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  1. 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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