Hello,
In 21:35, where 2000 fixed cost come from? Please reply to me
T
Tahreem·
it is given in the question
D
Dan·
I have ended up calculating a profit of 177,500 for feb but it seems way off. help anyone ?
D
Dan·
I assumed we carried over inventory of Jan and costed only the production of feb but seem to have got lost
J
John MoffatTutor·
Have you checked the answer at the back of the lecture notes?
M
mohomed·
sir how did u get the closing balance of 2000
J
John MoffatTutor·
The amount absorbed during the period is the number of units produced multiplied by the absorption rate. Separately we subtract the closing inventory (charged at the absorption rate).
T
Twesigye·
why does the profit increase when you over absorb and why are you calling the budgeted overheads actual fixed overheads?
J
John MoffatTutor·
If you have over-absorbed then you have over-charged, and so the profit is lower than it should be. So you need to increase the profit.
I shouldn't have said actual. It is just that because we are preparing budget statements, the fixed overheads taken are the budget overheads.
A
Anon·
I dont understand Why the profit increases when there is an over-absorption
S
Stephen·
Worked under assumption no inventory brought into Jan and none carried over into march, (production of 11 in Jan, subtract sales of 9 for a cfwd amount of 2 into Feb, production of 9.5 gives us a total stock of 11.5, which is then reduced to Nil with 11.5 Feb Sales figure)
Hope this helps :)
R
Rehma·
Sir, if the production was lesser than the sales then closing inventory wont be included right? So for the cost of production we wont subtract closing inventory?
J
John MoffatTutor·
If production is lower than sales then the inventory will decrease. (There must have been opening inventory otherwise they would not have had enough to sell!! The closing inventory will be lower than the opening inventory.)
J
John MoffatTutor·
Example 1 asks for the budget profit statements and so the actual fixed overheads are irrelevant.
In example 2 we are told the actual fixed overheads.
T
Thenuka·
Noted,
Thank You!
J
John MoffatTutor·
You are welcome.
T
Thenuka·
Dear John,
In example 1, For the 'Actual Fixed OH' You have taken the "Budgeted" OH of $20,000,
Whilst in Example 2, You have used $315,000 of the Amount provided for the 'Actual Fixed OH' instead the Budgeted OH of $320,000.
Could you please be kind enough to justify why you have inverted the use of the elements when applying it to the same concept & How I should be expected to deal with such similar situations at the Exam.
Much Appreciated! :)
M
Muhammed Saleem·
Hii sir,
while doing profit statement why we are adding over absorption and subtracting under absorption from profit??
J
John MoffatTutor·
In order to arrive at the 'correct' profit.
S
Sami·
I think it's becuase Fixed Overhead is charged on per month basis. So it alwayas have to be completely charged on that period In January it is Over charged even though Actual Fixed Overhead is less and we have wrote Fixed Overhead on the basis of unit which is greater so to get to the actual Fixed Overhead written in PS we do Over Under Absorption.
M
Mannan·
Hi sir! I am confused about what you've done in example 2. when you said that we would have charged each hour worked with $4 in the profit statement, which profit statement are you talking about? are you talking about the budget profit statement or are you talking about the final profit statement at the end of the month? and if you are talking about the budget profit statement, shouldn't we look for any under or over absorption of fixed overheads in arriving at the budgeted profit and therefore compare 78,000*4 with $3,20,000 and not with $3,15,500?
M
Muhammed Saleem·
Sir,
In ex. 1 when preparing profit statement for january,
why we want to adjust the fixed overheads? I am asking this because in the question they gave that it will take $20000 for 10000 units. but we produced 11000. if we assume fixed overhead is electricity bill, it will consume more electricity for producing extra 1000 units. then the bill will be higher than $20000. so the actual fixed overhead is $22000 and that is the correct amount, isn't it?
then why we want to make adjustments? the profit $72000 also correct, isn't it???
Please reply to my doubt........
J
John MoffatTutor·
As explained in an earlier lecture fixed overheads do not change with the level of activity, by definition. Therefore electricity cannot be a fixed overhead if it is changing with the level of production.
U
Urwa·
Can you plzz tell where I get the lectures of ma2
J
John MoffatTutor·
We only provide study notes for Paper MA2 and not lectures.
