Question

1. a) Mulwa Ltd a manufacturing company produced 10,000 units of 2kg unga product during the first quarter of 2013. The following additional information is also provided

• Direct material – ksh 8
• Direct labour - ksh 4
• Variable manufactury – 2
• Fixed manufacturing cost – ksh 36,000
• Selling and administration cost – ksh 5,000
• Selling price – ksh 20 per cent
• Closing stock at the end of the period = 1000 units.

Required:

1. Determine the unit production cost of the product using marginal and absorption costing methods                                                     
2. Prepare an income statement for the period using absorption and marginal cost techniques.                                                              

Answer 1

i)Calculation of Unit Product Cost- Absorption Costing

Direct Material	$       8.00
Direct Labor	$       4.00
Variable Manufactured	$       2.00
Fixed Manufactured Cost	$       3.60
Cost per unit	$    17.60

Calculation of Unit Product Cost- Marginal Costing

Direct Material	$       8.00
Direct Labor	$       4.00
Variable Manufactured	$       2.00
Cost per unit	$    14.00

ii) Income Statement- Absorption Costing

Sales		$ 180,000.00
Cost of Production	$ 176,000.00
Less: Closing Inventory	$ (17,600.00)
Cost of Goods Sold		$ 158,400.00
Gross Profit		$    21,600.00
Selling and administration cost		$      5,000.00
Net Profit		$    16,600.00

Income Statement- Marginal Costing

Sales	$ 180,000.00
Variable Cost	$ 126,000.00
Contribution Margin	$    54,000.00
Fixed Cost	$    41,000.00
Net Profit	$    13,000.00