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Natalee says

What is the difference when flexing a budget with marginal and absorption costing?

johnmoffat says

With marginal costing, the total fixed overheads do not change. With absorption costing you flex the fixed overheads. (Normally we do not change the total fixed overheads)

Mohammed says

Hi John. Brilliant lecture as always. Just wanted to clarify a point (from reading some of the other comments below). The fixed costs are only flexed when using absorption costing, and are not flexed when using marginal costing (since the fixed cost comes right near the end). Would we be safe to assume that we should use absorption costing if neither it or marginal costing is specified? Also, if we are given a $/unit rate for Fixed O/H, and we are required to use marginal costing, can we find the total fixed o/h based on budgeted production and use that in the flexed budget? Would that be correct? Thank you so much!

johnmoffat says

If you are just asked to flex a budget then you should use marginal costing always (and fixed overheads do not change).

The reason that I have flexed the fixed overheads here is because we are doing variance analysis and it is to try and explain why the fixed overhead variances are rather odd when it is absorption costing.

You will not be required to do the flexing, and you can simply learn the rules for the fixed overhead variances, but it is important to have some understanding of why the rules are what they are.

With regard to the second part of your question, what you say is correct – you do calculate the the total fixed overheads using the budgeted production.

Emily says

Thanks a lot! Very helpful videos.

godze26 says

Could you just verify if my interpretation was correct in this question

The question states:

The standard direct material cost per unit for a product is calculated as follows:

10.5 litres at $2.50

Last month the actual price paid for 12000 litres of material used was 4% above standard and the direct material usage variance was$1815 favourable. No stocks of material are held.

What was the adverse direct material price variance for the last month?

In the answer from the question bank test it shows

12 000 litres * $2.50 = $30 000

Std cost (12 000 * $2.50 * 1.04)= 31 200

Direct Mat. price variance 1200 A

My question is, the 1.04 in the workings for the standard cost is it representing the 4% as 104/100 being equal to 1.04.

johnmoffat says

Yes – multiplying by 1.04 is the same as adding 4%

godze26 says

Hi

How do you determine the format of using percentage in a question. For example in some questions you see where like the format used is 115/100 or 100/85 or as is as 15/100.

This question i was doing from a question bank for the F2 exam stated:

A unit of product L requires 9 active labour hours for completion. The performance standard for product L allows for ten percent of total time to be idle, due to machine downtime. The standard wage rate is $9 per hour. What is the standard labour cost per unit of L.

The answer read

9 hours * 100/90 * $9 = $90.

I find it a bit confusing at times.

johnmoffat says

The idle time is always a percent of the total time paid.

So….for every 100 hours that are paid, 10 will be idle and therefore 90 will be actually working.

So…..putting it the other way, it means that for every 90 hours worked, it they will have to pay for 100 hours.

If therefore the product needs 9 working hours, then they will have to pay for 10 hours.

alisy says

Hi Sir John,

I don’t understand one thing, it says fixed costs should not vary with the production, then why on earth we are calculating it based on number of units produced? I am referring to example where fixed cost value is 130500($15 x 8700).

Thanks a million.

Ali

johnmoffat says

It is because we are using absorption costing.

Using the standard profit to calculate total budget profit is effectively treating the fixed overheads as though they are variable. They are not, of course, which is why we have the fixed overhead volume variance to ‘correct’ for it.

The only reason that I have flexed the overheads as I have is just to be able later to explain why the fixed overhead volume variance exists.

alisy says

Thank you so much for your reply, you are very kind.

Cheers,

Ali

johnmoffat says

You are welcome

godze26 says

Hi sir

I understand the the first two explanations in your response but unclear with the third. Could clarify that part please.

johnmoffat says

You say that you understand that for every 90 hours that are worked, the company will have to pay for 100 hours.

So……for every 45 hours worked (half of 90), the company will have to pay for 50 hours (half of 100).

For every 9 hours worked (10% of 90), the company will have to pay for 10 hours (10% of 100)

godze26 says

Hi sir

How did you arrive at the 10 hours for 10% of 100?

johnmoffat says

You agreed that 90 hours work would need paying for 100 hours.

So…..since 9 hours work is 10% of 90, then they need paying for 10% of 100 (= 10)

godze26 says

Understood. Thanks

ibrahim23babayev says

Mr Moffat, why did you flex the fixed costs? BPP textbook specifically says that we should not flex fixed costs.

johnmoffat says

It depends whether you are using absorption or marginal costing.

Usually we do not flex fixed costs, but if you listen carefully the reason was to explain why the fixed overhead variances are what they are when we are using absorption costing.

ibrahim23babayev says

Yes, it makes perfect sense to me. But in BPP text they don’t specify when to flex and when not to, they just say “don’t fall into trap of flexing fixed costs” literally. Did they make a mistake? I mean if i’m faced with this issue on the exam, what to do?

johnmoffat says

If you are asked to produce a flexed budget you do not flex fixed costs.

However, as I wrote before, if you are asked for the total fixed overhead variance and it is absorption costing then you are effectively flexing the fixed costs (you can simply learn a rule, but it is better to understand what you are doing and why)

ibrahim23babayev says

Oh i get it now, thank you very much. It’s very helpful with your lectures, you always explain things so easy You are the Mozart of ACCA thank you!)

johnmoffat says

Thank you, and you are welcome

abeer1393 says

why arent the videos working ?

johnmoffat says

They are working, Try a different browser.

abeer1393 says

its working now..thanks alot

rooman says

for variance revision for p5.i am listening these lecture.am i right

johnmoffat says

Do you mean P5 or F5?

You will not be asked to calculate variances in Paper P5!

For Paper F5 there are lectures on variances on the F5 pages (and F5 also has the more advanced variances)