- This topic has 8 replies, 2 voices, and was last updated 9 years ago by
.
- Posts
Dear sir,
Why are we computing fixed cost p.u, and adding it to direct costs, when it ll not vary with the nom. Of units produced? And Absorbed OHs actually mean, OAR * * actual activity level, right? But when we did cost cards in e.g 1 and e.g 2, we multiplied OAR with Budgeted activity level? This is really confusing.. Can u plx help me out in tht?With absorption costing we want to get the full cost of producing a unit which means bringing in all costs (whether fixed or variable).
I do not know which e.g. 1 and e.g. 2 you are referring to.
Please in future say which chapter as well – I assume you mean Chapter 8!
In example 1, the OAR is calculated using the overheads and production budgeted for the year (which average at $20,000 and 10,000 units a month) we keep that standard cost throughout the year – it would be silly to change it each month.
It turns out that some months we expect to produce more (in this example January) and in some months we expect to produce less (in this example February), so when we prepare the monthly budgets we will be charging (absorbing) at the OAR of $2 per unit produced. As a result we will be over or under absorbing.
In example 2, it is exactly the same principle except that we are not asked to produce a budget for April – we are producing the actual profit statement.
Dear sir,
Y dont v simply charge the actual fixed overheads, when preparing profit statements? Y to a/c for over/under absorption??In financial accounts, we would.
However in management accounts (using absorption costing), we have told management to expect the standard profit per unit (which includes in the calculation the standard fixed cost per unit at the OAR) and we need to be able to explain month by month why the profit will actually be different (due to changes in the level of production).
- You must be logged in to reply to this topic.