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Homework answers / question archive / A company has planned to produce 5,000 units of product B in December
A company has planned to produce 5,000 units of product B in December. The plan for December shows that for Product B the beginning inventory will be 1,000 units and the ending inventory will be 200 units. The monthly budgeted production cost data for product B for December is as follows: Variable direct costs per unit: Rs.6 Variable production overhead costs per unit: Rs.3.50 Total fixed production overhead costs: Rs.29,500 The company absorbs overheads on the basis of the budgeted number of units produced. [predetermined overhead rate is based on number of units produced] Would the operating profit for product B for December using absorption costing be higher or lower than using variable costing? By how much?
The operating profit for product B for December using absorption costing would be lower than using variable costing by Rs. 4,720.
Calculation:
The difference in profit between absorption and variable costing system is due to presence of fixed production overhead cost per unit in net inventory.
Beginning Inventory = 1,000 Units
Ending Inventory = 200 Units
Net Beginning Inventory = 1,000 Units - 200 Units = 800 Units
|
operating profit for product B for December using absorption costing would be lower than using variable costing by = 800 Units * Rs.5.90 per unit = Rs.4,720 |
Working notes:
1. Sales (Units) = 1,000 Units + 5,000 Units - 200 Units = 5,800 Units 89320
2. Predetermined overhead rate = Fixed Production overhead costs / Number of Units produced
Predetermined overhead rate = Rs.29,500 / 5,000 units = Rs.5.90 per unit
3. Unit product cost under absorption costing
| Particulars | Rs. |
| Variable direct costs per unit | 6.00 |
| Variable production overhead cost per unit | 3.50 |
| Fixed production overhead cost per unit | 5.90 |
| Total Unit Product costs | 15.40 |
4. Unit product cost under variable costing
| Particulars | Rs. |
| Variable direct costs per unit | 6.00 |
| Variable production overhead cost per unit | 3.50 |
| Total Unit Product costs | 9.50 |
