Kindly answer this question. Since the example states we should use the marginal costing approach, why did we include the fixed overheads in the costing? Doesn’t marginal costing only deal with variable production costs?

The profit is after charging all costs whichever method of costing is used.

With marginal costing we do not absorb the fixed overheads into the cost per unit – only the variable costs – and then subtract all the fixed costs for the period from the contribution to arrive at the profit.

With absorption costing we do absorb the fixed overheads into the cost per unit (but as a result, we are likely to have over or under absorbed the overheads and need to adjust).

I explain all of this in my free lectures on marginal and absorption costing.

In future you must ask this kind of question in the Ask the Tutor Forum, and not as a comment on a lecture.

If at the moment they are using 75% of the capacity, then the total capacity is 60,000/75% = 80,000. Therefore to make 100,000 they will still pay the rent of 90,000 but in addition, for the extra 20,000 units they will have to pay 90,000/80,000 per unit.

Hi sir, can u guide me through this question ? A company rents its factory for $90,000 per annum. This year 60,000 units have been manufactured in the factory utilising 75% of its total capacity. Next year the plan is to manufacture 100,000 units by using the existing factory at full capacity and by renting just sufficient additional capacity. The additional capacity is available at the same rental cost per square metre as the existing factory.

What is the budgeted total rental cost for next year? The answer is 112500

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m900 says

john sir.. you are a damn good teacher.. the best one i ever had.. love from india

muskaankumar says

Hello

Kindly answer this question. Since the example states we should use the marginal costing approach, why did we include the fixed overheads in the costing? Doesn’t marginal costing only deal with variable production costs?

John Moffat says

No – that is not true.

The profit is after charging all costs whichever method of costing is used.

With marginal costing we do not absorb the fixed overheads into the cost per unit – only the variable costs – and then subtract all the fixed costs for the period from the contribution to arrive at the profit.

With absorption costing we do absorb the fixed overheads into the cost per unit (but as a result, we are likely to have over or under absorbed the overheads and need to adjust).

I explain all of this in my free lectures on marginal and absorption costing.

John Moffat says

In future you must ask this kind of question in the Ask the Tutor Forum, and not as a comment on a lecture.

If at the moment they are using 75% of the capacity, then the total capacity is 60,000/75% = 80,000.

Therefore to make 100,000 they will still pay the rent of 90,000 but in addition, for the extra 20,000 units they will have to pay 90,000/80,000 per unit.

davthev says

I’m sorry sir & tqvm for your help

John Moffat says

You are welcome 馃檪

davthev says

Hi sir, can u guide me through this question ? A company rents its factory for $90,000 per annum. This year 60,000 units have been manufactured in the factory utilising 75% of its total capacity. Next year the plan is to manufacture 100,000 units by using the existing factory at full capacity and by renting just sufficient additional capacity. The additional capacity is available at the same rental cost per square metre as the existing factory.

What is the budgeted total rental cost for next year?

The answer is 112500