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Standard cost of the only product is ($/unit):
Price 118;
Direct labour (4 hours) 80;
Material 21 (3 kg);
Fixed overhead 5;
Profit 12.
Budgeted production and sales were 8,000 units, whilst actual were 6,000 units.
What is the flexed budget profit?Answer: $62,000
I assume that you are asking me to explain?
The contribution per unit is $17. Therefore the flexed contribution is 6,000 x $17 = $102,000.
The budgeted fixed overheads were 8,000 x 5 = $40,000 and this (by definition) does not change with the actual level of activity.
Therefore the flexed profit is 102,000 – 40,000 = $62,000.
Have you watched my free lectures? The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well.
But this problem doesn’t specify which costing method to use. If absorption costing is used, the flexed fixed overhead should be 5 x 6000 = 30000, resulting in a flexed profit of 6000 x 12 = 72000. Sir, how can I determine if the question expects the answer using marginal costing instead of absorption costing?
As I make very clear in my free lectures, if there is no change in the inventory (which there isn’t here because the production is equal to the sales) then absorption and marginal costing both result in the same profit.
The flexed profit would not be as you have stated if they were using absorption costing because there would be the adjustment for the under-absorption of fixed overheads.
Again, have you watched my free lectures? 🙂
I watched all of your lectures(which is super helpful!), and some I watched several times to sort out my brain.
Thank you for clarifying. I forgot that there would be the adjustment for the under-over-absorption of fixed overheads. In fact I often forget this when I tackle the exam kit, but I think I remembered it firmly this time:)
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