Please help?

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
Hi,

I am trying to do a question in June 2006 paper on the comparing of the absorption and marginal costs. I am managing to get the calculations right but I am stuck on explaining why there are a difference between the too.

Could someone PLEASE give me some help as I don't really understand why I have a difference?

Sorry to be a pain

Thank you

Cat12

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Please help?

    When there is a change in the volume of closing stock the two different costing methods will have different profits.

    Marginal costing values closing stock at variable cost per unit.
    Absorption costing values closing stock at absorption cost per unit.

    So when the opening stock is lower than the closing stock the absoption costing approach has a lower cost of sales and a higher profit.

    Take a simple example:

    Cat Ltd produces a product A80

    In May 2007 they had no opening stock
    They produced 3000
    They sold 2700

    Price per unit £50
    Variable cost per unit £20
    Fixed Overhead absorbed per unit £10 (total £30,000)

    Under marginal costing
    Profit calc
    Sales Revenuec 2700 x £50 = £135,000

    Variable cost of production-
    ccccccccccccccccc3000 x £20 = £60,000
    Closing stock ccccccc300 x £20 = £6,000
    Variable cost of sales-
    cccccccccccccccccc2700 x £20 = £54,000
    Contribution cccccc2,700 x £30 = £81,000

    Fixed Costs ccccccccccccccccccc£30,000
    Profit cccccccccccccccccccccccccc£51,000


  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Please help?

    Under absorption costing
    Profit calc
    Sales Revenuec 2700 x £50 = £135,000

    Total cost of production-
    Variable cost
    ccccccccccccccccc3000 x £20 = £60,000
    Fixed overhead ccc3000 x £10 = £30,000

    Closing stock ccccccc300 x £30 = £9,000
    cost of sales-
    cccccccccccccccccc2700 x £30 = £81,000

    Profit cccccccccccccccccccccccccc£54,000
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Please help?

    The difference between the two profits is entirely due to the different value of the closing stock.

    Where £3000 of overheads have been absorbed into the closing stock, the cost of sales has been reduced by that amount and the profit increased.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Please help?

    Thank you very much for your help.

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