do you have a lecture on activity based costing because im looking at my teachers notes and its basically the same thing as this lecture, is that correct?
J
John MoffatTutor·
It is not the same and is explained in the lectures on 'Alternative Cost Accounting'. (Paper MA only requires an awareness of activity based costing, not full calculations which are not examined until Paper PM)
E
emily·
I find marginal easier so is it fine if I just use this in the exam? also will they specifically ask us to find absorption or marginal? also is one answer correct and the other isn't im abit confused
J
John MoffatTutor·
It is not your choice in the exam - questions will specify which approach is required.
You will find plenty of examples how it is examined in your Exam Kit and on the ACCA Study Hub.
D
David·
Hello, using the full profit statement gave me an incorrect answer. please help rectify where i was wrong
I think it is to be like FIFO LIFO methods, it needed yo count always the same way, if marginal-always mardginal and the other method same. Am I right?
J
John MoffatTutor·
Yes - you are correct
S
Sargis·
In absorbtion way I think it is not right way, because we put fixed cost to closing inventory, and don’t count it to sales of the month, but it is a fixed cost, it is considered to be occured every month, isn’t it?
A
Abdullahi Yusuf·
how marginal cost equals 59000
A
Abdullahi Yusuf·
how it possible to get absorption higher profit while production greather than sales
thankz
J
John MoffatTutor·
This is explained (with examples) in the lectures working through Chapter 10 of our free lecture notes.
M
Mannan·
while preparing the final profit statement at the end of the month using absorption costing, why do we charge fixed production overheads for the actual units produced at standard cost per unit? why do we not just write the actual fixed overheads of the month directly? if we write the actual amount for the month directly, we won't have to do any adjustments later. and also, doesn't it seem wrong to charge the units actually produced during the month with the budgeted fixed overhead cost per unit (in the final profit statement at the end of the month)
J
John MoffatTutor·
The final profit statements use financial accounting rules. The management accounting profit statements are not the same and companies can do whatever they find more useful for decision making. (And, of course, you cannot be asked to produce a full profit statement in the Paper MA exam, even though you must understand the principles).
M
Mannan·
Hi sir! if we don't use absorption costing, then while preparing the cost card we don't absorb fixed costs into the cost per unit and therefore, we end up with just the marginal cost of a unit. So then how do we decide on the selling price if we don't know the full cost of production (including the fixed cost) of a unit ?
J
John MoffatTutor·
There are many ways of deciding on a selling price, and not all of them focus on the cost (the attitude of customers is just as important). However all the different approaches to determining a selling price are not examinable until Paper PM.
M
Mannan·
On third page of chapter-10 notes, what does the statement "The delay in charging some production overheads under absorption costing leads to the following situations." mean?
J
John MoffatTutor·
The sentence should end with a colon and not a full stop.
The example (together with the discussion of it in the lecture) explains what happens.
J
Joanne·
Hello John,
How would we prepare a schedule to reconcile net operating income for both absorption and marginal costing?
Please help!
J
John MoffatTutor·
I do this in my lectures. The only difference between the two is the change in inventory over the period multiplied by the fixed production cost per unit.
J
Joanne·
Okay, great. Thank you.
J
John MoffatTutor·
You are welcome :-)
R
rumandeep·
If In absorption costing we end up correcting the amount of fixed cost charged to the profit statement by adjusting for the over/under absorption so the right amount of fixed cost is deducted from profit and we also deduct variable over head selling cost & the fixed selling cost why do we end up with a different profit using marginal costing?
The reason I ask is because same amount of sales revenue is made in marginal costing, aswell as the same amount of fixed costs (selling and production) being deducted from the profit as with absorption costing, also the same amount of variable overheads are being deducted too. Even though inventory is valued as different for each method due to how we treat fixed costs at the end of the calculations both methods still end up charging the right amount of fixed costs again profits so why do we have different figures???
R
rumandeep·
This is relevant to the January sections btw
J
John MoffatTutor·
The reason is purely because of the fact that the inventory is being valued differently. Changing the value of the inventory automatically changes the cost of sales and hence the profit.
S
sherazsaied·
I am glad you and I survived this difficult covid period Mr Moffat. The last time I sat an ACCA exam was 2019 , I need to sit MA soon.
N
NAKATO·
Great thanks Sir.
