I don't understand where you get your closing inventory for the original flex budget
J
John MoffatTutor·
It is the difference between the number of units produced and the number of units sold.
R
Ronan·
Hi John,
In the Actual Results column, the actual cost per unit can be derived from the production figures as $609,392/8900 = $68.47. The cost per unit in Closing Inventory is standard cost $68. Doesn't using two different values within the same column introduce a discrepancy?
Many thanks.
J
John MoffatTutor·
No. I do actually explain why we value the inventory at standard cost. It is so that we can account for the variances in the period in which they occur rather that carry them forward in the value of inventory.
R
Ronan·
Thank you!
R
Ronan·
But doesn't this result in an incorrect actual Profit in the Actual Results column?
Profit = Sales - Cost of Sales = Sales - (Cost of Production + Closing Inventory)
Cost of Production is valued at actual cost per unit ($68.47), and Closing Inventory at standard cost per unit ($68). Therefore, the actual Cost of Sales figure is incorrect. Therefore, the actual Profit is incorrect.
Thank you.
J
John MoffatTutor·
It will not be the same as the financial accounting profit, but as explained in the lectures on the first chapter of our lecture notes the management accounting profit will not be the same as the financial accounting profit for various reasons.
The purpose of management accounting is not to arrive at a profit figure but to enable management to manage the business better and (in the case of variances) to control costs.
H
Haroon·
Sir I got a question,
- In chapter 17 example 2 when we prepared the flexed budget we didn't flex the fixed o/heads (i.e. in original fix o/head was $10,000, and in flexed budget fix o/head was $10,000).
- The original budget gave us a std. profit/unit of $0.25/unit, and in the flexed budget our std. profit/unit was $0.416
- However in this example when we prepared the flexed budget, we flexed the fixed o/heads to maintain the std. profit/unit as $7.
Why is the approach difference in the two examples?
Your response would be much appreciated!
H
Haroon·
Bump, I hope you see this John!
J
John MoffatTutor·
When preparing flexed budgets in general we do not flex the fixed overheads because by definition they do not change with the level of production.
I do flex the fixed overheads in my lecture on variance analysis with absorption costing, but (as I do explain in the lecture) this is simply to explain the logic behind the fixed overhead variances.
H
Haroon·
I appreciate you taking the time to clarify. We do not flex the fixed overheads from the original budget to the flexed budget!
Thank you for clarifying John!
J
John MoffatTutor·
You are welcome :-)
M
Mannan·
Hi sir! do we as management accountants prepare the cost card every month? because if not, then how have they absorbed the fixed overheads in example 1 to get the cost of fixed overheads per unit for the cost card? I assume they have taken 8700 units as the production to absorb the fixed overheads and 8700 units is the production of a month according to this example. in this example while preparing the fixed budget, we just multiplied 68 with 8700 units to get the cost of production and assumed that this is the correct cost of production and it doesn't need any adjustment for under or over absorption of fixed overheads therefore I assume that we have taken 8700 units as the total no. of units produced to absorb the fixed overheads for the cost card. Could you please give clarity on this?
J
John MoffatTutor·
The overheads are absorbed based on the budgeted production of 8,700 units. The actual production turned out to be 8,900 units, not 8,700 units.
J
John MoffatTutor·
Thank you for your comment :-)
K
Khalid·
Mr Moffat why you flexed the Fixed Cost. You said it's 130500 in fixed budget and 133500 in the flexed budget; Instead of keeping it at 130500.
J
John MoffatTutor·
I did this to explain why it is with absorption costing that there is a problem with the fixed overheads and why therefore (as is explained in the later lectures) there is a fixed overhead volume variance (for the same reason as the under/over absorption of fixed overheads explained in an earlier chapter).
C
Carine·
So much Clarity now on my part. Thanks so much Sir
In the Actual Results column, the actual cost per unit can be derived from the production figures as $609,392/8900 = $68.47. The cost per unit in Closing Inventory is standard cost $68. Doesn't using two different values within the same column introduce a discrepancy?
Many thanks.
Profit = Sales - Cost of Sales = Sales - (Cost of Production + Closing Inventory)
Cost of Production is valued at actual cost per unit ($68.47), and Closing Inventory at standard cost per unit ($68). Therefore, the actual Cost of Sales figure is incorrect. Therefore, the actual Profit is incorrect.
Thank you.
The purpose of management accounting is not to arrive at a profit figure but to enable management to manage the business better and (in the case of variances) to control costs.
- In chapter 17 example 2 when we prepared the flexed budget we didn't flex the fixed o/heads (i.e. in original fix o/head was $10,000, and in flexed budget fix o/head was $10,000).
- The original budget gave us a std. profit/unit of $0.25/unit, and in the flexed budget our std. profit/unit was $0.416
- However in this example when we prepared the flexed budget, we flexed the fixed o/heads to maintain the std. profit/unit as $7.
Why is the approach difference in the two examples?
Your response would be much appreciated!
I do flex the fixed overheads in my lecture on variance analysis with absorption costing, but (as I do explain in the lecture) this is simply to explain the logic behind the fixed overhead variances.
Thank you for clarifying John!