Question

Duke Ltd makes and sells two products. A and B. The following information is available for period 3:

                                                                                                       A             B

Production (units                                                                           2,500     1,750

Sales (units)                                                                                  2,300      1,600

Opening inventory (units)                                                                0              0

Financial data:                                            

                                                                                                        A                 B

                                                                                                        ₵                 ₵

Unit selling price                                                                              90                75

Unit cost:

                      Direct materials                                                          15                 12

                     Direct labour                                                                  18               12

                     Variable production overheads                                      12               8

                     Fixed production overheads                                            30             20

                     Variable selling overheads                                               1               1

Fixed production overheads for the period were ₵105,000 and fixed administration overheads were ₵27,000.

Required:

1. Prepare a profit statement for period 3 based on marginal costing principles.
2. Prepare a profit statement for period 3 based on Absorption costing principles.

Reconcile the profits reported under the different methods.

Answer 1

Ending Inventory in units = Production - Sales

For Product A = 2,500 - 2,300 = 200

For Product B = 1,750 - 1,600 = 150

Now for Absorption Costing we take total cost of goods manuctured,

Cost of Goods manufactured per unit, Product A = 75 and Product B = 52, as per first image.

Therefore, Cost of Ending Inventory,

For Product A = 200 x 75 = 15,000

For Product B = 150 x 52 = 7,800

For Variable Costing we take variable cost of Goods Manufactured,

Cost of Ending Inventory,

For Product A = 200 x 45 = 9,000

For Product B = 150 x 32 = 4,800

For Reconciliation difference is Fixed Cost per unit is not apportioned under Variable Costing Method to Ending Inventory,

i.e. For Product A = 200 x 30 = 6,000

For Product B = 150 x 20 = 3,000

For Overabsorbed Overheads,

Applied Overheads (as per first image) = 75,000 + 35,000 = 110,000

Actual Overheads = 105,000

Therefore, Overabsorbed Overheads = 110,000 - 105,000 = 5,000

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