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Dear John Sir,
I have a doubt in following question BPP revision kit 9.11
A company produces and sells a single product whose variable cost is $6
Fixed Costs have been absorbed over the normal level of activity of 200,000 units and have been calculated as $2 per unit
The current selling Price is $ 10 Per unit.
How much profit is made under marginal costing if the company sells 250,000 Units?
Answer is Option B 600,000
My Doubt
Dear Sir, Math is no issue as the figures are straightforward.
However my understanding was Marginal costing purely deducts the ” Actual” Fixed overheads from Contribution and not the absorbed one. So is this correct question and correct answer being handled by BPP or am i missing any crucial point?
Thanks
AmitThe absorption rate is calculated based on the estimated fixed overheads and the estimated production.
Since the absorbed over 200,000 units and arrived at $2 per unit, it means that they expect the total fixed overheads to be $400,000.The actual production is 250,000 units, but the expected total fixed overheads will remain at $400,000 – by definition, the total is not affected by the level of production.
Dear John Sir,
The explanation given you is basic logic which is quite clear to me.
However my point was that while producing 0.2 MM units and selling 0.25 MM units, there would have definitely being considerable time lag, which would have led to incurring of actual fixed overheads, which would in height of co-incidence match with the budgeted fixed overheads.
So necessarily actual Fixed overhead would have been different and so would be Marginal profit. In the current sum my concern is in absence of actual figures BPP has assumed Budgeted Fixed overheads = Actual…which is a far fetched assumption.
Might be i m missing some other point which you based on your rich experience can put light on.
Thanks
AmitBut it is also assumed that the budgeted selling price and the budgeted variable costs remain the same. We have no choice in this question except to make that assumption.
We have no choice when we are preparing budgets but to assume that the budget costs remain. However, again, the total budgeted fixed costs must be expected to remain the same because by definition they are not affected by the level of activity.
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