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  1. avatar says

    This too :
    A company uses standard absorption costing. Its fixed overhead absorption rate is $8 per machine hour and each unit of production should take 3 machine hours. Last year there was an opening inventory of finished goods of 4000 units. They produced 30,000 units and sold 25,000 units. The actual profit last year was $526K.

    What profit would have been earned under a standard marginal costing system?
    (the answer is $406K)

    my workings are : 4K + 30K – 25K = 9K x $8 = $27,000. $526,000 – $27,000 = $499K. I do not know where did i go wrong.

    • Avatar of John Moffat says

      Please ask questions like this in the F2 Ask the Tutor Forum – not as comments on lectures.

      The only difference between marginal and absorption costing profits is the fixed overheads in opening and closing inventory.

      Here, the inventory increases by 5000 units. The fixed overheads per unit are 3 x $8 = $24.
      So the profits will be different by 5000 x $24 = $120,000.

      Because inventory is increasing, absorption profit will be higher than marginal profit, so the marginal profit is 526,000 – 120,000 = $406,000

  2. avatar says

    Sir, how do you work this out?
    A company uses standard absorption costing. Its fixed overhead absorption rate is $8 per machine hour and each unit of production should take 3 machine hours. Last year there was an opening inventory of finished goods of 4000 units. They produced 30,000 units and sold 25,000 units. 90,000 machine hours were used for production, and the total fixed overheads were $700,000. What was the amount of the over or under absorption of fixed overheads?

    (answer is 20,000 over-absorbed)

    • Avatar of John Moffat says

      Please ask questions like this in the F2 Ask the Tutor Forum – not as comments on lectures.

      As you will know from the lectures, the over or under absorption is the difference between the actual fixed overheads and the amount absorbed (i,e, actual hours x standard cost per hour).

      The amount absorbed is 90,000 hours x $8 per hour = $720,000.
      The actual overheads were $700,000.

      So the amount over-absorbed is $20,000.

      • Avatar of John Moffat says

        Yes it has. It is the change in inventory that is relevant.
        If they produce more than they sell, the inventory will increase. If they sell more than the produce, then inventory will decrease.

  3. avatar says

    These revision are much more helpful than attending classes… No disturbance, i can rewind and replay in case i didn’t understand.. Zat’s perfect… Very clear explanation, covering details of all chapters!!
    Thanks a lot!!

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