Revision Exercise
Question 1
May Chan operates a retail business. The capital balance of her business as at 1 January 2019 was
$1,000,000. The assets and liabilities of his business as at 31 December 2019, the year-end date, were
as follows:
$
Trade receivables
50,000
Trade payables
25,000
Inventory
32,000
Cash at bank
Office equipment
Prepayments
110,000
500,000
3,000
During the year, May took cash of $12,000 and inventory of $500 each month for her personal use.
Required:
(a)
(b)
Prepare for May Chan’s business a statement of affairs as at 31 December 2019.
Calculate the net profit or net loss for the year.
(3.5 marks)
(3.5 marks)
Answer:
(a)
May Chan
Statement of Affairs as at 31 December 2019
$
Assets
Office equipment
Trade receivables
Inventory
Cash at bank
Prepayments
Liabilities:
Trade payables
Capital as at 31 December 2019
500,000
50,000
32,000
110,000
3,000
695,000
0.5
0.5
0.5
0.5
0.5
25,000
670,000
0.5
Less
(b)
Net profit / (loss) = Closing capital balance + Drawings – Opening capital balance
= $670,000 + [($12,000 + $500) × 12] – $1,000,000
= ($180,000)
0.5
3
0.5
Question 2
Given the following information on Eric Lee’s business for the year ended 31 December 2018:
Cash purchases
Discounts received
Cash refund received from a trade creditor on over-payment
Cash and cheque payments to trade creditors
Returns outwards
Carriage inwards
Carriage outwards
$
400,000
325,000
35,000
2,546,500
23,500
50,000
26,500
As at 1 January 2018, trade payables totalled $564,100. As at 31 December 2018, trade payables
totalled $734,900.
Required:
Determine the total amount of purchases for the year ended 31 December 2018.
(5 marks)
Answer:
Returns outwards
Discounts received
Cash and bank
Balance c/f
Total Trade Payables
$
23,500
Balance b/f
325,000
Cash — Refund
2,546,500
Credit purchases (balancing figure)
734,900
3,629,900
Total purchases = Cash purchases + Credit purchases
= $400,000 + $3,030,800
= $3,430,800
$
564,100
35,000
3,030,800
0.5
0.5
1
0.5
0.5
0.5
0.5
3,629,900
1
Question 3
Larry Ltd performed an inventory count on 31 March 2016. However, the inventory sheets were lost.
Further investigation revealed the following information:
(i) Goods were sold at a uniform mark-up of 20%.
(ii) Inventory as at 1 January 2016 was valued at $495,880.
(iii) Purchases totalling $783,650 for the three months ended 31 March 2016 were recorded in the
books.
(iv) Sales for the three months ended 31 March 2016 amounted to $1,350,000.
(v) Goods returned by customers during the three months ended 31 March 2016 amounted to
$5,650 at cost.
(vi) On 31 March 2016, goods totalling $38,450 were received from a supplier. This transaction
was not recorded in the books.
(vii) An inventory sheet as at 1 January 2016 was overcast by $4,500.
(viii) Gross profit for the three months ended 31 March 2016 was $217,940.
Required:
Prepare for Larry Ltd an income statement extract, showing sales, cost of goods sold and gross profit
for the three months ended 31 March 2016.
(5 marks)
Answer:
Larry Ltd
Income Statement for the three months ended 31 March 2016 (extract)
$
Sales
Less Returns inwards ($5,650 × 120%)
Less
Cost of goods sold:
Opening inventory ($495,880 – $4,500)
Add Purchases ($783,650 + $38,450)
Less Closing inventory (balancing figure)
Gross profit
491,380
822,100
1,313,480
188,200
$
1,350,000
6,780
1,343,220
0.5
1
1
1
1,125,280
217,940
1
0.5
Question 4
Tony Tam is a sole trader. His business had a capital balance of $500,000 as at 1 January 2019.
During the year ended 31 December 2019, Tony withdrew cash of $10,000 for personal use each
month. His business had a capital balance of $1,000,000 as at 31 December 2019.
Required:
(a) Calculate the net profit for the year.
(b) Calculate the return on capital employed.
