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a company produces and sells product whose variable cost is $6
fixed cost have been absorbed over the normal level of activity of 200000 units and have been calculated as $2 per unit, selling price is $10 /unit
how much profit is made under marginal costing if company sells 250000 units.solution,
each unit selling price is 10
variable cost/unit is 6
so contribution is $4/unit
so total contribution is (250000×4)= 1000000upto this its all right.my question is in book they are subtractiong $400000 as overhead period cost from contribution; profit is $600000
my question is when nothing is being told about actual overhead incurred, will we assume it to be same as total absorbed overhead ; 200000 units x 2 = 400000.
and extra 50000 units sold are opening stock and as per marginal costing it will not have any share of OAR.
another question i have is there have been a question i faced related to standard marginal costing.
i wanna know in standard marginal costing statement which fixed overhead we need to substract from contribution.Is it the budgeted o/h or actual o/h incurred.how its possible to find out standard fixed overhead……….will it be same as absorbed overheadIt is the actual fixed overhead that is subtracted to get the actual profit.
If you are not told the actual fixed overhead then you assume that it the same as the total budgeted fixed overhead (which in your first post is indeed 400,000). Fixed overheads should stay fixed by definition and so it is irrelevant how many units they actually produce when using marginal costing.
related to standard marginal costing question says
A company uses standard absorption costing.Its fixed oar is $12/labor hr and each unit of production take 4 hrs. 20000 units were produced using 100000 labor hrs,18000 units were sold.The actual profit is $464000
what profit will be under standard marginal costingthe answer says $368000.
so here the standard hr for 20000 units is 20000×4=80000 hrs
so standard costing system means o/h is absorbed on 80000 hrs and not 100000 hrs.
so since nothing is being told about actual overhead we will consider it same as absorbed o/h.
Marginal profit should be $368000 as 2000 units of closing inventory is carrying forward the share of o/h which is 96000.
am i right?so in above question we will consider the actual overhead same as budgeted fixed o/h; which will be again same as absorbed o/h.am i right?
It is irrelevant how many units the overheads are absorbed over because you are not asked to prepare a profit statement (and it would be impossible anyway).
The inventory increases by 2,000 units and the standard fixed overheads per unit are 4 x $12 = $48.
Therefore the absorption profit is higher than the marginal profit by 2,000 x $48 = $96,000.Anything else is irrelevant to the question (and not possible anyway).
okay i got it
sir one last think i wanna ask that i know the term ‘standard material or standard labor time’ , like as per standard it should take 4 units of material to produce a complete product.
i’m clear about the budget and actual fixed overhead term.i’m confused about the term ‘standard overhead’,
what does it refer to, is it the predetermined rate that we calculate out i.e; OAR?,if it so does that mean overhead absorbed by units is the standard o/h itself. or they both are different
im confusing on these term,plz helpStandard is the same as budgeted.
Standard overhead will normally mean the budgeted overhead per unit (unless the question says it is e.g. the standard overhead per hour).
okay now its clear
so overhead absorption rate is the standard predetermined rate we find out ,and its absorbed by the cost units based on actual activity level, like actual labor or machine hours worked.
In case of above question related to standard absorption, overhead rate is calculated on standard hrs of each unit i.e; 4 hrs rather than actual hrs.
that makes it call standard fixed overhead as OAR is calculated on standard hrs……so u also use that term standard fixed overhead in ur above reply
standard fixed overheads per unit are 4 x $12 = $48.
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