Question

1) Capital ltd budget for the month of trading, during which production of 3,000 units and sales of 2,700 units are predicted is as follows variable productions costs $136,000; fixed costs $102,500; selling price is $500 per unit. The profit calculated on the absorption cost basis compared t the marginal cost basis will be?

Answer 1

			Marginal Costing	Absorption Costing
	Sales	Note - 1		13,50,000		13,50,000
	Variable Expenses		1,36,000		1,36,000
	Less : Closing Inventory cost	Note - 2	13,600		13,600
Less				1,22,400		1,22,400
Less	Fixed Expenses		1,02,500		1,02,500
	Less : Closing Inventory cost	Note - 3	-	1,02,500	10,250	92,250
	Profit			11,25,100		11,35,350

Note - 1

Amount of Sales = 2700 Units * 500 $ = 13,50,000 $

Note - 2

Variable production cost per unit for valuation of closing stock :

Closing Stock = Units Produced - units sold = 3,000 - 2,700 = 300 units

Variable cost of closing stock = (1,36,000/3,00) * 3000 = 13,600 $

Note - 3

Under Marginal Costing : The variable cost is considered as product cost while fixed cost is considered as period costs.Hence entire fixed cost are charged to Profit & Loss and no fixed cost has been apportioned to closing inventory.

Under Absortpion Costing : Both fixed and variable cost is considered as product cost.Hence Fixed cost has been substracted only to the extent of units sold.

Fixed cost lying in inventory under absorption costing = (1,02,500/3000)*300 = 10,250 $