

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

4. 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

• 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)

5. 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)

• 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.

6. says

Accountaholic were u able to do that question u posted. Please help me understand it.. THank you

7. 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.

• 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)

8. 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.

• 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.

9. 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

10. says

i am getting confused with variable & selling fixed cost y we deduct variable selling cost plz help me to clear my concepts regarding variable selling cost

• 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.

• 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.

• 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.

• says

Thank you for the amazing website! The videos and notes are extremely useful.
~ forever indebted.

11. 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?

12. says

this waaaas a very helpful lecture and thanks for guiding us free of cost
but kiiiiiiiiiiiindly don’t go for the paid help
thank you

13. 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.

14. says

hi i dnt use the same book i use bpp text can i get the answer for february profit please?

• says

@desie86, Well you need to use the free Course Notes to follow the example in the lecture. The answer for February is at the back o the course notes.