Cambrige AS and A Level Accounting Notes (9706)/ ZIMSECÂ Advanced Accounting Level Notes: Absorption Costing: Statement of Profit or Loss Example
- We have already looked at the format of a Statement of Profit or Loss under Absorption Costing here
- It is now time to look at an example
Example Question
Oakwood Manufacturing Ltd started in business on 1 January 20×8 to manufacture furniture to customers’ special requirements. The following information is available for its second year in business.
| 20x9 $ |
|
| Fixed Costs | 66 000 |
| Direct materials(per unit) | 15 |
| Direct labour (per unit) | 9 |
| Variable overheads (per unit) | 6 |
| Selling price( per unit) | 44 |
| Production(units) | 12 000 |
| Sales (units) | 13 000 |
- Closing inventory was 3 000 units valued at $81 000 on 31 December 20×8
- Oakwood uses the FIFO method of inventory valuation
Required:
- Prepare an Absorption Costing Statement of Profit or Loss for the second year
Solution
Oakwood Manufacturing Absorption Costing Statement of Profit or Loss for the year ended 31 December 20×9
| $ | $ | |
| Sales | 572 000 | |
| Opening Inventory | 81 000 | |
| Variable Costs | 360 000 | |
| Fixed Costs | 66 000 | |
| Closing Inventory | (71 000) | |
| 448 000 | ||
| Gross Profit | 124 000 |
- This is a simple example with no under/over absorption but the format here has already shown how to deal with theses scenarios
- Under absorption means the amount of under-absorption has to be subtracted from the Income Statement
- Over-absorption means the amount of over-absorption has to be added back to profit
To access more topics go the ZIMSEC Advanced Level Accounting page
To access more topics go to the Cambridge AS/A level page
