Question

A company commenced business on 1 January 2019 making one product only. The cost card of the company’s product is as follows: K Direct material 16 Direct labour 10 Variable production overhead 4 Fixed production overhead 10 Product cost per unit 40 The fixed production overhead figure has been calculated on the basis of a budgeted normal output of 72,000 units per annum. The fixed production overhead incurred in January was K30, 000. The selling, distribution and administrative expenses were: Fixed K20, 000 Variable 15% of the sales value The selling price per unit was K35 and the number of units produced and sold were: Production 4,000 units Sold 2,000 units Required Prepare the Income statement for March 20x8 using (i) Absorption costing (ii) Marginal costing (Total 25 marks

Answer 1

Calculation of Unit Product Cost(Per Unit)
	Absorption	Variable
	Per Unit	Per Unit
Direct Material	16	16
Direct Labour	10	10
Variable Production Overhead	4	4
Fixec Production Overhead	10
Total Unit Product Cost	40	30

Income Statements using Absorption Approach
	Amount
Sales(2000*35)	70,000
Less: Production Cost(4000*40)	160,000
Add: Closing Stock(2000*40)	80,000
Gross Profit	(10,000)
Selling and Administration Expenses
Variable cost per unit
(15%*70000)	10,500
Fixed Expenses	20,000
Net Income	(40,500)

Income Statements using Variable Cost Approach
Sales(2000*35)	70,000
COGS:
Direct Material(2000*16)	32,000
Direct Labour(2000*10)	20,000
Variable Overhead(2000*4)	8,000
Variable Selling and Admn. O/H(70000*15%)	10,500
Contribution Margin	(500)
Less: Fixed costs
Fixed Selling costs	20,000
Fixed manufacturing costs	30,000
Net Income	(50,500)