BPP chapter 9 absorbtion and marginal costing

3.2 Example: Marginal and absorption costing compared The following example will be used to lead you through the various steps in calculating marginal and absorption costing profits, and will highlight the differences between the two techniques. Big Woof Co manufactures a single product, the Bark, details of which are as follows. Per unit $ Selling price 180.00 Direct materials 40.00 Direct labour 16.00 Variable overheads 10.00 Annual fixed production overheads are budgeted to be $1.6 million and Big Woof expects to produce 1,280,000 units of the Bark each year. Overheads are absorbed on a per unit basis. Actual overheads are $1.6 million for the year. Budgeted fixed selling costs are $320,000 per quarter. Actual sales and production units for the first quarter of 20X8 are given below. January-March Sales 240,000 Production 280,000 There is no opening inventory at the beginning of January. Prepare statements of profit or loss for the quarter, using: (a) Marginal costing (b) Absorption costing Step 4 Calculate under/over absorption of overheads This is based on the difference between actual production and budgeted production. Actual production = 280,000 units Budgeted production = 320,000 units (see Step 1 above) Under-production = 40,000 units As Big Woof produced 40,000 fewer units than expected, there will be an under absorption of overheads of 40,000 ? $1.25 (see Step 1 above) = $50,000. This will be added to production costs in the statement of profit or loss. Why it is not over absorption intead it has written inder absorption which previous chapters has written ???