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Hi, John. Where in the question it is specified that the materials will be purchased next year? Or we will take on this project next year?
And also it said: Fixed overheads of the company currently amount to $1,000,000. The management accountant has
decided that 20% of these should be absorbed into the new product.Shall we not do any calculations for the 20% for the new product?
We always assume we start the project at time 0. As soon as we start manufacturing we will start incurring costs and we always assume that operating costs are occur at the end of years. So the first cash outflow for materials will be at time 1.
Absorbing fixed overheads simply means sharing the existing overheads between their various operations. There is no extra cash paid by the company and it is therefore not relevant for the appraisal.
I explain both of these points in my free lectures working through this example.
There is no point in using the notes without watching the free lectures – they are lectures notes (not a Study Text) and it is in the lectures that I explain and expand on the notes.
If you are not watching the lectures for any reason then you need to buy a Study Text from one of the ACCA approved publishers and study from there.
(However you choose to study, it is also essential that you buy a Revision Kit from one of the ACCA approved publishers. They are full of past exam and other exam standard questions for practice, and it is not possible to pass the exam without question practice.)
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