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Dear Sir,
Revision kit Page 41 No. 9.5
As per the example in the lectures the c.o.g.s direct material/labour/variable overhead/fixed OH we use the units produced however in the qsn above they are using the units sold i.e 5200 units. i dont understand why. please help.
Thank you in advance 🙂
I don’t have the BPP revision kit.
However, the cost of goods sold is the cost of the units they actually sell. (Which is the same as the opening inventory plus the cost of production less the closing inventory)
So depending on what is given in the question, you either get the cost of production and then adjust by the inventories to get the cost of goods sold; or you get the cost of the units sold directly.
Again, it depends what information is given in the question. (And of course, if there are o inventories then the cost of what is sold is equal to the cost of what is produced)
This is the qsn:
cost and selling price details for product z are as follows:
Direct material $ 6.00 per unit
Direct labour $ 7.50 per unit
Variable overhead $ 2.50 per unit
Fixed OAR $ 5.00 per unit
Profit $ 9.00 per unit
Selling Price $ 30.00 per unitBudgeted production for the month was 5000 units although the company managed to produce 5800 units, selling 5200 of them and incurring fixed OH costs of $27400.
What is the absorption costing profit for the month?
a) $45200 b) $46800
c) $45400 d) $48400My qsn is that in the answer they have used the units sold i.e 5200 to calculate the c.o.g.s in the statement where as in the lectures you have used the units produced. i dont understand why they used units sold instead of units produced like in the lectures
Also in the same qsn, to find the absorption costing profit we need to add/minus the over/under absorption however in this qsn they have only taken the gross profit as the answer. why?
The answer is as I wrote before.
The profit is the sales revenue less the cost of goods sold.
In the lecture we knew about the inventories so the cost of goods sold was calculated by taking the opening inventory plus the production less the closing inventory. It is the same thing.
Sorry i meant when we are preparing the absorption costing statement for the particular month we take the cost of production as the material/labour/variable and fixed costs times the production units right (in this case it is 5800 units)? but in this qsn they are using the units sold (5200 units)
this is how calculated my answer:
$ $
Sales (5200 * $30) 156000cost of production:
Materials (5800*$6) 34800
Labour (5800*$7.50) 43500
Variable (5800*$2.50) 14500
Fixed OH (5800*$5.0) 29000
Less: closing stock (12600)
(5800-5200)*$21
(109200)
Gross profit 46800Amt absorbed: (5800* $5) 29000
Actual amt: (As per qsn) (27400)
Over absorption 1600
Net Profit $48400However the book calculated it as follows (P/S check the cost of production, the book uses 5200 units instead of 5800 units like in my calculation)
9.5 D
$ $
Sales (5,200 at $30) 156,000cost of production:
Materials (5,200 at $6) 31,200
Labour (5,200 at $7.50) 39,000
Variable overhead (5,200 at $2.50) 13,000
Total variable cost (83,200)
Fixed overhead ($5 ? 5,200) (26,000)
Over-absorbed overhead (W) 1,600
Absorption costing profit 48,400Working $
Overhead absorbed (5,800 ? $5) 29,000
Overhead incurred 27,400
Over-absorbed overhead 1,600Sorry for bothering you Sir but i need a clarification which way is correct.
Thank you 🙂
I can’t keep saying the same thing.
It doesn’t matter which way you do it. You either get the cost of goods sold by taking the cost of production and adjusting by the inventory (as you did) or you calculate the cost of what was sold directly (as they did). In both cases you get the same profit and that is all that matters in the exam.
I don’t understand what your problem is since the final profit is the same in both cases.
i just wanted a confirmation if one/both ways were okay since they give the same profit. Anyway thanks.
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