[ryan32]

yes i got it , in variance if o/h absorbed based on units then its actual units x oar ,only in case of labour hrs we use standard hrs

so its better to keep this thing in mind in exam ,

that when any question ask about calculating under/over absorption then we will use actual hrs

but in variance analysis while flexing the budget use standard hrs for actual output x oar
and the difference between actual and flexed budget is the total fixed o/h variance ie; under/over absorbed

[ryan32]

can u plz explain it again i didn’t get ur answer,

do u mean to say in variance analysis the over or under absorbed will be different than the question where we are being asked about to cal over /under absorption

cause in variance we use standard hrs but in question about calculating over/under absorption we use actual hrs

[ryan32]

for example a question in bpp book

budgeted actual
labour hrs 9000 9900

d. mat 55000 53900

d.wages 34000 35500

overheads 63000 61500

units produced 120000 122970
calculate the amount of under/over absorbed overheads

so we find out OAR= budgeted o/h / budgeted labour hrs = 63000/9000= $ 7 / labour hr

absorbed overhead is actual labour hrs x oar = 9900 x 7 = 69300

actual o/h 61500
absorbed o/h 69300

so its over absorbed by 7800 (solved as per bpp)

we aren’t using standard hrs here to calculate absorbed o/h

other wise it will be like standard hrs for each unit is 9000/120000=0.075
then standard hrs for actual output 122970 = 122970x 0.075=9222.75

this is where i’m getting confused

[ryan32]

i completely understand that when we produce more unit we absorb more overheads and so u flexed the fixed o/h.

the question is when i solve some question on bpp kit related to find out whether its over /under absobed then to calculate absorbed o/h we used (actual hrs for production x OAR)

but here we are not doing like that instead of actual hrs we are doing (standard hrs for actual output x OAR). its okay but the problem is we are saying the difference between flex and actual overhead is the under/over absorbed.

isn’t that under/over absorbed should be the difference between actual overhead incurred and overhead absorbed based on actual hrs.

this is my question.i have exam on upcoming week so plz help me with this.

[ryan32]

basically i’m confused with these only fixed o/h variance.

we learned in absorption costing that we apply o/h based on actual hrs worked x OAR , and if the overhead absorbed is different that actual o/h incurred that leads to over/under absorption.

but here in variance analysis total fixed overhead variance show over/under absorption as a fixed o/h difference between flexed and actual budget why is it so? and also flex budget absorbs OAR based on standard hrs and not on actual hrs.

plz clear it sir,is it something different.

[ryan32]

or we absorb o/h on actual hrs on actual budget, since we are calculation variances between the original budget and actual, so the formula is like this.

ultimately the total fixed o/h variance will gonna show difference between actual o/h incurred and overhead absorbed based on actual labour hrs and not standard hrs.Is it right?

[ryan32]

no need to reply to the question as i asked about not understanding ur last para.i gone thru the lectures

(if using absorption costing) will be the same based on flexed budget figures because the same OAR is used. Again, I explain this in my lectures on variances.

its because we cost the units based of oar, so comparing the fixed overhead in flexed and actual budget will give us total fixed o/h variance i’e; its over or under absorbed

but one thing why u said that closing inventory shld be value at standard cost?i understand that inventory will be costed based on oar but related to material or labour why should we be costed at standard rather than actual.

[ryan32]

or is it the gross profit we refer to as standard profit or budgeted profit

[ryan32]

what do you mean that does in calculation of equity and capital employed we include reserves or accumulated profits?

[ryan32]

another thing the sales volume formula is (actual sales – budgeted sales) x standard profit

now in absorption costing how do we calculate the standard profit if standard cost of a unit is given and standard price is given cause to calculate profit shouldn’t we also need to know the non manufacturing overhead cost to get budgeted profit.

[ryan32]

ok i understood but i didn’t get ur last para,can u plz clarify it sir.
in original budget and flex budget the fixed overhead remain same.

(if using absorption costing) will be the same based on flexed budget figures because the same OAR is used. Again, I explain this in my lectures on variances.

[ryan32]

another thing sir we calculate OAR from original budget and not from flexed budget right?

[ryan32]

in kaplan book the formula for ROi given as

ROI = Controllable Profit/controllable capital employed x100

i wanna know can u plz clarify this controllable term, and how we we find out normally in questions if only operation profit is given.Do we assume that operating profit is the controllable profit.

