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Absorption and Marginal costing

ABSORPTION COSTING

Valuation

Fixed production overheads are treated as product cost Stock is valued on the basis of manufacturing cost Direct material + Direct Labour + Direct expense + Variable production overheads + fixed production overheads = Cost/unit Gross profit is calculated by taking difference between sales revenue and cost of goods sold Classification between manufacturing and non manufacturing cost is important Profit of absorption and marginal costing is different due to change in inventory level Under/Over absorption is used to adjust the gross profit

MARGINAL COSTING

Decision making (CVP, Relevant costing)

Fixed cost is treated as period cost Stock is valued on the basis of variable manufacturing cost Direct material + Direct Labour + Direct Labour + Variable production overheads = Variable manufacturing cost Contribution margin is calculated by taking difference between sales revenue and all variable costs (manufacturing and non-manufacturing) Classification between fixed and variable cost is important

PROFIT AND LOSS STATEMENT UNDER ABSORPTION COSTING $ Sales revenue Less: C.O.G.S Opening stock Production cost Less: Closing Stock XXX XXX XXX (XXX) Gross profit (unadjusted) (Under)/Over absorbed overheads Adjusted gross profit Non-manufacturing overheads Profit under absorption costing XXX (XXX)/XXX XXX (XXX) XXX $ XXX

1) Following are some details given about the only product of Illuminati Company: Prime cost $20 Variable production overheads $3 Fixed production overheads $2 Selling price $32 Actual production during the period was 9200 units and sales volume was 8750 units. Actual fixed production overheads were $20000. REQ: Prepare profit and loss statement under absorption costing

2) Details relating to Gucci are given below: Prime cost $23 Variable production overheads $6 Fixed production overheads $4 Selling price $56 Actual production during the period was 10500 units and sales volume was 9700 units. Actual fixed production overheads were $40300 NON MANUFACTURING OVERHEADS Variable selling overheads $1.5/unit Fixed selling overheads $10000 REQ: Prepare P & L under absorption costing

SHORTCUT APPROACH CALCULATE GROSS PROFIT/UNIT = SELLING PRICE COST/UNIT UNADJUSTED GROSS PROFIT = SALES VOLUME *G.P/UNIT CALCULATE UNDER/OVER ABSORPTION ADJUSTED G.P = UNADJUSTED G.P add: UNDER/less: OVER ABSORPTION PROFIT = ADJUSTED G.P NON MANUFACTURING OVERHEADS

3) Details of Sam Company are given below Budget $ Sales revenue (6000 units) C.O.G.S Production cost (7500) Closing stock 525000 (105000) (420000) Profit Fixed overhead absorption rate was $12/unit Actual production during the period was same as budgeted but sales volume was 200 units higher than budgeted. Actual fixed production overheads were as same as budgeted. REQ: G.P under absorption costing. 120000 $ 540000

PROFIT AND LOFF STATEMENT UNDER MARGINAL COSTING $ Sales revenue Less: Variable cost of sales Opening stock Variable production cost Less: Closing stock XXX XXX (XXX) XXX Add: Variable non-manufacturing cost XXX (XXX) Contribution margin Less: Fixed manufacturing cost Less: Fixed non-manufacturing cost Profit under marginal costing XXX (XXX) (XXX) XXX $ XXX

4) Details relating to Punk Company are as follows Selling price $80 Direct material $20 Direct labour $15 Variable production overheads $6 Fixed production overheads $3 Variable selling overheads $2 Actual production was 18000 units and sales volume was 16800 units. Actual fixed production overheads were $58000. Fixed non- production overheads were $10000. REQ: P & L under marginal costing 5

5) Following details relates to CM Punk Ltd Sales revenue (15000 units) - $975000 ($65/unit) Production cost (16000 units) - $832000 ($52/unit) Variable non-manufacturing cost - $3/unit sold Fixed non-manufacturing cost - $20000 Fixed production overhead absorption rate - $8/unit Actual production during the period was 14900 units out of which company sold 13800 units. REQ: P & L under marginal costing 6) RVD ltd manufactures and sells one product. Its budgeted profit statement for the first month of trading is as follows $ Sales (1200 units @ $180/unit) Less: C.O.S Production (1800 units @ $100/unit) Less: Closing stock (600 units @ $100/unit) 180000 (60000) (120000) Gross profit Less: Fixed selling and distribution cost 96000 (41000) 55000 The budget was prepared using absorption costing principles. If budgeted production in the first month had been 2000 units then the total production cost would have been $188000. REQ: 1. Using the high-low method calculate (i) the variable production cost per unit (ii) the total monthly fixed production cost 2. If the budget for the first month had been prepared using marginal costing principles, calculate (i) the total contribution (ii) the net profit 6 $ 216000

RELATIONSHIPS Opening Stock is inversely proportional to Gross Profit Cost of Goods Sold is inversely proportional to Gross Profit Closing Stock is inversely proportional to Cost of Goods Sold Closing stock is directly proportional to Gross Profit

STOCK LEVEL

PROFIT UNDER ABSORPTION COSTING High

PROFIT UNDER MARGINALA COSTING Low

NET INCREASE

NET DECREASE

Low

High

SAME

Equal

Equal

7) Cena ltd had opening stock of 1500 units which rose to 1800 units till the end of the year. The variable cost/unit is $2.5 and fixed cost/unit is $4. The profit as per marginal costing is $258000. REQ: Calculate profit as per absorption costing 8) DaVinci ltd had opening stock of 1800 units which was decreased to 800 units at the end of the year. The variable cost/unit is $6 and fixed cost/unit is $4. The profit as per absorption costing is $270000. REQ: Calculate the profit as per marginal costing 9) Alberto Del Rio Ltd had opening stock of 400 units which remained 400 till the end of the period. The variable cost/unit is $4 and the fixed cost/unit is $2.5. The profit as per absorption costing is $230000. REQ: Calculate the profit as per marginal costing 7

10) Details about the first quarter of Joe Kingman ltd are as follows: JANUARY Opening Stock 4000 Closing Stock 5200 Profit (absorption $25000 costing) Fixed overhead absorption rate is $5/unit REQ: Calculate profit under marginal costing FEBRUARY 5200 3900 $15000 MARCH 3900 3900 $10000