Cambrige AS and A Level Accounting Notes (9706)/ ZIMSEC Advanced Accounting Level Notes: Reconciliation of marginal costing and absorption costing profits
- As has been said here, due to changes in inventory levels from period to period
- The profit figures obtained using absorption costing and marginal costing method might vary
- It is now time to look at an 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 the Profit Statements for January and February using Absorption Costing
- Set out Statements of profit for the months of January and February using Marginal costing
- Prepare a reconciliation for absorption and marginal costing profits for both January and February
Solution
Zambe Ltd Absorption Costing Statement of Profit for the month of 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 |
||
Zambe Ltd Absorption Costing Statement of Profit for the month of 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 |
||
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 |
||
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 |
||
Zambe Ltd Absorption Costing and Marginal Costing Reconciliation
| January | February | |
| Profit using Absorption Costing | 63 000 | 77 500 |
| Less Fixed Overheads in closing inventory ($2x2 000) | (4 000) | ---- |
| Add Fixed Overheads in opening inventory: ($2x2 000) | ------ | 4 000 |
| Profit According to Marginal Costing | 59 000 | 81 500 |
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