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Dear Sir,
Could you please explain.
Q. 12 p. 12 of Kaplan Exam Kit (2008)
A. p. 92
Required – calculate mix of products and value of net profit.It was decided that profit maximizing mix should be 144 000 of A and 13 000 of B. When calculating the net profit WHY does the answer say that overheads should be used those of budgeted mix 120 000 and 45 000?
Thanks in advance!
I do not have the Kaplan Kit (only the BPP Kit). However I know the question because it is a very old Paper P5 question (when throughput accounting was only asked in P5).
When the actual production differs from the originally budgeted production then certainly the throughput contribution will change.
However, by definition, the fixed costs will stay the same however many they actually produce.
I do suggest that you watch me free lectures on throughput accounting because I deal with, and explain, this very point within the lecture.
(Our free lectures are a complete course for Paper F5 and cover everything needed to be able to pass the exam well.)
I see! But if fixed costs will stay the same however many they actually produce, then the rate of absorption of overheads per unit should be different and the amount of o/h apportioned to this new mix should be different.
Referring to the free lectures – of course, I have watched all of your lectures and have done all practice questions. I took this kit just to have extra practice.
So, if this kind of question is in exam, the correct thing to do is to solve it the way it is solved in the answers – actual production minus actual materials and minus budgeted other costs?
Thank you!
Whether we are using normal key factor analysis or throughput accounting, then in the original costings the absorbing will have been done on the original budgeted figures. So we can calculate what the total budgeted fixed overheads must have been.
Any further absorbing is completely irrelevant – we work on either the contributions or the throughput contributions. It is only at the end we need to subtract the total fixed overheads to calculate the profit, and the total fixed overheads, by definition, will not have changed.
I do suggest that you watch the lecture again, because I really do stress this very point.
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