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Hi, there is point related to fixed overhead rate for the period i am confused about…..
the illustration says we have selling price 15 per unit , variable costs per unit is 9.5
budgeted fixed overhead 5000 and budgeted production for the period is 2500.2400 units are actually produced and sales are 2220
NOW, the rate that should be used for the absorption of fixed overhead be 5000/2400=2.033
which increases the profit for the period about 375
OR it should be based on budgeted data 5000/2500=2 which increases the profit by 360?????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
CathEven 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 workingsYou 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
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