Question

The following data were taken from the records of a company

                                               Period 1       Period 2      Period 2

         Production                     30,000         38,000          27,000

           Sales                              30,000        27,000          38,000

           Opening Stock                   -                                 11,000

           Closing Stock                                  11,000

All the above in Kgs

The firm makes a single product the financial details of which are as follows (based on a normal

activity level of 30,000 kgs).

                                                                     Cost per Kg (£)

             Direct material                                                  1.50

             Direct labour                                                     1.00

             Production overheads (300% of labour          3.00

                                                                                        5.50

Selling price per kg. £9

Administrative overheads are fixed at £25,000 and one third of the production overheads are

fixed. Prepare separate operating statements on marginal costing and absorption costing principles

Answer 1

Solution :

Computation of Unit Product Cost - Variable Costing
Particulars	Year 1	Year 2	Year 3
Unit Product Cost:
Direct material	£1.50	£1.50	£1.50
Direct Labor	£1.00	£1.00	£1.00
Variable manufacturing overhead	£2.00	£2.00	£2.00
Unit product cost	£4.50	£4.50	£4.50

Computation of Unit Product Cost - Absorption Costing
Particulars	Year 1	Year 2	Year 3
Unit Product Cost:
Direct material	£1.50	£1.50	£1.50
Direct Labor	£1.00	£1.00	£1.00
Variable manufacturing overhead	£2.00	£2.00	£2.00
Fixed manufacturing overhead ($30,000 / Nos of unit produced)	£1.00	£0.79	£1.11
Unit Product Cost	£5.50	£5.29	£5.61

Income Statement - Absorption Costing
Particulars	Year 1		Year 2		Year 3
	Details	Amount	Details	Amount	Details	Amount
Sales		£270,000.00		£243,000.00		£342,000.00
Cost of Goods Sold:
Cost of goods produced	£165,000.00		£201,000.00		£151,500.00
Less: Ending Inventory	£0.00		£58,190.00		£0.00
Add: Opening Inventory	£0.00	£165,000.00	£0.00	£142,810.00	£58,190.00	£209,690.00
Gross Profit		£105,000.00		£100,190.00		£132,310.00
Administrative overhead		£25,000.00		£25,000.00		£25,000.00
Net Operating Income		£80,000.00		£75,190.00		£107,310.00

Income Statement - Variable Costing
Particulars	Per Unit	Year 1	Year 2	Year 3
Sales	£9.00	£270,000.00	£243,000.00	£342,000.00
Variable Costs:
Variable manufacturing Costs	£4.50	£135,000.00	£121,500.00	£171,000.00
Contribution Margin	£4.50	£135,000.00	£121,500.00	£171,000.00
Fixed Expenses:
Fixed manufacturing overhead		£30,000.00	£30,000.00	£30,000.00
Fixed Administrative overhead		£25,000.00	£25,000.00	£25,000.00
Net Operating Income		£80,000.00	£66,500.00	£116,000.00