Question

(11 points) Budgeted income statements, both methods, no opening inventory Katts Ltd commenced operations on 1 January 2014. Fixed factory overhead is to be applied to production on the basis of $3.00 per unit. Budgeted details for the year ended 31 December 2014 were: Sales units 400 000 $12 Selling price per unit Units produced Budgeted costs in total Direct materials Direct labour Variable factory overhead Fixed factory overhead Fixed selling and administrative expenses Budgeted variable selling and administrative expenses per 500 000 $ 750 000 1 000 000 1 000 000 1 500 000 450 000 $0.50 unit Required: (a) (1 points) Briefly explain why there will be no capacity variance. (b) (5 points) Prepare a budgeted income statement for the year ended 31 December 2014 using absorption costing. (c) (5 points) Prepare a budgeted income statement for the year ended 31 December 2014 using direct costing.

Answer 1

Answer 1

Budgeted fixed factory overhead	$      1,500,000
Divided by: Budgeted fixed factory overhead per unit	$                      3
Budgeted units	500,000
Actual units produced	500,000
There will be no capacity variance because actual units produced is equal to Budgeted units of 500,000.

Answer 2

Ending inventory in units (500000-400000)	100,000
Direct material	$          750,000
Direct labor	$      1,000,000
Variable factory overhead	$      1,000,000
Fixed factory overhead	$      1,500,000
Manufacturing costs	$      4,250,000
Less: ending inventory (Unit cost = 4250000/500000 = 8.5) (100000*8.5)	$       (850,000)
Cost of goods sold	$      3,400,000
Fixed selling and administration expense	$          450,000
Variable selling and administration expense (400000*0.5)	$          200,000
Selling and administration expense	$          650,000

Absorption costing income statement
Sales revenue (400000*12)			$     4,800,000
Less: cost of goods sold			$     3,400,000
Gross profit			$     1,400,000
Less: selling and administration expense			$         650,000
Net income			$         750,000

Answer 3

Direct costing income statement
Sales revenue (400000*12)			$     4,800,000
Less: Variable cost
Direct material	$              750,000
Direct labor	$          1,000,000
Variable factory overhead	$          1,000,000
Variable Manufacturing costs	$          2,750,000
Less: ending inventory (Unit cost = 2750000/500000 = 5.5) (100000*5.5)	$           (550,000)
Variable cost of goods sold		$        2,200,000
Variable selling and administration expense (400000*0.5)		$            200,000
Total variable costs			$     2,400,000
Contribution margin			$     2,400,000
Less: fixed cost
Fixed factory overhead		$        1,500,000
Fixed selling and administration expense		$            450,000
Total fixed costs			$     1,950,000
Net Income			$         450,000