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November 14, 2014 at 8:23 am
in this example why we change fix over head cost according to activity level… ?? because in my thought fixed cost do not change with the activity level…
John Moffat says
November 14, 2014 at 9:10 am
Fixed costs do not change with the activity.
However, as I explain in the lecture, using absorption costing and taking a standard profit per unit does effectively treat fixed costs as though they are variable. Since they are not variable, it does mean that there will be an over or under absorption of fixed overheads (as you will remember from the lecture on absorption costing earlier). With relevance to variance analysis, it also explains why the fixed overhead variances (when using absorption costing) also include a volume variance (as you will see in the next lecture on variance analysis).
If you are simply asked to flex a budget then you do keep fixed overheads constant, what I do here is simply to make sense of the fixed overhead variances that we calculate later.
September 16, 2014 at 8:07 am
hello Sir, can you please confirm me?
When we calculate variance, for sales variance we take Actual less Flexed?
and for the materials, labour, overheads, etc.. we take flexed less actual???
September 16, 2014 at 8:11 am
It doesn’t matter which way round you subtract – don’t simply learn things as rules!!
What matters is whether the difference will result in more profit (in which case favourable) or less profit (in which case adverse).
The examiner does ask questions deliberately to check that you understand what is happening, and that you have not just learned rules.
June 10, 2014 at 10:22 am
plz tell me which bppk you r using in lectures
June 10, 2014 at 10:34 am
We use our own Course Notes which you can download free of charge.
The link is just above the lecture, on the right.
June 1, 2014 at 4:14 pm
I still don’t understand why the evaluate the actual stock at $68 if the actual cost was more than $70
June 1, 2014 at 8:47 pm
We are not preparing financial accounts – then we may well value inventory differently.
With management accounting when we are usually preparing statements every month, we keep the inventory value constant at what we expect for the year. Some months the actual costs may be higher than they should be and some months lower, but it would be silly if we were changing inventory values every month.
June 1, 2014 at 11:26 pm
I understand Sir but I want to know it won’t affect the annual result. is the fianacial account consider this resultat at the end of the year? sorry if I don’t understand. Im new.
May 24, 2014 at 2:26 pm
Hi John, pls am using this platform to advice open tuition to help develop objective questions on Paper F8 against december sitting. Regards.
May 24, 2014 at 2:41 pm
It would have been better to post this in the F8 forum.
Obviously, since all papers from F4 to F9 (except F6) will have MCQ’s in December, we will as always be updating after the June exams by including MCQ’s.
Most people are studying at the moment for June exams, MCQs are not relevant for them.
If you are studying for December, then obviously the existing note and lectures are relevant because the syllabuses are not changing.
June 2, 2014 at 3:41 pm
In the financial accounts we would use the actual cost to value the inventory. But this is not relevant for Paper F2
May 3, 2014 at 8:02 pm
Thanks for your great lecture first!
While I am still not so clear why you mention : sales/8000 * standard profit/7 . What’s the purpose of this point?
May 3, 2014 at 8:53 pm
Because that is the budgeted profit, and the whole point of variance analysis is to explain why the actual profit is different from the budgeted profit.
May 3, 2014 at 10:01 pm
Yeah I know the whole point of variance analysis, and budget profit per unit is 7$, budget sales is 8000 units, so budget profit is 56000, no problem. But my problem is sales/ 8000 *standard profit/7 , what’s standard profit here ? Isn’t it the budget profit?
May 3, 2014 at 10:08 pm
Simply say how you get the budget profit 56000 from sales/8000*standard profit/7 ? Suppose we can get 56000 from that, then the standard profit is nearly 5227. Where am I wrong? I am very confuse about this now. Thank you very much for your answer!:)
May 3, 2014 at 10:31 pm
Standard costs and standard profit are the budgeted costs and the budgeted profit.
So….if we budget on selling 8000 units and we budget on making a profit of $7 a unit, then the budget profit is 56000.
I do not know where you get 5227 from!
May 3, 2014 at 11:11 pm
Ok sir, I find my problem. Thanks a lot!:))
May 24, 2014 at 7:10 am
Please sir how do i watch the f2 leacture its been difficult for me
May 24, 2014 at 8:24 am
You do not say what the difficulty is. Have you looked at the technical support page? The link to it is below the lecture.
