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June 28, 2022 at 8:39 pm
How would we prepare a schedule to reconcile net operating income for both absorption and marginal costing?
John Moffat says
June 29, 2022 at 7:31 am
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.
June 29, 2022 at 7:35 am
Okay, great. Thank you.
June 29, 2022 at 2:56 pm
You are welcome 🙂
April 6, 2022 at 6:23 pm
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???
April 6, 2022 at 6:25 pm
This is relevant to the January sections btw
April 7, 2022 at 10:24 am
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.
March 29, 2022 at 11:29 pm
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.
March 25, 2022 at 12:59 pm
Great thanks Sir.
March 25, 2022 at 3:54 pm
January 6, 2021 at 4:27 am
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…..
January 6, 2021 at 7:22 am
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.
January 6, 2021 at 2:51 am
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…….
See the previous answer. The answer in the notes and the lectures is perfectly correct.
December 9, 2020 at 11:50 am
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!
December 9, 2020 at 2:40 pm
Thank you for your comment 🙂
November 16, 2020 at 9:49 am
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.
November 16, 2020 at 3:31 pm
We do not have any immediate plans, but do hope to do so at some time in the future.
October 28, 2020 at 12:49 pm
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.
October 28, 2020 at 2:35 pm
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.
October 14, 2020 at 6:09 pm
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.
October 15, 2020 at 8:50 am
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.
October 14, 2020 at 5:44 pm
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.
October 15, 2020 at 8:53 am
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.
August 29, 2020 at 9:06 pm
In marginal costing fixed cost wants to change when activity level change or not
June 19, 2020 at 4:09 pm
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..
June 20, 2020 at 9:38 am
They are the profits that were calculated in the lectures on absorption costing for the same example.
May 4, 2020 at 7:48 pm
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?
May 4, 2020 at 8:03 pm
sorry, i was confused with other stuff. figured it on my own!
thanks for your great lecture again!
May 5, 2020 at 9:01 am
Glad you figured it out, and than you for your comment 🙂
April 7, 2020 at 2:58 pm
Can you explain the reason why absorption costing gives higher profit than marginal costing when inventory increases and vice versa.
April 7, 2020 at 4:57 pm
But I explain this in the lectures!!
March 3, 2020 at 8:32 am
I don’t write ‘cess’ 🙂
‘Less’ means subtract.
August 29, 2020 at 9:04 pm
August 30, 2020 at 8:08 am
By definition, fixed costs do not change with the level of activity. Have you watched the lectures on the earlier chapters?
March 2, 2020 at 5:38 pm
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
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.
February 11, 2020 at 2:50 am
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’.
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