[ryan32]

another question

while calculating npv we discount the future cash flows yearly, do we consider there that cash flow is happening at the end of the year

cause while calculating the payback period of the same project the answer came out like 3 year 6 months……..

[ryan32]

bpp question

in jan , the unemployment in a country is 567800,if the seasonal factor using an additive model is +90100, what is the seasonally adjusted level of unemployment?

what does this term seasonally adjusted level mean , is it asking to find the trend based upon actual unemployment.

ie; 567800-90100 = 477700

[ryan32]

if that is the case then a company holding different projects at the same time, do they recognize revenue of a particular project and reduct expenses related to that particular project to arrive as net cash receipts, am i right?

[ryan32]

i understand that
but there is a question in kaplan book Illustration.

op. WIP 400 units 40% complete
units started 1000
units finished 1400

The degree of completion quoted relates to labour and o/h cost. Three-quarters of the materials are added at the start of process and remaining quarter added when the process is 50% complete.Use FIFO method of cost allocation

so in this case they are saying until the process is 50% complete they won’t add the remaining quarter of material into the process.

So the Op. WIP units which is 40% complete, still need to get the remaining quarter of material to get it completed, apart from the material we need to put for 1000 units newly started.

So will there be exception in this case that the input material will be shown as
(150+1000) units

or it will be just 1000 units ignoring the remaining quarter of material is required for Op WIP.

and if it is shown as 1000 units then how do we account for that remaining quarter material 150 in Process A/c .
Or is it in this sense that the material input is enough to cover that material for Op WIP as well as to make 1000 new units and so its shown as 1000 units rather than 1150

Thank You.

[ryan32]

what we will write under units of material input on the debit side of process account.

will it be as per EU 10800 or 10000?

[ryan32]

another question i have that is
If in a process account (FIFO) there are opening WIP 2000 units which are 60% completed material wise. So we use equivalent units to value it.

In case it says at the end of period the output is 12000 completed units, no closing wip

so my question is how many units put into the process.

is it we will say 10000 units

or we will say it will be 10800
as op WIP is 60% complete material wise, so further units need to be put for completing other 40%- which is 800 units
and 10000 units which is completed.

please clear this out sir, this is only thing where i’m confusing at.
thank you

[ryan32]

sorry sir i have mistaken in writing
this question i picked not from study text but from F2 practise question set
this is question no 3 from ch 12

Question ask What was the total number of units input during last period?
answer says option c-15000

can u plz explain it

cause
The material required is 800 for op WIP remaining work
12000 for completed units apart from 2000 op. wip
and 900 for closing WIP 30% completed

so isn’t that should be 13700 units of material put into process

[ryan32]

that makes it call standard fixed overhead as OAR is calculated on standard hrs……so u also use that term standard fixed overhead in ur above reply

standard fixed overheads per unit are 4 x $12 = $48.

[ryan32]

okay now its clear

so overhead absorption rate is the standard predetermined rate we find out ,and its absorbed by the cost units based on actual activity level, like actual labor or machine hours worked.

In case of above question related to standard absorption, overhead rate is calculated on standard hrs of each unit i.e; 4 hrs rather than actual hrs.

[ryan32]

okay i got it

sir one last think i wanna ask that i know the term ‘standard material or standard labor time’ , like as per standard it should take 4 units of material to produce a complete product.
i’m clear about the budget and actual fixed overhead term.

i’m confused about the term ‘standard overhead’,
what does it refer to, is it the predetermined rate that we calculate out i.e; OAR?,if it so does that mean overhead absorbed by units is the standard o/h itself. or they both are different
im confusing on these term,plz help

[ryan32]

so in above question we will consider the actual overhead same as budgeted fixed o/h; which will be again same as absorbed o/h.am i right?

[ryan32]

related to standard marginal costing question says

A company uses standard absorption costing.Its fixed oar is $12/labor hr and each unit of production take 4 hrs. 20000 units were produced using 100000 labor hrs,18000 units were sold.The actual profit is $464000
what profit will be under standard marginal costing

the answer says $368000.
so here the standard hr for 20000 units is 20000×4=80000 hrs
so standard costing system means o/h is absorbed on 80000 hrs and not 100000 hrs.
so since nothing is being told about actual overhead we will consider it same as absorbed o/h.
Marginal profit should be $368000 as 2000 units of closing inventory is carrying forward the share of o/h which is 96000.
am i right?

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