Question

Calculate costs using appropriate techniques of cost analysis to prepare an income statement using variable and absorption costs. 

UCK Furniture produce one product - desks.

 Each desk is budgeted to require 4 kg of wood at £3 per kg, 4 hours of labour at £2 per hour, and variable production overheads of £5 per unit. 

Fixed production overheads are budgeted at £20,000 per month and average production is estimated to be 10,000 units per month. 

The selling price is fixed at £35 per unit. There is also a variable selling cost of £1 per unit and fixed selling cost of £2,000 per month.

 During the first two months X plc expects the following levels of activity: 

January - Production :11,000 units , Sales: 9,000 units

February - Production: 9,500 units , Sales: 11,500 units

Question: 

a.Prepare an income statement using absorption costing and variable costing

b. Accurately apply a range of management accounting techniques and produce a financial reporting document.
c. Produce financial reports that accurately apply and interpret data for a range of business activities. Make the interpretation of the both costing methods and explain the potential merits and demerits of the both methods.

Answer 1

Solution:

Given, Production Sales February 11,000.00 11,500.00 January 9,500.00 9,000.00 Under Absorption Costing For production, Wood required 44,000.00 kg Wood costs £ 1,32,000.00 38,000.00 kg 1,14,000.00 £

Labour required Labour costs 44,000.00 hours 88,000.00 £ 38,000.00 hours 76,000.00 £ £ Variable production OH Fixed Production OH £ £ 55,000.00 20,000.00 47,500.00 20,000.00 £ £ Variable Selling OH Fixed Selling costs 11,500.00 2,000.00 £ £ 9,000.00 2,000.00 £ Total Variable Costs Total Fixed Costs Variable costs per unit £ 2,86,500.00 £ 22,000.00 £ 26.05 4 4 4 2,46,500.00 22,000.00 25.95

Fixed Costs per unit £ 3.00 £ 3.00 Total costs Costs per unit SP per unit Total revenue £ 3,08,500.00 £ 29.05 £ 35.00 £ 4,02,500.00 મ મ મ મ 2,68,500.00 28.95 35.00 3,15,000.00 Net Profits £ 68,477.27 £ 54,473.68 Under Variable Costing Variable costs per unit SP per unit £ £ 26.05 35.00 £ £ 25.95 35.00

Net Profits £ 1,02,977.27 £ 81,473.68 Advantages of Absorption Costing: İ. Consideration of Fixed Costs ii. Conformity with accrual and matching concepts iii. No need to separate fixed and variable costs Limitation of Absorption Costing: i. Fixed Costs are Periodic Costs ii. Apportionment of Overhead Costs

iii. Not useful in decision making

Advantages of Variable Costing: İ. Useful in effective planning and control ii. Helps in managerial decision making iii. Aids in Costs control Limitation of Variable Costing: i. Need to separate fixed costs and variable costs ii. Acts as a temptation to managers to cut prices May lead to unwise decisions when sales are higher iii. than production