only cost that will increase the value of inventory is fixed manufacturing cost
the objective of the manager in the given question is to increase the profit from $ 20000 to $ 50000/- ( increase by $ 30000/-)
We know...ONLY fixed manufacturing costs are absorbed based on planned production unit overhead absorption rate
it is given in the question the production & sales are same quantity 5000 units...so Fixed Manuf overhead absorption rate is 100000/5000 = 20/- per unit
So when the manager decided to produce 1500 more units (that is total 6500 units and sells only 5000 units )
your PNL will be as follows :
Sales = 5000 units x 150 = 750,000
COGS = 5000 units x 100 = (500,000) ( variable 80 + 20 fixed manufacturing overhead)
Over absorbed/over applied = 30,000 ( gain ...refer note 1 below)
Gross Margin = 280000
Less :
Variable selling (80000)
Fixed Admin (150,000)
Profit expected 50000 ( as against original 20000/-)
This shows how manager can manipulate profit by increasing production without actually selling the goods
Note 1
Produced = 6,500 units x 20 = 130,000
Actual Fixed manufacturing overhead = 100,000
Overabsorbed/overapplied = 30000 (gain ... since company has produced more with less cost )
Hope this clarifies your doubt
Original Message:
Sent: 11-03-2021 07:35 AM
From: Noura Abuhammad
Subject: Question section D -CMA PART1
Hello everyone ,
Can someone help me understand the solution to this question?
Why was only the fixed manufacturing costs charged to the inventory (FG)?