Cambrige AS and A Level Accounting Notes (9706)/ ZIMSEC  Advanced Accounting Level Notes: Absorption Costing: Statement of Profit Worked 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:

Production11 000 units9 500 units
Sales9 000 units11 500 units


  1. Prepare a cost card using absorption costing
  2. Set out budget Profit Statements for the months of January and February


  • Based on what we have learnt here and here the cost card is easy to create
Cost Per Unit
Variable Overheads5
Fixed Overheads
($20 000÷ 10 000)


  • 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

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 Profit74 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

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 Profit91 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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