(2.5 marks)
(2.5 marks)
(Calculations to two decimal places)
Answer:
(a)
(b)
Net profit = Closing capital balance + Drawings – Opening capital balance
= $1,000,000 + ($10,000 × 12) – $500,000
= $620,000
2
0.5
Return on capital employed
= Net profit ÷ Average capital × 100%
= $620,000 ÷ [($1,000,000 + $500,000) ÷ 2] × 100%
= 82.67%
2
0.5
Question 5
Cherry Au is a sole trader. Her business’s summarised statement of financial position as at
31 December 2016 is as follows:
Cherry Au
Statement of Financial Position as at 31 December 2016
$
Assets
Capital and liabilities
Furniture and fittings
190,000 Capital
Inventory
27,500 Trade payables
Trade receivables
46,000
Cash at bank
2,700
266,200
$
202,050
64,150
266,200
As at 31 December 2017, the liabilities of her business consisted of trade payables $50,050 and a
loan of $47,500 from Lemon Ltd (repayable within one year). The assets included furniture and
fittings $167,500, inventory $22,750, trade receivables $40,250 and cash at bank $8,100. Drawings
in 2017 totalled $93,500 and the owner also contributed additional capital of $25,000. The gross
profit ratio was 20% and the net profit ratio was 12%.
Required:
From the above information, prepare the following:
(a) A statement of financial position as at 31 December 2017.
(b) An income statement for the year ended 31 December 2017.
(5 marks)
(5 marks)
Answer:
(a)
Cherry Au
Statement of Financial Position as at 31 December 2017
$
$
Non-current assets
Capital
Furniture and fittings
167,500 Balance as at 1 January 2017
Add Capital introduced
Current assets
Inventory
22,750
Add Net profit for the year
Trade receivables
40,250
(balancing figure)
Cash at bank
8,100
71,100
Less Drawings
Current liabilities
Trade payables
Loan from Lemon Ltd
238,600
$
$
202,050
25,000
227,050
7,500
234,550
93,500
141,050
50,050
47,500
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
97,550
238,600
(b)
Cherry Au
Income Statement for the year ended 31 December 2017
$
Opening inventory
27,500 Sales (W1)
Add Purchases (balancing figure)
45,250
72,750
Less Closing inventory
22,750
Cost of goods sold
50,000
Gross profit c/d (W2)
12,500
62,500
Operating expenses (balancing figure)
5,000 Gross profit b/d
Net profit
7,500
12,500
Workings:
(W1)
Net profit ratio = 12%
$7,500 ÷ Sales = 12%
Sales = $62,500
(W2)
Gross profit ratio = 20%
Gross profit ÷ $62,500 = 20%
Gross profit = $12,500
$
62,500
0.5
0.5
0.5
0.5
1
62,500
12,500
12,500
0.5
0.5
1
Question 6
Wilson Lam commenced business on 1 October 2015. He did not maintain a full set of accounting
records. All purchases and sales were made on credit. All other transactions were made by cheque.
For the year ended 30 September 2016, Wilson provided the following information:
$
Capital introduced on 1 October 2015 (cheque)
1,000,000
Machinery and equipment (purchased on 1 October 2015 by cheque)
670,000
Bad debts
2,600
Sales
685,000
Discounts received from suppliers
10,000
Payments to suppliers
Returns to suppliers
Returns from customers
424,000
15,000
2,000
Allowance for doubtful accounts
Inventory, 30 September 2016: At cost
At net realisable value
12,500
42,800
40,000
Trade receivables, 30 September 2016
Trade payables, 30 September 2016
Cash at bank
57,000
37,000
144,200
Expenses paid
?
Required:
(a) Calculate the net purchases for the year ended 30 September 2016.
(3.5 marks)
(b) Calculate the amount received from customers during the year ended 30 September 2016.
(3 marks)
(c) Calculate the amount of expenses paid by cheque during the year ended 30 September 2016.
(3.5 marks)
(d) Which inventory value, $42,800 or $40,000, should be used to value the closing inventory?
