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hey! i’ve been very confused in inventory valuation and costing etc. pls tell me when we talk about the cost or the value of the inventory do we include non-production cost in that as well because my tutor told me that we recover all our cost from customer. so i am assuming we charge the non-prod cost to the cost of the product as well but i read in bpp kit that closing inventory valuation under absorption costing is higher than under marginal costing because of the absorption of fixed overheads but if we include all the cost in the cost of the product it will include non-prod cost too so how will the closing inventory value be more in absorption? shouldn’t it be the same in both?
For management accounting we only include production costs in the valuation of inventory.
If the business choose to use marginal costing, then we only include the variable costs of production, whereas if they choose to use absorption costing we also include the absorption of the fixed production costs.
The fact that the inventory therefore has a different value also means that the profit will be different depending on whether they use absorption or marginal costing.
This is all explained in my free lectures on absorption and marginal costing. (The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well).
Do appreciate that the above is only for management accounting. The financial accounts have to follow accounting rules and are different from the management accounts for several reasons (of which the valuation of inventory is just one).
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