J
July·
I passed the MA exam with 64% today. Thank you so much for your notes and lectures, Sir.
J
John MoffatTutor·
That is great - many congratulations :-)
S
Sohaib·
Hi John, I'm a bit confused on the cost of sales part. the C.O.S formula is op.inv + Purchases - Cl.inv. so I don't understand what you have done there.
Thanks.
S
Sohaib·
sorry wrong comment. I have understood my query.
J
John MoffatTutor·
I am pleased that you now understand it :-)
A
Abiriyi·
Good day John, I am a bit confused.
If we sold 9,000 units and given that the cost of what was sold is what affects our profits and not cost of total units produced, shouldn't the profit after adjustments for over and under absorption be $70,000?
My reason being that if we are charging $2 as fixed cost per unit sold at the end of the period we would have only charged $18,000 in fixed overheads and as such we would have under absorbed but based on your lecture it is the reverse and I am a bit confused.
I will be glad if you can help me see what I am missing.
J
John MoffatTutor·
The cost of goods sold is the cost of what was produced less the cost of what is left unsold in inventory.
The amount of fixed overheads absorbed into the cost of what was produced depends on the quantity produced (not the quantity sold).
A
Abiriyi·
Thank you John ?
H
Hermela·
Hello sir, why we adjust the under or over absorbed overhead ? does it not turn the change the true image of profit?
J
John MoffatTutor·
It is because the actual overheads are different from the overheads initially absorbed/charged in the statement, so we need to adjust in order to get the correct profit.
M
Mannan·
I am planning to sit for the exam in April 2022, are these lectures up to date with the syllabus?
J
John MoffatTutor·
Of course. Our lectures are always up to date for the current syllabuses!!
J
John MoffatTutor·
In the first example we were preparing a budgeted profit statement and the budgeted fixed overheads were $20,000. In the second example we are comparing with what actually happened which was that fixed overheads were actually $315,000.
A
Asif·
Greetings. When in the beginning you carry out the quick calculation of profit (9,000 x (35-27) = 72,000). The cost card used in the calculation uses the the oar based on the original budgeted hours of 10,000, and not 11,000 adulteration, so why is the answer not directly 74,000 here, which you get later after making adjustments to the workings.
A
Asif·
Greetings.
For the workings in Ex1, why did you take the budgeted fixed overhead (20,000) and call it actual fixed overhead in the workings, thus leading the answer to be termed as an over absorption.
R
richie·
great lectures
J
John MoffatTutor·
Thank you for your comment :-)
E
Entela·
Thank you so much for those lectures!
I’m planning to sit on exam March 2021!
Are those lectures up to date please?
It’s easy study with your lectures rather than massive amounts of information in BPP text book!
Thank you on advance ?
J
John MoffatTutor·
Our lectures are always up to date for the current syllabus (and the syllabus will not be updated until after the June 2021 exams).
S
Sabika·
Why there is no practise question for chapter 9
J
John MoffatTutor·
Because most exam question test Chapters 9 and 10 together, so the test after Chapter 10 does this. You will find it is the same for questions in your Revision Kit.
G
Gabriela·
Very interesting videos. It's so much easier when I study like that but I hope you update them because half of the lectures are removed from the textbooks.
M
macson24·
Hi John,
When you adjust for the closing inventory, are we not also adjusting for the overabsorption of fixed costs? i.e. the 2,000 overabsorption is included in the 54,000 that you subtract from the cost of sales?
I am sure that what you have done is correct, I just don't understand how.
Would you please be able to help me understand this?
J
John MoffatTutor·
In management accounting we always value inventories at the standard cost. So the adjustment for the over or under absorption is the difference is based on the overheads actually absorbed.
G
Gav·
HI John while Illustrating for Feb I am encountering the problem as follow:
Sales 11500 * 35 $402,500
COS
Materials 11,500 * 12 138,000
Labour 11,500 * 8 92,000
V OAR 11,500 * 5 57,500
Fix OH 9,500 * 2 19,000 ($306,500)
I am unable to see the problem please can you advise?
J
John MoffatTutor·
The opening inventory was 2,000 units, and the production in February was 9,500 units.
