F.A.O Sandy Hood MAC Query

jewels.p

Hi Sandy,

I thought I would post this on here as the answer may benefit others.

When you are creating a Marginal Cost Statement when flexing the budget why is it the quantity sold figures you use and not the production figures?

Thanks

SandyHood

Jewels
You must compare like with like.

There are 2 ways to do this:
Sales
less variable cost of sales
Contribution
Fixed Costs
Profit

this is the way you refer too, and most students prefer it

The other is
Sales
less Variable Cost of Sales
calculated by:-
OP stock
+Production variable costs
- Cl stock
=Variable production cost of sales
+variable selling costs
=Total variable cost of sales
to give
Contribution
Less fixed costs
Profit

So although this is a little more tricky, the variances are more useful

In answer to your question. Sales are used to try to make it easier for students (but have no doubts the examiner is well aware that it has its weaknesses)

jewels.p

So how do you know which version to use? I have the Budgeted and Actual Operating Statement and have been asked to calculate the variances using Marginal Costing.

I flexed the budget for the actual amount (of production) then calculated all the variances.

I was then looking through my notes and came across notes that say to use the Actual Sales figures and not the production figures.

So I recalculated all my figures for Actual Sales and did the variances with those figures.

SandyHood

Unless your confident with the op and cl stock aspects associated with the production cost approach then stick to the sales based one.
I will use that one when I do my revision classes.

jewels.p

OK thanks Sandy :001_smile: