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MA Chapter 10 Questions The Management Accountant’s Profit Statement – Marginal Costing

 

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    • You do not need to know the selling price. As I explain in my free lectures, the only difference between the marginal and the absorption profits is the change in the inventory over the year multiplied by the fixed overhead absorption rate.

      (If you click on ‘review quiz’ after submitting your answers you will see the full workings.)

  4. Hi, sir. In question 3,

    Standard absorption rate = Budgeted overheads($258,750) / Budgeted machine hours(11,250 hours) = $23 per hour

    Overheads actually absorbed = Actual machine hours(10,980 hours) x Standard absorption rate($23) = $252,540

    Actual total overheads = $254,692

    I understand how to get the answer but I have few questions to sort out my brain:)

    My question is when the “Standard absorption rate” was determined. Was it like the beginning of the production year to use the standard rate for the rest of the year?

    What is the timing of calculating the “Overheads actually absorbed”? Is it like the end of every month or quarter (or any other timing that each manager prefers) AFTER that period of production ends, and managers use the number to make a profit statement?

    What is the timing of calculating “Actual total overheads”? Would it take several weeks or months to collect the relevant cost data AFTER every period of production ends?

    Please indicate if I misunderstood anything.

    • What you have written is correct.
      The standard cost is the budgeted cost which is determined in advance. The fixed overheads in the standard cost are absorbed using the budgeted fixed overheads and the budgeted production. At the end of the period they will know immediately what the actual fixed overheads were and if the total is different from the amount absorbed at standard cost, then to get the ‘correct’ profit they need to adjust for the difference between the actual total fixed overheads and the amount absorbed.

  6. Hi John

    To get the difference between marginal and absorption costing we do change in inventory multiplied by fixed cost. Why do we multiply by fixed cost only not variable cost?

    • Under marginal costing, inventory is valued only at the marginal cost.
      Under absorption costing, inventory is valued at the full absorption cost.
      The difference between the two is the fixed production overheads.

      Have you not watched my free lectures, because I explain all of this in the lectures 🙂

      • I watched your lectures but abandoned studying since covid. I have now come back to revise.

    • Why are you posting this as a comment under a lecture on marginal costing?

      Relevant costing as a full topic is not relevant until Paper FM. In Paper MA it is only relevant in investment appraisal questions.

    • But fo make sure that you also buy a Revision Kit from one of the ACCA approved publishers. It is vital to practice as many exam-standard questions as possible – these short tests are just meant as quick checks after each chapter 🙂

  14. Dear John,

    The examples in both lectures on absorption and marginal costing is giving us the selling price, hence allowing us to calculate the profit.
    Q1 and Q5 does not give us the selling price, so how can we calculate the profits then come up with the difference between absorption and marginal?

    Thank you

  15. When do we know we’ve had an over-absorption or under-absorption of overheads? Is it when we have a psitive answer that we get an over-absorption?
    Also, i know this is a little stupid but, is ‘normal level of activity’ referred to as Sales?

    • As I explain in my free lectures, the only difference ever between the absorption and marginal profits is the change in the inventory multiplied by the fixed production over heads per unit.

      In this question, the fact that there was no opening inventory is irrelevant because whatever the opening inventory had been then the fact that they produced 17,500 units but only sold 15,000 units means that the inventory would have increased by 2,500 units. So the answer would still be the same.

      • on a third thought I think opening inventory is very rrelevant…… in the example of given, for example, February had a production of 9000 units but sold 11000 units. what guarantee would show a 2000 opening inventory had it not been a January scenario. and the fact that they mention no opening inventory i this case shows that an opening inventory option is possible.

      • If they produce 2,500 units more than they sell, then the inventory must increase by 2,500 units!!

        Of course it is possible for there to be opening inventory, but if there was then the closing inventory would still be 2,500 more than the opening inventory and this is all that matters.

        Please watch the lecture again 🙂

  17. When calculating profit using marginal method, we exclude fixed cost, why is that we are multiplying the fixed cost rate by the difference of closing Inventory to get Marginal profit?

    • I don’t know which question you are referring to.

      However with marginal costing we do not exclude fixed cost when arriving at the profit – we subtract the fixed cost from the contribution in order to arrive at the profit.

      Also, the difference between the absorption profit and the marginal profit is always only the change in inventory multiplied by the fixed cost per unit.

      All of this is explained in the free lectures. Did you watch them before attempting this test?

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