I need some help with part 1.2
TLC Ltd manufactures a single product Cot. The following figures relate to Cot for one year period.
Acivity level 50% 100%
Sales and production ( units) 400 800

Sales £ 8000 16000
Prod. cost:Variable 3200 6400
Fixed 1600 1600

Sales distribution, admin cost
Variable 1600 3200
Fixed 2400 2400

The normal level of activity for 1 year 800 units. Fixed costs are incurred evently throughout the year, and actual fixed costs are the same as budgeted.
There were no stocks of Cot at the begining of year.
In the first quarter 220 units were produced and 160 units sold.

Required:
a) what would be the fixed production costs absorbed by Cot if absorption costing is used?
b) What would be the under/over recovery of overheads be during the quarter?


PLEASE HELP!!!!!!!!!!!!!!!!!!!!!!!!!!

I calculated on paper and here is answer
1) $ 800
Because rate of fixed production cost is $ 5
Fixed cost 1600 +2400 /800 = 5



2) Budgeted during quarter is 200 units while 20 extra units are produced so over aborption would be 5 * 20 = $100

Many many thanks
It is clear for me now.

Thanks

Anybody who knows the answer
- Discuss absoprtion costing as a method of costing facory output?
I have calculated a profit using absop. method/
What to do next?????????????????????????????????????????// :(

What question are you talking about :?
Any new problem
I am studying same subject as you.
come on

You are better student than me!!!!
I am completely lost:((((

I don't know about it :lol: I am studying with my other friends as group study and i haven't joined any college.ACCA looks very compatible with my mind... I love it.

Try to explain your problem we can help each other. :wave:

Hi Mariam

Thanks for help.

I am going on holiday for 2 weeks
When I come back I ask you a lot of questions


Many many thanks

Have you done a partnership?

Before holiday I have 1 question
I need to do a partners capital account
There were two partners Mr T and Mr S. In October they admitted MrX into the partnership. He paid 60 000 into partnership.
Capital Mr T 45000
Capital S 32 000
And it says that on the day that MrX admitted into the partnership the goodwill in the partnership was valued at £ 200000. No goodwill is to be kept in the accounts of the new partnership. Adjustments for goodwill are to be made in tha capital accounts of the partners.
Do I need to add this goodwill to partnars capitals?
And how do I need to do that?
Is it equall proportions or??????

I really need your help!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Now i think you have gone to holidays. :P
When yesterday i read your post it was different from now, you may have probably edited the post to ask partnership question.

I am doing partnership questions but not sure about goodwill but when you will come from holidays hopefully i would have better grip on this question.

Enjoy your hollidays.

Dear Mariam

I am doing a progress test and already have difficulties.
May be you can help me with following:

A company has 3 branches X Y Z to which the following budgeted info relates:
X Y Z Total
Sales £ 200 200 200 600

Contribution 60 50 20 130
Less: Fixed Cost (35) (35) (30) (100)
Profit/(Loss) 25 15 (10) 30

60% of the total fixed costs are general overheads. General overheads are apportioned to the branches on the basis of sales value. The other fixed overheads are specific to each branch and are avoidable if a branch closes down.

If branch Z is closed down and the sales of the other two branches remained the same< what would be the revised budgeted profit for the company?

A £ 10,000
B £ 20,000
C £ 40,000
D £ 50,000

Margo,
(and apologies for jumping in before Miriam) but it's solution B, 20k GBP because:

We are only interested in the marginal differrent of axeing site X: which is the loss of the 20,000 contribution netted off against the savings of overheads not incurred as the result of close down.

Savings of overhead:
60% of it is incurred anyway (general overhead) (20k of which is apportioned to X by virtue of it's 200k sales)
Given that X's total fixed costs are 30k, it follows that this leaves a remaining 10,000 overhead in X which must be branch specific and will be avoided if the branch is closed down.

Hence:
Old Profit 30k
Savings of O/H 10k
loss of contribution (20k)

New profit 20k.

sorry to jump in> Can anyone give advice??

my problem begins with this example. Company A produces a single product with the following budget. Selling price=10, Direct wages=2, Direct material=3, Variable overhead=1, Fixed overhead=10000.

