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Dear sir, in marginal costing exercises they list a number of items as follow:
Direct material
Direct labour
Variable production overhead
Fixed production overhead
=> why only fixed production overhead = OAR, what about variable production overhead, should they be a part of OAR??? When i calculate the difference between profit using absorption costing and profit using marginal costing, i notice the answer only uses fixed production overhead rather than variable production overhead. Could you explain this ???The total variable production overheads vary by definition with the number of units produced. The total fixed overheads do not vary with the level of production with is why they need absorbing.
The only reason ever for the difference between the absorption and marginal profits if because of the way that inventories are valued. Marginal costing does not include the fixed overheads in the inventory valuation whereas absorption costing does.
This, and the reasons for it, are all explained in my free lectures on marginal and absorption costing. The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well.
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