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  1. I have a qstn.
    In example 2 (a), for finding the overhead absorption rate, why did they divide the fixed o/h with the budgeted hours (i.e: 320,000/80,000)?

    I thought we were suppose to divide the actual o/h by the budgeted hours (i.e 315,500/80,000) to get the the OAR.

    Please help.
    TIA

    • No – we get the standard absorption rate by dividing the budgeted overheads by the budgeted hours.

      Have you not watched the earlier lectures on the absorption of overheads, because this is explained and stressed in the earlier lectures?

  2. I have a question (the only one it seems) on example 2. The budgeted absorption should be 80,000 units and $320,000. For a) we are looking at an average absorption of $4 as it’s 80,000/$320,000. However, for b), I’m confused. Why are we looking at the absorption $ amount resulting from 78,000 hours and not for the budget 80,000 hours? i.e 320,000(budgeted) – 312,000 (actual).

    Why then in example 1, do we use the original budgeted number of units no matter the units produced? It doesn’t work the same?

  3. Sir in February, fixed over heads were (9500X$2=$19000) lesser than budgeted fixed overhead of $20,000. how come you deducted the statement by under absorption of $1000 again. hasn’t the $1000 already been deducted? By sales of ( $402500 less total expenses of $256500=$146000). And Sir is always that the statement is only affected by fixed over and under absorption or should we look out for differences in any of the expenses?

    • The actual overheads were $20,000 as budgeted.
      The amount absorbed was only $19,000.

      Therefore the overheads were under-absorbed by $1,000 and this means we need to reduce the profit by $1,000.

  4. Hi, first of all thank you for putting these lectures up, they are really helping me as i am learning from home! I wanted to ask, i see that depending on whether one uses Absorption or Marginal costing, ones arrives at a different profit figure, but why is this? I understand that the fixed costs are factored in at different part of the workings, but shouldn’t this even out? When we subtract the fixed production costs at the end of marginal costing, shouldn’t this be equal to a higher level of production cost being subtracted from the sales figure (and the over/under absorption amendment) in absorption costing as the data we are using is the same? I hope this makes sense, thanks again 🙂

    • But I do explain at the end of the lecture on marginal costing – the only reason for the difference is the way that inventory is valued. With absorption costing we include the fixed production overheads in the value of inventory (and therefore the fixed overheads are charged in the period that the goods are sold) wherever with marginal costing the fixed production overheads are not included in the value of the inventory – they are charged in full in the period incurred.

      I do suggest that you watch the lecture on marginal costing again and the explanation of the difference between the profits.

  7. Lectures are so clear to understand. I think I can make a profit statement even in the middle of the night now 🙂 thank you very much! It is more interesting to study when you understand what are you doing 🙂

  10. thank you for such useful lecture sir. Still I have a question to ask.

    If the Actual Amount Absorbed = $22000, the Budget Amount Absorbed = $20000, isnt this is Under-Absorbed since the budget amount is less than the actual amount?

    • The actual total overheads are the same as the budget total – $20,000.
      The actual amount absorbed is $2 per unit produced and is therefore $22,000.
      The is $2,000 more than the actual total and therefore they have over-absorbed.

  12. Dear Sir,

    I have listed your lecture and read your your explain for above ashiq many times, I really still however confused and didn’t understand the fixed o/h adjustment part. I had some problem and need to your explain clearly:
    1. Why you plus $2.000 into $72.000. was it double? because in my view, we had minus $2.000 in closing inventory.
    2. The difference between actual and estimated production was 1.000 units, so why we din’t adjust fixeded o/h in cost card of $20.000/11.000unit = $1.82, not $2

    • 2 first

      We do not change the standard cost. Some months maybe we produce more and some months maybe we produce less. It would be silly to change the cost every month so we keep the same standard cost throughout.

      1 The 2,000 was to correct for the fact that the actual overheads were 20,000 but we have absorbed (charged) 22,000 (11000 units at $2 each)/

  14. can i know how we actually get the amount of $22000 for the amount of overheads absorbed? I’ve repeatly listen to the lecture but still can’t get for the amount of $22000

  17. My apologies being new on the site i dont know how to edit my earlier query.

    What i meant by above is my Cost of sales was not being charged with entire amount of FOH absorbed i.e 22,000. So to the Net Profit of 72000 if i am adding the entire amount of 2000 extra charged over budgeted, am i not over stating the profit earned to Managing Director for that month. Though i agree the next month this would get adjusted as it would form the opening Stock.

    Am i missing something here ?

    • What you say is correct which is one of the reasons why there is the alternative of using marginal costing instead (although in the long term it makes no difference).
      (Although in financial accounting fixed overheads of production have to be included in the inventory value)

      • Thanks a ton again John for clarifying and upholding my thought process.

        Its with finest precision you explain things that such doubts naturally come…

        cheers and thanks again for being an excellent teacher…

  18. Dear John,

    My apologies being new on the site i dont know how to edit my earlier query.

    What i meant by above is my Cost of sales was not being charged with entire amount of FOH absorbed i.e 22,000. So to the Net Profit of 72000 if i am adding the entire amount of 2000 extra charged over budgeted, am i not over stating the profit earned to Managing Director for that month. Though i agree the next month this would get adjusted as it would form the opening Stock.

    Am i missing something here ?

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