22.17 AD Ltd manufactures and sells a single product, E, and uses a standard absorption costing system. Standard cost and selling price details for product E are as follows.
$ per unit
Variable cost 8
Fixed cost. 2
Standard profit 10
Standard selling price 5
The sales volume variance reported for last period was $9,000 adverse.
AD Ltd is considering using standard marginal costing as the basis for variance reporting in future. What would be the correct sales volume variance to be shown in a marginal costing operating statement for last period?
A $6,428(A)
B $6,428 (F)
C $12,600 (F)
D $12,600 (A)
Sir I don't understand how to do this question
I understand in marginal costing that fixed cost is not supposed to be there so Standard Margin would be higher hence leading to a less adverse sales variance
But the problem I have is by how much would this variance reduce?
The fixed cost per unit is $2
But by how much should we multiply this by
Ask the Tutor ACCA MA
Marginal and absoprtion costing
We do not multiply it by anything!!!
You have not copies out the question correctly. The standard selling price is not $5, it is $15, and the standard profit is not $10, it is $5.
At the moment they are using absorption costing and therefore they must have sold $9,000/5 = 1,800 units fewer than budgeted.
If the change to marginal costing then the 1,800 units fewer are cost out at the standard contribution per unit of $7, and therefore the variance is 1,800 x $7 = $12,600 adverse.
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