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Hi,
Page 19 of the notes shows a typical cost card for a cost unit.
For 1 unit it gives:
Prime Cost = 15
Variable o/h = 2
Fixed o/h = 3
Total = 20Prime cost is variable because total cost increases with output.
Variable o/h also increases with output.I thought fixed costs don’t increase with output level. (They decrease in the Total Cost Curve graph as output increases)
So, using the above cost card, would 10 units cost:
Prime Cost (10 x $15) = 150
Variable o/h(10 x $2) = 20
Fixed o/h (Fixed ) = 3
Total = $173If the fixed o/h should be 10 x $3 = $30, then isn’t it behaving as a variable cost and not a fixed cost?
Or am I missing something?
Thanks
With absorption costing, are charged in the cost card by taking the budgeted total fixed overheads divided by the budgeted production.
So, for example, if they were budgeting on total fixed overheads of $30,000 and budgeted on total production of 10,000 units, then we would budget fixed overheads at $3 per unit.
We do this so as to get a total cost (in order to help decide on a selling price).
However, a problem with doing this is that if we end up producing more or less than 10,000 units, the fixed overheads in total will remain at $30,000 and so the cost is not $3 per unit. That is why there is an alternative way of costing known as marginal costing.
All of this is explained in detail in the later lectures.
(I assume that you are watching the lectures and not just using the notes on their own? The lectures explain and expand on the notes. If you are not watching the lectures for any reason then you must buy a Study Text from one of the ACCA approved publishers and study from there.)
Thanks for your reply.
I am watching the lectures, so far I’m at chapter 4 !
Thanks
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