Question

Jennson ltd manufactures one product only. the car model T6, the standard cost of which the following

Direct Material 16 ,Direct Labour 8 ,Variable Production Overhead 8 ,Fixed Production Overhead 10 , Total cost = 42

The fixed production overhead figure per unit has been based on a budgeted normal output of 30,000 units per annum It is expected that fixed overheads are incurred evenly over the year The actual fixed production overheads for July were £34,000. Selling, distribution and administration expenses are:

Variable 10% of the sales value - Fixed £240,000 per annum

The selling price is £70 per unit and in July the number of units produced and sold were

Units Production 3.000

Sales 2.400

There were no opening stocks in July.

You are required to: (a) Prepare profit statements for July using: Variable (marginal) costing and Absorption costing

(b) Present a reconciliation of the profit figures in your answer to (a) and explain the reasons for any differences between the two profit statements

Answer 1

Enclosed is answer

(a) Profit statement for July under Marginal Costing

Statement of Marginal Costing for July'18
	Particulars	UOM	QTY	Rate	Amount
	Sales	Nos	2400	70	168000
Less	Variable Cost of Good Sold (refer Note 1)		2400	32	76800
	Variable selling expenses _10% of Sales value				16800
	Contribution (a)				74400
Less :	Fixed Cost
	Fixed O/H				34000
	Fixed Selling & administrative Expenses (240000/12month)				20000
	Sub total (b)				54000
	Net Profit (a-b)				20400
		UOM	QTY	Rate	Amount
Note 1	Variable cost of good sold
	Direct Material	Nos	3000	16	48000
	Direct Labour	Nos	3000	8	24000
	Variable O/H	Nos	3000	8	24000
	Total		3000	32.000	96000
Add	Opening stock		0	0	0
Less	Closing Stock		600	32.000	19200
	Total Cost of Good sold		2400	32	76800

Profit statement under absorption Costing

Statement of Absorption Costing for July'18
	Particulars	UOM	QTY	Rate	Amount
	Sales	Nos	2400	70	168000
Less	Cost of Good Sold (refer Note 2)	Nos.	2400	42	100800
	Gross Margin (a)				67200
Less :	Sales & Administrative Cost
	Variable Cost _10% of SV				16800
	Fixed Cost_(240000p.a /30000unit *2400)		2400	8	19200
	Sub Total Cost (b)				36000
	Net Margin				31200
Note 2	Cost of good sold under Absorption Costing
	Direct Material	Nos	3000	16	48000
	Direct Labour	Nos	3000	8	24000
	Variable O/H	Nos	3000	8	24000
	Fixed O/H ( £10* 34000 unit /34000unit *3000unit)	Nos	3000	10	30000
	Sub Total		3000		126000
	Cost Of good sold P.U under Absorption Costing (126000/3000)				42
	OR
	Total Cost of Production		3000		126000
	Less : Closing stock		600	42	25200
	Add: Opening stock		0	0	0
	Cost of Good Sold		2400		100800

(B) Following is the statement of reconciliation of profit under two method

Statement of reconciliation between Marginal Costing and Absorption Costing
	Particulars	Rate	QTY	Amount
	Net Profit as under Marginal Costing			20400
Add:	Over-absorption of Fixed Production O/H
	Cost pu under marginal costing	46.2
	Cost pu under absorption costing	42
		4.17	2400	10000
Add:	Overabsortion of Admisnistrative & selling expenses
	Cost under Marginal costing	15.33
	Cost under absorption costing	15.00
		0.33	2400	800
	Net profit as per Absorption Costing			31200

It is to be noted in marginal costing fixed production O/H was taken on actual basis irrespective of production QTY whereas under absorption costing the said cost was taken on projected basis i.e 10 p.u on production QTY

The fixed cost on selling and administrative were different in marginal costing same was fixed for the year and per month cost was considered irrespective of production qty whereas under absorption costing was calculated based on qty sold taking into consideration budgeted annual output  of 30000.