State the accounting principle or concept that has been applied. Assuming the wrong figure was
used, state the effect on net profit for the year ended 30 September 2016 and
30 September 2017, respectively.
(6 marks)
(a)
Discounts received
Bank
Returns outwards
Balance c/f
Total Trade Payables
$
10,000 Purchases (balancing figure)
424,000
15,000
37,000
486,000
$
486,000
0.5
0.5
0.5
0.5
0.5
486,000
Net purchases = $486,000 – $15,000 = $471,000
1
(b)
Total Trade Receivables
$
685,000 Bad debts
Returns inwards
Bank (balancing figure)
Balance c/f
685,000
Sales
$
2,600
2,000
623,400
57,000
685,000
0.5
Amount received from customers = $623,400
0.5
0.5
0.5
0.5
0.5
(c)
Capital
Trade receivables (from (b))
Bank
$
1,000,000 Machinery and equipment
623,400 Trade payables
Expenses (balancing figure)
Balance c/f
1,623,400
$
670,000
424,000
385,200
144,200
1,623,400
Amount of expenses paid by cheque = $385,200
(d)
0.5
0.5
0.5
0.5
0.5
0.5
0.5
Inventory should be valued at the lower of cost and net realisable value. As the net
realisable value of the closing inventory is lower than cost ($42,800), the inventory
should be valued at its net realisable value of $40,000.
2
The lower of cost and net realisable value is an application of the prudence concept.
1
If the wrong figure (i.e., $42,800) was used, net profit for the year ended 30
September 2016 would be overstated by $2,800 ($42,800 – $40,000).
1
On the other hand, net profit for the year ended 30 September 2017 would be
understated by $2,800 as the opening inventory for that year would be overstated by
$2,800, which would result in a higher cost of goods sold figure.
2
Question 7
During the year ended 31 December 2016, Ace Ltd produced a total of 204,500 notebook computers,
with 205,000 units sold for $3,900 each. The following details relate to the notebook computers:
$
Salesmen’s commissions
100 per unit sold
Advertising expenses
10,000,000
Administrative expenses
15,000,000
Direct labour
500 per unit
Direct materials
800 per unit
Manufacturing overheads: Variable
200 per unit
Manufacturing overheads: Fixed
184,050,000
Inventory, 1 January 2016
3,600,000
The unit costs of the computers produced in 2015 were $2,400. The company uses absorption
costing.
Required:
(a)
(b)
Calculate the closing inventory in units and then compute the value of closing
inventory.
Prepare an income statement for the year ended 31 December 2016.
(c)
Compute the following:
(i) Prime cost
(ii) Conversion costs
(iii) Product costs
(iv) Period costs
(6.5 marks)
(5.5 marks)
(1.5 marks)
(2 marks)
(1.5 marks)
(2 marks)
Answer:
(a) Unit costs of a notebook computer:
Direct labour
Direct materials
Manufacturing overheads: Variable
Fixed ($184,050,000 ÷ 204,500)
$
500
800
200
900
2,400
0.5
0.5
0.5
1
0.5
Closing inventory in units:
Opening inventory in units ($3,600,000 ÷ $2,400)
Units produced
Less Units sold
Closing inventory in units
Value of closing inventory = 1,000 ´ $2,400 = $2,400,000
1,500
204,500
206,000
205,000
1,000
1
0.5
0.5
0.5
0.5
(b)
Ace Ltd
Income Statement for the year ended 31 December 2016
Sales (205,000 ´ $3,900)
Less Cost of goods sold:
Opening inventory
Add Manufacturing cost of goods completed (204,500 ´ $2,400)
Less Closing inventory
Gross profit
Less Expenses:
Administrative expenses
Advertising expenses
Salesmen’s commissions (205,000 ´ $100)
Net profit
(c)
$000
3,600
490,800
494,400
2,400
15,000
10,000
20,500
$000
799,500
1
0.5
1
492,000
307,500
0.5
0.5
0.5
45,500
262,000
1
0.5
(i) Prime cost:
Direct materials (204,500 ´ $800)
Direct labour (204,500 ´ $500)
$000
163,600
102,250
265,850
0.5
0.5
0.5
(ii) Conversion costs:
Direct labour
Manufacturing overheads [(204,500 ´ $200) + $184,050,000]
$000
102,250
224,950
327,200
0.5
1
0.5
(iii) Product costs:
Direct materials + Direct labour + Manufacturing overheads
= $163,600,000 + $102,250,000 + $224,950,000 = $490,800,000
(iv) Period costs:
Administrative expenses
Advertising expenses
Salesmen’s commissions
$000
15,000
10,000
20,500
45,500
0.5
0.5
0.5
0.5
Question 8
Sun Co’s budgeted information for next month (based on four different output levels) is as follows:
Output level
Direct labour
Direct materials
Water and electricity
Rent and rates
Marketing expenses
10,000 units
$50,000
$100,000
$10,000
$100,000
(vi)
20,000 units
$100,000
(ii)
$20,000
$100,000
$30,000
30,000 units
(i)
$300,000
(iv)
(v)
$33,000
50,000 units
$250,000
(iii)
$50,000
$100,000
$39,000
Required:
(a)
(b)
Fill in the missing figures.
