• Profile photo of John Moffat says

      Remember that total fixed overheads should not (by definition) be affected by the number of units produced (or the number of hours worked), and with marginal costing there is no volume (split into capacity and efficiency) fixed overhead variance (as you will see in the next example).

      The problem when we are using absorption costing is that fixed overheads have been absorbed as part of the cost card – the budgeted total has been absorbed on the budgeted hours. The standard profit is based on this budgeted unit cost.
      If we have more hours available than budget then we are capable of making more units. This means that the fixed overheads per unit will be lower, which results in more profit. That is why the variance is favourable.

      • avatar says

        Got it. Thanks for your reply and also for your help..cleared F2 with 80% with just less than 35 days of preparation, all I did was went thru text, listened to ur lectures n practised every question in ur lecture notes. Keep up the great work :-)

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