Question

QUESTION 2: Kabwe Martin Company (KMC) Ltd is a large sized mining firm domiciled in Mumbwa of central province of Zambia KMC Ltd is owned by Graduates of the University of Zambia who after working for Mopani Copper Mine (MCM) Ltd and Kafilonda Copper Mine (KCM) Ltd on the copper belt decided to set up business in Mumbwa district. KMC Ltd exports 3 types of copper products namely the explosives cathodes and blisters to outside markets both in Africa and Asia Data below relates to a typical production cycle of KMC Ltd: 1. There was no opening inventory for the latest period 2 Variable Production cost is K35 per unit and fixed production costs of K30,000 per period are recovered on the basis of the normal capacity of 5000 units per period 3. The selling price per unit of copper cathodes is K60 4 Fixed administration, selling and distribution overheads are K19, 000 per period Calculate the profit reported for sales of 5000 units last period for production volumes of 5000 units,6000 units and 7000units using Absorption costing (10 marks) Marginal Costing (10 marks)

Answer 1

Answer with working notes is given below

Reconciliation of profit is also given to understand the concept better.

Currency is kn Kabwe Martin Company Income Statement-Absorption Costing 5,000 5,000 Production Sales Closing stock 6,000 5,000 1,000 7,000 5,000 2,000 300,000 300,000 300,000 175,000 25,000 200,000 Sales Less : Variable Cost of Goods Sold Variable Manufacturing Cost -Kh35 per unit Fixed Manufacturing cost-kh 5 per unit Cost of Goods available for Sale Less: Closing stock Cost of Goods sold Gross profit Less: Operating expenses Administration, selling and distribution Overhead 210,000 30,000 240,000 41,000 199,000 101,000 245,000 35,000 280,000 82,000 198,000 102,000 200,000 100,000 19,000 19,000 19,000 Operating Income 81,000 82,000 83,000 Product cost per unit Year 1 Year 2 Year 3 Variable manufacturing cost Fixed manufacturing cost per unit (30,000/5,000) Total product cost Closing stock Closing stock value 41 1,000 41,000 2,000 82,000 Kabwe Martin Company Income Statement- Marginal Costing 5,000 5,000 6,000 Production Sales Closing stock 5,000 1,000 7,000 5,000 2,000 300,000 300,000 300,000 (Units X K60) 175,000 175,000 Sales Less : Variable Cost of Goods Sold Variable Manufacturing Cost -Kh35 per unit Variable Cost of Goods available for Sale Less: Closing stock Cost of Goods sold Contribution Margin Less: Fixed Cost Manufacturing overhead Administration, selling and distribution Overhead 210,000 210,000 35,000 175,000 125,000 245,000 245,000 70,000 175,000 125,000 175,000 125,000 30,000 19,000 30,000 19,000 30,000 19,000 Operating Income 76,000 76,000 76,000 Closing inventory is valued at variable manufacturing cost kh 30 per unit Reconciliation of Profit (Loss)- Marginal Costing and Absorption Costing Production units 5.000 6.000 Profit (Loss) as per Absorption Costing 81,000 82,000 7.000 83,000 Add: Difference in closing stock Closing stock as per Absorption costing Closing stock as per Marginal costing Difference 41,000 35,000 -6,000 82,000 70,000 -12,000 0 (Under)Over absorbed Fixed overheads -5,000 5,000 Profit (Loss) as per Marginal costing 76,000 76,000 76,000 (Under)Over absorbed Fixed overheads Fixed Overheads absorbed Actual Fixed Overheads (Under) Over absorbed Fixed overheads Production units 5,000 6,000 25,000 30,000 30,000 30,000 -5,000 7,000 35,000 30,000 5,000