Question

Pleae answer with proper calculation and table line tqvm

Gates Technologies LTD. Makes and sells one product, which has the following standard variables production costs per unit Direct Material cost (2KG at $10 per kg) Direct Labour cost (4 hours at $ 15 per hour) Variables production overhead cost ($3 per labour hour) 20 60 12 The budgeted selling price per unit is $150, and the production and sales budget for the coming this year are as follows: Production in Units 120,000 Sales in Units 100,000 Theres is no opening inventory at the beginning of 2016. Budgeted fixed production overhead cost are $15 per unit, and they are absorbed based on a normal production level of 100,000 units per annum. The b udgeted non- production costs for the coming year ar e as followings Variables non-production overhead costs S8 per unit sold Fixed non-production overhead costs per annum $2,000,000 Required: a) Prepare two income statement for the year of 2016, one using absorption and the other using marginal costing systems b) Prepare a reconciliation statement reconciling the profits under marginal and absorption costing c) Briefly explain why a difference arises between profit figures when using marginal and absorption costing principles

Answer 1

a)	INCOME STATEMENT-ABSORPTION COSTING
	Sales (100000*$150)			15000000
	Cost of goods sold:
	Beginning inventory		0
	Cost of goods manufactured:
	Direct materials (120000*$20)	2400000
	Direct labor (120000*$60)	7200000
	Variable overhead (120000*$12)	1440000
	Fixed overhead assigned (120000*15)	1800000
	Manufacturing costs for the year		12840000
	Total manufacturing costs		12840000
	Ending inventory = 12840000*20000/120000 =		2140000
	Cost of goods sold (Unadjusted)		10700000
	Fixed overhead overabsorbed (1800000-1500000)		-300000
	Adjusted cost of goods sold			10400000
	Gross profit			4600000
	Operating expenses:
	Non-production overhead costs = (100000*8+2000000) =			2800000
	Net operating income			1800000
	INCOME STATEMENT-MARGINAL COSTING
	Sales (100000*$150)			15000000
	Variable Cost of goods sold:
	Beginning inventory		0
	Cost of goods manufactured:
	Direct materials (120000*$20)	2400000
	Direct labor (120000*$60)	7200000
	Variable overhead (120000*$12)	1440000
	Variable Manufacturing costs for the year		11040000
	Total manufacturing costs		11040000
	Ending inventory = 11040000*20000/120000 =		1840000
	Variable cost of goods sold		9200000
	Variable non-production overhead costs (100000*8)		800000
	Total variable expenses			10000000
	Contribution margin			5000000
	Fixed costs:
	Manufacturing (100000*$15)		1500000
	Non production costs		2000000	3500000
	Net operating income			1500000
b)	NOI as per absorption costing income statement	1800000
	Less: Fixed costs deferred in ending inventory = 20000*15 =	300000
	NOI as per variable costing income statement	1500000
c)	The difference arises due to the inclusion of fixed manufacturing costs in the valuation of inventory
	under the absorption costing system; while under the variable costing system only variable costs
	are included.
	This will result in deferring of OH costs to the next period or in carry over of fixed costs from the
	previous year under absorption costing system. As the value of inventory differs, the NOI also
	differs.