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Hi sir,
The management accountant’s report shows that fixed production overheads were over-absorbed in the last accounting period.
What is the combination that is certain lead to this situation?
Answer: Production volume is higher than budget and actual expenditure is lower than budget
I do understand that production volume is higher than budgeted but I don’t understand how can expenditure cause the overhead to be over absorbed.… can you please explain the concept?
Thanks in advance
When using absorption costing the fixed overheads are initially charged to the profit statement at the standard cost per unit (which is calculated using the budgeted fixed overheads and the budgeted production). So the amount charged is the actual production multiplied by the standard cost per unit.
If the actual production is more than budgeted this will mean that the total amount charged will be more that the budgeted total expenditure and therefore it will have been over-absorbed (i.e. over charged).
Have you not watched my free lectures on absorption and marginal costing where this is explained? The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well 🙂
In my exam there is question I can’t understand
Company using absorption costing
Selling price 9999
Variable price 6666
Fixed price 2222
Ask to find contributionSelling price -variable price=contribution
But in absorption costing we deduct fixed cost as well
So do we deduct fixed or note?
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