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ACCA F2 The Management Accountant’s Profit Statement – Absorption Costing
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Good Evening Sir,
First of all i really admire your way of teaching its remarkable thank you very much.
Regarding the lecture Sir i am not sure that is my question makes any sense or not but i have a little confusion i watched the lecture several times but i couldn’t get it.
Thing that is bugging me is in the Example #1 when we made the “Profit Statement” we added
Sales (9,000 x $35) = 315,000 —understood
Cost of “Sales”
Materials (9000 x $12) = 108,000
Labor (9000 x $8) = 72,000
Var. O/H(9000 x $5) = 45,000
Fixed O/H (9000 x( 20000/11000) ) = 16,363
Q-1 : The point is that if we are calculating Cost of Sales then why arent we calculating the cost of products we sold why it cant be done the way i did?
Q-2 : The Fixed O/H is fixed like in previous chapters where you said that the Electricity Bill will be fixed for the lights use in the department weather we produce 10000 units or 5000 units its a fixed cost then Why in this question we didnt do this
fixed cost / units produced =Fixed O/H per unit ?
Apologies for the long text, Sir
Thankyou.
With standard costing, we always first charge the fixed overheads at the standard absorption rate, and then make the adjustment for the over or under absorption but adjusting for the difference between the actual fixed overheads and the amount absorbed.
What you are doing is what we would do in financial accounting, but we are not doing financial accounting. With financial accounting we value inventory at the actual cost, but with management accounting we value it at standard cost.
Dear Mr Moffat
In video above you mentioned over and under absorption of fixed overheads. In which of your later videos you discuss reasons why over and under absorption occurs ? What factors cause over and under absorption of fixed overheads?
It is clear from the workings what is causing the user/over absorption – a change in the level of production and a change in the total fixed overheads! There is nothing else to discuss!
It is, of course, considered again in the lectures on variance analysis.
thanks for reply
You are welcome 🙂
Hi Sir, in example 2,000 units are left in the inventory at the end of January where we have already charged Production costs. Why do we charge production costs for all 11,500 units? Should it be for 9,500 units and then the Selling price for 11,500 units?
Given that 11,500 units are sold in February, we need to charge the cost of producing those 11,500 units.
Dear sir,
Referring to example 2 of your handout. If the question requires to prepare profit statement .Will the examiner ask budgeted profit statement or will ask actual profit statement . If it will ask budgeted so for adjustment we will compare 320000 and 312000 or we will comapre 315500 and 312000?
Plss explain
The exam can ask for neither, because of the type of questions that are asked.
I assume you are referring to example 2, which is the sort of way it will be asked in the exam i.e. the amount of the over or under absorption.
If it refers to a budgeted profit statement then you would be budgeting on working 80,000 hours and there would be no adjustment necessary because they amount absorbed would be 320,000 and the budgeted overheads would also be 320,000. More likely you would be told the actual hours as in this question, and therefore the adjustment is as I show in the free lectures.
(I assume that you are watching the lectures and not just trying to use the notes on their own?)
I got it . Thanxs
Great 🙂
Hi Sir,
Does a profit statement literally compare just the production costs with the revenue from the sales?
is the selling price x units sold = revenue
and
the revenue – (cost of producing one unit x number of units produced) = profit?
Yes to all three
Sir,
I am still very heavily confused at the fact that non-production overheads wont be included in the cost card of valuing cost per unit. Every format of a cost card says otherwise.
I know in accordance with IAS 2 of valuing inventories, we do not take the non-production overheads. I know only Production overheads can be absorbed into the cost of a product.
But if we are not going to consider the non production overheads PER UNIT in fixing a selling price, why is it included in the cost card format ?
Please help me with this confusion. In the exam whether they give the information of non-production overheads or not, why is it still not included in the cost card as you say in your lectures ? Why does the books say otherwise ?
To say that ‘every format of a cost card says otherwise’ is nonsense.
This is the first of two lectures comparing absorption costing with marginal costing, and the difference is the way that the inventory is valued. For the valuation of inventory, only production costs appear on the cost card, and in this lecture the cost card is prepared for the valuation of inventory.
Obviously non-production costs are considered in arriving at the final profit, and obviously non-production costs are considered (amongst other things) when deciding on a selling price (although pricing decisions are not asked until Paper F5).
These lectures cover everything needed to be able to pass Paper F2 well.
Thank you very much for the help and clarification Sir. Much appreciated. Makes me feel better now.
You are welcome 🙂
sir i am referring to page 213 of the Kaplan book (2018-2019 edition), solution to Illustration 2. in the video we are simply multiplying the variable overheads per unit with the number of units produced to find the figure in the profit or loss account. however, if i do the same ($2 x 2000units=$4000) it is very different from the book’s solution’s ($15x2000units=$30000). could you please tell me how they calculated the $15?
