Student Doubts Forum

Problem 10

Problem 10

by Francisca Mendes Pereira -
Number of replies: 1

Hello!

In question 10.1 C), the COGM changes relative to A) as the overhead rate (estimated) is different from the previous overhead rate. However, according to the solutions, the Gross Profit in the P&L account is the same.

Should we assume that because we are using an estimated rate we must consider the under-recovery of overheads in the end?

Thanks in advance!

In reply to Francisca Mendes Pereira

Re: Problem 10

by Pedro Pinto da Silva Perdigão -
Hello Francisca,

The overheads that occurred in the period will still be the same in 10.1 c), there is no change to that. But the fact that the company estimated a budgeted overhead rate of 4€ can lead to them having to register Over-recovery or Under-recovery of overheads if the budgeted allocation rate is different from the real allocation rate. And that is the case in this exercise.

If you look at the P&L from 10.1a, COGS will sum up yo 41.253.000, but the COGS in P&L of 10.1c will be only 40.478.000. That happens because the 4€ of budgeted overhead allocation rate was an underestimation. Because of that, you will need to register Under-recovery of overhead of 775.000, and the Operating profit will be the same in both P&Ls.

Hope this helps!

Pedro Perdigão