Check the answer as printed at the end of the lecture notes.
G
Gav·
Thank you for your reply..
I did not realise the P&L was there and of course a rookie mistake of illogical stock reasoning.
Feels bad as I wasted 3 days to figure this out.
Cheers though, grateful!
J
John MoffatTutor·
No problem :-)
L
Lenhard·
Dear Mr Moffat, regarding fixed production overheads - you end up calculating as expense only 18K USD, moreover you recharge as income 2K USD to the final profit, which in my opinion should be the opposite, it should be recharged as expense 2K USD, hence the final profit 59K USD. Appreciate if you can look at this, and confirm your opinion.
Thank you.
S
Sneha·
Sir for January in absorption costing
Why did you consider the $20,000 as budgeted
It says in the question that "fixed production overheads are budgeted at $20,000 per month"
So how do you assume that this was the actual???
Isn't the actual figures supposed to be $22,000?
J
John MoffatTutor·
The question asks for budget profit statements. The budgeted fixed overheads are 20,000 and (by definition) will not change with the level of activity.
With absorption costing we will absorb $22,000 but then have the adjustment for over-absorption because the budget figure should stay at $20,000.
A
Asif·
Hello there sir.
1) In the first exercize, if the actual fixed overhead is not mentioned, you take the budgeted fixed overhead as the Actual ?
Reason:
In the second exercize, the actual fixed overhead was mentioned, so I observed you did not consider the budgeted fixed overhead as the actual this time around -like you did so for the first exercize.
A
Asif·
Greetings.
For the workings in Ex1, why did you take the budgeted fixed overhead (20,000) and call it actual fixed overhead in the workings, thus leading the answer to be termed as an over absorption.
J
John MoffatTutor·
The question asks for budget profit statements. The budgeted fixed overheads are 20,000 and (by definition) will not change with the level of activity.
With absorption costing we will absorb $22,000 but then have the adjustment for over-absorption because the budget figure should stay at $20,000
S
shazia786·
Hi John,
Where did the £20,000 actual fixed O/H figure come from?
J
John MoffatTutor·
It is the budgeted figure as printed in the question.
S
shazia786·
Thanks John, bit confused, you say the actual F/O is 22,000 the amount actually absorbed is 22k , so 20k is the budgeted Fixed O/H? hence the over absorption resulting in increase in profit by 2k
J
John MoffatTutor·
No. What I say is that because we have absorbed 22,000 but the overheads we should be budgeting are only 20,000 we will have charged to high an amount. Therefore the profit will be 2,000 less that it should be and therefore we need to increase the profit by 2,000.
D
Demyan·
I know this Q sounds like one of those you already answered. But I bear with me for a sec.
I wrtite down the calculation a tad differently.
Let's assume with start with the direct costs.
So our margin would be 35-25 = 10 per unit. No fixed production OH yet included.
We get contribution margin
10 * 11 000 = 110 000
Sold during Jan | Went to the inventory
9000 units | 2000 units
$ 90 000 | $20 000
Now to arrive at 74 000 of profit for Jan what we do is:
Less:
22 000 * 9/11 | 22000 * 2/11
Equals
72 000 | 16 000
And plus over-absorption 2000
74 000 | 16 000
Hence my Q is:
Why do we adjust for overabsorption in Jan only for the whole amount? Even though partly Fixed OH are included in the closing inventory. Wht don't we charge over/under absorption prorata depending on the amount of inventory rolling to the next month?
Image the situation when we only sold 200 units this month and the rest would go to the inventory. It means we would have been left with $1600 before adjustments but then we would boost our profit by $2000 adjustment to $3600. And the inventory would be valued 86400.
Please, correct me at the point where my judjement is flawed
J
John MoffatTutor·
If we produced the budgeted amount each month then the problem would not exist. However from month to month, some months we will produce more and some months we will produce less. So we make the adjustment for the over or under absorption. In the long term it makes no difference - in the long term the total profit will stay the same whether we use absorption or marginal costing.
D
Demyan·
Hi John.
Thank you for your reply.
