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This is a BPP revision kit question
My question – Part a ) How and what is the understanding behind the variable overhead calculation ?
Part b)we have to forecast the ratio for the end of 3 month period so it should be march and therefore units should be 1400 and not 1500 , could you explain why they have taken 1500 ?
(a) The variable overheads are $100 per unit produced,
Per note 2, production takes place one month before sales.
Therefore in January they will produce 1,300 units (for Februarys sales).
So the overheads are 1,300 x $100 = $130,000 and the payment is made in the month of production (per note 4) so the cash flow in January is $130,000.
(b) Given that production takes place one month before sales (per note 2), the production in March will be 1,500 units (to be sold in April). These 1,500 units will therefore be in inventory at the end of March.