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Dear tutor,
first of all I would like to thank you a lot for your material and lectures. You are a great teacher and it makes it easier to study my acca.
I have looked at your lectures and notes, beside on studyng on BPP, but I am still confused about one point: I read that closing inventory changes between marginal costing and absorption costing. I am recalling inventory evaluation lectures with LIFO, FIFO, or weighted avg. By using one method, I got different closing inventory and then my COGS on the income statement will change, depending on the method used. (COGS = Beginning Inventory + Purchases – Ending Inventory)
so that the point is: how could absorption or marginal costing affect closed inventory, shouldn’t it be affected by lifo/ fifo or weighted average choces?
I don’t get the point. don’t absorption/marginal costing affect only profit, being calculated without absorbed fixed costing ?
thank you for your answer
edit:
I mean, in my mindCOGS = beginning inventory + production costs (direct labour + direct material + direct expenses) – ending inventory
is
-beginning and ending inventory come from inventory evaluation calc (lifo/fifo/other method)
-production costs (or somewhere called purchase costs) are direct labour + direct material + direct expenses
in this way: I only add fixed costs in absorption costing method (not in marginal costing), to define the profit. COGS and inventory aren’t affected (since COGS is only direct costs by definition).
You are confusing two things.
When comparing absorption and marginal costing, FIFO LIFO etc is not relevant. In both cases the inventory is valued at standard cost.
The only difference between absorption and marginal (apart from the layout of the profit statement, but the layout is not what affects the final profit) is that if using marginal costing, inventory is valued at the marginal (variable) cost of production. If we are using absorption costing then the inventory is valued at the full production cost – i.e. the variable cost plus the fixed production cost per unit.
As a result, both the opening and closing inventories will be valued differently and therefore the profits will be different. The difference in the profits is always only the change in inventory over the period multiplied by the fixed production overheads per unit.
I do suggest that you watch the lectures on marginal and absorption costing again – at the end of the second of the two chapters I do show the reconciliation/explanation of the difference in the two profits.
thank you very much for your reply. It is now clear to me. Just for check if I well understand, is it right to say:
-the text of the exam will give me a per unit $ (that is the unit value of closing inventory at marginal costing or absorption), then I only will need to multiply it by the units of closing inventory.
– COGS contains by definition variable costs (direct labour, matrial and direct expenses, if any), only within absorption costing I will be considering fixed overheads absorped per unit
– in an exercise with avaluation of inventory with lifo, fifo, or avg inventory (that i need to forget when doing absoprtion and marginal costing exercises), COGS are: (open inventory + production costs ) – closing inventory. In this case the formula of production costs considers ONLY variable costs. But all variable costs, not only raw material issues costed during the exercise of lifo- fifo or weighted avg method.
thank you a lot again
Not all correct.
The exam will not necessarily give you a cost per unit – you could be required to calculate it yourself from information given (adding up materials, labour etc..)
To get the total value of inventory you multiply this by the number of units.
With marginal costing, the cost of goods sold is only the variable production costs of goods sold. You then subtract any other variable costs to get the contribution, and then subtract the fixed costs to get the profit.
If (as a completely separate question) you are asked to value inventory using FIFO etc., then it will only be the inventory of purchased raw materials that you will be asked to value. Therefore other costs of production will be irrelevant.
(Incidentally, you can find lectures on FIFO and weighted average valuation as part of the F3 lectures on inventory, because it is also examinable there.)
Hello sir Moffat,
I encountered a past ACCA question requiring use of Weighted Value of Inventory in Actual Absorption costing statement and I was not convinced at all by the solution.Question:
If I am given both budgeted and actual data, and also opening inventory, how do I find average cost and the relevant overhead absorption rate?Surprisingly, the book used different OH rates on reconciliation and it balanced just because they used the normal Absorption rate without incorporating Opening inventory rate.
it is solved in Colin Drury sixth edition qn 8.4
I do not have the Colin Drury book. It is 25 years old and is now in its 10th edition. It is a good book, but is not specifically aimed just at the ACCA Paper F2 exam. (The syllabus for the Paper F2 has changed a lot over the last 25 years.)
Everything needed for the current exam is covered in my free lectures. For practice you should be using a current edition of a Revision Kit from one of the ACCA approved publishers. They are full of exam standard questions for the current syllabus and in the current exam format.
Given Opening inventory of 2000 units and $25 unit variable and $5 unit fixed cost..
Budgeted and Actual data of
Production:
Production
units: 40,000 46,000
Sales
units: 38,000 46,000
Variable
cost: 1,800,000 2,070,000
Fixed
Overhead:. 300,000 318,000Given selling price of $72, prepare an actual Absorption costing statement based on Weighted Average inventory valuation.
My questions then:
1: How do I calculate the Overhead Absorption rate?
2: If asked to reconcile after preparing a Marginal costing statement, what OH absorption rate do I use?1. You use the budgeted figures. You would take the total fixed overheads in the opening inventory (10,000), add the fixed overheads for this year (300,000), and divide by the total units (42,000). This gives the fixed overhead rate to use when valuing the closing inventory.
2. The difference between the profits is the difference between the total fixed overheads in the opening inventory, and the total fixed overheads in the closing inventory.
Again, this really is not relevant for Paper F2 questions.
(and why are you attempting questions for which you have no answer?)
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