Classify the costs into variable, fixed or mixed costs.
Answer:
(a) (i) $150,000
(ii) $200,000
(b)
(6 marks)
(5 marks)
1
1
(iii) $500,000
(iv) $30,000
(v) $100,000
1
(vi) $27,000
1
Variable costs: Direct materials, Direct labour, water and electricity
Fixed costs: Rent and rates
Mixed costs: Marketing expenses
1
1
1 each
1
1 each
Question 9
Lemon & Co is a manufacturer that produces a single product. The firm planned to produce 100,000
units for the year ended 31 December 2016. Budgeted fixed manufacturing overheads for the year
amounted to $1,000,000.
In January 2017, the following information for the year ended 31 December 2016 became available:
Production
80,000 units
Fixed manufacturing overheads
$1,000,000
Required:
(a) Calculate the fixed manufacturing overhead absorption rate.
(3 marks)
(b)
(3 marks)
State the amount of fixed manufacturing overheads over- or under-absorbed.
Answer:
(a)
(b)
Fixed manufacturing overhead absorption rate under normal costing
= $1,000,000 ÷ 100,000
= $10 per unit
Over- or under-absorption of fixed manufacturing overheads
= $1,000,000 – (80,000 × $10)
= $200,000 (under-absorption)
1
0.5
1
0.5
Question 10
Abby Co is a manufacturer that produces a single product. You are provided the following budgeted
information on the product for the year ended 31 December 2019:
Production and sales
35,000 units
Selling price
$400 per unit sold
Direct labour
$55 per unit produced
Direct materials
$125 per unit produced
Variable manufacturing overheads
$30 per unit produced
Fixed manufacturing overheads
$3,500,000
Machine hours
1 hour per unit produced
Variable non-manufacturing overheads
$25 per unit sold
Fixed non-manufacturing overheads
$1,000,000
There was no opening inventory. Fixed manufacturing overheads were absorbed by applying a
predetermined absorption rate on the basis of budgeted machine hours.
Actual data for the year are as follows:
(i)
(ii)
A total of 40,000 units were produced. There was closing inventory of 3,000 units.
The selling price, direct labour cost per unit and direct materials cost per unit were as
budgeted.
(iii) Variable manufacturing overheads were $25 per unit produced.
(iv) Fixed manufacturing overheads amounted to $3,800,000.
(v) Non-manufacturing overheads were as budgeted.
Required:
(a) Calculate the predetermined fixed manufacturing overhead absorption rate.
(2 marks)
(b) Calculate the amount of fixed manufacturing overheads absorbed.
(2 marks)
(c) Prepare an income statement for the year ended 31 December 2019 under absorption costing
based on actual data.
(8 marks)
Answer:
(a) Predetermined fixed manufacturing overhead absorption rate
= Budgeted fixed manufacturing overheads ÷ Budgeted machine hours
= $3,500,000 ÷ (35,000 × 1)
= $100 per machine hour
(b)
1.5
0.5
Fixed manufacturing overheads absorbed
= Actual machine hours × Predetermined fixed manufacturing overhead absorption rate
= (40,000 × 1) × $100
= $4,000,000
1.5
0.5
(c)
Abby Co
Income Statement for the year ended 31 December 2019
Sales [(40,000 – 3,000) ´ $400]
Less Cost of goods sold:
Opening inventory
Add Cost of goods manufactured (W1)
Less
Closing inventory (W2)
Less Over-absorption of fixed manufacturing overheads (W3)
Gross profit
Less Variable non-manufacturing overheads (W4)
Fixed non-manufacturing overheads
Net profit
$
－
12,200,000
12,200,000
915,000
11,285,000
200,000
925,000
1,000,000
$
14,800,000
2
1
11,085,000
3,715,000
1,925,000
1,790,000
Workings:
(W1) Cost of goods manufactured = 40,000 × ($55 + $125 + $100 + $25)
= $12,200,000
(W2) Closing inventory = $12,200,000 × 3,000/40,000
= $915,000
(W3) Over-absorption of fixed manufacturing overheads = $4,000,000 – $3,800,000
= $200,000
(W4) Variable non-manufacturing overheads = (40,000 – 3,000) ´ $25
= $925,000
1.5
1
0.5
1
0.5
0.5
Question 11
Master Ltd commenced business on 1 January 2017 and produces a single product. The following
information is available for its first year of operations.
