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overhead under absorption costing is being carried forward to the following period therefore
creating a greater profit than marginal costing.
Production
overhead under absorption costing is carried forward to the following period therefore
creating lower profit (by charging more fixed overhead for this period) than marginal
costing.
Production = Sales (Year 1 and 2) As should be in the long-run, both methods would give
exactly the same profit. If you add both years profits above together under both methods, the
total comes to £248,000, in both years together production equals sales. This is because
under absorption costing the same overhead would be brought in as is taken out in stock
valuation.
Note: Remember the only reason why profits differ under both methods is because of
differences in stock valuation.
44
Example 4.6 (CIMA past exam question)
Part (i)
Under the absorption costing method $3,840 of fixed overhead would be carried forward to
the next financial period, due to production being higher than sales (production > sales).
(2,000 units 1,400 units) x $6.40 = $3,840. Therefore absorption costing profit would be
$3,840 greater than using marginal costing.
Budgeted profit for absorption costing
$
Marginal costing profit 5,700
Add: Fixed overhead carried forward to the next period 3,840
Absorption costing profit 9,540
Part (ii)
Tip: A marginal cost (variable cost) is a cost that can be avoided if a unit is not
produced or would be incurred if a unit was produced. A fixed cost remains constant
whether a unit is or is not produced, therefore including fixed overhead within a cost
unit can distort decision making when working out the profit effect of increasing or
decreasing sales.
üð Marginal costing is more appropriate for decision making e.g. the nature of cost
behaviour is not distorted by including fixed overhead within a cost unit. Therefore
in a situation where a manager wants to view the true profit effect of increasing or
decreasing sales volume, marginal costing would be more appropriate e.g. for
techniques such as sensitivity, what if? or break-even analysis.
üð A manager cannot manipulate profit from one period to the next by deliberately
setting the volume of production higher than sales for a period e.g. stock piling.
Using marginal costing would therefore allow a better performance evaluation of a
manager and ensure they concentrate on the maximisation of contribution leading to
greater cash-flow for the organisation.
45
Example 4.7
For a hospital which of these does not seem like a sensible activity and cost driver?
Activity Cost driver
a) Insurance for building Maintenance costs
b) Phone appointments No. of patients
c) Patient main reception No. of patients
d) Length of patient stay No. of patients
The answer is d
Example 4.9
Pre-packed Plc
Absorption costing
Labour hours
CC 40,000 x 0.50/4.00 = 5,000 hrs
SV 25,000 x 0.75/4.00 = 4,688 hrs
LV 30,000 x 0.50/4.00 = 3,750 hrs
13,438 hrs
£100,000 / 13,438 = £7.44 PER LABOUR HOUR
Chicken Sweet and Lamb
Curry Sour Vegetables Vindaloo
Monthly sales 40,000 25,000 30,000
£ £ £
Selling price 2.99 3.50 3.99
Ingredients (0.99) (0.50) (1.49)
Labour (0.50) (0.75) (0.50)
Contribution 1.50 2.25 2.00
Fixed overhead
£7.44 x
0.50/4.00 (0.93)
0.75/4.00 (1.40)
0.50/4.00 (0.93)
PROFIT 0.57 0.85 1.07
TOTAL PROFIT £22,800 £21,250 £32,100
46
ABC
Set ups 4 + 5 + 10 = 19
£50,000/19 = £2,632 a batch
Shredding mixing and packaging
100 x 4 = 400
25 x 5 = 125
125 x 10 = 1,250
1,775 machine hours
£20,000/1,775 = £11.27 per machine hour
Cooking
6,000Kj x 4 = 24,000
4,000Kj x 5 = 20,000
10,000Kj x 10 = 100,000
144,000
£30,000/144,000 = £0.208 per Kj
Fixed overhead analysis
Chicken Sweet and Lamb
Curry Sour Vegetables Vindaloo
£ £ £
Set up
£2632 x
4 10,528
5 13,160
10 26,320
Shredding mixing
And packaging
£11.27 an hour x
100 hrs x 4 4,508
25 hrs x 5 1,409
125 hrs x 10 14,088
Cooking
£0.21 per Kj x
6,000 Kj x 4 5,040
4,000 Kj x 5 4,200
10,000 Kj x 10 21,000
Total F/OH per unit 20,076 38,845 61,408
47
Chicken Sweet and Lamb
Curry Sour Vegetables Vindaloo
Monthly sales 40,000 25,000 30,000
£ £ £
Revenue 119,600 87,500 119,700
Ingredients (39,600) (12,500) (44,700)
Labour (20,000) (18,750) (15,000)
Contribution 60,000 56,250 60,000
Fixed overhead (20,076) (38,845) (61,408)
PROFIT 39,924 17,405 (1,408)
Notice how after using ABC the overall profitability of lamb turns into a loss. This will be
useful to management!
Example 4.10
Robertson Interiors (£) BJ Flooring (£)
Revenue 500,000 100,000
15% DISCOUNT (75,000) n/a
Net revenue 425,000 100,000
Cost of goods sold (300,000) (60,000)
Gross margin 125,000 40,000
Transport (4500) (10,000)
Orders (10,000) (4,000)
Visits (240) (40)
Net margin 110,260 25,960
Transport £200,000/200,000 miles = £1 a mile
Orders £500,000/500 orders = £1,000 an order
Salesman £500,000/25,000 visits = £20 a visit
48
Example 4.11
Warehouse
Labour 350,000/100,000 = £3.50 per mc per week
Refrigeration 50,000/20,000 = £2.50 per mc per week
Building 250,000/100,000 = £2.50 per mc per week
Supermarkets
Staff 50,000 x 5/100,000 = £2.50 per mc per week [ Pobierz caÅ‚ość w formacie PDF ]
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overhead under absorption costing is being carried forward to the following period therefore
creating a greater profit than marginal costing.
