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Hi My Dear Tutor, I have a question.
A company has the following budgeted costs and revenues.
Sales price-50
variable production cost-18
fixed production cost-10In the most recent period, 2000 units were produced and 1000 units were sold.Actual sales price, variable production cost per unit and total fixed production costs were all as budgeted.Fixed production costs were over absorbed by 4000$. There was no opening stock for the period.
what would be the reduction in profit for the period if the company has used marginal costing rather than absorption costing?
Marginal costing approach
Sales———-(1000*50)———————————————-50000
cost of sales———————————————————–(18000)
opening stock-nil
marginal production overheads(2000*18)-36000
closing stock(1000*18)———–18000
contribution———————————————————————32000fixed production cost(2000*20)——————————————-(20000)
net profit————————————————————————12000Absorption costing approach
Sales———-(1000*50)———————————————-50000
cost of sales———————————————————–(24000)
opening stock-nil
marginal production overheads(2000*18)-36000
fixed production cost(2000*10)————–20000
closing stock(1000*28)————————(28000)
over absorbed———————————–(4000)
gross profit———————————————————————2600026000-12000=14000
answer shows.
2000-1000=1000*10=10000When i follow formula and get the result why i can not get the same?
could you explain?i want to understand it that is why i followed this waythanks in advance
usually its production units higher than sales so it will give the result of high absorption costing profit and there some example which i follow this way but in the question it mention over absorbed which made me use of formula for comprehension.
When using marginal costing, you should use the actual fixed overheads. The actual fixed overheads are not 20,000.
The question says that they are as budgeted, and so the actual total fixed overheads will be the same as the total budgeted fixed overheads. $20,000 are absorbed when using absorption costing, but since they were over absorbed by $4,000 then the budgeted fixed overheads (and therefore the actual fixed overheads) are $16,000.
So the marginal profit is 32,000 – 16,000 = 16,000, which is 10,000 less than the absorption profit.(Obviously to do it this way in the exam would be ridiculous – there is too much time pressure in the exam.)
yea yea now I paid attention.I will not follow this way in the exam i just need to analyse some aspects of both absorption and marginal costing.
Doing extra work, but want to enter exam but last time you said work over cash budget but no patience to work over it.I will watch f9 lecture for cash budget
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