Question

Question #8 Basic standard cost data of Zahoor & Co. is as under: Normal Capacity (monthly) Production, October, 2007 Sales October, 2007 50,000 units 45,000 units 47,500 units Standard variable costs per unit: Material and labour Factory overhead Distribution expenses Operating variances: Representing excessive incurrence of variable costs Selling price per unit Rupees) 8.00 2.00 1.00 Rs.4,500 Rs.20 Fixed cost for October, 2007: Manufacturing expenses (Rs.4/- per unit on normal capacity) Distribution expenses Administration expenses Others Rs.200,000 75,000 50,000 25,000 MARGINAL AND ABSORPTION COSTING 7

plz solve step by step

Answer 1

Income Statement as per absorption costing for the month October, 2007

Sales (note 1)	9,50,000
Less: Cost of goods sold (note 2)	7,59,525
Gross profit (a –b)	1,90,475
Less: Distribution Expense	75,000
Less : Administration Expense	50,000
Less:Excessive incurrence of variable cost	4,500
Operating Income (c – d-e-f)	60,975

Note 1 : Calculation of total sales:

Sales = Price * Number of units sold

= Rs. 20 * 47,500 units

= Rs. 9,50,000

Note 2: Calculation of cost of goods sold:

Cost of goods sold = Cost per unit * Number of units sold

Firstly, we need to calculate cost per unit as per absorption costing:

Statement showing cost per unit:

Particulars	Amount in Rs. (cost per unit)
Direct material and Labour	8.00
Factory Overhead	2.00
Variable Distribution Expense	1.00
Fixed Manufacturing Expense ( Rs.2,00,000 / 45000 units)	4.44 (approx)
Other fixed overhead (Rs. 25000 / 45000 units)	0.55 (approx)
Total	15.99

Therefore, Cost per unit = Rs. 15.99

Therefore, cost of goods sold = Rs. 15.99 * 47,500 units

                                                     =Rs. 7,59,525

NOTE :

1. Absorption costing is used to take decisions based on past cost incurred. As per this method we consider fixed cost while calculating operating Income.
2. Usually overheads are apportioned or allotted to cost units on an estimated basis. But it is quite natural that the overhead so estimated may be different from the amount of overhead actually incurred.Hence the question of under or over absorption of overhead arises when there is a difference between the amount of overhead absorbed and the amount of overhead incurred.

In the given question fixed manufacturing expense is Rs. 2,00,000 which is based on the estimated production based on normal capacity i:e 50,000 units and,

Cost per unit is Rs. 4.00 (given in the question).

But Actual units produced is 45,000 units

Therefore total fixed manufacturing expense recovered will be Cost per unit * actual unit produced

          = Rs. 4.00 * 45000 units

          = 1,80,000

Therefore under recovery = Actual Expense – Expense recovered

                                                 = Rs. 2,00,000 – 1,80,000

                                                   = Rs. 20,000

As there is under recovery while calculating cost per unit we divided total fixed manufacturing expense by actual unit produced.

Income Statement as per Marginal costing for the month October, 2007

Sales (note 1)	9,50,000
Less: Variable cost:
Material and labour (Rs.8.00 * 45000 units)	3,60,000
Less: Factory Overhead ( Rs. 2.00 * 45000 units )	90,000
Less :Distribution Expense (Rs. 1.00 * 45000 units)	45,000
Less:Excessive incurrence of variable cost	4,500
Contribution (a-b-c-d-e)	4,50,500
Less: Fixed manufacturing expense	2,00,000
Less: Distribution Expense	75,000
Less : Administration Expense	50,000
Less : Other fixed Expense	25,000
Net Income (f-g-h-i-j)	1,00,500