Absorption cost statement

The overheads absorbed will be the actual production x the overhead absorption rate. The actual sales are likely to be either higher or lower that the actual production, but the difference is accounting for by the change in the level of inventory (and the valuation of inventory includes fixed overheads at the OAR). It is difficult to explain in more detail in words. If you watch the free lectures on both marginal and absorption costing (and the reconciliation between them) then it should make sense.

Alighere: No. I perfectly understood your question, but I repeat - the amount absorbed is always based on the actual production. Maybe this will convince you: Suppose the budget overheads were $200,000 and the budget production was 10,000. So the OAR is $20 per unit. Suppose materials and labour are $30 per unit. So the total standard cost is $50. The selling price is $80. Suppose there is no opening inventory. The actual production 25,000 units. The actual sales are 20,000, and therefore the closing inventory is 5,000. The revenue is 20,000 x 80 = 1,600,000. The variable cost of production is 25,000 x $30 = 750,000 The fixed overheads (by definition) should stay at 200.000 Therefore the cost of production should be 950,000. The closing inventory is valued at 5,000 x $50 = 250,000 Therefore the cost of sales should be 950,000 - 250,000 = 700,000 Therefore the profit should be 1,600,000 - 700,000 = 900,000 However, using absorption costing we say the profit per unit should be 80 - 50 = $30 per unit. Therefore a total profit of 20,000 x 30 = 600,000 Why is this wrong? It is because in arriving at 600,000 we have effectively charged/absorbed overheads of 25,000 units produced at $20 per unit = 500,000. But the fixed overheads should really stay at 300,000. So we have over-charged/over-absorbed fixed overheads by 500,000 - 200,000 = 300,000. So we adjust the absorption profit of 600,000 by the over absorption of 300,000 to arrive at the correct profit of 900,000.

chanee23: I don't understand why you simply copy a question that I have already replied to!!

You are welcome :-)