December 06 ECR

System

I have printed section 1 of december 06 paper as we have not completed anything on section 2 yet. Can somebody please help me with task 1.6 B as I think difference in valuation is 10,000 but not sure about the profit as there is no selling price although i seem to think there would not be a difference is profit under the two costing systems. Am i correct or completely wrong.

System

Re:December 06 ECR

The difference in valuation is entirely due to the absorption cost including fixed overhead and the marginal cost not.

b) State how much the difference in the closing stock valuation and the reported profit for October would be under the two costing principles.

Closing stock 1,000 – 800 units = 200 units
£50.00 per unit
Difference in stock valuation £10,000.00

So far we agree.

But the profit is a period based value.
Under both costing sytems the business has sold 800 units and will have a closing stock of 200 units.
But the closing stock value under marginal costing does not include 200 x £50 of fixed overhead as all the fixed overhead has been charged to the period.
Whereas the absorption costing approach has put an extra £50 x 200 into the closing stock.

Thus the absorption costing profit reported would be £10,000 more than the marginal costing profit.

In my answer I didn't go any further than stating £10,000. But your point is fair and one other students may find helpful

If you email me
sandy.hood@chichester.ac.uk
and make the suject line of youe email exactly this
Please send me your ECR Dec 2006 answer?

The rule section of my out of office reply will automatically send you an email with my answer to the paper attached.

Sandy