calculating profit with absorption costing

Hi there, im searching the notes for the example you are talking about ( but not sure if its an Open Tuition exercise or not?) However, without looking at the detail, I can confirm that budgeted OAR is ALWAYS based on budgeted data ( like your second example... never the actual data) Hope thats ok Cath

Even i am confused with this problem... imited manufactures a single product, the budgeted selling price and variable cost details of which are as follows: $/unit Selling price $15.00 Variable costs per unit: Direct materials $3.50 DIrect labour $4.00 Variable overhead $2.00 Budgeted fixed overhead costs are $60,000 per annum charged at a constant rate each month. Budgeted production is 30,000 units per annum. In a month when actual production was 2,400 units and exceeded sales by 180 units, identify the profit reported under absorption costing: My answer comes 7770 Sales(2220*15)------- 33,300 COGS Cost of production (2400*11.5)-----------(27600) Less CI (180*11.5)-------------(2070) Total-------------------(25530) Gross profit-------7770 and right answer is as per below Calculate marginal costing profit first: (Contribution per unit x no. of units sold) - fixed costs = MC profit ($15 - $3.5 - $4 - $2) x (2,400 - 180) - $60,000 / 12 - MC profit $5.50 x 2,220 units - $5,000 = $7,210 Then calculate the profit difference between marginal and absorption costing: Difference = OAR x difference in closing and opening inventory units = $60,000 / 30,000 x 180 = $2 x 180 = $360 As production is for a higher quantity than sales, closing inventory must be larger than opening inventory and absorption costing profit must be higher than marginal costing profit Absorption costing profit = $7,210 + $360 = $7,570 Regards Mayur

Hi Mayur, Thanks for your query & good question.... The way they have worked it out - is a useful shortcut - because marginal profit is quickest & you can convert to absorption profit the difference being ( No of units stock increases/decrease in year * FOAR) However, your way of calculating using normal absorption profit statement is just as valid & should give the same answer.... Your workings are fine except youve missed on key adjustment (pasting your answer from above below). Sales(2220*15)——- 33,300 COGS -(25530) Gross profit = 7770 You have forgotten to adjust for UNDER/OVER absorption of overhead. So overhead absorbed in month = 2400* 2 = $4800 Overhead incurred in month = $5000. ( ie 60k per year /12) So underabsorbed in this month by $200 Deduct this from your workings You will see absorption profit is $7570. ( just like the answer says - youve followed another valid route to calculate - but missed off that last adjustment) Hope this helps