2017
Units sold
86,000
Units manufactured
94,000
Cost and price data for 2017:
Selling price per unit
Variable production costs per unit produced
Variable administrative and marketing costs per unit sold
$240
$58
$15
The company incurred fixed production overheads of $282,000 in 2017. Fixed administrative and
marketing costs in 2017 totalled $110,000.
Required:
(a) Prepare an income statement for the year ended 31 December 2017 using:
(b)
(i) Absorption costing
(ii) Marginal costing
Reconcile the difference in net profit between the two costing approaches.
(6.5 marks)
(5.5 marks)
(2 marks)
Answer:
(a) (i) Under absorption costing:
Master Ltd
Income Statement for the year ended 31 December 2017
$000
Sales (86,000 ´ $240)
Less Cost of goods sold:
Cost of goods manufactured (W1)
5,734
Less Closing inventory (W2)
488
Gross profit
Less Variable administrative and marketing costs (86,000 ´ $15)
1,290
Fixed administrative and marketing costs
110
Net profit
$000
20,640
5,246
15,394
1
2
1
0.5
1
1,400
13,994
0.5
0.5
Workings:
(W1) Cost of goods manufactured = 94,000 ´ [$58 + ($282,000 ÷ 94,000)]
= 94,000 ´ ($58 + $3)
= $5,734,000
(W2) Closing inventory = (94,000 - 86,000) ´ $61
= $488,000
1.5
0.5
0.5
0.5
(ii) Under marginal costing:
Master Ltd
Income Statement for the year ended 31 December 2017
$000
Sales
Less Cost of goods sold:
Cost of goods manufactured (94,000 ´ $58)
Less Closing inventory [(94,000 - 86,000) ´ $58]
Product contribution margin
Less Variable administrative and marketing costs
Total contribution margin
Less Fixed production overheads
Fixed administrative and marketing costs
Net profit
(b)
5,452
464
282
110
$000
20,640
0.5
1
4,988
15,652
1,290
14,362
392
13,970
1
0.5
0.5
0.5
0.5
0.5
0.5
The difference in net profit is reconciled as follows:
Net profit under absorption costing
Less Fixed production overheads absorbed in closing inventory (8,000 ´ $3)
Net profit under marginal costing
$000
13,994
24
13,970
0.5
1
0.5
Question 12
Treasure Ltd manufactures a single product. The company’s financial year ends on 31 December.
Inventory as at 1 January 2019 amounted to 3,000 units, with a value of $216,000 (under absorption
costing). The company incurred fixed production overheads of $798,000 in 2019.
Information on unit costs in 2018 and 2019:
$
15
22
21
Direct materials
Direct labour
Variable production overheads
Production (units)
Sales (units)
2019
57,000
59,000
Selling and administrative overheads are as follows:
Variable selling and administrative expenses
Fixed selling and administrative expenses
$19 per unit sold
$180,000 per annum
The selling price of the product in 2018 and 2019 was $260 per unit.
Required:
(a) Calculate the unit production costs for 2019 under:
(i) Absorption costing
(ii) Marginal costing
(b) Prepare an income statement for the year ended 31 December 2019 using:
(i) Absorption costing
(ii) Marginal costing
(c) Reconcile the difference in net profit between the two costing approaches.
