1. Paper F2 Management Accounting
2019/2/21

2. Chapter 9 Absorption and marginal costing
2019/2/21

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. End of Chapter 9
2019/2/21