Chapter 12 Marginal Costing: Task 2

Danielle Milton

Hi,

I'm getting ready for my exam and task 2 on page 215 of the costing book is confusing me. I need work out the variable overhead and in the book it says (120,000/24,000) *2. Now I understand the formula but I cannot figure out where they got the 24,000 from.

I know the 120,000 is the total variable overhead cost. The other information given is Open Inv 1400 units, Production 12,000 units and sales 11,600 units. It takes 2 hours labour to make 1 unit. So I understand we need to / 120000 OH by the level of activity and then * by 2 (as in 2 hours) to get the absorption rate. What I don't get is where they get the 24,000 from.

We made 12000 units this period well that's not 24000. We sold 11600 that's also not 24000. Add the two together that's still not 24000. Where are they getting this 24000 from?

crispy

Hello,

The 24,000 represents the level of activity (ie: 24,000 labour hours)

Variable O/heads = 2 Hours @ £ 5 = £10 per unit

So, 12,000 Units at 2 hours each = 24,000 hours

Hope this helps.

Danielle Milton

Oh I feel so silly now. Thank you so much for that.