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CIMA BA2 – The Management Accountant’s Profit Statement – Absorption Costing
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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
Correction: Gross profit in Jan = 315000 – (295000 – 53640) = 73640
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.
Thank you very much for reply and explanations!