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A company uses standard absorption costing. Its fixed overhead absorption rate is $8 per machine hour and each unit of production should take 3 machine hours. Last year there was an opening inventory of finished goods of 4,000 units. They produced 30,000 units and sold 25,000 units. 90,000 machine hours were used for production, and the total fixed overheads were $700,000. What was the amount of the over or under absorption of fixed overheads?
Can you show me a calculation for this question please?The amount absorbed is 90,000 hours x $8 per hour = $720,000.
The actual overheads are $700,000.
So the over-absorption is $20,000
thank you sir.
but why do they always include unnecessary details in the questions, makes some of them a bit tricky.You are welcome 🙂
(The questions are meant to be tricky 🙂 The are checking that you know what are the relevant figures!)
Hlw john,
I got confused between the terms ‘budgeted’ and actual .. 🙁 can you plz explain me with examples..
Question:
‘the fixed overhead figure has been calculated on the basis of normal output of 36000 units per annum.. the fixed production prodn overhead incurred in march were 15000 each month..
fixed prodn overhead .. 5/unit
production-2000 units
sales – 1500 units
here, I am confused is 15000 budgeted fixed overhead or actually incurred???In marginal costing, what value should we have to put as fixed cost??????
I am confused which fixed costs are used in marginal and absorbtion. fixed costs are so messy for me.. plz help 🙁I think it will help you to watch the free lectures on absorption and marginal costing!
Since the question says that the fixed overhead incurred is 15000, then this is the actual overhead.
In absorption costing we charge overheads for each unit at whatever the budgeted rate per unit is – in your example $5 per unit. As a result we might end up over-charging (over absorbing) or under-charging (under absorbing) and need therefore to make an adjustment.
When we use marginal costing, we are not absorbing the fixed overheads and so we simply charge whatever we actually pay (in this case $15,000)
I still have confusion. 🙁 then, what is the budgeted fixed overhead in this question??
are absorbed overhead, budgeted overhead and actual overhead three different terms??
how can I clear all my confusions on these terms? 🙁Have you watched the free Paper F2 lectures? If you do then you will clear your confusion!
Of course absorbed, budgeted and actual are different terms and mean different things.
You really should not be attempting questions until you have studied – either by watching our lectures, or by using a study text. If you do not study first then you are wasting your own time.
Since the absorption rate is $5 per unit, and the question says that it has been calculated on a normal output of 36,000 per annum, the budgeted overheads must be 36,000 x $5 = 180,000 a year, or 180,000/12 = $15,000.
In this particular question the actual fixed overheads are $15,000 in March also, but they certainly do not need to be the same.
The overheads absorbed in March are 2,000 x $5 = $10,000.
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