Question

Saunders manufactures a single product, details of which are as follows.

per unit	$
selling price	1500
direct materials	400
direct labour	200
variables overheads	150

Annual fixed production overheads are budgeted to be $4 million and Saunders expects to produce 80,000 units of Bark each year. Overheads are absorbed on a per unit basis. Budgeted fixed selling costs are $1,520,000 per quarter.

Actual stock data for quarter of 2020 are given below.

	January -March	April-June
Sales	20000	23000
Production	22000	17000
opening Stock	5000	7000

Required-

1. Calculate closing stock.
2. Prepare a Marginal Costing Statement for both quarters.
3. Prepare an Absorption Costing Statement for both quarters.
4. Reconcile profit figures from both statements.

Answer 1

A)

Closing stock calculation
Particulars	January - March	April - June
Opening stock	5000	7000
Production	22000	17000
Total stock	27000	24000
Less : Sales	20000	23000
Closing stock	7000	1000

B) Marginal costing statement for both quarters:-

Particulars		January - March	April - June
Sales	Units	20000	23000
Selling price	Per unit	1500	1500
Gross Sales		3,00,00,000.00	3,45,00,000.00
Variable costs
Direct Material	Per unit	400.00	400.00
Direct Labour	Per unit	200.00	200.00
Variable overheads	Per unit	150.00	150.00
Total variable costs	Per unit	750.00	750.00
Total variable costs	Gross	1,50,00,000.00	1,72,50,000.00
Contribution		1,50,00,000.00	1,72,50,000.00
Less :- Fixed costs
Fixed production costs		10,00,000.00	11,50,000.00
Fixed selling costs		15,20,000.00	15,20,000.00
Net Profit		1,24,80,000.00	1,45,80,000.00

Fixed production cost calculation under marginal costing
Annual fixed production costs		40,00,000.00
Annual production		80,000.00
Fixed production cost per unit		50
Fixed production cost		January - March	April - June
Units sold		20000	23000
Fixed production cost per unit		50	50
Fixed production cost	Quarterly	1000000	1150000

C) Absorption costing statement for both quarters

Particulars		January - March	April - June
Sales	Units	20000	23000
Selling price	Per unit	1500	1500
Gross Sales		3,00,00,000.00	3,45,00,000.00
Direct Material	Per unit	400.00	400.00
Direct Labour	Per unit	200.00	200.00
Variable overheads	Per unit	150.00	150.00
Total variable costs	Per unit	750.00	750.00
Total variable costs	Quarterly	1,50,00,000.00	1,72,50,000.00
Fixed production cost	Quarterly	10,00,000.00	10,00,000.00
Total cost of goods sold	Quarterly	1,60,00,000.00	1,82,50,000.00
Gross Margin	Quarterly	1,40,00,000.00	1,62,50,000.00
Fixed selling costs	Quarterly	15,20,000.00	15,20,000.00
Net profit	Quarterly	1,24,80,000.00	1,47,30,000.00

D) Reconciliation of profit figures under both methods

Reconciliation of profit	January - March	April - June
Absorption cost method	1,24,80,000.00	1,47,30,000.00
Marginal cost method	1,24,80,000.00	1,45,80,000.00
Net difference in profit	0.00	1,50,000.00

Under the absorption costing method total fixed overheads are calculated based on the annual projected amounts which are 1 million quarterly hence this amount is considered as fixed production cost for both the quarter but under the marginal costing statement total production cost is calculated basis of unit price which is $50 per unit (refer to marginal cost statement working).

In first quarter of January to March there is no difference as 20000 units were sold and $1 million are calculated under the marginal costing statement ( 20000 units * $50 per unit) and same amount is calculated under the marginal costing method

In second quarter of April to Jun, there is difference of $1,50,000 as 23000 units were sold hence $14,58,0000 is calculated under marginal costing system (23000 units * $50 per unit) but under the absorption statement on $10,00,000 is calculated (this amount is equivalent to fixed production cost of 20000 units). Hence the difference in second quarter is $1,50,000 (3000 units * $50 per unit) under the marginal costing hence profit calculated under marginal costing statement is less by $1,50,000 for second quarter than by Absorption costing statement.