1. 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


    Less: Closing Inv 37100
    @ variable cost
    700 * 53

    Profit.. ?????

    • Avatar 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.??

  2. 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
    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

    • Avatar 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.

  3. 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.

    • Avatar 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.

    • Avatar of John Moffat says

      @loopheichuen, The marginal cost means the variable cost – so by definition we do not absorb fixed overheads into the unit cost.
      However, fixed overheads still exist and remain an expense and so affect the profit.
      Its simply that with marginal costing we subtract the total fixed overheads (and therefore have an expenditure variance if the total is more or less than budget).
      With absorption costing the fixed overheads are absorbed and so in addition to the variance due to the total being more or less than the total budgeted, we have the volume variance because if we produce more or less than budget we will have absorbed more or less than we should have.

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