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  1. Hi I have a query,

    Maybe I am wrong but the budgeted statement seems to be wrong. I agree with all the information until we reach the 77,500 as operatic profit. However, the 2,000 units we sell in February (produced in January) are valued at $27 per unit, in this valuation, we have considered a fixed overhead of 2 per unit (a total of $4,000). But we have charged the complete $20,000 overhead in January and seems we are duplicating the fixed overhead for these 2,000 units ($4000) that we should adjust this difference (respecting the premise assumed, we can’t overcharge overheads). The final profit expected for February should be $81,500.

    • I found the difference, the same 4000 overcharged in February is undercharged in January matching all to zero. Thanks, The problem in the absorbing cost is we are delaying the payment of fixed costs in the case we have a remaining inventory. Thanks

  2. hello,

    I have a question regarding the first example, why can’t I write a profit statement for 9000 units whereas I correct fixed overhead cost from $18,000 (9000 * $2 ), to $20,000 and get the cost of production for 9000 units?

    Answer is $245,000. But if it’s done as explained it’s $241,000. Can someone explain why there’s a difference in the answers?

    What I understand is there shouldn’t be a difference because the only cost that changes is the fixed overhead cost.

    I will stick to the method explained by the lecturer but I think I’m missing out on understanding an important theory part I suppose not to understand what happens in each method.

    thank you!

  3. 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

      • 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.

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