Production
overhead under absorption costing is carried forward to the following period therefore
creating lower profit (by charging more fixed overhead for this period) than marginal
costing.
Production = Sales (Year 1 and 2) As should be in the long-run, both methods would give
exactly the same profit. If you add both years profits above together under both methods, the
total comes to £248,000, in both years together production equals sales. This is because
under absorption costing the same overhead would be brought in as is taken out in stock
valuation.
Note: Remember the only reason why profits differ under both methods is because of
differences in stock valuation.
44
Example 4.6 (CIMA past exam question)
Part (i)
Under the absorption costing method $3,840 of fixed overhead would be carried forward to
the next financial period, due to production being higher than sales (production > sales).
(2,000 units 1,400 units) x $6.40 = $3,840. Therefore absorption costing profit would be
$3,840 greater than using marginal costing.
Budgeted profit for absorption costing
$
Marginal costing profit 5,700
Add: Fixed overhead carried forward to the next period 3,840
Absorption costing profit 9,540
Part (ii)
Tip: A marginal cost (variable cost) is a cost that can be avoided if a unit is not
produced or would be incurred if a unit was produced. A fixed cost remains constant
whether a unit is or is not produced, therefore including fixed overhead within a cost
unit can distort decision making when working out the profit effect of increasing or
decreasing sales.
üð Marginal costing is more appropriate for decision making e.g. the nature of cost
behaviour is not distorted by including fixed overhead within a cost unit. Therefore
in a situation where a manager wants to view the true profit effect of increasing or
decreasing sales volume, marginal costing would be more appropriate e.g. for
techniques such as sensitivity, what if? or break-even analysis.
üð A manager cannot manipulate profit from one period to the next by deliberately
setting the volume of production higher than sales for a period e.g. stock piling.
Using marginal costing would therefore allow a better performance evaluation of a
manager and ensure they concentrate on the maximisation of contribution leading to
greater cash-flow for the organisation.
45
Example 4.7
For a hospital which of these does not seem like a sensible activity and cost driver?
Activity Cost driver
a) Insurance for building Maintenance costs
b) Phone appointments No. of patients
c) Patient main reception No. of patients
d) Length of patient stay No. of patients
The answer is d
Example 4.9
Pre-packed Plc
Absorption costing
Labour hours
CC 40,000 x 0.50/4.00 = 5,000 hrs
SV 25,000 x 0.75/4.00 = 4,688 hrs
LV 30,000 x 0.50/4.00 = 3,750 hrs
13,438 hrs
£100,000 / 13,438 = £7.44 PER LABOUR HOUR
Chicken Sweet and Lamb
Curry Sour Vegetables Vindaloo
Monthly sales 40,000 25,000 30,000
£ £ £
Selling price 2.99 3.50 3.99
Ingredients (0.99) (0.50) (1.49)
Labour (0.50) (0.75) (0.50)
Contribution 1.50 2.25 2.00
Fixed overhead
£7.44 x
0.50/4.00 (0.93)
0.75/4.00 (1.40)
0.50/4.00 (0.93)
PROFIT 0.57 0.85 1.07
TOTAL PROFIT £22,800 £21,250 £32,100
46
ABC
Set ups 4 + 5 + 10 = 19
£50,000/19 = £2,632 a batch
Shredding mixing and packaging
100 x 4 = 400
25 x 5 = 125
125 x 10 = 1,250
1,775 machine hours
£20,000/1,775 = £11.27 per machine hour
Cooking
6,000Kj x 4 = 24,000
4,000Kj x 5 = 20,000
10,000Kj x 10 = 100,000
144,000
£30,000/144,000 = £0.208 per Kj
Fixed overhead analysis
Chicken Sweet and Lamb
Curry Sour Vegetables Vindaloo
£ £ £
Set up
£2632 x
4 10,528
5 13,160
10 26,320
Shredding mixing
And packaging
£11.27 an hour x
100 hrs x 4 4,508
25 hrs x 5 1,409
125 hrs x 10 14,088
Cooking
£0.21 per Kj x
6,000 Kj x 4 5,040
4,000 Kj x 5 4,200
10,000 Kj x 10 21,000
Total F/OH per unit 20,076 38,845 61,408
47
Chicken Sweet and Lamb
Curry Sour Vegetables Vindaloo
Monthly sales 40,000 25,000 30,000
£ £ £
Revenue 119,600 87,500 119,700
Ingredients (39,600) (12,500) (44,700)
Labour (20,000) (18,750) (15,000)
Contribution 60,000 56,250 60,000
Fixed overhead (20,076) (38,845) (61,408)
PROFIT 39,924 17,405 (1,408)
Notice how after using ABC the overall profitability of lamb turns into a loss. This will be
useful to management!
Example 4.10
Robertson Interiors (£) BJ Flooring (£)
Revenue 500,000 100,000
15% DISCOUNT (75,000) n/a
Net revenue 425,000 100,000
Cost of goods sold (300,000) (60,000)
Gross margin 125,000 40,000
Transport (4500) (10,000)
Orders (10,000) (4,000)
Visits (240) (40)
Net margin 110,260 25,960
Transport £200,000/200,000 miles = £1 a mile
Orders £500,000/500 orders = £1,000 an order
Salesman £500,000/25,000 visits = £20 a visit
48
Example 4.11
Warehouse
Labour 350,000/100,000 = £3.50 per mc per week
Refrigeration 50,000/20,000 = £2.50 per mc per week
Building 250,000/100,000 = £2.50 per mc per week
Supermarkets
Staff 50,000 x 5/100,000 = £2.50 per mc per week [ Pobierz caÅ‚ość w formacie PDF ]