Question

In: Accounting

Using the information provided below, calculate the closing stock valuations and the profit figures for Product...

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.

Solutions

Expert Solution

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

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