I get your point. However I was trying to stress another point. I totally understand that if we produced the budgeted amount, there would be no problem at all. And since our production levels will always diverge, I understand that we have to make adjustments. But my Q is why are we adjusting for over/under in one month for the whole amount even though we were left with some goods in the inventory and it seems these goods should bear some of the adjustment?
I mean it would seem logical to distribute it this way: Jan for 9/11*2000 and Feb for 2/11 * 2000. Having decreased the cost of inventory, we would end up with profit adjusting up 9/11*2000 in Jan and 2/11*2000 in Feb.
Does my Q make sense now?
Many thanks in advance. Just struggling with this part. As I personally make adjustments for the companies I advise in exactly this way.
J
John MoffatTutor·
But then we would be valuing inventory at a different unit cost each month. Although certainly we can change the inventory value each month - in management accounting we can do whatever we find most useful - it is more common (and certainly always in the exam) to keep to the same standard cost for inventory throughout the year.
Also when we come to variance analysis (later in the course) it makes checking whether we have paid too much or too little for materials etc purchased each month more meaningful.
(For financial accounting we have to value the inventory at actual cost, but that is not relevant for management accounting.)
P
Pranjal·
I meant "closing inventory value per unit" will remain same when I referred to "closing inventory value"
D
Dhiraj·
Mr. Moffat , is there any way you could have the subtitles on the video lecture better written as they are wrong & very hard to refer back to when I miss certain words that you say during the lectures.
if the software team could have a look at it , it would be of great help.
Great lecture as always !
H
hannah·
When you click the subtitles button it states that they are auto generated in brackets, so I am assuming it means these are generated by Youtube?
B
Beata·
Good afternoon Sir
At the begining I would like to say that you are a wonderful person and you helped me a lot during preparing for FA.Thank you very much.
I have a doubt about adjustment of over/under absorption. Why in January we don't take into consideration absorption included in closing inventories? Accually when we calculate cost of sales we deduct absorption of overheads included in closing inventories and there would be 22000 minus 4000 = 18000 and underabsorption?
K
Kartik·
Hello,
In example 1 why have we taken actual fixed overhead at 20000 for calculating over absorption as in question it is mentioned that fixed production overhead are budgeted at 20000 instead of actual?
J
John MoffatTutor·
It is because we only look at the cost of goods that were sold, as we should do.
By all means calculate the cost of the goods sold by taking the opening inventory plus the production less the closing inventory (and you can see it done this way in the printed answer in the lecture notes), but it takes longer :-)
K
Khaula Basheer·
Hi John,thanks for the lecture.
I had a doubt regarding the way we charged fixed selling cost.
We had first taken fixed selling cost into account while calculating fixed overhead per unit that's how we reached the figure of $2 per unit(22000/11000)
So why did we deduct it again from the final profit along with variable selling cost?
Wouldn't it be liking charging fixed selling cost of 2000 twice ?
J
John MoffatTutor·
The $2 per unit does not relate to the selling overhead.
It is the fixed production overhead per unit, absorbed at the rate of $20,000/10.000 = $2 per unit.
K
Khaula Basheer·
Thanks!
J
jijo·
Sir near time stamp 12:56 shouldn't it be actual fixed OH occurred= 22000 and absorbed O.H =20000?
J
jijo·
and shouldn't it be underabsorption?
J
jijo·
No worries sir I got it.Great lecture btw
A
Angelica Amposta·
for example 2 since we are calculating the absorption rate for the actual hours, can we use the actual hrs (78000) and actual fixed OH (315000)to solve the OAR or will that change the answer?? and in other examples, is that applicable as well?
J
jinse·
sir, thank you so much. but I have a question. why should we use 27 dollar per unit to calculate the value of inventory? or why the fixed average overheads on the inventory is 2 dollar per unit?
J
John MoffatTutor·
We are not preparing financial accounts - we are preparing management accounts. They are usually prepared each month and we don't want to change the value of inventory each month. We absorb the fixed overheads based on what we expect (on average) to happen, and value the inventory accordingly.
M
MMA·
at 17:16 you said that the sales are 115000 when in the question it says 11500, that is why 92000 is wrong and people are getting confused
J
John MoffatTutor·
What I have written on the screen is completely correct.