J
John MoffatTutor·
You are welcome :-)
J
joel·
we should not add four thousand in profit in jan month as we havent taken 22000 as fixed overhead.as we have taken only 20000 as fixed overhead ,we can add only 2000 in profit and the answer is 61000 only not 63000.please reply.....
J
John MoffatTutor·
The answer printed in the notes and explained in the lectures is perfectly correct.
The adjustment for the over absorption of fixed overheads is 2,000 because the standard profit is absorbing 22,000 whereas the correct figure is 20,000. So lower fixed overheads give higher profit.
J
joel·
as you have already subtracted 1000[subtracted 20000 as fixed cost but in absorption costing we subtract only 19000 ] ,i think that you have to subtract 3000 only .and the answer is 78500 not 77500.please reply.......
J
John MoffatTutor·
See the previous answer. The answer in the notes and the lectures is perfectly correct.
F
Fionnghuala·
These lectures are fantastic, very to the point but still clearly explained. Thank you so much! I only wish I had found them sooner so I could have used them for my first exams!
J
John MoffatTutor·
Thank you for your comment :-)
E
Evan·
Good Day Sir
Thank you for your lecture!
I am currently preparing for my C.A.T exams on June 2021, and have found the lectures beneficial, in order to fill my knowledge gaps in management accounting, since I have been exempted due to my degree.
If I may ask, will you upload any lectures regarding the C.A.T modules in the future?
Thank you for your assistance.
J
John MoffatTutor·
We do not have any immediate plans, but do hope to do so at some time in the future.
N
Nihal·
Hello,
Came here after failing to pass FMA. I'm finding this to be very helpful. Thank you sir! Also I wanted to know if I have to pay the entire exam fee to be able to sit again. I am giving remote cbe.
J
John MoffatTutor·
You need to check that with the ACCA on their website. I think you have to pay the entire fee, but because of what is happening at the moment it might be different.
A
Asif·
Sir John,
I understand that when the product is more than the sales, it gives ride to higher closing units and because of absorption method having $27 per cost unit compared to the $25 per cost unit of the marginal costing, it results in the costing inventory of the absorption unit being higher, thus reducing the purchases further, and thus increasing the profit when subtracting with sales.
What I don’t understand is why when production is less than sales, does absorption costing only get affected and becomes lower than marginal costing. Why marginal costing is not getting affected. At the end of the day, even marginal cost - we subtract the fixed cost 20,000 + 2,000 from the contribution to get the profit. And also with over and under absorption, we do fix the absorption profit as well. So please explain the rational, Im really lost.
J
John MoffatTutor·
Although the 'layout' is different in the profit statements, overall the same total fixed overheads appear in both - in absorption costing it is the absorbed amount but there is then the adjustment for the over or under absorption (so the end result is as though the actual amount has been changed). With marginal costing we charge the actual total.
The only thing that is different as far as the numbers goes the valuation of inventory (both opening and closing). Marginal costing values inventory at marginal cost whereas absorption costing also included the absorption of fixed overheads in the inventory valuation.
If production is more than sales then the inventory increases and absorption gives a higher profit.
If production is less than sales then the inventory decreases and marginal gives a higher profit.
The best way of really understanding is to make up some figures yourself and convince yourself as to what is happening.
A
Asif·
Thankyou for the important advices about the reason behind the difference between marginal and absorption costing.
However isnt there some glitch in the accounting system, if companies show up with different profits because of using either of the methods. Then accounting becomes subjective and less reliable. It seems we just have to live with it, unless some accounting messiah comes and revolutionizes the Accounting world.
J
John MoffatTutor·
What you have written is completely untrue, as I make very clear in my lectures.
For management accounting companies can do whatever they find most useful for them.
However for financial accounting, accounting standards apply and inventories have to be valued using absorption costing.
A
Ashad·
In marginal costing fixed cost wants to change when activity level change or not
S
Sue·
Hi, thanks for your lecture.
I have a question about absorption costing. Where's the number from?
63,000 for Jan, 77,500 for Feb..
J
John MoffatTutor·
They are the profits that were calculated in the lectures on absorption costing for the same example.
S
Sydney·
hi, firstly thanks for your lecture
I assume that you subtracted closing inventory (50,000) for the February one as well. Can you explain why?
S
Sydney·
sorry, i was confused with other stuff. figured it on my own!
thanks for your great lecture again!
J
John MoffatTutor·
Glad you figured it out, and than you for your comment :-)
K
Kartik·
Hello,
Can you explain the reason why absorption costing gives higher profit than marginal costing when inventory increases and vice versa.
