Chapter 4 extract from our ExPress notes for
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Notes
ACCA Paper F2
Management Accounting
For exams in 2011
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ExPress Notes
ACCA F2 Management Accounting
Marginal costing
A marginal approach to costing focuses on the variable (marginal) costs generated in a
business and considers fixed costs as period costs. This allows the company to be able to
quantify the amount by which its costs rise, if it produces/sells an additional unit of output.
Example
Below is data on a manufacturing company.
Selling price (per unit):
120
Cost card (per unit):
Direct materials
Direct labour
Variable production O/Hs
Total variable costs
45
18
9
72
There is a variable selling cost of $2 per unit
Year 1
(units)
Year 2
(units)
Budget (normal) production
1,100
1,100
Actual Production
Actual Sales
1,000
950
1,100
1,150
$16,500
$ 7,000
$16,500
$ 7,000
Actual fixed production O/Hs
Actual SGA costs
Based on the above data, a profit and loss statement for the Years 1 and 2 is shown on the
next page.
Assume that the beginning inventory is zero.
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ExPress Notes
ACCA F2 Management Accounting
Profit/Loss (Marginal costing)
Year 1
$
Sales (950/1,150 units)
Year 2
$
114,000
138,000
Less: Variable cost of sales
Opening inventory
0
3,600
Production costs:
o
Variable
(1,000 x $72)
(1,100 X $72)
Less: closing inventory
(50 x $72)
72,000
(3,600)
Less: Variable selling costs
(950 x $2)
(1,150 x $2)
79,200
(68,400)
(1,900)
0
(82,800)
(2,300)
Contribution
43,700
52,900
Less: Fixed production O/Hs
Less: SGA costs
(16,500)
(7,000)
(16,500)
(7,000)
Profit
20,200
29,400
Inventory is valued at variable production costs.
Absorption Costing
This method argues that focusing on marginal costs is potentially misleading in the longer
run because fixed production costs have also to be covered. Accounting conventions require
that fixed production costs be reflected in each unit produced.
Page | 3
© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any
other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always
obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes
will be accepted by the ExP Group.
theexpgroup.com
ExPress Notes
ACCA F2 Management Accounting
Revised cost card (Absorption costing)
Cost card (per unit):
Direct materials
Direct labour
Variable production O/Hs
Fixed production O/Hs
Total production costs
45
18
9
15
87
Profit/Loss (Absorption costing)
Year 1
$
Sales (950/1,150 units)
Year 2
$
114,000
138,000
Less: Variable cost of sales
Opening inventory
0
4,350
Production costs:
o
o
Variable
(1,000 x $72)
(1,100 X $72)
72,000
Fixed
(1,000 x $15)
(1,100 X $15)
15,000
Less: closing inventory
(50 x $87)
(4,350)
Over/(under) absorption
1,500
Gross Profit
Less: Variable selling costs
(950 x $2)
(1,150 x $2)
1,900
Less: SGA costs
7,000
Profit
79,200
16,500
0
0
(84,150)
29,850
(100,050)
37,950
2,300
(8,900)
7,000
20,950
(9,300)
28,650
Inventory is valued at the full production costs.
Page | 4
© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any
other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always
obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes
will be accepted by the ExP Group.
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ExPress Notes
ACCA F2 Management Accounting
Summary of Absorption costing and Marginal costing formats
Absorption Costing
Marginal Costing
Variable/Fixed
production costs
Variable production/
non-production costs
Revenue
Less: Cost of Sales
Gross profit
Contribution
Less: Expenses
Variable/Fixed
non-production costs
Fixed production/
non-production costs
Net Profit
Job costing / Batch costing
This refers to the calculation of costs associated with a specific job or customer order. This
is appropriate in situations where each product or service is distinct, and possibly unique, in
its delivery.
Batch costing is similar to job costing; the distinction lies in the identification of costs with
specific batches, which are numbered (separately identified) for this purpose.
Process Costing
Process costing is a technique that applies to the mass production of a large number of
identical products, moving through a series of processing stages. The accumulated costs of
production can be averaged over the number of items produced.
The average cost is determined by the following formula:
Average cost per unit =
Total cost of inputs – Scrap value of rejected units
No. of units of input – Normal loss
The total cost of inputs refers to labour, materials and overhead costs of production. If
losses occur along the way that necessitate the scrapping of defective units, then to the
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© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any
other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always
obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes
will be accepted by the ExP Group.
theexpgroup.com