Question

VARIABLE AND ABSORPTION COSTING

Benches on High began operations at the beginning of 2014. This company produces and sells granite and marble benchtops, designed and customised to individual kitchen specifications. Rob Stone, the owner, is very happy with his overall profitability, but is confused about some of the numbers. He is curious as to why, when he sold exactly twice as many bench tops in 2015 as he did in 2014, his reported annual profit is not exactly twice what it was in 2014 (2014: $173,000). The company uses a standard costing system, and fixed manufacturing overheads are allocated according to the number of units produced in 2014. There are no price, efficiency or spending variances in 2015. All variances are written off to Cost of Goods Sold in the year in which they occur. Actual data are provided in Exhibit 4. Exhibit 4 Actual Data for 2014 and 2015 Sales Price (average) $ 1,000 per unit sold Variable manufacturing costs 100 per unit produced Variable marketing costs 150 per unit sold Fixed manufacturing costs 20,000 Fixed administrative costs 40,000 2014 2015 Units produced 500 400 Units sold 300 600 Required: (a) Prepare an Income Statement for 2015 using absorption costing.

(b) Prepare an Income Statement for 2015 using variable (direct) costing.

(c) Write a brief comment to Mr Patz, explaining why the profit for 2015 was not twice that of 2014. Include a numerical analysis to justify your explanation.

Answer 1

1-	Income statement-2015				2-	Income statement-2015
	Absorption costing					variable costing
sales			600000		sales			600000
less cost of goods sold					less variable cost of goods sold
opening stock	140*200	28000			opening stock	200*100	20000
cost of units manufactured	400*150	60000			variable cost of units manufactured	400*100	40000
cost of goods available for sale		88000			cost of goods available for sale		60000
less closing stock	0	0			less closing stock		0
cost of goods sold			88000		variable cost of goods manufactured			60000
gross profit			512000		gross contribution margin			540000
less variable marketing cost	600*150		90000		less variable marketing expense			90000
less fixed administrative expense			40000		contribution margin			450000
net profit			382000		less fixed manufacturing cost			20000
					less fixed administrative expense			40000
		2014		2015	net profit			390000
cost of production
variable manufacturing cost per unit		100		100
Fixed manufacturing cost	20000/500	40	20000/400	50				2014
cost of production per unit		140		150		variable cost of production
						variable manufacturing cost per unit		100
3-
1-	Income statement
	Absorption costing		2014	2015
sales			300000	600000
less cost of goods sold
opening stock	0	0
cost of units manufactured	500*150	75000
cost of goods available for sale		75000
less closing stock	200*150	30000
cost of goods sold			45000	88000
gross profit			255000	512000
less variable marketing cost	300*150		45000	90000
less fixed administrative expense			40000	40000
net profit			170000	382000
Profit is not doubled because in 2015, total goods available for sale is 600 in which 200 is closing stock of previous year in which fixed manufacturing expenses are charged in previous year and this year only fixed expenses of units manufactured are charged due to which profit is not double and it is more than previous year
		2014
cost of production
variable manufacturing cost per unit		100
Fixed manufacturing cost	20000/500	40
cost of production per unit		140