Question

1. The following data has been extracted from the following budgets and standard costs of Storm Limited, a company which manufactures and sells two products J & K.

Storm cost and revenue

                                                                      Per unit

Item	J	K
Selling Price	£45	£100
Direct materials costs	£10	£ 18
Direct wages costs (variable)	£ 4	£    6
Variable overhead cost	£ 2.50	£    3
Machine hours	2 hours	3 hours

Fixed production overhead costs are budgeted at £2,000,000 per quarter. Normal production is planned to be 500,000 machine hours per quarter.

Budgeted selling and distribution costs are as follows:

Variable                  £1.50 per unit sold

Fixed                      £800,000 per quarter

Budgeted administration costs are £1,200,000 per quarter. The company allocates production overheads to products based on machine hours.

The following pattern of sales and production is expected during the first six months of the year:

Production is higher than sales in order to meet seasonal demand in July – September.

	January – March	April – June
Sales (units)	J        80,000	J        70,000
	K        90,000	K        80,000
Production (units)	J        110,000	J        110,000
	K        120,000	K        130,000

          There is no stock on January 1^st

         

You should assume that actual fixed costs for the two quarters were the same as budgeted fixed costs.

Required:

1. Prepare profit statements for each of the two quarters, in a columnar format, using:

1. marginal costing
2. absorption costing

2. Reconcile the profits reported for each quarter in your answer to (a) above.

(c)      State and explain briefly why companies might decide to use marginal costing as the basis of management reporting.

         

2.       Compare and contrast the different worldviews on which ABC and Throughput Accounting are based.

Answer 1

a.

i)

Preparation of profit statements under Marginal costing
SI.No	Particulars	Jan - Mar	Apr-Jun
1	Sales
	Product J (80000*45), (70000*45)	3600000	3150000
	Product K (90000*100), (80000*100)	9000000	8000000
		12600000	11150000
2	Direct materials
	Product J (110000*10), (110000*10)	1100000	1100000
	Product K (120000*18), (130000*18)	2160000	2340000
3	Direct Labour
	Product J (110000*4), (110000*4)	440000	440000
	Product K (120000*6), (130000*6)	720000	780000
4	Variable Overhead cost
	Product J (110000*2.5), (110000*2.5)	275000	275000
	Product K (120000*3), (130000*3)	360000	390000
5	Total (2+3+4)	5055000	5325000
6	Opening stock
	Product - J (1980000*30000/120000)	0	495000
	Product - K (3510000*30000/130000)	0	810000
7	Total (5+6)	5055000	6630000
8	Closing Stock
	J-30000 units---> (10+4+2.5)*30000	495000
	K-30000 units---> (18+6+3)*30000	810000
	J-70000 units---> (10+4+2.5)*70000	0	1155000
	K-80000 units---> (18+6+3)*80000	0	2160000
9	Production cost for sale units (7-8)	3750000	3315000
10	Variable Selling expenses
	Product J (80000*1.5), (70000*1.5)	120000	105000
	Product K (90000*1.5), (80000*1.5)	135000	120000
11	Fixed Selling expenses	800000	800000
12	Administration Overheads	1200000	1200000
13	Fixed Production Overhead	2000000	2000000
	Total (9+10+11+12+13)	8005000	7540000
14	Actual Profit under Marginal costing
	(1-13)	4595000	3610000

ii.

Preparation of profit statements under Absorption costing
SI.No	Particulars	Jan - Mar	Apr-Jun
1	Sales
	Product J (80000*45), (70000*45)	3600000	3150000
	Product K (90000*100), (80000*100)	9000000	8000000
		12600000	11150000
2	Direct materials
	Product J (110000*10), (110000*10)	1100000	1100000
	Product K (120000*18), (130000*18)	2160000	2340000
3	Direct Labour
	Product J (110000*4), (110000*4)	440000	440000
	Product K (120000*6), (130000*6)	720000	780000
4	Variable Overhead cost
	Product J (110000*2.5), (110000*2.5)	275000	275000
	Product K (120000*3), (130000*3)	360000	390000
5	Fixed Overheads (WN-2)
	Product J (110000*8), (110000*8)	880000	880000
	Product K (120000*12), (130000*12)	1440000	1560000
6	Total (2+3+4+5)	7375000	7765000
7	Opening stock
	J-30000 units---> (10+4+2.5+8)*30000	0	735000
	K-30000 units---> (18+6+3+12)*30000	0	1170000
8	Total (6+7)	7375000	9670000
9	Closing Stock
	J-30000 units---> (10+4+2.5+8)*30000	735000
	K-30000 units---> (18+6+3+12)*30000	1170000
	J-70000 units---> (10+4+2.5+8)*70000		1715000
	K-80000 units---> (18+6+3+12)*80000		3120000
10	Production cost for sale units (8-9)	5470000	4835000
11	Gross Profit (1-10)	7130000	6315000
12	(UNDER)/ OVER ABSORPTION OF OVERHEADS	320000	440000
13	Variable Selling expenses
	Product J (80000*1.5), (70000*1.5)	120000	105000
	Product K (90000*1.5), (80000*1.5)	135000	120000
14	Fixed Selling expenses	800000	800000
15	Administration Overheads	1200000	1200000
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