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Dear John,
Firstly, thank you for your very clear lectures! I am now going through the BPP revision manual and I’m having a problem with the following question:
Cost and selling price details for product Z are as follows:
$ per unit
Direct materials 6.00
Direct Labour 7.50
Variable ohead 2.50
fixed ohead ab
rate 5.00
——-
21.00
profit 9.00
——–
selling price 30.00Budgeted production for the month was 5,000 units although the company managed to produce 5,800 units, selling 5,200 of them and incurring fixed overheads of $27,400.
What is the marginal costing profit for the month and the absorption costing profit for the month?
I understand that marginal costing is the contribution (selling price-variable costs x units produced of 500) then take off the fixed overheads. I also understand the absorption costing up to a point. However nowhere in these answers is closing inventory taken into account. Surely there is some closing inventory (5800-5200=600 units left)?
Many thanks,
NadineWith marginal costing, then the contribution is the sales multiplied by the contribution per unit, less the fixed overheads, as you have written.
If you watch my free lectures, then the only difference between the marginal and absorption profits is the change in inventory multiplied by the fixed overheads per unit.
If they produce 5,800 units and sell 5,200 units, then the inventory must increase by 600 units and that is all that matters.
Please do watch the lectures – they are a complete free course for Paper F2 and cover everything needed to be able to pass the exam well.
Thank you. I did watch your lectures and was then trying some practice questions. I made a mistake in my workings and then made a mistake by looking at BPP’s answers, which didn’t mention closing inventory so I got more confused. I did it the way you just explained and got the correct answer! Many thanks, again. Nadine
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