BPP kit - Question 32 Mermus Dec 2004

Aacltang7216y ago

For the flexed budget the fixed production overhead remains the same as the original budget because it's fixed and therefore cannot be flexed. However on the OT notes page 67 example 1 the fixed production overhead in the flexed budget has been adjusted. Why is this? Is it something to do with it having closing stock?

Thanks!

John MoffatTutor16y ago#1

It is because they are using absorption costing.

With absorption costing, fixed overheads appear in the unit costs and so when we flex the budget for actual production, all the costs flex including fixed overheads.

This is the reason that the fixed overhead variances for absorption costing are split into Expenditure (because we spent more than the original budget total) and Volume because the production is different than budget production.

If we are using Marginal Costing, then fixed costs do not appear on the cost card and we do not flex the total. Then the only fixed overhead variance is the Expenditure variance.