ABC (Pty) Ltd started production of alphas at the beginning of January. Actual fixed manufacturing overheads are the same as the budgeted amount of R330 000 for both January and February. Production in February increased by 10% over the previous month’s production. ABC (Pty) Ltd considers it appropriate to calculate the fixed manufacturing overhead rate on a monthly basis, based on that month’s budgeted capacity. The actual and budgeted capacity were the same. January’s production was 5 000 alphas. At the end of February, 1 000 alphas remained in stock. In January, there were 500 alphas in stock at the end of the month. There was no work-in-progress for either month. Assuming that ABC (Pty) Ltd uses the weighted average method of inventory valuation, what is the difference between the absorption and variable costing net profits for February?
a.
Absorption costing net profit is R27 000 higher than variable costing net profit
b.
Absorption costing net profit is R30 250 higher than variable costing net profit
c.
Absorption costing net profit is R27 500 lower than variable costing net profit
d.
Absorption costing net profit is R27 500 higher than variable costing net profit
e.
Absorption costing net profit is R27 000 lower than variable costing net profit
Definition Definition Indirect costs incurred while producing goods or services. Overhead costs cannot be directly attributed to products or services. Overhead includes indirect material cost, indirect labor cost, rent, utilities expenses, and depreciation. Since these costs directly affect the profitability of a company, managing overhead becomes an important task for management.
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