Question

Woodwork Craft Dealers is a manufacturing company that budgeted to produce 15,000 units. At the end of February, 2010 the company had closing stock of 5,000 units. The following information was taken from the company’s books for the month of February 2010:

	$
Direct Material cost per unit	200
Direct Labour cost per unit	150
Variable Overhead cost per unit	50
Fixed overhead cost	600000
Sales price per unit	750

During February 2010 the company produced 12,000 units and 11,000 units were sold. Administrative and selling overheads amounted to $80,000 and $70,000 respectively.

Required:

1. Calculate the value of the opening stock
2. Prepare profit statement using variable/marginal costing techniques for February 2010.
3. Prepare profit statement using absorption costing techniques for the month of February 2010. Show a reconciliation of the profit figures obtained above.

Answer 1

Answer 1
	Particulars	In Units
	Closing stock	5000
	Add : Sold Units	11000
	Less : Produced Units	12000
	Opening Stock Units	4000
	Opening Stock in Value :
	As per Marginal Cost *	$200,000.00
	As per Absorption Costing **	$360,000.00

Answer 2
	Profit statement under Marginal cost method
	Sales	(11000 units @ Rs.750)	$8,250,000.00
	Direct Material cost	(12000 units @ $200)	$2,400,000.00
	Direct Labour cost	(12000 units @ $150)	$1,800,000.00
	Add :Variable production Cost	(12000 units @ 50)	$600,000.00
	Add :Variable Selling cost	(11000 units @ 50)	$550,000.00
	Total Variable cost		$5,350,000.00
	Add : Opening Stock*	(4000 unit @ $50)	$200,000.00
	Less : Closing Stock	($1150000/12000 units*5000 units)	-$2,229,166.67
	Variable cost of good sold		$3,320,833.33
	Contribution	(Sales - Variable cost of good sold)	$4,929,166.67
	Less : Fixed Cost
	Production	(Fixed)	$600,000.00
	Admin	(Fixed)	$80,000.00
	Selling	(Fixed)	$70,000.00
	Total Fixed cost		$750,000.00
	Profit		$4,179,166.67

Answer 3
Profit statement under Absorption cost method
		Amount in $
Sales	(11000 units @ $750)	$8,250,000.00
Production Cost :
Direct Material cost	(12000 units @ $200)	$2,400,000.00
Direct Labour cost	(12000 units @ $150)	$1,800,000.00
Variable	(12000 units @ $50)	$600,000.00
Fixed	(12000 units @ $40)*	$480,000.00
Cost of Goods produced		$5,280,000.00
Add : Opening Stock**	(4000 unit @ ${50+40})**	$360,000.00
Less : Closing stock	($5280,000 /12000 units *5000 units)	-$2,200,000.00
Cost of Good Sold		$3,440,000.00
Add : Under absorbed fixed production overhead (600000-480000)		$120,000.00
Sales overhead :
Variable	(11000 units @ $ 50)	$550,000.00
Fixed selling overhead	(Fixed)	$80,000.00
Administrative overhead	(Fixed)	$70,000.00
Total Cost		$4,260,000.00
Profit	(Sales -Total cost)	$3,990,000.00
* Fixed production overhead are absorbed at a pre-determined rate based on normal capacity, i.e.. 600,000/15000 units = $40.
			** Answer number 1

Reconciliaton for Profit
Particulars		Amount
Profit asper Absorption Costing		$3,990,000.00
Add : Openig stock Over valued in Marginal costing		$160,000.00
(360000-200000)
Less : Closing stock over valued in Marginal costing		$29,166.67
Profit asper Marginal Costing		$4,179,166.67