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Hello Sir,
Please would you be able to explain the logic of the 2 qns below, thank you.
Questions 1
A company uses standard absorption costing. Its fixed overhead absorption rate is £8 per machine hr and each unit of production take 3 machine hrs.
Last year was an opening inventory of finished good of 4,000 units. They produced 30,000 units and sold 25,000. The actual profit last year was £526,000What profit would have been earned under a standard marginal costing system?
Ans. supposed to be 406,000
Question 2
A company purchases 5,000 units per quarter at an even rate throughout the year. Each order placed with the supplier incurs a delivery charge of £20. The annual cost of holding one unit in inventory is £5.What is the minimum total of the inventory costs (order costs plus holding costs) per year?
The answer should be £2000 but I cannot get it
Thank you for your help
Question 1:
The difference between absorption profit and marginal profit is always the change in inventory multiplied by the fixed overheads per unit.
The inventory increased by 5,000 units (30,000 produced less 25,000 sold). The fixed overheads are 3 hours x $8 = $24 per unit.
So the difference in profit is 5,000 x $24 = $120,000.Question 2:
I am guessing that you calculated the EOQ wrongly.
In the formula, D = 20,000; Co = 20; Ch = 5.
So the EOQ = 400 units.
So the order cost = 20,000/400 x $20 = 1,000
The holding cost = 400/2 x $5 = 1,000
Total = 2,000Thank you for your response.
Qn2 – I was trying to find reorder cost & holding cost without calculating EOQ 🙁
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