Comments

  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.)

  2. avatar says

    thank you so much John for your kindness of giving everyone this opportunity to get a full understanding of every topic in the syllabus.

    May God Bless you. Amen.

    I am Confused while producing an operating statement under Marginal Costing approach.

    As the statement would be as follows:

    Sales 8000
    Production 8700

    Sales Revenue 600000
    Materials 156600
    Labour 217500
    Variable O/H 87000

    Contribution 138900

    Less: Fixed O/H 130500

    8400

    Less: Closing Inv 37100
    @ variable cost
    700 * 53

    Profit.. ?????

    • Profile photo of John Moffat says

      I will answer you, but please in future ask this sort of question in the Paper F5 Ask the Tutor Forum (not as a comment under a lecture on variances).

      The contribution is not 138900.

      The sales are 8,000 units and the revenue is $600,000.
      To get the contribution, we need the cost of sales i.e. the cost of producing 8,000 units.

      The cost of producing 8700 units is (156600 + 217500 + 87000) = 461100 (the cost per unit produced is therefore 461100/8700 = $53)

      So….the cost of the 8000 sold, is the cost of producing 8700 less the cost of the closing inventory of 700. i.e. 461100 – (700 x $53) = 424000. (or if you prefer, 8000 x $53 = 424,000)

      So the contribution is 600,000 – 424,000 = 176,000. So the profit is 176,000 – 130,500 = 45,500.

      (You will never ever be asked to do this in Paper F5. I go through it in the lecture (as revision of F2) so as to make sense of the variances that come later and that can be asked)

      • avatar says

        Thank You much Once again.. really appreciate your help Once again..

        I never knew about that ask a teacher forum.. I will ask anything again the way you said..

        Just One last thing I would like to verify that the fixed cost using marginal costing approach will not change as we produce the flexed budget, i.e it will remain 130,500. Right.??

  3. avatar says

    is this deleted for june 2014 exam
    i am really confused
    Calculate, identify the cause of and interpret
    basic variances: [1]

    i) Sales price and volume
    ii) Materials total, price and usage
    iii) Labour total, rate and efficiency
    iv) Variable overhead total, expenditure and
    efficiency
    v) Fixed overhead total, expenditure and, where
    appropriate, volume, capacity and efficiency.
    so shall i know the rules of the variances or not
    and preparation of operating statements

    • Profile photo of John Moffat says

      No – it is not deleted. It is assumed knowledge from Paper F2.

      The examiner has made it clear that they can be asked as part of a question. The syllabus for June 2014 is the same as for the last two exams and basic variances were examined in both.

      In addition, it is impossible to understand planning & operational variances without an understanding of basic variances.

  4. avatar says

    Dear Mr. John. In the last exam there was a question which said to find the sales price operational variance and the sales price planning variance. In the question, there were standard variable production costs per unit figures and there were also average market price per unit figures. Strangely, the former was not used at arriving at d solution. Instead, it was the latter that was used.The formulas used at arriving at d answers were (actual price – market price) x actual quantity and (standard price – market price) x actual quantity respectively. Please I am a bit taken aback as u did not talk about average market price per unit in your examples. Thanks and well done.

    • Profile photo of John Moffat says

      Variable costs are never relevant in calculating sales price variances – they are not relevant in my lecture and neither in the exam question.

      The reason market price was used was because we were doing planning and operational variances, and market price is effectively the revised standard cost. I did not mention market price in my lecture (and I won’t in future either) – it is not a standard term and has not been used before, but it was clearly meant to indicate the revised standard cost. Next time she might use other words because she is testing your understanding rather that you have just learned rules.

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