FTC Units 8/9 Chap 9 Act 2 - Help!

mi|kshake

Hi,

I'm a bit stuck on one of the questions (and I've been looking at it far too long now to make any sense of it lol).

I'm asked why two profits based on selling the same amounts are different and this is because one uses absorption costing and the other variable costing. I then have to do a working to show this, the answer coming out as the difference between the two profits - most of which I understand. Part confuses me however:

£153000 (total fixed costs included in product cost) x 1200 (?) / 10000 (production ?) = £18360 (diff in profits)

I think the 10000 is the actual production volume (the actual units being sold were 8800), but am unsure were the 1200 comes from and why I am multiplying the total fixed costs included in product cost figure.)

It's probably fairly obvious and I've just been looking at this question for far too long, but can anyone help? (Hope I've given enough info on the question)

Thanks!

mi|kshake~

AdamR

hi
If the production volume is 10000 and actual sales 8800, the 1200 is closing stock of units (10000-8800). This figure is then used to calculate the amount of fixed overheads absorbed into the closing stock on the absorption costing statement in the way you have described, giving you the difference in profit of £18360. The inclusion of overheads into the stock figure in absorption costing creates the difference between the absorption profit and the result of a marginal costing statement.

Hope that helps!

Adam

mi|kshake

Thanks - that makes sense now!

Perhaps studying on the weekend is not a good idea, lol!

mi|kshake~