Financial Performance Question

Andy84

Hi, having a little trouble on the understanding of a financial performance question. I can't get my head around why the difference is not just budgeted figure minus the actual figure (233750 - 241000 = -7250) on questions like the one below; If they're a 'Fixed' cost why do you change the budgeted total based on the number of units produced in order to work the answer out? (Correct answer is 242250 - 241000 = 1250). On other questions I've had that look very similar, you don't have to adjust the budgeted figure???

Any help would be greatly appreciated.


A company budgeted to produce 55,000 units with fixed production costs of £233,750. The actual volume of production was 57,000 units and the actual fixed costs were £241,000... Complete the following sentence:

Fixed production overheads were (Under / Over Absorbed) by £________

tillyjbc

Hi Andy - the reason the answer is not just budgeted minus fixed costs is because they are not asking for the fixed overhead expenditure variance. They are asking how much the overheads have been under/over absorbed. So first you have to calculate your Budgeted Overhead Absorption Rate - budgeted overheads / budgeted no. units. 233,750 / 55,000 = 4.25. Multiply that by actual units produced = 242,250. Take away actual fixed costs. So the answer is fixed production overheads were over absorbed by 1250.

Hope that helps!

Andy84

Brilliant, thank you!

I could see where the answer came from, but it was just the understanding of why you do it for one type of question but not the other that was confusing me. Your reply has made it a lot clearer though now, thanks for your help.