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The Management Accountant’s Profit Statement – Marginal Costing – ACCA Management Accounting (MA)

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  1. 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 ?

    • 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.

  4. 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???

  7. 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…..

    • 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.

  8. 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…….

  10. 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.

  11. 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.

  12. 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.

    • 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.

  13. 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.

    • 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.

  19. 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

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