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Direct materials—6
direct labor——-7.50
variable overhead–2.50
equal marginal costing-16
fixed overhead absorption rate-5
equal absortion costing-21profit—-9
equal selling price-30
Budgeted production for the month was 5000 units although the company managed to produce 5800 units, selling 5200 of them and incurred fixed overhead costs $27400
What is the absorption costing profit for the year?
Sales(5200*30)——————————————————————————–156000
opening inventory at absorption cost–nilvariable or marginal production overhead(5000*16)————–80000
fixed production ovearhead——————————————–27400
closing inventory at absorption cost(200*21)———————4200cost of sales———————————————————————————–111600
gross profit———————————————————-44400
usually closing inventory(4200) is deducted but in this case budgeted production unit is lower than actual sales that is why we add
in the answer it has been showen 48400?why my figure becomes wrong?
In the case of finding marginal costing profit
Sales—————————————————————————–156000
opening stock at marginal cost————————————nil
variable or marginal production overhead(5000*16)——80000
closing inventory at marginal cost(200*16)————–3200
cost of sales————————————————————–83200contribution———————————————————72800
less fixed production overhead——————————-27400
marginal costing profit——-45400
Marginal costing profit is correct when i followed the formula but in the case of absorption costing i followed the formula but i could not reach correct outcome:(
Have you watched my free lectures on marginal and absorption costing?
What you have done is completely incorrect – you should not simply try and learn formulae. The exam deliberately tests that you understand rather than have just learned rules.
The closing inventory is not 200 units – it is 600 units.
The cost of goods sold is always the cost of production less the closing inventory and is therefore (5,800 x 16) + 27,400 – (600 x 21) = 107,600
Therefore the profit = 156,000 – 107,600 = 48,400.
For the marginal profit it would have been a lot quicker just to use the fact that the only difference ever between the marginal and absorption profits is the change in inventory multiplied by the standard fixed cost per unit.
So marginal profit = 48,400 – (600 x 5) = 45,400.Would I be right by that he/she had not accounted for Over-absorption of 4000?
5*5800-5*5000=4000Also, some books add over absorbed OH after Gross margin while others subtract before the Margin.
Which do you recommend ?
No. An over or under absorption would only have been relevant if the production had all been charged at standard cost of $21 (which would have been absorbing the fixed overheads at $5 per unit).
As it is, in his layout he has charged the actual total fixed overheads and so there is no over or under absorption. So his absorption profit would have been correct (even though his layout is wrong) had he taken the correct closing inventory (as I have shown in my reply to him).The over or under absorption should be dealt with immediately after the gross profit (as I show in my lectures). (Although you will not be asked in the exam to produce a full profit statement)
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