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Mark up and margin in consolidated financial statements

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Mark up and margin in consolidated financial statements

  • This topic has 3 replies, 2 voices, and was last updated 1 year ago by P2-D2.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • June 24, 2021 at 5:33 am #626189
    andreaskraken
    • Topics: 57
    • Replies: 30
    • ☆☆

    I was preparing a consolidated statement of financial position and when I was trying to find the unrealised profit I ran into a problem

    This is the information relevant
    Premier(parent) had $2 million (at cost to Premier) of inventory that had been supplied in the post-acquisition period by Sanford as at 30 September 2020. Samford made a markup on cost of 25% on sales

    So in order to find the profit on inventory I thought we needed to use markup and not convert the markup into margin since the inventory is stated to be given at cost “$2 million (at cost to Premier) ”

    Therefore I just took 2 000 000 *25/100=500 000

    However the correct answer had converted the markup into a margin instead and did
    2 000 0000 *25/125= 400 0000

    Could you explain what actually went wrong there because I thought since the inventory is given at cost there is no need to convert the markup into a margin since markup can directly be applied at cost to find the profit

    June 24, 2021 at 8:42 pm #626241
    P2-D2
    Keymaster
    • Topics: 4
    • Replies: 6119
    • ☆☆☆☆☆

    Hi,

    If it is at cost to Premier then this is what it would have been sold to them for by Sanford, the subsidiary.

    We then apply the 25% mark up to this sales value to work out the unrealised profit, hence the 25/125 x 2,000,000. The 25/125 is the standard cost structure adjustment for a mark up.

    Sales 125%
    Costs 100%
    Profit 25%

    Thanks

    June 24, 2021 at 10:10 pm #626244
    andreaskraken
    • Topics: 57
    • Replies: 30
    • ☆☆

    But isn’t 25/125 when you convert from markup to margin

    when it is markup it is 25/100 and we convert it to margin it is 25/125
    Is that what was done here???

    June 25, 2021 at 2:30 pm #626297
    P2-D2
    Keymaster
    • Topics: 4
    • Replies: 6119
    • ☆☆☆☆☆

    No, I think you need to revisit your understanding on mark ups and margins.

    A margin is where we apply the percentage to the sales revenue.

    25% margin

    Sales 100%
    Costs 75%
    Profit 25%

    A mark up is where we apply the percentage to the costs figure.

    Sales 125%
    Costs 100%
    Profit 25%

    Thanks

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