Question

Question 4 (20 Marks – 36 Minutes) Nov Sup. 2014 Opuwo Investment CC opened a new manufacturing facility. In the first month the following changes were observed in their inventory: Opening inventory nil Produced 16 000 units Sold 12 000 units Closing inventory 4 000 units Each unit is sold for N$35. The costs incurred are as follows: Materials N$15 per unit produced Labour N$7 per unit produced Indirect manufacturing costs (fixed) N$40 000 Selling cost (fixed) N$15 200 Administration costs (fixed) N$23 600 Page 6 of 66 REQUIRED MARKS 4.1. Prepare a statement of comprehensive income using the marginal costing approach. 8 4.2. Prepare a statement of comprehensive income using the absorption costing approach. 8 4.3 Reconcile the profit of the absorption costing and marginal costing method 2 4.4 Explain the difference in profit between the two approaches. 2 TOTAL MARKS 20

Answer 1

Compute the Variable costing Unit Product cost
				Year 1
Direct Material				15
Direct labour				7
Variable Manufacturing overheads				0
Variable costing unit prroduct cost				22
Construct The Variable Costing Income Statement under FIFO
				YEAR 1
Sales					420,000
Less: Variable cost
variable cost of goods sold				264,000
Variable selling expense				0	264,000
Contribution margin					156,000
Fixed expense:
Fixed Manufacturing overheads					40,000
Fixed selling & Admin expense (15200+23600)					38,800
Net operating Income					77,200
Construct The Absorption Costing Unit Product Cost
				Year 1
Direct Material				15
Direct labour				7
Variable Manufacturing overheads				0
Fixed Manufacturing overheads				2.50	(40000/16000)
Absorption costing unit product cost				24.50
Construct the Absorption Costing Income Statement Under FIFO
				Year 1
Sales				$420,000
Cost of Goods sold				294000
Gross Margin				$126,000
Selling and admin expense				38,800
Net operating income				87,200
Reconciliation Statement:
Net Income under Variable costing				77200
Add: Fixed OH deferred (4000*2.50)				10000
Net Income under Absorption costing				87200
Reason:
The reason for difference in profits under both costing is that the fixed manufacturing overheads is included in inventory cost under Absorption costing and it will be deferred in ending inventory for next period.