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I have been asked to prepare the profit statement for two periods using absorption costing but I don’t know how to calculate the fixed production cost.
Q. A company makes and sells a single product. At the beginning of period 1,there are no opening inventories of the product,for which the variable production cost is $4 and sales is $6 per unit. There are no variable selling costs. Fixed costs are $2,000 per period, of which $1,500 are fixed production costs. Normal output is 1,500 units per period. In period 1 sales were 1,200 units,production was 1,500 units. In period 2,sales were 1,700 units,production was 1,400 units.But you are given the fixed production cost in the question!! On the fourth line of your question it says that $1,500 are fixed production costs!
You need to absorb the fixed production overheads over the budgeted production, and then prepare a cost card. The cost per unit that you arrive at is what you will use to value inventories.
I suggest that you watch our Paper F2 free lectures. They cover everything needed to be able to pass the exam well (and I obviously cannot type out all of the lectures here 🙂 )
Who is saying that the fixed production costs are $1,400 in period 2?
The standard fixed production cost is $1 per unit, and therefore since 1,400 units are produced in period 2, they will absorb 1,400 x $1 = $1,400. However there will then be an adjustment of $100 under absorption because the actual fixed overheads will stay at $1,500.
Have you watched my free lectures on this?
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