J
John MoffatTutor·
But I explain this in the lectures!!
J
John MoffatTutor·
I don't write 'cess' :-)
'Less' means subtract.
A
Ashad·
In marginal costing fixed cost wants to change when activity level change or not
J
John MoffatTutor·
By definition, fixed costs do not change with the level of activity. Have you watched the lectures on the earlier chapters?
E
Eli·
Thank you very much for your lecture. I don't understand how you don't have to add the cost of producing an additional 2000 which are not sold? Isn't that considered 2000 X the amount it cost to produce them? Looking forward to your answer. many Thanks Eli
J
John MoffatTutor·
We only subtract the cost of items that are sold. The goods left in inventory are sold in the following period and so are charged in the following period.
K
Kim·
Thank you for great lecture! I am sorry but I don't know what less or cess is. Whenever you track back, you write 'less or cess'.
You will find plenty of examples how it is examined in your Exam Kit and on the ACCA Study Hub.
this is how i went by it; $ $
sales(11500*35) 402500
less: cost of sales
Production(9,500)
Material 11,4000
Labour 76000
Variable 47500
9500*25 *237500*
closing inventory (2000*25) (50,000)
( 189500)
213000
less: variable cost
variable selling cost ( 1 *11500)
( 11500)
201500
Less: fixed cost
Production (20,000)
Selling cost (2000) (22000)
Profit 179500
thankz
The example (together with the discussion of it in the lecture) explains what happens.
How would we prepare a schedule to reconcile net operating income for both absorption and marginal costing?
Please help!
The reason I ask is because same amount of sales revenue is made in marginal costing, aswell as the same amount of fixed costs (selling and production) being deducted from the profit as with absorption costing, also the same amount of variable overheads are being deducted too. Even though inventory is valued as different for each method due to how we treat fixed costs at the end of the calculations both methods still end up charging the right amount of fixed costs again profits so why do we have different figures???
The adjustment for the over absorption of fixed overheads is 2,000 because the standard profit is absorbing 22,000 whereas the correct figure is 20,000. So lower fixed overheads give higher profit.
Thank you for your lecture!
I am currently preparing for my C.A.T exams on June 2021, and have found the lectures beneficial, in order to fill my knowledge gaps in management accounting, since I have been exempted due to my degree.
If I may ask, will you upload any lectures regarding the C.A.T modules in the future?
Thank you for your assistance.
Came here after failing to pass FMA. I'm finding this to be very helpful. Thank you sir! Also I wanted to know if I have to pay the entire exam fee to be able to sit again. I am giving remote cbe.
I understand that when the product is more than the sales, it gives ride to higher closing units and because of absorption method having $27 per cost unit compared to the $25 per cost unit of the marginal costing, it results in the costing inventory of the absorption unit being higher, thus reducing the purchases further, and thus increasing the profit when subtracting with sales.
What I don’t understand is why when production is less than sales, does absorption costing only get affected and becomes lower than marginal costing. Why marginal costing is not getting affected. At the end of the day, even marginal cost - we subtract the fixed cost 20,000 + 2,000 from the contribution to get the profit. And also with over and under absorption, we do fix the absorption profit as well. So please explain the rational, Im really lost.
The only thing that is different as far as the numbers goes the valuation of inventory (both opening and closing). Marginal costing values inventory at marginal cost whereas absorption costing also included the absorption of fixed overheads in the inventory valuation.
If production is more than sales then the inventory increases and absorption gives a higher profit.
If production is less than sales then the inventory decreases and marginal gives a higher profit.
The best way of really understanding is to make up some figures yourself and convince yourself as to what is happening.
However isnt there some glitch in the accounting system, if companies show up with different profits because of using either of the methods. Then accounting becomes subjective and less reliable. It seems we just have to live with it, unless some accounting messiah comes and revolutionizes the Accounting world.
For management accounting companies can do whatever they find most useful for them.
However for financial accounting, accounting standards apply and inventories have to be valued using absorption costing.
I have a question about absorption costing. Where's the number from?
63,000 for Jan, 77,500 for Feb..
I assume that you subtracted closing inventory (50,000) for the February one as well. Can you explain why?
thanks for your great lecture again!
Can you explain the reason why absorption costing gives higher profit than marginal costing when inventory increases and vice versa.
'Less' means subtract.