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Dear Mr John,
$ per unit
direct material :$4.20
direct labour :$3.00
Variable overhead :$1.00
Fixed overhead : $2.80
Profit : $4.00 & Selling Price : $15Budgeted production for the mth 10,000 units,
Actual production for the month 12,000 units
Actual sales for the month 11,200 units
Actual fixed overhead cost incurred during mths $31,000Q1) The variable costing profit for the months is : $50,600 ???
Q2) The absorption costing profit for the months is : $44,800???
No.
Q1. The contribution per unit is 15 – 4.2 – 3 – 1 = $6.80 ( or 4 + 2.80 = $6.80)
Total contribution = 11200 (actual sales x $6.80 = $76160
Actual fixed overheads are $31,000
So marginal costing profit is 76160 – 31000 = $45160Q2. You can get the absorption costing profit in two ways. The quickest is to say that the only difference from the marginal costing profit is the change in inventory x fix overheads per unit.
The inventory increases by 800 units (produce 12,000 and sell 11,200).
So the difference in profit is 800 x $2.80 per unit = $2240.Because inventory increases, absorption will give the higher profit, and so absorption profit = 45160 + 2240 = $47400.
The alternative way is to say that standard profit is $4 per unit. Sales are 11,200. So the standard total profit is 11200 x $4 = $44800.
However we need to check the fixed overheads.
The actual fix o/hs are $31,000
The absorbed fix o/hs are 12,000 (production) x $2.80 per unit = $33600.So…..the fixed overheads are been over-absorbed (over-charged) but 33600 – 31000 = $2,600.
So….the actual profit is 44800 (std profit) + 2600 = $47400 (as before).
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