(2 marks)
(2 marks)
(6.5 marks)
(6.5 marks)
(4 marks)
Answer:
(a) (i) Unit production costs under absorption costing
= $15 + $22 + $21 + ($798,000 ÷ 57,000)
= $15 + $22 + $21 + $14
= $72
1.5
0.5
(ii) Unit production costs under marginal costing = $15 + $22 + $21
= $58
(b)
1.5
0.5
(i) Under absorption costing:
Treasure Ltd
Income Statement for the year ended 31 December 2019
$000
Sales (59,000 ´ $260)
Less Cost of goods sold:
Opening inventory
216
Add Cost of goods manufactured (57,000 ´ $72)
4,104
4,320
Less Closing inventory [(3,000 + 57,000 - 59,000) ´ $72]
72
Gross profit
Less Variable selling and administrative expenses (59,000 ´ $19)
1,121
Fixed selling and administrative expenses
180
Net profit
$000
15,340
1
0.5
1
4,248
11,092
1.5
1,301
9,791
0.5
0.5
1
0.5
(ii) Under marginal costing:
Treasure Ltd
Income Statement for the year ended 31 December 2019
$000
Sales
Less Cost of goods sold:
Opening inventory (3,000 ´ $58)
Add Cost of goods manufactured (57,000 ´ $58)
Less Closing inventory (1,000 ´ $58)
Product contribution margin
Less Variable selling and administrative expenses
Total contribution margin
Less Fixed production overheads
Fixed selling and administrative expenses
Net profit
(c)
174
3,306
3,480
58
798
180
$000
15,340
0.5
1
1
3,422
11,918
1,121
10,797
978
9,819
1
0.5
0.5
0.5
0.5
0.5
0.5
The difference in net profit is reconciled as follows:
Net profit under absorption costing
Add Fixed production overheads absorbed in opening inventory
{3,000 ´ [($216,000 ÷ 3,000) - $58]}
Less Fixed production overheads absorbed in closing inventory (1,000 ´ $14)
Net profit under marginal costing
$000
9,791
42
9,833
14
9,819
0.5
2
1
0.5
Question 13
Snowball Ltd produces a single product. The company uses absorption costing but is considering
adopting marginal costing instead. It wants to compare the results under these two costing systems.
Fixed production overheads are absorbed at the rate of $30 per unit, based on the normal production
level of 400,000 units per annum. The company’s year-end date is 31 December. The following
information was extracted from the books:
2018
Production units
380,000
Sales units
370,000
Cost and price data for 2017 and 2018:
Direct materials per unit produced
$
34
Direct labour per unit produced
Variable production overheads per unit produced
Selling price per unit
12
9
170
Non-manufacturing overheads for the past two years are as follows:
Variable non-manufacturing overheads
$27 per unit sold
Fixed non-manufacturing overheads
$8,000,000 per annum
As at 31 December 2018, 90,000 units of the product remained unsold.
Required:
(a) Calculate the unit production costs for 2018 under:
(i) Absorption costing
(ii) Marginal costing
(b) Prepare an income statement for the year ended 31 December 2018, using:
(i) Absorption costing
(ii) Marginal costing
(c) Reconcile the difference in net profit between the two costing approaches.
(2 marks)
(2 marks)
(8.5 marks)
(6.5 marks)
(3 marks)
(a)
(i) Unit production costs under absorption costing= $34 + $12 + $9 + $30 = $85
(ii) Unit production costs under marginal costing = $34 + $12 + $9 = $55
(b)
(i) Under absorption costing:
Snowball Ltd
Income Statement for the year ended 31 December 2018
$000
Sales (370,000 ´ $170)
Less Cost of goods sold:
Opening inventory (W1)
6,800
Add Cost of goods manufactured (380,000 ´ $85)
32,300
39,100
Less Closing inventory (90,000 ´ $85)
7,650
31,450
Add Under-absorption of fixed production overheads (W2)
600
Gross profit
Less Variable non-manufacturing overheads (370,000 ´ $27)
9,990
Fixed non-manufacturing overheads
8,000
Net profit
$000
62,900
1
2
1
1
32,050
30,850
1
0.5
1
17,990
12,860
0.5
0.5
Workings:
(W1) Opening inventory in units = 370,000 + 90,000 - 380,000 = 80,000 units
Opening inventory in value = 80,000 ´ $85 = $6,800,000
1
1
(W2) Under-absorption of fixed production overheads
= (400,000 - 380,000) ´ $30 = $600,000
(ii) Under marginal costing:
Snowball Ltd
Income Statement for the year ended 31 December 2018
$000
Sales
Less Cost of goods sold:
Opening inventory (80,000 ´ $55)
Add Cost of goods manufactured (380,000 ´ $55)
Less Closing inventory (90,000 ´ $55)
Product contribution margin
Less Variable non-manufacturing overheads
Total contribution margin
Less Fixed production overheads (400,000 ´ $30)
Fixed non-manufacturing overheads
Net profit
(c)
4,400
20,900
25,300
4,950
12,000
8,000
$000
62,900
0.5
1
1
20,350
42,550
9,990
32,560
1
0.5
0.5
1
20,000
12,560
0.5
0.5
The difference in net profit is reconciled as follows:
Net profit under absorption costing
Add Fixed production overheads released from opening inventory (80,000 ´ $30)
Less Fixed production overheads absorbed in closing inventory (90,000 ´ $30)
Net profit under marginal costing
$000
12,860
2,400
15,260
2,700
12,560
0.5
1
1
0.5
Question 14
Jumbo Ltd manufactures a single product. Fixed factory overheads were absorbed at the rate of $12
per unit, based on the normal production level of 360,000 units per annum. For the year ended
31 December 2017, both sales and production volumes increased considerably. As at 1 January 2017,
the inventory consisted of 90,000 units.