If you want to see how the profit is arrived at showing a full profit statement, then this is of course printed in the lecture notes (in the answers to examples).
People are not getting confused!!
M
MMA·
Sorry sir I thought you wrote 115000, when instead you wrote 11500u, I thought the u was a zero. This topic was a little tricky, but at the end I got the hang of it!
J
John MoffatTutor·
That's great - I am pleased you have got the hang of it :-)
S
skhan10·
Very confused how you came to the figure for February
Sales:
£35 x 11,500 = £402,500
Production Cost:
Material 9500 x 12 = 114,000
Labour 9500 x8 = 76,000
Var Prod. 9500 x5 = 47,500
Fixed Prod. 9,500 x2 = 19,000
Total = £256,500
No remaining inventory. 0
Budgeted profit. £146,000
Under Absorb £1,000
Still comes no where close to your figures. ???
S
skhan10·
Okay. £54,000 opening inventory from previous month.
J
John MoffatTutor·
Correct :-)
I
isoemi·
I'm also very confused
Total=256,000
Less inventory=£54,000
Profit will be £402,500-£202,500= 200,000
This is nowhere near the actual profit
Somebody help please
J
John MoffatTutor·
The 11,500 units sold in February were the 2,000 units that were in inventory at the start of the month plus the 9,500 units that were produced during the month.
The cost of the 2,000 units at the start of the month was $54,000, the cost of the 9,500 units produced during the month was $256,500. So the total cost was $310,500, and the profit is therefore 402,500 - 310,500 = $92,000.
H
harshali·
I'm having trouble identifying whether the overheads were over-absorbed or under-absorbed could you explain me that
J
John MoffatTutor·
The overheads absorbed is the production multiplied by the standard fixed overhead per unit.
If this is more than the actual overheads then there is over-absorption. If this is less than the actual overheads then there is under-absorption.
M
matthews96·
Thanks for clarifying that.
J
John MoffatTutor·
You are welcome :-)
M
matthews96·
With regard to example 1 , why are we making an adjustment of £2,000 for the over absorption which relates to the production of 11,000 units when we are trying to calculate the profit figure for only 9,000 units.
If 9,000 units are sold we have absorbed £18,000 of the fixed production cost. Therefore we have under absorbed by £2,000. Thanks
J
John MoffatTutor·
If they produce 11,000 units then the fixed overhead charged (absorbed) will be 11,000 x $2 = $22,000.
(The amount absorbed depends on the production. Although only 9,000 units are sold, the cost of sales is the cost of the 11,000 produced less the cost of the closing inventory of 2,000 units.)
Given that $22,000 has been absorbed, we have over-absorbed by $2,000.
M
Martin·
Sir, I would have loved if worked February the long way...I'm not seeing how you arrived at a profit of 92,000, but I'm assuming it has something to do with the opening inventory
J
John MoffatTutor·
The answer in the lecture notes show it the 'long way' (although you won't have time to do it that way in the exam :-) )
J
John MoffatTutor·
You are welcome :-)
C
calvintai·
Thank you so much. :)
J
John MoffatTutor·
calvintai: The difference is that in Example 1 we are asked to prepare budget statements and therefore we are using the budgeted fixed overheads of 20,000. To get the over/under absorption we then compare that with the absorbed overheads (the actual production x the standard fixed overheads per unit).
In Example 2 however, we are not prepared a budget. We know what the actual fixed overheads are (315,500) and we are comparing this with the absorbed overheads (again the actual hours x the standard fixed overheads per hour).
C
calvintai·
Hi, I am so confused on the Over/Under Absorption. On example 2 Why you use the budgeted fixed production overhead $20,000 as Actual fixed overhead, but you used the $315,500 as the actual fixed overhead? Why not 320,000? It would be so thankful if someone can answer my question.
K
Kerron·
I was thinking the same thing, glad you asked and glad the Tutor cleared it up.
In 21:35, where 2000 fixed cost come from? Please reply to me
I shouldn't have said actual. It is just that because we are preparing budget statements, the fixed overheads taken are the budget overheads.
Hope this helps :)
In example 2 we are told the actual fixed overheads.
Thank You!
