Question

QUESTION 1 (25 MARKS) Tayar Rambo Bhd manufactures a single product, a tyre, which the selling price is RM285 each. Budgeted fixed overhead was RM690,000 and budgeted production was 30,000 units. The company's actual production for the year was 30,000 units, of which 27,000 units were sold. The variable costs of production were as follows: Direct material Direct labor Variable manufacturing overhead RM 105 48 30 Variable selling and administrative costs were RM20 per unit sold; fixed selling and administrative costs were RM630,000. The firm does not prorate variances. Required: a) Calculate the product cost per unit under: i) Absorption costing ii) Variable costing (CLO3:PLO1:C4) (8 marks) b) Prepare income statement for the year using: i) Absorption costing ii) Variable costing (CLO3:PLO2:C3) (15 marks) c) Explain the reason why you need allocate fixed overhead costs to products. (CLO3:PLO2:C2) (2 marks)

Answer 1

solution: Part a: i. Unit product cost under absorbtion costing Direct Materials Direct labour Variable manufacturing overhead Fixed manufacturing overhead =690000/30000 Unit product cost 105.00 48.00 30.00 23.00 206.00 ii.Unit product cost under variable costing Direct Materials Direct labour Variable manufacturing overhead Unit product cost 105.00 48.00 30.00 183.00 Part b: i. Income Statement Absorption Costing sales =27000*285 Less : cost of goods sold (27000*206) Gross Profit Less : selling and administrative expenses =27000*20+630000 net operating income (loss) 7,695,000 5,562,000 2,133,000 1,170,000 963,000 7,695,000 ii.Income Statement Variable Costing sales =27000*285 Variable expense: Less : Variable cost of goods sold (27000*183) Less : Variable selling and administrative expenses (27000*20) 4,941,000 540,000 5,481,000 2,214,000 contribution margin fixed expense: Fixed manufacturing overhead Fixed selling and administrative expenses 690,000 630,000 1,320,000 894,000 net operating income (loss) 1.To setting up the correct prices for the product we need to include fixed overhead as we heave to somehow cover it from customer as cost is actually incurred. 2.To value the ending inventory correctly which is to be shown in balance sheet. 3. Since it is in direct cost hence it needs to be allocated as they are not direcly traceable.