Question

Question 1 Mayana Limited manufactures a specialised storage accessory for automobiles called the Storax", which is a type of pocket which can be easily fixed in the boot of any vehicle. The company has been in operation for two years and, now that the production process has been established and refined, the directors have decided to focus on the income and costs arising from activities. The managing director has recently read an article about product costing and, in particular, absorption and variable costing and is keen to understand how this would affect company profits. The following information is available for the months of July and August July August Production (units) 13 000 15 000 Sales (units) 12 000 16 000 Direct materials N$29 250 N$33 750 Direct labour N$19 500 N$22 500 Variable production overheads N$7 800 N$9 000 Total selling and administrative expenses N$45 200 N$57 600 Additional information: 1. For Ludo Limited normal production capacity is 15 000 units per month. 2. Fixed production overheads are N$29 400 per month. 3. The company sells the Storax" for N$20 each. 4. Total selling and administrative expenses includes a fixed and variable element. The variable portion is N$ 1.55 per unit and is based on units sold. 5. At 30 June the company had no 'Storax' accessories in its warehouse. REQUIREMENT: REQUIRED: Prepare profit statements for Mayana Limited for the months of July and August using Absorption costing 1.2 Reconcile the profit between Absorption costing and Variable costing, Provide a brief explanation of the effect on profit of using each of the methods at (b) above 1.1 1.3

Answer 1

1.1 Absorption costing :

	July	August
sales(units sold*selling price per unit)	240000	320000
less;cost
direct materials	29250	33750
direct labour	19500	22500
variable production OH	7800	9000
fixed production OH	29400	29400
total selling and adminstration expeses	45200	57600
profit	108850	167750

1.2. profit under variable costing:

	July	August
sales(units sold*selling price per unit)	240000	320000
less; cost
direct materials	29250	33750
direct labour	19500	22500
variable production OH	7800	9000
total selling and adminstration expeses	45200	57600
profit	138250	197150

reconsilation of profits under both methods.

	july	august
profit under variable costing	138250	197150
profit under absorption costing	108850	167750

1.3.

as we can see from the above information , profit under variable costing is high compared to profit under absorption costing .the reason is that absorption costing method includes fixed overhead costs used for production and variable overhead does not .the reason that selling and administrative expenses are taken at full amount without considering the variable and fixed portion is that it does not relates to the cost of production . it is a non production cost .absorption costing method gives more accurate information about the cost of the products so as the overall profit of the company .