CIMA BA2 – The Management Accountant’s Profit Statement – Absorption Costing

Comments

1. rusz1x10 says

   August 26, 2019 at 1:36 pm

   Hello,

   I have one question regarding 1st example:

   Shouldn’t we also adjust absorbtion rate for goods that were transferred to inventory?

   i.e. = 20000/11000 = 1.82 – Absorbtion rate of f/o in Jan

   Cost of production in Jan:
   Materials 12$ * 11000 = 132000
   Labour 8*11000 = 88000
   Var o/h 5*11000 = 35000
   Fix o/h 1,82 * 11000 = 20000
   Total = 26,82 295000

   less 2000 (stock) * 26,82 = 53640

   Gross profit in Jan = 315000 – 295000 – 53640 = 73640

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   • rusz1x10 says

     August 26, 2019 at 1:40 pm

     Correction: Gross profit in Jan = 315000 – (295000 – 53640) = 73640

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     • John Moffat says

       August 26, 2019 at 4:54 pm

       No – the answer in the notes (and in the lecture) is correct.

       The absorption rate is always based on the budgeted overheads and budgeted production and is therefore $20,000/10,000 = $2 per unit.

       This forms parts of the standard cost, and the production is costed at the standard cost and the inventory is valued at standard cost.

       Because the actual production I’m January is more than 10,000, too many fixed overheads will have been absorbed which is why we need the adjustment for the over absorption.

     • rusz1x10 says

       August 26, 2019 at 7:34 pm

       Thank you very much for reply and explanations!