Question

Question 2: Case study on Victoria Ltd.

Mr. Andrews is the CEO of Victoria Ltd. He is quite unhappy as he figured that the profits for the last three years were declining despite increasing sales. He approached you to seek advice on the cost accounting numbers and income statement prepared by his accountant. He supplies you the following information:

Particulars	2017	2018	2019
Sales (at $20 per unit)	$1,000,000	1,100,000	$1,200,000
Less: Cost of goods sold
Opening stock	50,000	200,000	250,000
Add: Cost of production
Variable	260,000	240,000	160,000
Fixed (allocated)	390,000	360,000	240,000
Less: Closing stock	200,000	250,000	50,000
Cost of goods sold (before adjusting for production volume variance)	500,000	550,000	600,000
Adjustment for production volume variance	(30,000)	0	120,000
Actual Cost of goods sold (after adjustment for production volume variance)	470,000	550,000	720,000
Gross profit	530,000	550,000	480,000
Less: Selling expenses (semi-variable)	490,000	530,000	570,000
Operating profit / (loss)	40,000	20,000	(90,000)

Actual production for the last three years was as follows. 2017: 65,000 units, 2018: 60,000 units, and 2019: 40,000 units. The opening stock as of 1st January 2017 was 5,000 units. Fixed manufacturing overheads were allocated to production based on budgeted activity of 60,000 units every year. Actual fixed overheads for each of the three years was $360,000 (per annum).

Required:

1. (a) Prepare a marginal costing income statement which would help you understand the performance of Victoria Ltd.

2. (b) Calculate and advise Mr. Andrews of the breakeven point for Victoria Ltd.

3. (c) Prepare a numerical reconciliation of the profit numbers that you calculated in requirement (a) and the profit numbers calculated by Victoria Ltd’s accountant.

4. (d) In order to help Mr. Andrews better understand the financial affairs of this business, explain the reasons in two brief points about the differences in profit numbers obtained from your marginal costing calculations and the profit numbers calculated by Victoria Ltd’s accountant.

Answer 1