- This topic has 11 replies, 2 voices, and was last updated 2 years ago by
.
- Posts
The budget for Bright’s first month of trading, producing and selling boats was as follows:
$000
45. Variable production cost of boats
30. Fixed production costs
——–
75. Production costs of 750 boats
(25). Closing inventory of 250 boats
———
50. Production cost of 500 sold
5. Variable selling costs
25. Fixed selling costs
—–
80. Total costs
10. Profit
———
90. Sales revenueBudget has been produced using an absorption costing system
Sir I’ve got a confusion in this question it asks for * 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, sir could you tell me what does this means? Fixed cost can be budgeted and same for selling price but variable changes with production why does it stays in line with budget?
Question continue, 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.
-$9000
-$12000
-$14000
-$15000Sir i calculated profit by multiplying the change in inventory with foh, produc 700-600=100 closing inventory and it says fixed production are in line with budget so fixed production rate per unit is 40
100×40=4000 this wasn’t correct, i even tried with profit per unit previous profit 10000/500=20×600=12000
But the answer is 15000 in book, could you please explain me this question sir
It says to assume that the UNIT variable costs are in line with the budget. Obviously the total variable costs will change if production changes.
It also says that the selling price is in line with budget and therefore if the sales change then the total revenue changes.Rewrite the profit statement for the actual production and actual sales, using the same variable costs per unit as in the budget, using the same selling price per unit as in the budget, valuing the inventory at the same cost per unit as in the budget, and keeping the fixed costs the same in total.
Sir mybad I turned blind eye to “unit” variable cost and all of them, I’ve solved the entire question but can’t reach to the answer, 1value which I’m confused about as question says keep fixed cost per unit same as budget, and we figure out absorbed overheads using the same unit with the actual production and we get under absorbed, in the answer it’s adding under absorbed why are we doing that sir? Aren’t we supposed to deduct it? As it’s a loss
You can get the same answer in various ways and it doesn’t matter which way because nobody looks at your workings.
I find the easiest way is to do it the way that I described in my reply. If you do that and put in the fixed overheads at the budgeted amount then there is no need to bother with any over or under absorption and you get the correct answer of $15,000.
Have you actually done what I suggested in my reply?
Yes sir I’ve done it like you suggested, or maybe i goofed up, I’ll show you what I’ve done
Keeping the unit cost same and adjusting to new inventory levels
Variable produc cost 45/750×700=$42
Fixed produc cost $30Production cost of 700 boats $72
Closing inventory ($10)Production cost of 600 sold $62
Variable selling cost $6
Fixed selling cost $25————
Total cost of sales $93
Profit $15Sales revenue $108
Sir i got the profit but one thing im confused about, we are supposed to keep unit fixed cost same, aren’t we supposed to change it to the new production levels? Because it doesn’t says total fixed cost should remain the same, i know total fixed cost doesnt changes with activity, but here it says unit fixed cost is in line with budget that means we should adjust it to new inventory levels? Could you explain me this sir
It does not say the unit fixed costs stay the same.
They only stay the same when it comes to valuing the inventory.
If you want to put in the absorbed fixed costs using the standard rate and then adjust it to the actual fixed costs (the difference being the over or under absorption) then fine – the answer will be exactly the same.
Yes sir i got you, but your method is easier of keeping the total fixed costs same, but even if i use the diff being over or under absorption and keeping fixed selling costs the same, in the book it’s adding under absorption rather than deducting it, which I don’t get it because over absorbed is supposed to be added, could you please explain me that, other than that i got the entire question
I am guessing that maybe the answer added it to the costs, which would be logical.
Is it like because fixed costs are carried forward in absorption inventory while deducted from marginal? So we are just adding the difference for the balance?
It is because if the actual fixed overheads are higher than the absorbed overheads then the actual cost is higher.
Yes sir i got it, basically adding under absorbed overheads would make the fixed cost the same as in previous budget which is 30k, thankyou sir!
- The topic ‘Marginal/absorption costing’ is closed to new replies.