Accounting for overheads — OpenTuition Forums

NNguyen4y ago

Hi John. I have a problem with question 7a.24 in MA Kit book. A company uses standard absorption costing to value inventory. Its fixed overhead absorption rate is $12 per labour hour and each unit of production should take four hours. In a recent period where there was no opening inventory of finishing goods. 20,000 units were produced using 100,000 labour hours. 18,000 units were sold. The actual profit was $464,000. What profit would have been earned under a standard marginal costing system? A. $368,000 B. $440,000 C. $344,000 D. $560,000 Could you please explain why the answer is A? Thank you so much in advance.

John MoffatAdmin4y ago#1

I assume that you have watched my free lectures and therefore know that the only difference ever between the absorption profit and the marginal profit is the change in inventory multiplied by the fixed overheads per unit. Here, the inventory increased by 2,000 units (they produced 20,000 and only sold 18,000). The fixed overheads per unit are 4 hours x $12 per hour = $48. Therefore the profits are different by 2,000 x $48 = $96,000. Given that the inventory increased, the marginal profit is lower and is 464,000 - 96,000 = $368,000

BBrian4y ago#2

But sir in the lectures you stated the only difference between marginal costing profits and absorption costing profits Is Oar x difference in inventory Not Oh/ unit x difference in inventory

John MoffatAdmin4y ago#3

Of course it is per unit otherwise it would make absolutely no sense at all. Watch the lectures again!!!

NNguyen4y ago#4

Thank you so much John. I understand it now.

BBrian4y ago#5

Then sir In the below Kaplan question they have given overhead absorption rate Per liter So we also need to multiply it by the standard number of liters per unit in order to get the overhead cost per unit But they have not given it So how to solve it Should we take Overhead absorption rate Or Overhead cost per unit When opening inventory was 8,500 litres and closing inventory was 6,750 litres, a firm had a profit of $62,100 using marginal costing. Assuming that the fixed overhead absorption rate was $3 per litre, what would be the profit using absorption costing?

John MoffatAdmin4y ago#6

Nguyen: You are welcome :-) johnbriane: Given that the inventories are given as litres then the units must be litres. Had you been told that the inventories were 1,850 and 6.750 bottles each holding 2 litres, then the units would be bottles and the overheads per unit would have been 2 x $48. But that is not the case in this question.

BBrian4y ago#7

Dear sir Are there any differences between Overhead absorption rate per unit And Overhead cost per unit ?

John MoffatAdmin4y ago#8

No - not if both are expressed per unit. However the OAR is often expressed in (for example) a rate per hour. If each unit takes (say) 4 hours to make, then the overhead rate per unit is 4 x the OAR per hour.

BBrian4y ago#9

Ok sir thank you so much for your support

John MoffatAdmin4y ago#10

You are welcome.

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