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The budget for Bright’s first month of trading, producing and selling boats was as follows: $ Variable production cost of boats 45
Fixed production cost 30
Production cost of 750 boats 75
Closing inventory of 250 boats (25)
Production cost of 500 sold 50
Variable selling cost 5
Fixed selling cost 25 Profit 10 Sales revenue 90The budget has been produced using an absorption costing system. 20. If a marginal costing system were used, the budgeted profit would be: A $ 22,500 lower B $ 10,000 lower C $ 10,000 higher D $ 22,500 higher
b)
Assume that at the end of the first month unit variable costs and fixed costs and selling price for the month were in line with the budget and any inventory was valued at the same unit cost as in the above budget. However, if production was actually 700 and sales 600, what would be the reported profit using absorption costing?A $ 9,000 B $ 12,000 C $ 14,000 D $ 15,000
Sir I cannot understand this question at all, can u please help me out. thanks a lot
a) You will know from my free lectures that the difference between the marginal and absorption profits is only ever the change in inventory multiplied by the fixed production cost per unit.
The inventory increased by 250 units, the fixed production cost is 30,000/750 = $40 per unit.
Therefore the profits will differ by 250 x $40. And since inventory is increasing, absorption will give the higher profit and marginal the lower profit.b) This is an extremely silly question because fixed costs per unit would not be in line with budget. However, if they were, then in (a) the sales were 500 units and therefore the profit per unit = 10,000/500 = $20. In (b) they sell 600 units and so the profit will be 600 x $20.
Did the question come from a Revision Kit published by one of the ACCA approved publishers? If not, then you really should buy a Revision Kit from one of the ACCA approved publishers because they have exam standard questions and also show the answers together with the workings!
sir but the answer given for (b) is 15,000.
Variable production cost of boats 45/750 × 700 42
Fixed production costs (absorbed) 30/750 × 700 28
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Production costs of 700 boats 70
Closing inventory of 100 boats (10)
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Production cost of 600 sold 60
Under?absorbed overhead 30 – 28 2
Variable selling costs 5/500 × 600 6
Fixed selling costs 25
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93
Profit 15
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Sales revenue 90/500 × 600 108
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