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I meet two questions which I cannot calculate the correct answers
First question
A company manufactures and sells a single product. For this month the budgeted fixed production overheads are $48,000, budgeted production is $ 12,000 units and budgeted sales are 11,720 units.The company currently uses absorption costing.
If the company used marginal costing principles instead of absorption costing for this month, what would be the effect on the budgeted profit?
A $1,120 higher
B $ 1,120 lower
C $ 3,920 higher
D $ 3,920 lowerSecond question
B Co makes a product which has a variable production cost of $21 per unit and a sales price of $39 per unit. At the beginning of 20X5, there was no opening inventory and sales during the year were $50,000 units. Fixed costs(production, administration, sales and distribution) totalled $ 328,000. Production was 70,000 unitsWhat would the value of closing inventory
Please help me fix these questions! Thank you
I have asked you several times if you have watched the lectures, but you have not replied.
You must watch the lectures because both of these questions would then be easy for you.First question:
Production is 12,000 units and sales are 11720 units. So inventory has increased by 280 units.
The absorption rate is 48000/12000 = $4 per unit.
Therefore the marginal profit is 280 x 4 = $1120 lower than the absorption profit.Second question:
They must be using marginal costing, because we do not know the fixed production costs.
The closing inventory is 20,000 units.
So the the inventory value is 20,000 x $21 (because we have no choice but to assume marginal costing).
sir I know it is a silly question but I really could not get clear idea on this word “absorption”.I watched lectures and could solve questions on marginal and absorption costing . In AC u said that we charge FoH according to absorption and In MC there is no absorption so we directly charge budgeted FOH. sir, I just did not understand ” there is absorption in AC not in MC”.
thank you for the lectures. 🙂
Absorption is really another word for charging.
If we spend $10,000 on fixed overheads, and if we produce 5,000 units, then if we are using absorption costing we charge each unit with $2 (10000/5000) for fixed overheads. i.e. we absorb them at $2 per unit.
thank you sir 🙂
sir in variance analysis you have calculated profit according to flexed, fixed and actual . the thing i did not understand is that you have given reason why we put FOH according to the ”production units * $15 ” in flexed budget. sir I could not get that point. fixed overhead in fixed budget is 130500 and flexed is 133500 ( 8900*15) . whether the production is 8700 or 8900 aren’t we suppose to keep FOH 130500 as it is. and other thing I did not understand when production increases, fixed cost per unit decrease and for 8900 FCPU is less than $15. so can’t we do like this (8900*14.6629) and get answer 130500. why are we putting $15 for 8900 also?
I watched lectures and only thing I did not understand was above queries
If you are asked to flex a budget on its own, then we do keep fixed overheads fixed (which is marginal costing).
However, if we are using absorption costing (and this bit is only relevant for variance analysis to explain why there is the fixed overhead variances are different) then using a standard profit per unit (which is what we do) effectively assumes there is a standard cost per unit for fixed overheads. So it assumes that if we produce more we are effectively charging more fixed overheads.
This obviously should not actually be the case, and so the fixed overhead volume variance is correcting for it – if we produce more then we will have effectively charged more fixed overheads than we should have done and therefore it is corrected by the volume variance.(If we are splitting the volume variance into capacity and efficiency then it is the same logic).
Tutor, please bear with me. Can you please assist what to do with a marginal costing question that bears both budgeted and actual overheads?
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