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Dear sir,
I do have watched your lectures concerning marginal and absorption costing but I still have a small doubt.
Could you explain briefly in wordings, why when making the cost card for absorption costing we take the fixed cost to calculate the ‘full cost’ and why for marginal costing we do not include the fixed cost when calculating ‘marginal cost’?Thanks in advance.
Because that is the rule!
Marginal means variable, and so with marginal costing we only take the variable costs.
With absorption costing we absorb the fixed overheads and include them in the cost card.Marginal costing is more useful when looking at the effect of changes in the level of activity (because it is the contribution that will vary – the fixed costs will stay the same). Absorption costing is more useful when, for example, determining a selling price because to be profitable we need to sell at a price that covers all costs.
Thanks for the reply sir.
I do have watched your free lectures and concerning example 1 for absorption costing in the lecture notes, for the adjustment for fixed overhead, there is 2000 over-absorbed. Could you explain to me in wordings why 2000 is being added and not minus?
According to me, we expect to spend $20,000 but we end up with spending $22,000.This means that we have spent $2000 more than expected. We have a “profit” of $72,000 in which $2000 is more. So we should minus it( 72000-2000).
Please help me to clear this doubt.
Thanks.No, we actually should spend 20,000 but have absorbed/charged 22,000.
Therefore we have charged too much and therefore the profit is too low.
Concerning absorption costing, for example 1, the part where it say: “There is also variable selling cost of $1 per unit and fixed selling cost $2,000 per month”, why didn’t you take the variable cost and the fixed selling cost to calculate the full cost?
Dear sir, I have some difficulties to tackle with the following question in the BPP revision kit.
– In a period, a company had opening inventory of 31,000 units and closing inventory of 34,000 units. Profits based on marginal costing were $850,500 and on absorbing costing were $955,500.
If the budgeted total fixed costs for the company was $1,837,500, what was the budgeted level of activity in units?
A. 32,500
B. 52,500
C. 65,000
D.105,000The answer is B.
The inventory changed by 3,000 units.
The profits are different by $105,000.Therefore the fixed costs per unit must be $35
Therefore the budgeted level of activity = 1,837,500 / 35 = 52,500
The BPP Revision Kit shows the full workings for the answer.
Dear sir,
1.Could you explain what is the effect does inventory has on the profit of marginal and absorption costing? For example what happen to profit of both marginal and absorption costing if opening inventory is higher and vice versa.2.The OAR for a product is $4 per machine hour. Each unit of T requires 3 machines hours
Opening inventory 2400 units
closing inventory 2700 unitsCompared with the normal costing profit for the period,the absorption costing profit for the product will be what?
The answer is 3,600 lower. The workings are shown but with no explanation. Could you explain please?
3.Variable cost is $6
Fixed costs are absorbed over a normal level of activity of 200,000 units and have benn calculated as $2 per unit.
Selling price is $10 per unitsHow much profit is made under marginal costing if the company dells 250,000 units?
I have done:
Sales (250,000 x 10)=2,500,000
less COS (250,000 x 4)=1,000,000
less FC (200,00 x 2)=400,000
Therefore my answer is is 1,100,000 which is wrong.
What is my mistake?I am sorry but all of this is explained in my lectures, and I am not going to type them all out here! 🙂
I do have watched your lectures a couple of times. Just for number 1 and 2, just explain briefly please
Thanks.
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