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Basic Variance Analysis part 4 – Marginal Costing – ACCA Performance Management (PM)

VIVA

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  2. Hi John,

    With regard to preparing the fixed budget for Part A of Example 3, it appears that there is no account for the value of closing inventory, as we had with absorbtion costing.

    If closing inventory is value at the rate of contribution, closing inventory would be $15400 and budgeted profit would be $30100.

    However, as the video suggests that the only accounting of closing inventory is to describe the difference in profit between M.C. and A.C., do we just not take account of inventory in M.C. budgeting?

    Many thanks,

    Kyle

      • Of course, my mistake.

        Also, just realised the difference is that you are deducting the cost of inventory from the total costs in absorbtion costing and, for reasons unknown, I thought it was coming off of the profit. Therefore, by only taking account of the units sold in marginal costing, you are essentially doing the same thing as part of the calculation as you go. Got it. Though now I am a little confused as to why the cost of inventory/cost of units produced but not sold should be deducted from the expenses at all. We have had to pay those costs within the period, so surely they should be recognised?

      • Remember that we are trying to explain why the actual profit is different from the budget profit.

        Given that we always value inventories at standard cost in management accounts, it is differences in the cost of the materials and in the materials used that cause the variances.

  3. Huge thanks Mr.John for everything you do!!!

    I have a question..Is it acceptable to solve Example 1 under both absorption and marginal costing as follows?

    Rev (sold items)
    -Direct costs (related to items sold) (That’s what matching principle dictates in financial accounting)
    (Method #1)

    Instead of:
    Rev (sold items)
    -Direct costs (related to items produced)
    -Direct costs (related to items left)
    (Method #2)

    I know, you’ve mentioned it for several times that in management accounting they can do whatever they want with Profit and Loss statement…and I do understand the logic behind solving the example under method #2 and the results are approximately the same..But is it considered to be wrong to solve the problem using #1 method?

    Thank you in advance!!!

    P.S. Sincerely wish everyone to stay safe and sane!

    • Just as in financial accounting, the cost of goods sold is the cost of the proaction less any opening inventory plus any closing inventory. So both methods give the same answer.
      How you calculate the profit is irrelevant in the exam because you cannot be asked to produce a full statement and nobody looks at your workings – only the final answer is marked by the computer.

  5. Thanks again for a great explanation Mr. Moffat. I just thought of something regarding the MA/F2 lectures. There is a very detailed explanation again about how to calculate the variances but there wasn’t any example of the Operating Statement. I scored well on the MA/F2 exam using the lectures, however there was a significant question with reference to the Operating Statement. I think it would add value to include some this lecture’s info into the MA/F2 lectures on Variances to get students familiar with the layout.

    Thank you very much for providing this excellent platform to us, it’s greatly appreciated

  6. Thanks John. With marginal costing we use the standard contribution p.u. for the sales volume variance when preparing the operating statement. Like you said the budgeted and actual profit is would change under both approach due to the valuation of inventory. MC value inventory at the variable costs of production whereas AC uses the full production cost.

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