PEV June 2006

lhemmings

Hi everyone,

I am just going over this paper for what feels like the hundreth time but I am struggling to figure out how to explain 1.1 e.
When I look at the answers it completly confuses me as it seems like they are speaking a different language!

Can anyone explain this to me in lamens terms so that I can figure out whether I get it or not??

Thanks x

SandyHood

Do you know the difference between marginal costing and absorption costing?

Well where are the differences:

1. The standard cost of actual production in one is made up of the absorption cost per unit x units produced. The other is the standard marginal cost per unit + the budgeted production overhead.
2. The marginal costing doesn't have any fixed overhead volume variances

Why?

Do you know the difference between marginal costing and absorption costing?

The only reason for the difference is that absorption costing includes an amount for fixed overhead in the cost of the product, whereas marginal costing leaves fixed overheads as a cost of the accounting period and works out product costs as the marginal costs only.

SandyHood

was that clear enough to be "layman's terms"?

lhemmings

I think I understand what you have said there, I have started to feel a little bit giddy with it all and therefore am trying to figure out what I would say in response to the question of:
Explain why there are differences between the two operating statements.

I just want to make sure that I am clear on how to explain it - sorry if I am sounding like I am a little thick.

SandyHood

Tomorrow is the exam day, your comments are quite understandable.

I think the butterflies have all disappeared and turned up in the tummies of PEV candidates!

lhemmings

So if I was to answer:
Absorption costing uses labour hours to absorb the fixed overheads into each unit by using fixed overhead volume variances.
Marginal costing takes the fixed cost out of the standard for total actual production and adds it in seperatley as the budgeted cost, therefore doesnt need to use any overhead variances apart from the fixed overhead expenditure variance.

Does that sound at all right?

Think you are right about the butterflies - I think my problem is this is my 2nd time taking this exam, failing it in June this year and it has completly knocked my confidence.
Am sure I am not alone there though! Thanks for your help Sandy