The Management Accountant’s Profit Statement – Absorption Costing – ACCA (MA)
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Hii sir,
while doing profit statement why we are adding over absorption and subtracting under absorption from profit??
In order to arrive at the ‘correct’ profit.
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.
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?
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……..
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.
Can you plzz tell where I get the lectures of ma2
We only provide study notes for Paper MA2 and not lectures.
I passed the MA exam with 64% today. Thank you so much for your notes and lectures, Sir.
That is great – many congratulations 🙂
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.
sorry wrong comment. I have understood my query.
I am pleased that you now understand it 🙂
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 $18,000 in fixed overheads and as such we would have under absorbed but based on your lecture it is the reverse and I am a bit confused.
I will be glad if you can help me see what I am missing.
The cost of goods sold is the cost of what was produced less the cost of what is left unsold in inventory.
The amount of fixed overheads absorbed into the cost of what was produced depends on the quantity produced (not the quantity sold).
Thank you John ?
Hello sir, why we adjust the under or over absorbed overhead ? does it not turn the change the true image of profit?
It is because the actual overheads are different from the overheads initially absorbed/charged in the statement, so we need to adjust in order to get the correct profit.
I am planning to sit for the exam in April 2022, are these lectures up to date with the syllabus?
Of course. Our lectures are always up to date for the current syllabuses!!
Hi sir why didn’t you use the fixed cost of 315,500$ to calculate the over or under absorption for FC? I’m confused because In the first example you said to find out Fixed overheads used we take 11000×2 and compare to the 20,000. But to find out the overhead used in this one, don’t we do this 78000×4 and then minus from the 320,000??????????
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.
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.
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.
great lectures
Thank you for your comment 🙂
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 ?
Our lectures are always up to date for the current syllabus (and the syllabus will not be updated until after the June 2021 exams).
Why there is no practise question for chapter 9
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.
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.
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?
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.
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)
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?
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.
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!
No problem 🙂
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.
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?
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.
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.
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.
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