When do we know we’ve had an over-absorption or under-absorption of overheads? Is it when we have a psitive answer that we get an over-absorption? Also, i know this is a little stupid but, is ‘normal level of activity’ referred to as Sales?
If the actual fixed overheads are more than the amount absorbed, then we have under-absorbed. If the actual fixed overheads are less than the amount absorbed, then we have over absorbed.
The normal level of activity is the level of production used to calculate the overhead absorption rate.
As I explain in my free lectures, the only difference ever between the absorption and marginal profits is the change in the inventory multiplied by the fixed production over heads per unit.
In this question, the fact that there was no opening inventory is irrelevant because whatever the opening inventory had been then the fact that they produced 17,500 units but only sold 15,000 units means that the inventory would have increased by 2,500 units. So the answer would still be the same.
on a third thought I think opening inventory is very rrelevant…… in the example of given, for example, February had a production of 9000 units but sold 11000 units. what guarantee would show a 2000 opening inventory had it not been a January scenario. and the fact that they mention no opening inventory i this case shows that an opening inventory option is possible.
If they produce 2,500 units more than they sell, then the inventory must increase by 2,500 units!!
Of course it is possible for there to be opening inventory, but if there was then the closing inventory would still be 2,500 more than the opening inventory and this is all that matters.
When calculating profit using marginal method, we exclude fixed cost, why is that we are multiplying the fixed cost rate by the difference of closing Inventory to get Marginal profit?
However with marginal costing we do not exclude fixed cost when arriving at the profit – we subtract the fixed cost from the contribution in order to arrive at the profit.
Also, the difference between the absorption profit and the marginal profit is always only the change in inventory multiplied by the fixed cost per unit.
All of this is explained in the free lectures. Did you watch them before attempting this test?
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When do we know we’ve had an over-absorption or under-absorption of overheads? Is it when we have a psitive answer that we get an over-absorption?
Also, i know this is a little stupid but, is ‘normal level of activity’ referred to as Sales?
If the actual fixed overheads are more than the amount absorbed, then we have under-absorbed. If the actual fixed overheads are less than the amount absorbed, then we have over absorbed.
The normal level of activity is the level of production used to calculate the overhead absorption rate.
Have you watched my free lectures on this?
Yes sir. Thank you very much!
Hi. Johns. How would the solution (for question 4) been, had there been opening inventory. cheers
As I explain in my free lectures, the only difference ever between the absorption and marginal profits is the change in the inventory multiplied by the fixed production over heads per unit.
In this question, the fact that there was no opening inventory is irrelevant because whatever the opening inventory had been then the fact that they produced 17,500 units but only sold 15,000 units means that the inventory would have increased by 2,500 units. So the answer would still be the same.
you are right. many thanks.
You are welcome 🙂
on a third thought I think opening inventory is very rrelevant…… in the example of given, for example, February had a production of 9000 units but sold 11000 units. what guarantee would show a 2000 opening inventory had it not been a January scenario. and the fact that they mention no opening inventory i this case shows that an opening inventory option is possible.
If they produce 2,500 units more than they sell, then the inventory must increase by 2,500 units!!
Of course it is possible for there to be opening inventory, but if there was then the closing inventory would still be 2,500 more than the opening inventory and this is all that matters.
Please watch the lecture again 🙂
When calculating profit using marginal method, we exclude fixed cost, why is that we are multiplying the fixed cost rate by the difference of closing Inventory to get Marginal profit?
I don’t know which question you are referring to.
However with marginal costing we do not exclude fixed cost when arriving at the profit – we subtract the fixed cost from the contribution in order to arrive at the profit.
Also, the difference between the absorption profit and the marginal profit is always only the change in inventory multiplied by the fixed cost per unit.
All of this is explained in the free lectures. Did you watch them before attempting this test?