# The Management Accountant’s Profit Statement – Absorption Costing part b

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1. johnmoffat says:

Sorry but the videos are not downloadable – it is the only way that we can keep this site free of charge.

2. maravilla says:

I find example 2 confusing. Why was \$315500 used to get the over/under absorption value instead of \$320000?
Isn’t \$320000 the budgeted overhead since you used 320000 divided by 80000 to get the absorption rate at \$4?

• johnmoffat says:

320,000 is indeed the budgeted overhead.

However with absorption costing, every unit produced is charged at \$4 and so is we produce more or less that the budgeted production we will have over or under absorbed the overheads.

3. Can someone correct me if i am wrong pls ?
If we observe , in the part A, we subtracted the total cost of closing inventory of 2000 units at £27 . This means that the total cost of this £2000 was not included in our calculation in January ….Agreed !

Now in February , the closing stock of £2000 becomes our opening stock valued at £27, of which £2 of it represents fixed overhead cost . If we only produced 9500 units in february , the total value of fixed overhead absorbed at £2 will be – (opening stock of 2000 units x £2) + (actual production 9500 units x £2) = . £23000. Therefore the adjustment for fixed overheads would have been £23000 – Actual budget of £20000 = £3000 . It seems the lecturer ignored the fixed cost element of £4000 in the february opening stock, as it was not accounted for in January .

Can someone pls correct me if i am wrong ?

• johnmoffat says:

You are wrong – my lecture is correct.

You are confusing two things – the way we value inventory, and the amount that is charged (which is what absorbed means) in the profit statement.

I don’t know if you have done Paper F3 yet, but if we were doing financial accounts (which we are not) then there are several ways that you might choose to value inventories, but you would charge still charge the actual fixed overheads (here 20,000) in the income statement. Because we are doing management accounts (and using absorption costing) the amount initially charged in the income statement is always the actual production times the standard fixed overhead per unit. To ‘correct’ it we then need the over/under adjustment for fixed overheads. The calculations in the lecture (and obviously in the answer at the back of the course notes) is correct.

(and if you look at the next chapter where it is the same example using marginal costing, it effectively ‘proves’ it).

• I totally agree with all you said above……its never been my bone of contention.
My grouse , or rather what i am finding difficult to understand is – when adjusting for fixed overheads in february , we only adjusted for 9500 units , and we completely ignored any adjustment for the opening stock of 2000 units that we brought forward from january.
Again i might be wrong…..just looking for clarification.

• Bear in mind – The 2000 units brought forward in January was calculated at £27 , which includes and over-charge of £2 , so i think our adjustment should have been £2 x (2000 units + £9500 units ).

• johnmoffat says:

I am afraid you are wrong

The reason is that the variances are checking whether or not we have over/under spent in the current period.
Since opening and closing stock are valued at standard cost per unit, it is only what was spent in the current period that is relevant.

4. Samuel Mayes says:

Nice work.

had there been opening inventory in jan, how would we have valued it?

• user120 says:

@emmadarko, you value with the budgeted cost which is 27 \$ happened that already have been calculated in the previous video go back and you will see

• saintwright says:

@emmadarko, they would have given you a valuation or figures so you can work out the valuation

6. wonderful lecture….

7. rixxwoon says:

hey guyz the video is not working properly ?
cn u help plz

8. Thank you for a wonderful lecture, I am grateful, May the Lord Bless you!

9. accakeisha says:

feels so good to be part of OT. i am doing a self study for this course and if it weren’t for OT’s lecturer i would be lost………………thanks OT!!!THUMBS WAY WAY UP!!!!

10. desie86 says:

where did the fixed 2000 come from?

• johnmoffat says:

@desie86, The question says that the fixed selling costs are \$2000 a month.

11. NOKINOKI says:

were can we get question practices since its a new syllabus

12. glenlct says:

why is the amount absorbed \$19000?

• NOKINOKI says:

@glenlct, we produced 9500 in feb so 9500*2=19000

2 being fixed overheads p.u on our cost card

13. herbiby says:

good things in life are freee

15. ishika says:

never understood this from text books(self study),its all so clear now…Thanku Open Tution..

16. silverclu says:

Why is there no closing inventory of 2000 units in Feb?

• debbiechew says:

@silverclu, all sold in Feb, i.e. Closing+Produced=2,000+9,500 = 11,500units. Since all units sold, so no closing inventory

17. fnuha89 says:

Hi,