[zulf005]

Hi, i think i can help you on this…. let me know and we can talk about this.

[zulf005]

Ok great! Please see below question,

A business reported a mc profit of 45,000 last period. It’s inventory values for the period were as follows:

Opening inventory: 16000
Closing inventory: 20,800

If the business had used absorption costing, the inventory values would have been as follows

Opening inventory 28000
Closing inventory 36400

What would the profit be using AC?

My QUERY:

MC profit
Less fixed overhead in opening inventory
Plus fixed overhead in closing inventory
AC profit

I have seen the above formula used when we have the the MC profit and the inventory levels at both MC and AC, where the question asks to calculate the AC profit….. What i don’t understand is:

1) Why do we remove fixed overhead in opening inventory when calculating AC profit if opening inventory is calculated at variable costs?

2) Why we are adding fixed overheads in opening inventory when we are calculating the MC profit

In some questions they don’t give the fix OAR rate so i would have to adopt the above method, it would be useful to understand it fully.

Thanks for you’re help and sorry if the answer is obvious.

[zulf005]

Hi, thanks for the reply. I understand all of the theory but i don’t understand the application of the below:

MC profit
Less fixed overhead in opening inventory
Plus fixed overhead in closing inventory
AC profit

I have seen the above formula used when we have the the MC profit and the inventory levels at both MC and AC, where the question asks to calculate the AC profit….. What i don’t understand is:

1) Why do we remove fixed overhead in opening inventory when calculating AC profit if opening inventory is calculated at variable costs?

2) Why we are adding fixed overheads in opening inventory when we are calculating the MC profit

In some questions they don’t give the fix OAR rate so i would have to adopt the above method, it would be useful to understand it fully.

Thanks for you’re help and sorry if the answer is obvious.

[zulf005]

Hello John,

I understand the 3.40 because this is the contribution per kilo that we could use to buy more kilos.

If the selling price is 18 and the direct labour + v/oh equates to 4.50, surely we have more than 5.40 to play with before we start making a loss?

[zulf005]

Hi, just wanted to ask how we got the 2.5kg for product B for this question?

[Author]

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