Cambrige AS and A Level Accounting Notes (9706)/ ZIMSEC Advanced Accounting Level Notes: Absorption Costing: Statement of Profit Worked Example
- We have already looked at the format of a Statement of Profit or Loss under Absorption Costing here
- We also looked at another example here
- It is now time to look at another example
The Question
Zambe Ltd produces one product –desks.Each desk is budgeted to require 4 kg of wood at $3 per kg, 4 hours of labour at $2 per hour, and variable production overheads of $5 per unit. Fixed production overheads are budgeted at $20,000 per month and average production is estimated to be 10,000 units per month. The selling price is fixed at $35 per unit. There is also a variable selling cost of $1 per unit and fixed selling cost of $2,000 per month. During the first two months Zambe expects the following levels of activity:
| January | February | |
| Production | 11 000 units | 9 500 units |
| Sales | 9 000 units | 11 500 units |
Required:
- Prepare a cost card using absorption costing
- Set out budget Profit Statements for the months of January and February
Solution
- Based on what we have learnt here and here the cost card is easy to create
| Cost Per Unit $ |
|
| Materials(4kgx$3) | 12 |
| Labour(4hrsx$2) | 8 |
| Variable Overheads | 5 |
| Fixed Overheads ($20 000÷ 10 000) | 2 |
$27 |
- The cost per unit is therefore $27
- We can also create the Absorption Statements of Profit for both February and January
Statement of Profit for January
| Workings | January | ||
| Sales | (9000x35) | 315 000 | |
| Cost of Sales: | |||
| Opening Inventory | ---- | ----- | |
| Finished Desks for the period | (11000x27) | 297 00 | |
| Less Closing Inventory | (2000x27) | (54 000) | |
(243 000) |
|||
| Standard Gross Profit | (9000x8) | 72 000 | |
| Adjustment for over/under absorption | (22000-20000) | 2 000 |
|
| Actual Gross Profit | 74 000 | ||
| Less Selling Costs | |||
| Variable selling costs | (9000x1) | 9 000 | |
| Fixed selling costs | 2 000 | ||
| (11 000) | |||
| Actual Net Profit | 63 000 |
||
Statement of Profit for February
| Workings | February | ||
| Sales | (11500x35) | 402 500 | |
| Cost of Sales: | |||
| Opening Inventory | (2000x27) | 54 000 | |
| Finished Desks for the period | (9500x27) | 256 500 | |
| Less Closing Inventory | ----- | (----) | |
(310 500) |
|||
| Standard Gross Profit | (9000x8) | 92 000 | |
| Adjustment for over/(under) absorption of fixed overheads | (19000-20000) | (1 000) |
|
| Actual Gross Profit | 91 000 | ||
| Less:Selling Costs | |||
| Variable Selling Costs | (11500x1) | (11 500) | |
| Fixed Selling Costs | (2 000) | 13 500 | |
| Actual Net Profit | 77 500 |
||
- Costs are absorbed using units but they could also be absorbed on another basis for example labour hours if the question so directs
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