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Week 6 AC and VC Additional Example

Coase Ltd uses variable costing for internal reporting and absorption costing for external reporting. The document provides cost and sales data for 2007 and 2008. Required is to prepare profit statements for 2008 using (a) variable costing and (b) absorption costing, and (c) explain the difference in profits between the two methods.

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44 views

Week 6 AC and VC Additional Example

Coase Ltd uses variable costing for internal reporting and absorption costing for external reporting. The document provides cost and sales data for 2007 and 2008. Required is to prepare profit statements for 2008 using (a) variable costing and (b) absorption costing, and (c) explain the difference in profits between the two methods.

Uploaded by

kokomama231
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Absorption and Variable Costing

Additional example
(Source: UOL POA)
Coase Ltd is a single-product manufacturing company which uses a variable costing
system for internal management reports. The companys annual income statement for
external reporting purposes are based on full absorption costing.
The following data refer to the years ended 30th June 2007 and 2008:
2007
$

2008
$
90

21
19
8
2

23
22
10
3

170,000

180,000

Selling price per unit


Marginal costs per unit
Direct materials
Direct labour
Marginal factory overheads
Marginal selling and administrative expenses
Fixed factory overheads

Opening stock
Closing stock
Sales

Units
1,500
2,000
20,000

Units
2,000
1,500
25,000

The normal volume used for the purpose of absorption costing is 28,000 units in both
years. The company uses the first-in first-out assumption for the calculation of cost of
sales.
Required:
(a) Prepare internal management profit statements for the year ended 30th June 2008
using marginal costing.
(7 marks)
(b) Prepare a draft income statement for the year ended 30th June 2008 using full
absorption costing.
(8 marks)
(c) Give calculations showing why the profits for 2008 are not the same in your
answers to (a) and (b) above.
(5 marks)

(a) Marginal costing


Assume FIFO
Coase Ltd
Profit statement for the year ended 30th June 2008
units
Sales

25,000

2,250,000

Less Cost of Sales


Opening stock @2007's unit VC of 48
Production costs: - Materials @
- Direct labour @
- Var prod OH @
less: Closing stock @55

2000
23
22
10

96,000
563,500

24,500
1500

539,000
245,000

1,347,500
1,443,500
82,500
1,361,000

Manufacturing contribution
Less: Variable Selling and distribution overheads

889,000
3*25,000

75,000

Contribution

814,000

Less: Fixed factory overheads

180,000

Net profit/(loss)

634,000

(b) Absorption costing


Assume FIFO
Coase Ltd
Profit statement for the year ended 30th June 2008
units
Sales

25,000

2,250,000

2000

108,140

Less Cost of Sales


Opening stock @2007's 54.07
Production costs: - Materials @
- Direct labour @
- Var prod OH @
- Fixed factory overhead

23

563,500

22
10
6.43

539,000
245,000
157,500

24,500

less: Closing stock @61.43

1500

1,505,000
1,613,140
92,145
1,520,995

Gross Profit

729,005

Under-absorbed fixed factory overheads (180000-157500)

(22,500)
706,505

Less: Variable Selling and distribution overheads

3*25,000

75,000

Net profit/(loss)

631,505

(W1) 2007's fixed factory overheads per unit=

170,000/28,000

6.07

2008's fixed factory overheads per unit=

180,000/28,000

6.43

(W2) 2007's production cost per unit=


2008's production cost per unit=

(c)

21+19+8+6.07

54.07

23+22+10+6.43

61.43

Marginal profit

634,000

Fixed overhead b/f in opening stock

108140-96000

12,140

Fixed overhead c/f in closing stock

92145-82500

9,645

Reduction in profit
Absorption profit

(2,495)
631,505

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