Question

(25 marks) QUESTION 3 Telekong City Bhd (TCB) has organized a new division to manufacture and sell me Muslimah (ladies) praying attire called as 'telekong'. The division's monthly costs are as below: Manufacturing cost: Variable cost per unit Direct material Variable manufacturing overhead Fixed manufacturing overhead costs RM76.80 RM 3.20 RM576,000 Selling and administrative cost Variable Fixed (total) 12% on sales RM752,000 TCB regards all of its workers as full-time employees and the company has a long-standing no lay-off policy. Furthermore, production is highly automated. Accordingly, the company includes its labor costs in its fixed manufacturing overhead. The 'telekong' is sold at RM320 each. During April, the number of unit produced was 24,000 units, and the number of unit sold was 20,000 units. Required: a) Compute the unit product cost using: i. Absorption costing. ii. Variable costing (6 marks) (CLO3:PLO2:C3) b) Prepare the absorption income statement for April. (4 marks) (CLO3:PLO2:03) c) Prepare the contribution income statement using variable costing. (4 marks) (CL03:PLO2:03)

Answer 1

Answer is given below with working notes

a Product Cost Absorption Costing 76.80 3.20 24.00 104.00 Variable costing 76.80 3.20 Direct Material Variable manufacturing Overhead Fixed manufacturing cost (RM 576,000/24,000 units) Total Product Cost per unit 80.00 Currency is RM Telekong City Bhd (TCB) Income Statement-Absorption Costing (April Month) Production units 24,000 Sales 20,000 Closing stock 4,000 Selling price per unit 320 6,400,000 Sales Less: Cost of Goods Sold Direct Material Variable Manufacturing Overhead Fixed Manufacturing overhead Cost of Goods available for Sale Less: Closing Stock-(4,000 X 104.40) Cost of Goods Sold Gross Profit Less: Operating expenses Selling and administrative expenses (Variable + Fixed) Operating Income 1,843,200 76,800 576,000 2,496,000 416,000 2,080,000 4,320,000 1,520,000 (6,400,000*12%) +752,000 2,800,000 Currency is RM Telekong City Bhd (TCB) Income Statement- Variable Costing (April month) Production 24,000 Sales 20,000 Closing stock 4,000 Selling price per unit 320 6,400,000 1,843,200 76,800 1,920,000 320,000 Sales Less : Variable Cost of Goods Sold Direct Material Variable Overhead Cost of Goods available for Sale Less: Closing Stock (4,000 X 80) Variable Cost of Goods Sold Variable Selling and administrating expense Contribution Margin Less: Fixed Cost Fixed Manufacturing Overhead Selling and administrative expenses Operating Income 1,600,000 768,000 12% of Sales 4,032,000 576,000 752,000 1,328,000 2,704,000 d Absorption costing income statement should be presented to investors since it is in like with Generally Accepted Accounting principles Currency is RM 2,800,000 e Reconciliation of profit Profit as per Absorption Costing Less: Difference in closing stock Closing stock as per Absorption costing Closing stock as per Variable costing Difference 416,000 320,000 96,000 Profit as per Variable costing 2,704,000 f Fixed cost remains same at overall absolute level. Hence it should be divided by the production units during the year to arrive at per unit cost. Per unit cost helps in valuing closing stock at full product cost