Comments

  1. avatar says

    Hello Sir,
    Please if you are asked to produce Operating Statement, do you have to do all the variance calculations seperately before using them in preparing the Operating Statement or you can just go ahead to prepare the Operating Statement and show working within it?
    Thanks

    • Profile photo of John Moffat says

      It doesn’t matter, provided that you workings are neat (and so they are easy for the marker to understand). You get marks for trying to do it the correct way, even if you make a silly mistake and they the figure wrong.

      At F5 it is very unlikely that you will be asked for a full operating statement, but it can be checked that you do understand what it is.

  2. avatar says

    Dear Sir,

    Request your guidance to understand following statements during the lecture :-

    1. There is no capacity and volume variance in Marginal costing as we are not absorbing the cost.
    2. Marginal cost doesn’t include Fixed O/H.
    If this is the case, then why marginal cost is lower i.e. $ 30308 vs $ 37808 with absorption costing.

    Regards,
    mohsin

    • Profile photo of John Moffat says

      Your first statement is correct.

      However, the reason that the marginal costing profit is different from the absorption costing profit is nothing to do with the variances.

      The profits are different because the inventories (both opening and closing) are valued differently With marginal costing we do not include fixed overheads in the unit cost, whereas with absorption costing we do include fixed overheads.
      However, in both cases, fixed overheads are charged in arriving at the final profit.

      With marginal costing the whole of the fixed overheads are charged in the period in which they occur, whereas with absorption costing some of them are effectively carried forward in the inventory valuation.

      It is very difficult to explain the whole story here. If what I have written confuses you at all, then best is to look at the two chapters (and lectures) on Marginal and Absorption costing in the Paper F2 section of the website.
      However, in Paper F5 you are not tested on the difference between the two – the question will either be marginal costing, or it will be absorption costing. (It is Paper F2 where you are tested on the reasons for the profits being different.)

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