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Paper F2 Management Accounting
2019/2/21
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Chapter 9 Absorption and marginal costing
2019/2/21
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MC vs AC Chapter Preview Cost card under MC Cost card under AC
Contribution Profit/Loss under MC Profit/Loss under AC Reconciliations 2019/2/21 Ji Weili, JXUFE
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Cost card – marginal costing
$/unit Direct materials X Direct labour X Variable overhead X Marginal cost X Used to value inventory under Marginal costing Fixed overheads X Full product cost X Used to value inventory under Absorption costing Chat about how some businesses prefer to focus on VC only, as treat FC as a period cost Stress the main difference between the two methods is inventory valuation I.e. FC treated as period vs product costs 2019/2/21 Ji Weili, JXUFE
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Contribution = selling price - ALL variable costs
$ Selling price X Less: Variable production costs X Variable non-production costs X (X) Contribution X Say that it means contribution towards fixed costs and profit 2019/2/21 Ji Weili, JXUFE
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Marginal costing profit statement
$ Sales X Cost of sales Opening inventory X Marginal cost) Production costs: Variable costs (mats, lab, var.overhead) X Closing inventory (X) Marginal cost) _____ (X) Variable non production costs (X) ____ Contribution X MUST LEARN THIS Less: Fixed costs (X) ____ Net Profit X 2019/2/21 Ji Weili, JXUFE
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Example-3.2 Cost of sales Variable costs ($66 x 280,000) 18,480
(15,840) Opening inventory Production costs: Variable costs ($66 x 280,000) 18,480 Closing inventory ($66 x 40,000) (2,640) ______ Contribution 27,360 Variable non production costs 0 Net Profit 26,640 _______ $000 Sales ($180 x 240,000) 43,200 Cost of sales Fixed production costs (400) Fixed Selling costs (320) 2019/2/21 Ji Weili, JXUFE
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Absorption costing profit statement
$ Sales X Cost of sales Opening inventory X Full cost) Production costs: Variable costs (mats, lab, var.overhead) X Fixed overheads absorbed X Actual Activity Overhead Absorbed = X OAR Closing inventory (X) Full cost) Adjustment for under/(over) absorption X/(X) _____ (X) ____ Note that now the absorption is dealing with fixed overheads only – up until now we not really made a distinction with our overheads when doing our calculations. If students enquire – reassure them that variable overheads will be given to them and that fixed overhead/unit will have to be calculated using the 3 steps LEARN THIS PROFORMA Gross Profit X Non production costs (sales, distribution, admin) X ____ Net Profit X 2019/2/21 Ji Weili, JXUFE
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Example-3.2 Cost of sales Variable costs ($66 x 280,000) 18,480
Production costs: Variable costs ($66 x 280,000) 18,480 Fixed overheads absorbed ($1.25 x 280,000) Adjustment for under/(over) absorption Gross Profit 27,010 Variable selling costs 0 Fixed selling cost (320) Net Profit 26,690 ________ $000 Sales ($180 x 240,000) 43,200 Cost of sales Opening inventory Closing inventory (2,690) ($67.25 x 280,000) (16,190) This slide could be used to talk through the differences in the inventory valuation. You could tick off the other numbers to show that they are all the same as under marginal costing except the inventory value. Then go talk about year 2 when closing inventory will become opening inventory etc….. _______ 2019/2/21 Ji Weili, JXUFE
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Reconciliation $000 Absorption costing profit 26,690
Add: Fixed overhead in opening inventory - Less: Fixed overhead in Closing inventory ($1.25 x 40000) (50) 26,640 ______ Marginal costing profit 2019/2/21 Ji Weili, JXUFE
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Marginal and absorption costing compared
Difference in profit = Change in inventory X OAR/unit But which profit is higher AC profit Or MC Profit? < > = Production Sales This approach is very useful for the type of questions the students get on the CBA so talk through the rules and the way of remembering it ie alphabetically (see tutor guidance) Closing inventory Opening inventory AC Profit MC Profit 2019/2/21 Ji Weili, JXUFE
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Lecture example When opening inventory were units and closing inventorys units, a firm had a profit of $ using marginal costing. Assuming that the fixed overhead absorption rate was $3 per unit, what would be the profit using absorption costing? A $ B $56 850 C $ D $82 350 ( )×5=$5 250 =$67350 =$56 850 2019/2/21 Ji Weili, JXUFE
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Marginal costing VS absorption costing
Arguments in favour of MC or AC. Basically, MC is more suitable for internal reporting, AC is more suitable for external reporting. 2019/2/21 Ji Weili, JXUFE
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End of Chapter 9 2019/2/21
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