CMA Study Group

Absorption Costing

  • 1.  Absorption Costing

    Posted 9 days ago
    Can someone please help me to understand this?

    Last year, Blake Company's income under absorption costing was $3,600 lower than its income under variable costing. The company sold 10,000 units during the year, and its total variable costs were $9 per unit, of which $1 was variable selling expense. If total production costs were $11 per unit under absorption costing, then how many units did the company produce during the year?

    Absorption net income is $3,600 lower, which means that ending inventory decreased and sales were greater than production. To calculate fixed overhead cost per unit, subtract variable production cost per unit from total production cost per unit. Remember that $1 of the total variable costs per unit is variable selling expense. Hence, total variable production costs per unit is $8 ($9 − $1). To compute fixed production costs per unit, subtract the variable cost from the total cost to get $3 per unit ($11 − $8).

    The difference between absorption costing and variable costing can then be divided by the fixed overhead cost per unit to determine the decrease in inventory: $3,600 ÷ $3 = 1,200 units.

    To calculate the units produced during the year, subtract the decrease in inventory from the total units sold during the year: 10,000 – 1,200 units = 8,800 units produced.

    Tejas Doke
    Dombivli MH

  • 2.  RE: Absorption Costing

    Posted 8 days ago
    Hello Tejas,

    I can try.

    The main difference between Absorption Costing and Variable Costing is Fixed Overhead (FOH) costs.

    Hence, when the question says, Absorption Costing Income is $3,600 lower than Variable Costing Income, it means that the difference is nothing but FOH costs which have not been accounted in the Variable Costing method.

    Now that the FOH total cost has been derived, we need to compute the FOH per unit cost.

    The questions mentions a total Production Cost of $11; a total Variable Cost of $9 out of which $1 accounts for Variable Selling Expenses.

    Total Production Cost per unit = Variable Costs per unit + Fixed Costs per unit
    $11 = ($9 - $1)* + x
    On solving x, we derive the Fixed Cost per unit to be $3

    *a total Variable Cost of $9 out of which $1 accounts for Variable Selling Expenses, so we need to subtract the Variable Selling Expenses per unit to find the actual Variable Cost per unit.

    Now that we have derived the Fixed Cost per unit, we need to find the number of units in hand. (the reason I said number of units in hand is because the question mentions the units sold and is asking us to derive the number units produced, so the only logical explanation is that there were some units held prior to production)

    Fixed Cost per unit = Total Fixed Costs / Number of units

    $3 = $3600/x

    On solving x, the number of excess units in hand were 1,200.

    Now from the question, we know the number of Units Sold is 10,000.

    Unit Sales = Units produced + Excess units in hand

    10,000 = X + 1,200

    On solving x, the units produced were 8,800.

    I hope this helps!

    Vinti Shahani

  • 3.  RE: Absorption Costing

    Posted 8 days ago
    Hi Tejas,
    In this present problem, they have given
    -The total variable cost as $9 per unit (which comprises of Direct material, Direct labour, Variable Manufacturing cost and Variable Selling cost) of which $1 is variable selling cost. From this we can interpret that $9 includes of production and period cost. To get pure variable production cost we have to subtract $1 from $9 i.e $8 (this is pure variable production cost)
    - The have also given Total production cost of $11 (which comprises of Direct material, Direct labour, Variable Manufacturing cost and fixed manufacturing cost) To get Fixed manufacturing cost we have to subtract Pure variable production cost as computed above from the total production cost (i.e $ 11- $8= $3) $3 is the fixed manufacturing cost per unit.
    -The difference between net income as per absorption costing and variable costing is purely due to the treatment of Fixed manufacturing cost as production cost as per the absorption cost and treating the same as period cost as per the variable costing. Therefore, to calculate the no of units produced which are less that the no of units sold is ($3600 / $3 = 1200 units). Which means that when the sold units is 10000, we can come to the conclusion that (10000-1200 = 8800 )is the total no units produced.
    (Reconciliation factor= Production units – sold units X Fixed manufacturing cost per unit)
    8800 – 10000 X $3 = -3600
    i.e Net income is $3600 less that the net income as per the variable costing

    Hope this suffices your query
    Best Wishes!!!
    Thank you
    Nitin Mudugal

    Nitin Mudugal

  • 4.  RE: Absorption Costing

    Posted 8 days ago
    Hi ,

    Which Part is this question from  ?Part 1 or 2?

    Heena Sharma

    Heena Sharma