Question

George Fine Company produces shoes and wallets. Selected data for the past year follow:

  Shoes   Wallets

Production (units) 90,000 190,000

Sales (units)   80,000 200,000

Selling price   £7 £9

Direct labour hours 80,000 60,000

Manufacturing costs: £ £

Direct Materials per unit 0.75 0.5

Direct Labour per unit 2.5 2.0

Variable overheads per unit 0.20 0.13

Fixed overhead:

Direct 70,000 70,000

Non-manufacturing costs:

Variable selling 30,000 60,000

Direct fixed selling 60,000 65,000

Budgeted fixed overhead for the year, £140,000, equalled the actual fixed overhead. Fixed overhead is assigned to products using a plantwide rate based on expected direct labour hours, which were 140,000. The company had 10,000 wallets in inventory at the beginning of the year. These wallets had the same unit cost as the wallets produced during the year. “

Required:

a) “Prepare an income statement using marginal costing.”

b) “Prepare an income statement using absorption costing.”

c) “Prepare a reconciliation statement between Absorption and Marginal costing profit figures calculated above.”

Answer 1

George Fine Company produces shoes and wallets. Selected data for the past year follow:

   Shoes   Wallets

Production (units) 90,000 190,000

Sales (units)    80,000 200,000

Selling price    £7 £9

Direct labour hours 80,000 60,000

Manufacturing costs: £ £

Direct Materials per unit 0.75 0.5

Direct Labour per unit 2.5 2.0

Variable overheads per unit 0.20 0.13

Fixed overhead:

Direct 70,000 70,000

Non-manufacturing costs:

Variable selling 30,000 60,000

Direct fixed selling 60,000 65,000

Budgeted fixed overhead for the year, £140,000, equalled the actual fixed overhead. Fixed overhead is assigned to products using a plantwide rate based on expected direct labour hours, which were 140,000. The company had 10,000 wallets in inventory at the beginning of the year. These wallets had the same unit cost as the wallets produced during the year. “

Required:

a) “Prepare an income statement using marginal costing

,

,	Shoes	Wallets
Sales ( sales units * selling price )	560000	1800000
Marginal cost:
Direct Materials	60000	100000
Direct Labour	200000	400000
Variable overheads	16000	26000
Variable selling	30000	60000
Contribution margin	254000	1214000
Fixed cost:
Direct*	80000	60000
Direct fixed selling	60000	65000
Operating profit	114000	1089000

.

*Fixed overhead is assigned to products using a plant wide rate based on expected direct labour hours, which were 140,000.

Fixed Overhead rate = 140000 / 140000 = 1

For Shoes   = 1 * 80000 dl hrs = 80000

For Wallets = 1 * 60000 dl hrs = 60000

.

b) “Prepare an income statement using absorption costing

.

,	Shoes	Wallets
Sales ( sales units * selling price )	560000	1800000
Cost of goods sold:
Direct Materials	60000	100000
Direct Labour	200000	400000
Variable overheads	16000	26000
Direct Fixed cost	71111*	63158**
Gross profit	212889	1210842
Non- manufacturing cost:
Variable selling	30000	60000
Direct fixed selling	60000	65000
Operating profit	122889	1085842

.

*Fixed manufacturing cost allocated to shoes = $80000 for total production of 90000 units, per units = 80000 / 90000 = 0.8889

For sold units = 0.88888 * 80000 = 71111

.

**Fixed manufacturing cost allocated to Wallet = $60000 for total production of 190000 units, per units = 60000 / 190000 = 0.3158

For sold units from current period production = 0.31579 * 190000 = 60000

For sold units from beginning units = 0.31579 * 10000 = 3158

Total Fixed manufacturing cost = 60000 + 3158 = 63158

.

c) “Prepare a reconciliation statement between Absorption and Marginal costing profit figures calculated above”

.

Shoes

	Shoes
Marginal costing Profit	114000
Add Fixed direct cost allocated to ending inventory	0.8889*10000= 8889
Absorption costing profit	122889

.

Wallets

Marginal costing Profit	1089000
Less: Fixed direct cost incurred to beginning inventory	0.31579*10000= 3158
Absorption costing profit	1085842

*If production greater than sale, the absorption costing profit will be higher than the marginal costing profit, and vise verse.. because some portion of direct fixed cost are allocated to ending inventory or ( some portion are incurred from beginning inventory to current period incme statement )