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Dear Mr Moffat.
I have got below question from Exam kit and it looks like not being correct to me.
Question:
A new company has set up a marginal costing system and has a budgeted contribution for the period of $ 26,000 based on sale of 13,000 units and production of 15,000 units. This level of production represents the firm’s expected long term level of production. The company’ s budgeted fixed production cost are $ 3,000 for the period.
If the company were to change to an absorption costing system the budgeted profit would be:
My working:
Absorption rate 3,000/15,000 = $ 0,2
Budgeted contribution $ 26,000
+ Closing inventory
2000 (15000-13000)*0.2 $ 400Profit under absorption costing $26,400
For my knowledge budgeted contribution is equal selling price – total variable cost.
Answer gives in the book.
Absorption rate 3,000/15,000 = $ 0,2
Budgeted profit with marginal costing: Contribution – fixed cost = $26,000 – $3,000 =$23,000
+ Closing inventory
2000 (15000-13000)*0.2 $ 400Total $23,400.
Why do we need to subtract the fixed cost from budgeted contribution if contribution does not include fixed cost?
If the answer provided in the book is correct, then I believe I have made some confusion with budgeted contribution. In case could you kindly help me to better understand.
Thank you very much for your help.
Gabbi
Contribution is indeed selling price – variable cost.
However, the difference between absorption and marginal profits is always equal to the fixed overheads in the inventory.
The answer in the book is correct.
There is no logic in adding the fixed overheads in inventory to the contribution (there are no fixed overheads in calculating the contribution). You add the fixed overheads in inventory to the profit, and the profit in marginal costing is the contribution minus the fixed overheads.
Got it!
Silly mistake, of course in marginal costing we have to subtract fixed overheads from contribution. I need to read the question more carefully.
Thank you so much for your help.Gabbi
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