Question

Question #1 ABC Ltd is considering using direct costing method for decision making instead of absorption costing method. Following data has been summarized for that purpose: Units Units Rs. Rs. Annual Maximum Plant capacity Annual Normal Plant capacity Fixed Factory overhead for the year Fixed Marketing Expenses for the year Fixed Administrative expenses for the year Sales price per unit Standard variable manufacturing cost per unit Variable marketing expenses per unit sold Budgeted production for the year Actual production for the year Sales for the year Opening finished goods inventory 50,000 40,000 500,000 100,000 150,000 1,000 400 100 40,000 30,000 28,000 1,000 Rs. Rs. Unit Unit Unit Unit Required: (a) Income statement for the year under direct method. (b) Operating income for the year if absorption costing had been used.

plz solve step by step

Answer 1

Ans A. Income statement under Direct costing / Marginal costing

Particulars Rs Rs

Sales (28000 units *1000rs) 28000000

Less: Marginal cost of sales

Opening Inventory (Valued at Marginal cost) (1000units *400) 400000

Add:Cost of Production(valued at marginal cost)

   (Units produced * marginal cost)(30000units*400) 12000000

Less: Closing stock (valued at marginal cost) (3000*400) (1200000) (11200000)

Less Variable marketing expenses (28000*100) (2800000)

Contribution 14000000

Less Fixed costs:

Fixed factory overheads (500000)

Fixed marketing expenses (100000)

Fixed Administrative expenses (150000) (750000)

Profit for the year 13250000

Working note 1:Calculation of marginal costs:

Marginal cost =Standard manufacturing cost per unit= 400

Ans B: Operating income under absorption costing

All the unit rates used are the cost per unit under absorption system which is calculated as working note under the solution

Particulars Rs Rs

Sales (28000 units *1000rs) 28000000

Less: cost of goods sold   

Opening Inventory (1000units *518.75) 518750

Add:Cost of Goods Manufactured

(30000units*518.75) 15562500

Cost of goods available for sale 16081250

Less: Closing stock (3000*518.75) (1556250) 14525000

Operating income 13475000

Working notes

Calculation of overhead absorption rate:

Fixed factory overhead for the year = 500000

Budgeted production= 40000units

Fixed factory OH rate= 500000/40000 (Overhead/Budgeted output)

=12.5

Fixed marketing expenses OH rate= 100000/40000= 2.5

Fixed Admin expense OH rate = 150000/40000 =3.75

Calculation of Cost per unit:

Variable cost per unit 400

Add: Variable Marketing 100

Add: Fixed

Factory OH 12.5

Fixed marketing 2.5

Fixed admin 3.75   

Cost per unit under

absorption costing 518.75