Question

that 2 Conte ad absorption pred Direc lculation of overhead abso differences in profits. A act with the following you over IM7.5 Batermediate: Calcula and an explanation of the diffe manufactures a single product per unit: Direct materials Direct Labour Manufacturing overhead £7.00 15.50 12.00 is £36.00 per unit. Fate 0000 to selling price of the product is $36.00 is are expected to be £134000 acturing costs are expected to be analysed as manufacturing costs are expected period. Fixed non manufacturing £875000. Fired manufactur Faed manufacturing costs can be an Service department General follows: Department factor Production £265000 £23000 £465000 £380000 tion is as follows: al factory' costs represent space costs, for exa rates, lighting and heating. Space utilization is as fe Production department 1 Production department 2 Service department 40% 50% 10% S per cent of service department costs are labour related and the remaining 40 per cent machine related. Normal production department activity is: Machine Direct labour Department 1 Department 2 80000 100 000 Production hours units hours 2400 120000 2400 120000 Faed manufacturing overheads are absorbed at a predetermined rate per unit of production for each production department, based upon normal activity. Required: (a) Prepare a profit statement for a period using the full absorption costing system described above and Showing each element of cost separately. Costs for the period were as per expectation, except for additional expenditure of £20000 on foxed manufacturing overhead in Production Department 1. Production sales were 116 000 and 114000 units respective ement for a prescribed aboosts for rred the period. (b) Prepare a profit statement for the period using man costing principles instead. (c) Contrast the general effect on profit of using abso and marginal costing systems, respectively. (Use figures calculated in (a) and (b) above to illustrate yo answer.) units respectively for (14 marks) Sing marginal (5 marks) & absorption (6 marks ACCA Cost and Management Accounting IM7.6 Advanced: Preparation and

Answer 1

Solution:

	Production Dept		Services Dept	General factory	Total	Working
	1	2
Allocated	380,000	469,000	265,000	230,000	1,340,000
Share of general factory	92,000	115,000	23,000	-230,000
			288,000
	76,800	96,000	-172,800			60% *288,000
	57,600	57,600	-115,200			40% * 288,000
	606,400	733,600

Per unit - Production Dept. = 606,400 / 120,000 = 5.053

Per unit - Service Dept. = 733,600 / 120,000 = 6.113

Total manufacturing costs per unit based on normal activity:

Direct material	7.00
Direct labour	5.50
Variable overhead	2.00
Fixed overhead Dept - 1	5.053
Fixed overhead Dept - 2	6.113
	25.665

2)

		Amount (£’000’)
Profit statement using absorption
Sales: 114,000 units x £36		4104
Minus: Cost of sales 114,000 units * 25.665		2926
Gross profit		1178
Non manufacturing cost		875
Net profit (before adjustment)		303
Under–absorbed overhead Dept - 1	(20,000 + (4000 * 5.053) = -40.2113
Under–absorbed overhead Dept - 2	(4000 * 6.113) = -24.453	-64.7
Profit adjustment		238.3

Profit statement – margin costing		Amount (£’000’)
Sales: 114,000 units * £36		4104
Minus: Variable cost of sales (11000 * $14.5)		-1653
Contribution		2451
Minus: Fixed costs of manufacturing (1340 + 20)	-1360
Non manufacturing	-875	-2235
Net profit		216

3) The above calculations reveal £ 22,300 rise profit as depicted by the absorption costing approach. It shows the fixed costs carried in stock as to be 2,000 [5.05 + 6.113].