Help - Budgeting Exam

Help - Budgeting Exam

Example of Absorption costing :<BR><BR>Budget Production of 100 pcs <BR><BR>Direct materials 100 (Variable cost directly linked to the level of production)<BR>Direct Labour 100 (As above)<BR>Overheads 500 (Non variable cost / not directly linked to level of production)<BR><BR>With absoption costing the overheads are absorbed into the units of production or standard hours using a rate, for the above budget using units of production the rate would be £5 per unit (500/100)<BR><BR>The standard cost for one unit above would be<BR>Direct material 1<BR>Direct labour 1<BR>Overheads 5 the overhead is part of the standard cost for the unit<BR>Total 7<BR><BR>The key is to remember that the overheads are absorbed.<BR><BR>With Marginal costing things are a lot simpler as we split the costs into Variable and Fixed which enables us to see the Contribution to fixed costs :<BR><BR><BR>The standard cost using Marginal costing would be:<BR><BR>Direct materials 1 - As is a variable cost<BR>Direct Labour 1 - As is variable cost<BR>Total 2<BR><BR>All you then need is the selling price to see the contribution to fixed costs, if this was £10 per unit and you sold all 100 then:<BR><BR>Sales income £1000<BR><BR>Costs for 100 units<BR>Direct materials 100<BR>Direct labour 100<BR><BR>Contribution to fixed costs 800 (1000 - 100 - 100)<BR><BR>The fixed oveheads variances are only one calculation for Marginal costing so you mught be asked a question about it in an exam but the exam will be based on absorption costing variances.<BR><BR>hope this helps<BR><BR>