In: Accounting
Using the information provided below, calculate the closing
stock valuations and the profit figures for Product Z under both
Absorption Costing principles and Variable Costing
principles.
Product Z:
Annual production (units) 31,000 Units sold during the period
25,000 Costs: Direct materials per unit €10 Direct labour per unit
€21 Administration expenses for period €15,000 Overheads incurred:
Power and maintenance (variable) €24,000 Other factory overheads
(fixed) €36,000
Other information: Selling price per unit €40 Total machine hours
per annum 12,000 hours Machine time per unit 1 hour
Its my second time posting this question I would love if someone could explain to me how to calculate the cost of goods sold and not just put the figure of cost of goods sold in to the calculation.
In absorption costing, product cost includes all manufacturing costs, including fixed manufacturing overhead. Therefore, if part of the inventory produced during the period remains unsold, a portion of fixed manufacturing overhead will be deferred to the next accounting period through ending inventories.
In variable costing, product cost includes only variable manufacturing costs. In other words, fixed manufacturing overheads are treated as period expense.
Variable Costing:
Direct Materials | 310,000 |
Direct Labor | 651,000 |
Power and Maintenance | 24,000 |
Total Cost of Goods Manufactured ( 31,000 units ) | 985,000 |
Less: Closing Stock ( 985,000 / 31,000 * 6,000) | (190,645) |
Variable Cost of Goods Sold | 794,355 |
Variable Costing Income Statement:
Sales Revenue ( 25,000 x 40) | 1,000,000 | |
Less: Variable Cost of Goods Sold | 794,355 | |
Contribution Margin | 205,645 | |
Fixed Costs: | ||
Manufacturing | 36,000 | |
Administrative | 15,000 | |
Total Fixed Cost | 51,000 | |
Net Operating Income | 154,645 |
Absorption Costing:
Direct Materials | 310,000 |
Direct Labor | 651,000 |
Power and Maintenance | 24,000 |
Other Factory Overheads | 36,000 |
Total Cost of Goods Manufactured ( 31,000 units) | 1,021,000 |
Less: Closing Stock ( 1,021,000 / 31,000 * 6,000) | 197,613 |
Cost of Goods Sold | 823,387 |
Absorption Costing Income Statement:
Sales | 1,000,000 |
Cost of Goods Sold | 823,387 |
Gross Profit | 176,613 |
Less: Administration Expenses | 15,000 |
Net Operating Income | 161,613 |