Question

A Mini Case (Conceptual Clarification) The standard cost of a product, made by precision Limited (that started its operations on January 2006) is as under, 12.00 Direct Material Cost (Rs) 7.50 Direct Labour Cost (Rs) Variable Production Cost (Rs) 3.00 Fixed Production Overhead (Rs) 7.50 The normal output on which the fixed overhead absorption rate of Rs 7.50 has been calculated is 48000 units per year. Production in January 2006 is 2000 units and production in February 2006 is 3200 units. Sales in January 2006 amounted to 1500 units and sales in February 2006 amounted to 3000 units. The selling price per unit is Rs 52.50 and the selling and administrative expenses are fixed at Rs 180000 per year and variable up to 10% of sales value. All fixed costs may be assumed to accrue evenly throughout the year. Based on the above information, you are required to prepare profit statements for both months (January 2006 and February 2006) applying, b) Absorption Costing Technique Marginal Costing Technique

Answer 1

Please give positive ratings so I can keep answering. It would help me a lot. Please comment if you have any query. Thanks!

Precision Limited.
Under absorption costing fixed production overhead is also allocated to units and it is a part of product cost.
Calculation of product cost	Amount $		Note
Direct materials	12.00
Direct labor	7.50
Variable production	3.00
Fixed production	7.50
Product cost	30.00		A
Cost of goods manufactured	January	February
Production units	2,000.00	3,200.00	B
Product cost	30.00	30.00	See A
Cost of goods manufactured	60,000.00	96,000.00	C=B*A
Ending Inventory	January	February
Opening units	-	500.00	D	This is closing units of January.
Add: Production units	2,000.00	3,200.00	See B
Less: Sales units	1,500.00	3,000.00	E
Ending Inventory (units)	500.00	700.00	F=D+B-E
Product cost	30.00	30.00	See A
Cost of Ending Inventory	15,000.00	21,000.00	G=F*A
Sales Revenue	January	February
Units sold	1,500.00	3,000.00	See E
Sell price	52.50	52.50	H
Sales Revenue	78,750.00	157,500.00	I=E*H
Variable selling and administrative costs @ 10%	7,875.00	15,750.00	J=I*10%
Annual Fixed selling and administrative costs	180,000.00	180,000.00	L
Monthly	15,000.00	15,000.00	M=L/12
Answer a
Profit Statement- Absorption costing	January	February
Sales	78,750.00	157,500.00	See I
Less:
Cost of goods manufactured	60,000.00	96,000.00	See C
Add: Opening Finished goods	-	15,000.00	This is value of closing inventory of January.
Less: Closing Finished goods	15,000.00	21,000.00	See G
Cost of goods sold	45,000.00	90,000.00	N
Gross Profit	33,750.00	67,500.00	O=I-N
Less: Operating Expenses
Fixed selling and administrative costs	15,000.00	15,000.00	See M
Variable selling and administrative cost	7,875.00	15,750.00	See L
Net Income	10,875.00	36,750.00
Under marginal costing only variable production cost is a part of product cost and all the fixed cost is charged off in the month its incurred.
Calculation of product cost	Amount $		Note
Direct materials	12.00
Direct labor	7.50
Variable production	3.00
Product cost	22.50		P
Cost of goods manufactured	January	February
Production units	2,000.00	3,200.00	See B
Product cost	22.50	22.50	See P
Cost of goods manufactured	45,000.00	72,000.00	Q=B*P
Ending Inventory	January	February
Opening units	-	500.00	See D	This is closing units of January.
Add: Production units	2,000.00	3,200.00	See B
Less: Sales units	1,500.00	3,000.00	See E
Ending Inventory (units)	500.00	700.00	See F
Product cost	22.50	22.50	See P
Cost of Ending Inventory	11,250.00	15,750.00	R=P*F
Sales Revenue	January	February
Units sold	1,500.00	3,000.00	See E
Sell price	52.50	52.50	See H
Sales Revenue	78,750.00	157,500.00	See I
Fixed Production Overhead cost	January	February
Production units	2,000.00	3,200.00	See B
Fixed Production per unit	7.50	7.50	S
Fixed Production Overhead cost	15,000.00	24,000.00	T=B*S
Variable selling and administrative costs @ 10%	7,875.00	15,750.00	See L
Annual Fixed selling and administrative costs	180,000.00	180,000.00	See M
Monthly	15,000.00	15,000.00	See M
Answer b
Profit Statement- Marginal costing	January	February
Sales	78,750.00	157,500.00	See I
Less:
Cost of goods manufactured	45,000.00	72,000.00	See Q
Add: Opening Finished goods	-	11,250.00	This is value of closing inventory of January.
Less: Closing Finished goods	11,250.00	15,750.00	See R
Cost of goods sold	33,750.00	67,500.00	U
Contribution	45,000.00	90,000.00	V=I-U
Less: Fixed costs
Fixed Production overhead	15,000.00	24,000.00	See T
Fixed selling and administrative costs	15,000.00	15,000.00	See M
Variable selling and administrative cost	7,875.00	15,750.00	See L
Net Income	7,125.00	35,250.00