In your lecture for Standard Costing & Basic Variance Analysis, you Flex the Fixed Overhead budget so that the Std. profit for actual production reconciles to the Std. cost card – which I completely understand why this has been done. [Increase in budget to actual production of 200u X £15p/u = £3000 increase from budget fixed o/head to flexed budget fixed o/head]
However, in the quesiton Memus Plc paper 2.4 Dec 2004, they ask for a flexed budget and the answer does not flex the fixed overhead budget, which again I understand why they haven’t flexed it (as they are assuming fixed costs remain fixed, regardless of production numbers).
This conflict is causing me confusion. Is there a rule for flexing fixed overhead budgets?
The answer to Mermus is a bit confusing really.
For the purposes of pure variance analysis, then if we are using absorption costing the fixed overheads do need to be flexed (and the fixed overhead variances that are calculated in the second part of the question do in total explain the difference between actual and flexed fixed overheads).
However in part (a), the examiner can be justified because for that part he was not asking about variances, and of course whichever method of costing we use fixed overheads in total should stay fixed.
Having said that, I would have flexed the fixed overheads in part (a) (and therefore got a different answer) and I am certain that I would have been given full marks.
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