In example 1, For the 'Actual Fixed OH' You have taken the "Budgeted" OH of $20,000,
Whilst in Example 2, You have used $315,000 of the Amount provided for the 'Actual Fixed OH' instead the Budgeted OH of $320,000.
Could you please be kind enough to justify why you have inverted the use of the elements when applying it to the same concept & How I should be expected to deal with such similar situations at the Exam.
Much Appreciated! :)
while doing profit statement why we are adding over absorption and subtracting under absorption from profit??
In ex. 1 when preparing profit statement for january,
why we want to adjust the fixed overheads? I am asking this because in the question they gave that it will take $20000 for 10000 units. but we produced 11000. if we assume fixed overhead is electricity bill, it will consume more electricity for producing extra 1000 units. then the bill will be higher than $20000. so the actual fixed overhead is $22000 and that is the correct amount, isn't it?
then why we want to make adjustments? the profit $72000 also correct, isn't it???
Please reply to my doubt........
Thanks.
If we sold 9,000 units and given that the cost of what was sold is what affects our profits and not cost of total units produced, shouldn't the profit after adjustments for over and under absorption be $70,000?
My reason being that if we are charging $2 as fixed cost per unit sold at the end of the period we would have only charged $18,000 in fixed overheads and as such we would have under absorbed but based on your lecture it is the reverse and I am a bit confused.
I will be glad if you can help me see what I am missing.
The amount of fixed overheads absorbed into the cost of what was produced depends on the quantity produced (not the quantity sold).
For the workings in Ex1, why did you take the budgeted fixed overhead (20,000) and call it actual fixed overhead in the workings, thus leading the answer to be termed as an over absorption.
I’m planning to sit on exam March 2021!
Are those lectures up to date please?
It’s easy study with your lectures rather than massive amounts of information in BPP text book!
Thank you on advance ?
When you adjust for the closing inventory, are we not also adjusting for the overabsorption of fixed costs? i.e. the 2,000 overabsorption is included in the 54,000 that you subtract from the cost of sales?
I am sure that what you have done is correct, I just don't understand how.
Would you please be able to help me understand this?
Sales 11500 * 35 $402,500
COS
Materials 11,500 * 12 138,000
Labour 11,500 * 8 92,000
V OAR 11,500 * 5 57,500
Fix OH 9,500 * 2 19,000 ($306,500)
Adjustment Overhead (1,000)
Profit before the selling cost $95,000
other selling costs (13,500)
Profit-------------------------------------------------- $81,500
I am unable to see the problem please can you advise?
Check the answer as printed at the end of the lecture notes.
I did not realise the P&L was there and of course a rookie mistake of illogical stock reasoning.
Feels bad as I wasted 3 days to figure this out.
Cheers though, grateful!
Thank you.
Why did you consider the $20,000 as budgeted
It says in the question that "fixed production overheads are budgeted at $20,000 per month"
So how do you assume that this was the actual???
Isn't the actual figures supposed to be $22,000?
With absorption costing we will absorb $22,000 but then have the adjustment for over-absorption because the budget figure should stay at $20,000.
1) In the first exercize, if the actual fixed overhead is not mentioned, you take the budgeted fixed overhead as the Actual ?
Reason:
In the second exercize, the actual fixed overhead was mentioned, so I observed you did not consider the budgeted fixed overhead as the actual this time around -like you did so for the first exercize.
For the workings in Ex1, why did you take the budgeted fixed overhead (20,000) and call it actual fixed overhead in the workings, thus leading the answer to be termed as an over absorption.
With absorption costing we will absorb $22,000 but then have the adjustment for over-absorption because the budget figure should stay at $20,000
Where did the £20,000 actual fixed O/H figure come from?
I wrtite down the calculation a tad differently.
Let's assume with start with the direct costs.
So our margin would be 35-25 = 10 per unit. No fixed production OH yet included.
We get contribution margin
10 * 11 000 = 110 000
Sold during Jan | Went to the inventory
9000 units | 2000 units
$ 90 000 | $20 000
Now to arrive at 74 000 of profit for Jan what we do is:
Less:
22 000 * 9/11 | 22000 * 2/11
Equals
72 000 | 16 000
And plus over-absorption 2000
74 000 | 16 000
Hence my Q is:
Why do we adjust for overabsorption in Jan only for the whole amount? Even though partly Fixed OH are included in the closing inventory. Wht don't we charge over/under absorption prorata depending on the amount of inventory rolling to the next month?
