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Kit Question

Forums › FIA Forums › MA2 Managing Costs and Finance Forums › Kit Question

  • This topic has 4 replies, 2 voices, and was last updated 1 year ago by maximus07.
Viewing 5 posts - 1 through 5 (of 5 total)
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    Posts
  • July 18, 2021 at 8:02 pm #628281
    maximus07
    Participant
    • Topics: 407
    • Replies: 398
    • ☆☆☆☆

    A question in a kit says
    A benefit of predetermined overhead in Absorption costing is that it avoids impact of any abnormal cost.
    Sir can you explain this?

    July 18, 2021 at 8:46 pm #628288
    Ken Garrett
    Keymaster
    • Topics: 10
    • Replies: 10193
    • ☆☆☆☆☆

    Let’s say that thr normal cost of water used was $5,000 per year and that 100,000 units are budgeted for production. Water costs would be absorbed at $0.05 per unit and that would be added to product cost.

    If then a serious water leak raised the water bill to $7,000, is it right to say that production costs should include $0.07 per unit?

    The products are the same and the leak is an accident of timing.

    So, keep the cost per unit the same and separately identify the extra 2,000 in the statement of P&L.
    .

    July 19, 2021 at 4:46 am #628514
    maximus07
    Participant
    • Topics: 407
    • Replies: 398
    • ☆☆☆☆

    Sir, in Marginal costing, we would charge (if any) abnormal events in product costs.
    Thank you sir.

    July 19, 2021 at 8:34 am #628600
    Ken Garrett
    Keymaster
    • Topics: 10
    • Replies: 10193
    • ☆☆☆☆☆

    In marginal costing no fixed costs are charged to units.

    July 19, 2021 at 10:08 am #628649
    maximus07
    Participant
    • Topics: 407
    • Replies: 398
    • ☆☆☆☆

    Right sir. I mean to say that fixed cost are incurred in period costs which are inclusive of abnormal events?

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