The fixed overhead absorption rate is based on volume of 5000 units per month.Opening statement for the month when 4800 units were produced and sold assuming that costs are as budgeted. Under absorption costing :

Sales(4800 units) = 48000
Cost of sales (4800x8) = 38400

Operating margin = 9600
Under absorbed overhead = (400)

Operating profit = 9200

End of example

To me fixed overhead is included in production costs hence cost of sales because there is no closing stock and sales are in line with production. Therefore naturally fixed overhead is being charged out to profit in the form of cost of sales. Now if fixed overhead is 10000 then 4800--> cost of sales---multiplied by 2 <--- (absorption factor) would give 9600 <---- fixed overhead absorbed which is not enough to cover 10000 <--- fixed overhead. We need 400 more. FINE!! UNDERSTOOD!! but y is it that when we have production of 6000 units, i.e 4800 sold plus 1200 held in stock, the absorption statement shows a over absorption of 2000 ??? It is the same cost of sales being charged out to sales to give profit. And I know that the remaining absorbed fixed costs go forward to the next period in the closing stock to form opening stock, but y is it that there isn't an effort to try to get close to the real fixed cost of 10000. I mean only 4800 x 2 is still being charged out to sales. I don't see anywhere else fixed costs are being incorporated in the statement before we get operation margin of 9600 (6000 x8 minus 1200 x 8 to give 38400 wjich will be subtracted from sales of 4800 x 10).

Where am I going wrong?? To me part of fixed costs have adequately been represented in cost of sales figure so the remainder should be found and just reconciled to get your 10000.

Really confused Confused

Hi always the bridesmaid, (great name)

I'm not a costing expert but will have a stab at your two questions:

1) For some reason the example answer has cited 6000 units x 2 (abs rate), minus 10,000 equals 2000 to be the over absorption for the month. I don't know why that should be, because 1200 x 2 =2400 is being deducted from the monthly statement and held in the balance sheet as inventory, leaving 400 short in the month as under absorption. I don't know about this one.

2) Because 10,000 is an estimate and the actual amounts paid every month may be (and usually are) different to this estimate, then the company will periodically reveiw this amount in the light of the historic actual costs. They can then tweak the fixed cost estimate (and therefore the absorption rate), and/or do a journal into the particular cost of sales account to bring the posted costs into line with the actual costs.

There is a great article about Absorption costing vs Marginal costing here:
http://www.accaglobal.com/pdfs/studentaccountant/forster0506.pdf

It is written by David Forster the 1.2 examiner and gives some great exam tips in this article, particularly quick ways to analyse the differences btween marginal and absoption costing.

That's an excellent article GAAP. Thanks for the heads up!
My problem still stands though. In the article, example 1 has full profit statements but I do not see absorption recovery for the absorption costing statement i.e. closing stock of 3000@20=60000 takes with it into period two 36000 and cost of sales charges overhead at 8000 x 12 = 96000 ----> charged to sales BUT the fixed overhead IS 120000. It is fixed and no amount of production would change that (well within a given limit of course). Therefore, 96000 IS SHORT 24000. This means that 96000 is not enough and Under absorbed, therefore, 24000 supposed to be under absorbed i.e. 240000 (contribution) minus 24000 (under absorbed overhead) to give 216000.

Can someone explain y this was not put in example 1, May 2006 student accountant, page 51 or http://www.accaglobal.com/pdfs/studentaccountant/forster0506.pdf

and my original post still confuses me. I got all that info off of an At folks book 1994!!! Therefore, I was studying an old syllabus format text. Has the syllabus so changed that in 1994 ACCA required more knowledge at level 1 (which was called foundation level and there were 4 papers to pass before the intermediate level). Does it mean that I am looking / studying absorption costing with recovery rates not yet needed at this new level 1 (new to me anyway, cause as u may have guessed, once did the ACCA thing in circa 1994)

To narrow it down, the original example is using production costs to calculate overhead recovery and I am thinking that u need to use cost of sales production costs to calculate overhead recovery...<---dunno if that made sense

I guess if they developed the book keeping they would show the under/over absorption being debited to the Cost of Sale account with the under absorbed amount (and presumably credit the expense account). but like you said, it could be outside the scope of this syllabus.

But I think that it is more likely that these examples don't include the under/over amounts because the subject of the example was some other aspect of the costing method (eg. in the David Forster piece it was to compare against marginal costing)

Anyhow, I just had a look at the 1.2 syllabus and is still on it, so keep posing the question my friend!