Question

Question 3 (13 marks) Biotech Ltd produces memory discs at its factory. The following information relates to the production of memory discs for the period ending 31 March 2020. Sales Production (Units) (Units) Budget Actual 90,000 96,000 87,000 93.000 Variable Prod. Cost $ 4,500,000 4.800,000 Fixed Prod. Overhead S 900,000 937,500 Fixed Selling Overhead $ 675,000 675,000 Budget Actual The fixed production overhead was absorbed at a pre-determined rate per unit produced. One memory disc was sold for $130. At the beginning of April 2019, there was opening inventory of 5,250 units valued at $315,000; this includes fixed production overhead of $52,500. Required: a. Prepare a marginal costing income statement for the company. [3 marks) b. Prepare an absorption costing income statement for the company. [8 marks) c. Reconcile the income under both statements. [2 marks]

Answer 1

a.

solution:

Marginal costing

	Calculations	Amount	Amount
Sales	$130*93000		$12090000
(-) Variable costs:
Manufacturing	Note 1	$4650000
Selling and administrative	$0	$0	($4650000)
Contribution margin			$7440000
(-) Fixed costs:
Manufacturing		$937500
Selling and administrative		$675000	($1612500)
Net profit			$5827500

Note 1:

Variable manufacturing cost = opening stock value + current year units cost

= ($315000 - $52500) + [$4800000/96000]*(93000-5250)

= $262500 + $50*87750

= $262500 + $4387500

= $4650000

b.

solution:

Absorption costing-

	Calculations	Amount	Amount
Sales	$130*93000		$12090000
(-) Cost of goods sold	Note 3		($5580000)
(+) over absorption of overhead	Note 4		$22500
Gross profit			$6532500
(-) Selling and administrative cost:
Variable		$0
Fixed		$675000	($675000)
Net profit			$5857500

Note 2: Calculation of predetermined overhead rate

Predetermined overhead rate = budgeted overhead/budgeted units produced

=$900000/90000

= $10 per unit produced

Note 3: Calculation of cost of goods sold

cost of goods sold = opening stock value + current year units cost

= opening stock value + current year units variable cost + current year units fixed cost

= $315000 + [$4800000/96000]*(93000-5250) + (93000-5250)*$10

= $315000 + $50*87750 + 87750*$10

= $315000 + $4387500 + $877500

= $5580000

Note 4: Under or Over absorption of overhead

Under or Over absorption of overhead = Actual overhead – absorbed overhead

= $937500 - (total units produced*predetermined rate)

= $937500 - (96000*$10)

= $937500 - $960000

= -$22500

= $22500 over absorbed

c.

solution:

Profit reconciliation-

Profit as per variable costing		$5827500
(+) Closing stock value difference	8250*$10 [current year production overhead at predetermined rate]	$82500
(-) Opening stock value difference	$52500 [previous year production overhead]	($52500)
Profit as per Absorption costing		$5857500

Note 5:

Closing stock units = production + opening stock – sales

= 96000+5250-93000

= 8250