Please ask this sort of question in the Ask the Tutor Forum, and not as a comment on a lectures.
However I do not have Kaplan books (only the BPP Revision Kit) and so without seeing the whole question I cannot help you.
Sir we expected fixed o.h in January to be 20000 but fixed o.h were 22000 so that means our costs have increased by 2000 so our profit shall be reduced by 2000?
The fixed overheads in January are not $~22,000. The question says that they are as budgeted and therefore remain at the budgeted $20,000.
Using absorption costing has effectively charged $2 per unit and therefore a total of $22,000.
This is charging $2,000 more that it should be, and therefore the profit needs increasing by $2,000.
Dear Sir,
aren’t fixed costs budgeted to be $20000 ? So when you conclude that for example in January there was an over absorption of 2000 in reality we do not know until the actual O/Hs are incurred? In other words in the exam shouldn’t I look for a statement of the actual fixed OHs?
But the question says that costs are as budgeted – so the actual fixed overheads are 20,000.
oh i did not notice. Thank you.
You are welcome 🙂
Sir the question doesn’t say the costs are as budgeted.
You are correct – it doesn’t 🙂
However, it does ask for the budget profit statement, and that means that the costs will all be as per the budget.
oh i see..
Great 🙂
Hello!
Just wanted to ask; in your lecture you say we absorb using the units produced. So in the example, materials @ £12 x 11000 units.
However, i’m going through a BPP exam kit, and the example asks for marginal and absorption profits. The workings for the absorption profits answer use the units sold, not produced.
Do you know why?
But if you watch my lecture again, you will see that I do show how the absorption profit is the units sold multiplied by the standard profit per unit, which we then adjust for the over or under absorption of fixed overheads. I ask show that the marginal profit is the units sold multiplied by the standard contribution per unit, less the fixed overheads.
The reason that I write up full profit statements as well, is to make it clear what is happenings with the overheads (I do say that you will never be required to write up a full statement). With absorption costing we are automatically always absorbing the overheads based on the units produced, which is why we need to calculate the over and under absorption (which BPP obviously do as well).
If you feel that any of the answers in the BPP Revision Kit contradicts this, then say which question and I will explain why it does not 🙂
Hi John,
Thank you for your reply! Ok, I think that makes sense to me…!
The question in particular I was referring to was question 9.5 – do you think you could just explain using the example why they’re multiplying the costs by the units sold and not units produced? I’m pretty sure I understand but would really appreciate the confirmation!
I should have said in my last reply that for questions like this you should in future post in the Ask the Tutor Forum rather than as a comment on a lecture. However it is my fault for not having said that, so I will answer you here.
Firstly, it is exactly as I replied before – with absorption costing, the profit is the units sold multiplied by the standard profit per unit (so 5200 units x $9 per unit = $46800) but then adjusted by the over absorption of fixed overheads ($1,600) to get the actual profit of 46800 + 1600 = $48400. The over absorption is calculated by comparing the overheads incurred ($27,400) with the overheads absorbed, which is always the actual production (5,800 units) multiplied by the absorption rate ($5) which comes to $29,000. So the over absorption is 29,000 – 27,400 = $1,600.
Secondly, however, if this were asked in the exam, then much much faster would be to use the fact (as I explain in my lectures) that the only difference between the marginal and absorption profits is the change in inventory multiplied by the fixed overheads per unit. So having calculated the marginal profit for question 9.4, then the absorption profit for question 9.5 must be higher by 600 units (5,800 produced but only 5,200 sold) multiplied by $5 per unit. i.e $3,000.
Nobody looks at your workings in the exam – only the answer – and time is critical. Doing what I have written under ‘secondly…’ is much faster 🙂
Hi John,
That’s great – all makes sense. Thank you so much!
You are welcome 🙂
In example 1 why do we add the over absorbed cost of $2000 to the profit? If it is costing us $2000 more than we expected (budgeted) shouldn’t the profit be $2000 less?
Thank you very much these lectures are really helpful!
The absorbed cost is not the budgeted cost. It is the actual production multiplied by the standard cost per unit (i.e. multiplied by the absorption rate).
hello Moffat,
I have a question on example 1.
when calculating the amount absorbed in Feb,
why we should calculate 2×9500=19000?
I thought it should be 2 x 11500= 23,000 since the fixed overhead in the cost of sales is 2 x 11500=23,000. therefore, I thought we need to use the same value here.
saels 11500x 35= 402500
cost of sales
materials 12x 11500
labour 8 x 11500
variable 5 x 11500
fix o/H 2x 11500
total 310500
profit 402500-310500 = 92000
actual fix o/H 20,000
amount absorbed =
because when we calculate the amount absorbed in Jan, we followed in that way.
which mistake did I make sir??
The overheads are absorbed based on the units produced (9,500) and not on the units sold.