### Cambrige AS and A Level Accounting Notes (9706)/ ZIMSECĀ  Advanced Accounting Level Notes: Marginal Costing: Statement of Profit 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:

1. Prepare a cost card using marginal costing
2. 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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