Question

THUMB Ltd, which manufactures a single product, is considering whether to use absorption costing or marginal costing to report its budgeted profit in its management accounts. The following information is available:

K /unit Direct materials 4.00

Direct labour 15.00

Total 19.00

Selling price 50.00

Fixed production overheads are budgeted to be K300,000 per month and are absorbed on an average activity level of 100,000 units per month. For the month of April 2020, sales are expected to be 100,000 units although production units will be 120,000 units. Fixed selling costs of K150,000 per month will need to be included in the budget as will the variable selling costs of K2.00 per unit. There are no opening inventories expected at 1 April 2020. Required: (a) Prepare the budgeted statement of profit or loss for the month of April 2020 for THUMB Ltd using absorption costing. Clearly show the valuation of any inventory figures. [6 Marks] (b) Prepare the budgeted statement of profit or loss for the month of April 2020 for THUMB Ltd using marginal costing. Clearly show the valuation of any inventory figures.

Answer 1

Absorption Costing is a Total Cost Technique, whereas in Marginal Costing, only variable costs are charged to products.

Calculation Of Closing Inventory Of Finished goods :

Produced = 120000 units

Sold : 100000 units

Closing Inventory = 120000 - 100000 = 20000 units

Notes:

• FIFO method of Accounting is used.
• P.u. refers to Per Unit

Budgeted Statement Of Profit And Loss Using Absorption Costing Method

Particulars	Calculation	Amount (K)
Variable Material Cost of Quantity Produced ( Units Produced * Cost Per unit)	120000 units @ K 4 p.u.	480000
Add: Variable Labour Cost of Quantity Produced ( Units Produced * Cost Per unit)	120000 units @ K 15 p.u.	1800000
Add: Fixed Production Overhead	K 300000 / 100000 units * 120000 units	360000
Total Production Cost of Quantity Produced		2640000
Add : Opening Inventory of Finished Goods		NIL
Less: Closing Inventory of Finished Goods	2640000/ 120000 units *20000 units	440000
Total Production Cost of Quantity Sold		2200000
Add: Variable Selling cost of Quantity Sold ( Units Sold* Cost Per unit)	100000 units @ K 2 p.u.	200000
Add: Fixed Selling cost of Quantity Sold		150000
Total Cost of Quantity Sold		2550000
Profit (Balance) (Sales Value – Total Cost)	(5000000 – 2550000)	2450000
Sales Value of Quantity Sold ( Units Sold* Selling Price Per unit)	100000 units @ K 50 p.u.	5000000

Budgeted Statement Of Profit And Loss Using Marginal Costing Method

Particulars	Calculation	Amount (K)
Variable Material Cost of Quantity Produced ( Units Produced* Cost Per unit)	120000 units @ K 4 p.u.	480000
Add: Variable Labour Cost of Quantity Produced ( Units Produced* Cost Per unit)	120000 units @ K 15 p.u.	1800000
Variable Production Cost of Quantity Produced		2280000
Add : Opening Inventory of Finished Goods		NIL
Less: Closing Inventory of Finished Goods	2280000/ 120000 units *20000 units	380000
Variable Production Cost of Quantity Sold		1900000
Add: Variable Selling cost of Quantity Sold	100000 units @ K 2 p.u.	200000
Total Variable Cost of Quantity Sold		2100000
Sales Value of Quantity Sold ( Units Sold* Selling Price Per unit)	100000 units @ K 50 p.u.	5000000
Contribution Of Quantity Sold ( Sales Value – Total Variable Cost)		2900000
Less : Total Fixed Cost Production Overhead ( 300000 K / 100000 units * 120000 units) Selling Cost	(360000 K + 150000 K)	510000
Profit ( Contribution – Total Fixed Cost)		2390000