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Sir, If we are valuing inventory under either the absorption or Marginal costing, does it mean that the inventory kept is the stock of raw materials, not the finished goods?
This is because in the chapter on Accounting for Materials, we are valuing inventory on FIFO, LIFO, and Weighted average cost methods but here in the chapter on Absorption costing and marginal costing, we are valuing inventory under either of these methods(absorption and marginal costing). Sir, Do both valuations of inventory done in both chapters have any linkage between each other regarding the valuation?
Sir, Could you please clarify my doubt?
The chapter on accounting for materials is looking at the valuation of the materials that the company is buying.
As regards absorption and marginal costing, this is when the company is producing goods and we are looking at the cost of production (which includes the cost of any materials). Absorption as against marginal costing is purely looking at whether or not we include the fixed costs involved in production.
Sir, Therefore when the company purchases raw materials we value them by using FIFO, LIFO, and weighted average cost( any one of the three methods). Moreover, when the raw materials get into the production stage and become finished goods we value them again under either marginal costing or absorption costing since they have absorbed additional costs apart from the purchase ( cost of production )
Sir, Apart from the valuation of inventory in both methods(absorption and marginal costing) we consider it for the preparation of the Budgeted profit statement, right? In addition, I assume that this budgeted profit statement is prepared after the actual results have occurred, so effectively, it is the comparison between a flexible budget and actual results, right?
Sir, Could you please tell me what I have understood and assumed is correct or not and where I need to make changes in my understanding if it was wrong?
As far as the inventory is concerned, raw materials can be valued using any of the methods. Absorption and marginal costing are always separate questions in the exam and it is just a question as to whether or not we include fixed overheads in the valuation.
Budgeted statements are prepared before the actual results have occurred – they are budgets. For variance analysis we compare the actual results with the flexed budget.
Have you watched my free lectures on these topics? The lectures are a complete free course and cover everything needed to be able to pass the exam well.
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