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Year of operation 1 2 3 4
Accounting year 2005/6 2006/7 2007/8 2008/9
Sales volume 100,000 120,000 130,000 140,000
(units)Selling price and standard cost data for ProductFT7, based on an annual budgeted volume of 100,000 units, are as follows
(sterling/unit)
Selling price18·00
Direct material 7·00
Direct labour 1·50
Fixed production overhead 4·5The fixed production overhead is incurred exclusively in the production of Product FT7 and excludes depreciation.Selling price and standard unit variable cost data for Product FT7 are expected to remain constant
years 1 2 3 4
i wanted to know that while taking fixed production overheads what i was doing is 450 540 585 630 but in the answer the effect of inflaion has not been taken 450 is taken for all four years??? why??Ahhh – watch out for this. It has happened more than once in the exam 🙂
(You do not mean inflation – you are meaning that because the sales volume changes, you increased the fixed overheads.)
For selling price and for variable costs, this is correct – if you sell more units there will be more units and more cost.
However, by definition, the fixed overheads in total will not change whether you produce more or produce less.
The question said that for the first year it would be 4.50 per unit, which means for the first year the total will be 450,000.
However, if the total is 450,000 it will stay at 450,000. Again, fixed means that it will not change with the level of production.
(It also means that the fixed overhead cost per unit will change in future years, but this is not relevant for the question).Make sure you are clear what I mean (and shout if not 🙂 ) because it is a ‘trick’ that he has had in the exam more than once.
ohhhhh so u mean to say that fixed cost per unit changes with the level of production but the total fixed overheads remains constant i think i can shout if i really understood the trick:P
Yes – total fixed overheads (by definition) do not change with the level of production.
(They may change for other reasons – e.g. inflation, but unless you are told that they change then they stay fixed each year.)(The unit cost for fixed overheads in future years is irrelevant – it is only the total that we need)
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