Cambrige AS and A Level Accounting Notes (9706)/ ZIMSEC Advanced Accounting Level Notes: Marginal Costing: Statement of Profit Example
- In the introduction to marginal costing we it was pointed out that there is a difference between
- Marginal costing and Absorption costing statements of profits
- Here we will now examine a worked example to illustrate how a statement of profit can be prepared using marginal costing
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 marginal costing
- Set out Statements of profit for the months of January and February
Solution
- Below is the cost card, we have also included a calculation of standard profit per unit though it’s not required
| Cost Per Unit | ||
| Materials | (4kg x $3) | 12 |
| Labour | (4hrs x $2) | 8 |
| Variable Overheads | 5 | |
| Marginal Cost per unit | $25 |
|
| Selling price | 35 | |
| Marginal cost | (25) | |
| Variable selling cost | (1) | |
| Contribution Per Unit | $9 per unit |
- Now the Statements of Profit for January
Zambe Ltd Marginal Costing Statement of Profit for the month of January
| Workings | January | ||
| Sales | (9000x35) | 315 000 | |
| Cost of Sales: | |||
| Opening Inventory | ---- | ----- | |
| Materials | (11 000x12) | 132 000 | |
| Labour | (11 000x8) | 88 000 | |
| Variable Overheads | (11 000x5) | 55 000 | |
| 275 000 | |||
| Less:Closing Inventory | (2 000x25) | (50 000) | |
(225 000) |
|||
| 90 000 | |||
| Less: Variable Selling Costs | (9 000x1) | (9 000) |
|
| Contribution | 81 000 | ||
| Less: Fixed Costs | (20 000) | ||
| Selling | (2 000) | ||
| Actual Net Profit | $59 000 |
||
- Under cost of sales the elements were deliberately shown to emphasise the point that fixed overheads are not included, we could have simply used $25/cost per unit instead as was done with closing inventory
Zambe Ltd Marginal Costing Statement of Profit for the month of January
| Workings | February | ||
| Sales | (11500x35) | 402 500 | |
| Cost of Sales: | |||
| Opening Inventory | (2000x25) | 50 000 | |
| Finished Desks for the period | (9500x25) | 237 500 | |
| Less Closing Inventory | ----- | (----) | |
(287 500) |
|||
| 115 000 | |||
| Less: Variable selling costs | (11 500x1) | (11 500) |
|
| Contribution | 103 500 | ||
| Less:Fixed Costs | (20 000) | ||
| Selling Expenses | (2 000) | ||
| Actual Net Profit | $81 500 |
||
- For the month of January we have used the cost card to calculate the value of inventory instead of showing the breakdown in the statement of profit
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