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ACCA F5 Basic Variance Analysis – Marginal Costing

VIVA

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  1. good day sir.
    the reason we took absorption costing in example 1 is because fixed overheads are included in the cost card and in the actual production?

    or it is just because it is there in the cost card and the question does not tell which method to use?

  4. Hi John,

    In the Kaplan Study Text, I see that the flexed budget is showing the same fixed overhead as in the original budget even at a higher level of production for absorption costing example.

    Please share your views.

    Thanks,
    Nitin

    • If we are simply preparing a flexed budget then yes indeed – fixed overheads stay fixed.

      However as Kaplan will also explain, when doing variance analysis for absorption costing, the fixed overhead volume variance (and capacity and efficiency) arises because using the standard profit is effectively treating the fixed overheads as though they are variable.
      (Which is the same problem that occurs when we are looking at the over/under absorption of fixed overheads as I explain in the lectures earlier on absorption costing).

      I flex the budget in the variance lecture in order to explain this problem and I do suggest that you watch it again because I do say this!

      • Thanks John. This is useful.

        Another quick question – Is it correct to keep the fixed cost in flexed budget same as the original one if we are using Marginal Costing?

      • Yes – that is correct (and is why with marginal costing there is not fixed overhead volume variance – only an expenditure variance) 馃檪

    • I assume you have watched the earlier lectures on marginal and absorption costing, and also the first of the lectures on variances where I go through variance analysis when using absorption costing.

      If you have then you will know that with absorption costing, we charge fixed overheads based on the units actually produced, costed at the fixed overheads per unit. This results in an over or under absorption of fixed overheads and therefore a volume variance.
      With marginal costing, we do not absorb fixed overheads and therefore the volume variance is no longer relevant.

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