March 21, 2014 at 7:28 pm
What is the difference when flexing a budget with marginal and absorption costing?
March 21, 2014 at 8:13 pm
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)
February 26, 2014 at 1:42 pm
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!
February 26, 2014 at 5:18 pm
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.
December 17, 2013 at 12:56 pm
Thanks a lot! Very helpful videos.
December 1, 2013 at 10:15 pm
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.
December 2, 2013 at 7:11 am
Yes – multiplying by 1.04 is the same as adding 4%
November 29, 2013 at 3:12 pm
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.
November 29, 2013 at 3:16 pm
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.
November 14, 2013 at 11:05 pm
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.
November 15, 2013 at 4:42 am
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.
November 17, 2013 at 11:51 am
Thank you so much for your reply, you are very kind.
November 17, 2013 at 11:52 am
You are welcome
November 29, 2013 at 3:39 pm
I understand the the first two explanations in your response but unclear with the third. Could clarify that part please.
November 29, 2013 at 6:32 pm
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)
November 30, 2013 at 1:13 pm
How did you arrive at the 10 hours for 10% of 100?
November 30, 2013 at 2:14 pm
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)
December 1, 2013 at 10:06 pm
October 28, 2013 at 9:22 pm
Mr Moffat, why did you flex the fixed costs? BPP textbook specifically says that we should not flex fixed costs.
October 28, 2013 at 9:48 pm
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.
October 28, 2013 at 9:52 pm
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?
October 28, 2013 at 10:04 pm
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)
October 28, 2013 at 10:08 pm
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!)
October 28, 2013 at 10:10 pm
Thank you, and you are welcome
May 2, 2013 at 12:35 am
why arent the videos working ?
May 2, 2013 at 5:48 am
They are working, Try a different browser.
May 2, 2013 at 12:25 pm
its working now..thanks alot 😀
April 21, 2013 at 8:21 pm
for variance revision for p5.i am listening these lecture.am i right
April 22, 2013 at 9:07 am
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)
February 17, 2013 at 2:22 pm
This video is not working. how can i get access to it.
February 17, 2013 at 4:26 pm
The video is working – try another browser.
November 24, 2012 at 11:41 pm
October 13, 2012 at 11:39 pm
Miss A.. says
September 6, 2012 at 10:55 pm
August 24, 2012 at 3:11 pm
did’nt the question asked to calculate the total variances
May 8, 2012 at 5:54 pm
Can anyone plz tell me where is he reading the question from ??
May 8, 2012 at 8:39 pm
@nidaitrat, from the OpenTuition course notes!
April 21, 2012 at 5:15 am
anybody idea abt lecture 18 to onward 21
April 21, 2012 at 6:39 am
@umershan, what do u mean? Also on the same topic?
March 28, 2012 at 11:55 pm
March 10, 2012 at 6:30 pm
What have I missed? I understand everything in this video up until the actual costs being calculated. For example, Material production costs are 163,455 according to the video. Yet 8,400 multiplied by 18 is 151,200. This follows for the costs following on from materials also, which video should I watch to understand why the gross figure is 163,455?
March 10, 2012 at 6:32 pm
@ccoda, Apoligies, I meant 8,900 multiplied by 18, which comes to 160,200. This still does not agree to the lecturers figure though. So a finger in the right direction would be apreciated. Thank you
March 14, 2012 at 2:11 am
this is because for the actual cost column nothing needs to be calculated, just take the actual figures straight from the last part of the question.
Only for the Flexed Budget we still use the budgeted costs of material, labour etc.
Hope that is clear now.
December 29, 2011 at 8:41 am
Hungry @ 15:45!
November 30, 2011 at 8:12 am
this is very good staf for my revision….thanx
May 23, 2011 at 5:06 pm
i want the supplementry notes on p7
May 23, 2011 at 12:10 pm
thanks for this, really helpful
May 14, 2011 at 2:23 pm
Video is working fine!!
Try another Browser / install flash etc..
Please visit the support page for help: http://opentuition.com/support/
May 30, 2011 at 6:50 pm
thank you very much sir
i installed flash player then its working fine
this is very very helpful to me
May 13, 2011 at 9:07 pm
this video is not working
and this video is very important could you please see what’s the problem
if you don’t mind sir
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