- This topic has 3 replies, 2 voices, and was last updated 1 year ago by
.
- Posts
Using Chapter 13 (example 1)
Flexed Budget using Absorption costing:
In absorption costing, we include all the costs both variable costs and fixed costs in the production costs.———————————-Fixed———–Flexed——–Actual——-Variance
Sales units——————-8000————-8400———–8400
Production units————8700————-8900———–8900Sales revenue————-600000———630000——–613200——-16800 (A)
less: material cost——-(156600)——-(160200)——(163455)——–3255 (A)
less: labour cost———(217500)——–(222500)——(224515)——-2015 (A)
less: variable OH———(87000)———(89000)——–(87348)——–1652 (F)
less: fixed OH————(130500)——–(130500)——-(134074)——3574 (A)Production costs———(591600)——-(602200)——–(609392)
less: closing inventory–(47600)———-(34000)———(34000)
Cost of Goods Sold——544000———-568200———575392
Profit————————-$56000———-$61800———$37808—–23992 (A)Fixed costs by definition remain fixed so the fixed cost in the flexed budget should be $130500 (budgeted cost).
Closing inventory is actually the inventory that remains unsold at the year-end so it should be deducted to get the cost of goods sold during the year.
Closing inventory is when we have produced more units than we can actually sell to the customers.
Is that correct sir?
If you were asked just to prepare a fixed budget, then yes – the fixed costs in total stay fixed (whether it is marginal or absorption costing).
However as I explain the lecture on basic variances, using absorption costing for variance analysis effectively treats fixed costs as though they are variable, and that is why there is a fixed overhead volume variance. You will not be asked to do this (as again I explain in the lectures) but it is silly just to learn the variances without understanding them.
The rest of what you have typed is correct, but I do work through the whole of this example in the lectures (and using the notes without watching the lectures would be pointless).
Thanks 🙂 Please say about this too.
Flexed Budget using Marginal costing:
In marginal costing, we include variable costs only in the production costs.———————————Fixed———-Flexed———-Actual———-Variance
Sales units——————-8000———–8400————8400
Production units————8700———–8900————8900
32
Sales revenue————-600000——–630000——–613200———16800 (A)
less: material cost——-(156600)——(160200)——(163455)———-3255 (A)
less: labour cost———-(217500)——(222500)——(224515)———2015 (A)
less: variable OH———(87000)——–(89000)——–(87348)———-1652 (F)Production costs———(461100)——-(471700)——(475318)
less: closing inventory—(37100)——–(26500)——–(26500)
Cost of Goods Sold——424000———445200——–448818Contribution—————-176000———184800——–164382——–20418 (A)
less: fixed OH————-(130500)——-(130500)——(134074)——–3574 (A)
Profit————————–$45500———$54300——–$30308——-23992 (A)The difference between absorption costing and marginal costing is the incorporation of fixed costs in the production costs.
We deduct fixed costs in both methods but the way of doing them is different.
Again, the flexing in this example is done just for explaining the difference in the way fixed overheads variances are calculated
When using marginal costing, the fixed overheads are not absorbed into the unit costs and therefore the only fixed overhead variance is the expenditure variance which is the difference between the actual total and the budgeted total.
Basic variances are rarely asked in Paper PM (and certainly never as a full question) because they are revision from Paper MA (was F2). In paper PM is is the advance variances that are asked regularly, but a basic understanding of the Paper MA variances is useful to make sense of what is happening in the advanced variances.
If, however, you are still worried then look at the free Paper MA lectures on variances where I work through the same example but work through it more slowly.
- You must be logged in to reply to this topic.