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 ($20 per unit)	1,000,000	1,100,000	1,200,000
Less: COGS
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
COGS( before adjusting for production volume variance)	500,000	550,000	600,000
Adjustment for production volume variance	(30,000)	0	120,000
Actual COGS ( After adjustment of 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 19 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:

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

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

(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.

(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

(a)

VICTORIA LTD
Marginal costing Income statement
Particular	2017($)	2018($)	2019($)
Sales	1000000	1100000	1200000
less : variable expenses
Cost of goods sold ( $ 4 / unit sold )	-200000	-220000	-240000
Selling expenses ( $ 8 / units sold )	-400000	-440000	-480000
Contribution margin	400000	440000	480000
Less : Fixed cost
fixed manufacturiong overhead	-360000	-360000	-360000
Fixed selling expenses	-90000	-90000	-90000
Operating prfit / loss	-50000	-10000	-30000

Working

Particular	2017($)	2018($)	2019($)
Sales	1000000	1100000	1200000
selling price	20	20	20
sales in units	50000	55000	60000
Particular	2017($)	2018($)	2019($)
Opening stock value	50000	200000	250000
Product cost per unit ( 50000 /5000)	10	10	10
Opening stock In units	5000	20000	25000
Particular	2017($)	2018($)	2019($)
Opening stock units	5000	20000	25000
production units	65000	60000	40000
	70000	80000	65000
clsoing stock units	-20000	-25000	-5000
sales units	50000	55000	60000
Fixed manufacturing O/H	390000	360000	240000
Fuxed manufacturing cost per unit	6	6	6
	(390000 / 65000)	(360000/60000)	(240000/40000)
Fixed manufacturing cost = 60000 * 6 =360000
Particular	2017($)	2018($)	2019($)
Variable cost	260000	240000	160000
production	65000	60000	40000
Variable cost per unit production	4	4	4
Particular	2017($)	2018($)	2019($)
Units sold	50000	55000	60000
Variable cost per unit production	4	4	4
Variable cost of goods sold	200000	220000	240000
Particular	2017($)	2018($)	2019($)
Total selling expenses (,c)	490000	530000	570000
Change in selling expenses (a)		40000	40000
Sales unit	50000	55000	60000
Change in sales unit (b)		5000	5000
variable selling expenses per unit (a/b)		8	8
Variable selling expenses (d)	400000	440000	480000
Fixed selling expenses ( c - d)	90000	90000	90000

(b)

Break even sales = Fixed cost / contribution margin ratio

Contribution margin ratio = Contribution margin * 100 / sales

Contribution margin = 400000 * 100 / 1000000

Contribution margin = 40%

Break even sales = 450000 / 40%

Break even sales = $ 1125000

(c)

Numerical reconcilliation of profit (loss) Numbers
Particular	2017($)	2018($)	2019($)
Operating profit / loss as per absorption costing	40000	20000	-90000
Add : difference in opening stock valuation	30000	120000	150000
	70000	140000	60000
Less : Difference in closing Stock valuation	120000	150000	30000
Opaerting profit / loss as per marginal costing	-50000	-10000	30000
Working :
Particular	2017($)	2018($)	2019($)
Opening stock in units	5000	20000	25000
Fixed manufacturing cost per unit	6	6	6
Opening stock value	30000	120000	150000
Closing stock in units	20000	25000	5000
Fixed ,manufacturing cost per unit	6	6	6
Closing stock value	120000	150000	30000

(d)

Absorption costing includes fixed manufacturing O/H

when closing stock is higher than opening stock as per absorption costing is higher

When opening stock is higher than closing stock as per absorption costing is lower

Fixed manufacturing O/H is dererred in absorption costing closing stock

hence when opening stock is used the COGS will be higher