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Hi John,
Can you help with this one…
A company uses a standard absorption costing system. The following details have been extracted from its budget for April.
Fixed production overhead cost $48,000
Production (units) 4,800
In April the fixed production overhead cost was under absorbed by $8,000 and the fixed production overhead expenditure variance was $2,000 adverse.
What was the actual number of units produced?
The correct answer is: 4,200
Actual expenditure = $(48,000 + 2,000) = $50,000
Overhead absorbed = $(50,000 – 8,000) = $42,000
Overhead absorption rate per unit = $48,000 / 4,800 = $10
Number of units produced = $42,000 / $10 = 4,200I’m a bit fuzzy on the logic of subtracting the 8000 from the 50000 to get the overhead absorbed…
The amount absorbed is the actual production multiplied by the standard overhead cost per unit.
If the overhead is under-absorbed, then the amount absorbed is less than the actual total overheads.
The actual overheads were 50,000 and therefore the amount absorbed must be 8,000 less than this.
Do watch my free lectures on marginal and absorption costing where this is all explained.
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