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Sir, I get confused about when I should change fixed costs and when I shouldn’t. for example, In this question, the fixed production cost is changed, but the fixed selling cost is not. Could you clarify this for me in a simple way, please?
The budget for Bright’s first month of trading, producing and selling boats was as follows: $ Variable production cost of boats 45
Fixed production cost 30
Production cost of 750 boats 75
Closing inventory of 250 boats (25)
Production cost of 500 sold 50
Variable selling cost 5
Fixed selling cost 25
Profit 10
Sales revenue 90
The budget has been produced using an absorption costing system.Assume that at the end of the first month unit variable costs and fixed costs and selling price for the month were in line with the budget and any inventory was valued at the same unit cost as in the above budget. However, if production was actually 700 and sales 600, what would be the reported profit using absorption costing?
The total fixed costs (both production and selling) do not change by definition.
However with absorption costing the fixed production costs are absorbed on a per unit basis and are charged in the profit statement on a per unit basis.The fixed selling costs are not absorbed and therefore the same fixed total is charged regardless of the level of sales and production.
Have you watched our free lectures on absorption costing?
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