Image the situation when we only sold 200 units this month and the rest would go to the inventory. It means we would have been left with $1600 before adjustments but then we would boost our profit by $2000 adjustment to $3600. And the inventory would be valued 86400.
Please, correct me at the point where my judjement is flawed
Thank you for your reply.
I get your point. However I was trying to stress another point. I totally understand that if we produced the budgeted amount, there would be no problem at all. And since our production levels will always diverge, I understand that we have to make adjustments. But my Q is why are we adjusting for over/under in one month for the whole amount even though we were left with some goods in the inventory and it seems these goods should bear some of the adjustment?
I mean it would seem logical to distribute it this way: Jan for 9/11*2000 and Feb for 2/11 * 2000. Having decreased the cost of inventory, we would end up with profit adjusting up 9/11*2000 in Jan and 2/11*2000 in Feb.
Does my Q make sense now?
Many thanks in advance. Just struggling with this part. As I personally make adjustments for the companies I advise in exactly this way.
Also when we come to variance analysis (later in the course) it makes checking whether we have paid too much or too little for materials etc purchased each month more meaningful.
(For financial accounting we have to value the inventory at actual cost, but that is not relevant for management accounting.)
if the software team could have a look at it , it would be of great help.
Great lecture as always !
At the begining I would like to say that you are a wonderful person and you helped me a lot during preparing for FA.Thank you very much.
I have a doubt about adjustment of over/under absorption. Why in January we don't take into consideration absorption included in closing inventories? Accually when we calculate cost of sales we deduct absorption of overheads included in closing inventories and there would be 22000 minus 4000 = 18000 and underabsorption?
In example 1 why have we taken actual fixed overhead at 20000 for calculating over absorption as in question it is mentioned that fixed production overhead are budgeted at 20000 instead of actual?
By all means calculate the cost of the goods sold by taking the opening inventory plus the production less the closing inventory (and you can see it done this way in the printed answer in the lecture notes), but it takes longer :-)
I had a doubt regarding the way we charged fixed selling cost.
We had first taken fixed selling cost into account while calculating fixed overhead per unit that's how we reached the figure of $2 per unit(22000/11000)
So why did we deduct it again from the final profit along with variable selling cost?
Wouldn't it be liking charging fixed selling cost of 2000 twice ?
It is the fixed production overhead per unit, absorbed at the rate of $20,000/10.000 = $2 per unit.
If you want to see how the profit is arrived at showing a full profit statement, then this is of course printed in the lecture notes (in the answers to examples).
People are not getting confused!!
Sales:
£35 x 11,500 = £402,500
Production Cost:
Material 9500 x 12 = 114,000
Labour 9500 x8 = 76,000
Var Prod. 9500 x5 = 47,500
Fixed Prod. 9,500 x2 = 19,000
Total = £256,500
No remaining inventory. 0
Budgeted profit. £146,000
Under Absorb £1,000
Still comes no where close to your figures. ???
Total=256,000
Less inventory=£54,000
Profit will be £402,500-£202,500= 200,000
This is nowhere near the actual profit
Somebody help please
The cost of the 2,000 units at the start of the month was $54,000, the cost of the 9,500 units produced during the month was $256,500. So the total cost was $310,500, and the profit is therefore 402,500 - 310,500 = $92,000.
If this is more than the actual overheads then there is over-absorption. If this is less than the actual overheads then there is under-absorption.
If 9,000 units are sold we have absorbed £18,000 of the fixed production cost. Therefore we have under absorbed by £2,000. Thanks
(The amount absorbed depends on the production. Although only 9,000 units are sold, the cost of sales is the cost of the 11,000 produced less the cost of the closing inventory of 2,000 units.)
Given that $22,000 has been absorbed, we have over-absorbed by $2,000.
In Example 2 however, we are not prepared a budget. We know what the actual fixed overheads are (315,500) and we are comparing this with the absorbed overheads (again the actual hours x the standard fixed overheads per hour).