The company’s financial year ends on 31 December. Its production and sales data are as follows:
2017
Production units
430,000
Sales units
490,000
Selling price per unit
$180
Unit costs for 2016 and 2017:
Direct materials
$45
Direct labour
Variable factory overheads
$31
$10
Non-manufacturing costs for the year ended 31 December 2017 are as follows:
Variable non-manufacturing costs
$18 per unit sold
Fixed non-manufacturing costs
$12,000,000 per annum
Required:
(a) Prepare an income statement for the year ended 31 December 2017 using:
(i) Absorption costing
(ii) Marginal costing
(b) Reconcile the difference in net profit between the two costing approaches.
(9 marks)
(7 marks)
(3 marks)
Answer:
(a) (i) Under absorption costing:
Jumbo Ltd
Income Statement for the year ended 31 December 2017
$000
Sales (490,000 ´ $180)
Less Cost of goods sold:
8,820
Opening inventory [90,000 ´ ($45 + $31 + $10 + $12)]
Add Cost of goods manufactured (430,000 ´ $98)
42,140
50,960
Less Closing inventory [(90,000 + 430,000 - 490,000) ´ $98]
2,940
48,020
Less Over-absorption of fixed factory overheads
[(430,000 - 360,000) ´ $12]
840
Gross profit
Less Variable non-manufacturing costs (490,000 ´ $18)
8,820
Fixed non-manufacturing costs
12,000
Net profit
$000
88,200
1
2
1
1.5
47,180
41,020
1
0.5
20,820
20,200
0.5
1
0.5
(ii) Under marginal costing:
Jumbo Ltd
Income Statement for the year ended 31 December 2017
$000
Sales
Less Cost of goods sold:
Opening inventory [90,000 ´ ($45 + $31 + $10)]
Add Cost of goods manufactured (430,000 ´ $86)
Less Closing inventory (30,000 ´ $86)
Product contribution margin
Less Variable non-manufacturing costs
Total contribution margin
Less Fixed factory overheads (360,000 ´ $12)
Fixed non-manufacturing costs
Net profit
(b)
7,740
36,980
44,720
2,580
4,320
12,000
$000
88,200
0.5
1.5
1
42,140
46,060
8,820
37,240
1
0.5
0.5
1
16,320
20,920
0.5
0.5
The difference in net profit is reconciled as follows:
Net profit under absorption costing
Add
Fixed factory overheads absorbed in opening inventory (90,000 ´ $12)
Less Fixed factory overheads absorbed in closing inventory (30,000 ´ $12)
Net profit under marginal costing
$000
20,20
0
1,080
21,28
0
360
20,92
0
0.5
1
1
0.5
Question 15
Una Ltd uses a predetermined overhead absorption rate (based on direct labour hours) to absorb
fixed manufacturing overheads. Budgeted figures for the year ended 31 March 2020 are shown
below:
Opening inventory
Nil
Production and sales
40,000 units
Unit selling price
$300
Direct materials
$30 per kg, 2.5 kg per unit
Direct labour
$40 per hour, 2 hours per unit
Manufacturing overheads:
Variable
$35 per unit
Fixed
$800,000
Non-manufacturing overheads:
Variable
Fixed
$20 per unit sold
$1,200,000
Actual production and sales levels for the year were 45,000 and 43,000 units, respectively. Actual
fixed manufacturing overheads were $920,000. Other figures were as budgeted.
Required:
(a)
(b)
Calculate the predetermined fixed manufacturing overhead absorption rate.
(2 marks)
Prepare the income statement for the year ended 31 March 2020 under absorption costing
based on actual data.
(8 marks)
(Calculations to the nearest dollar)
Answer:
(a) Predetermined fixed manufacturing overhead absorption rate
= Budgeted fixed manufacturing overheads ÷ Budgeted direct labour hours
= $800,000 ÷ (40,000 × 2)
= $10 per direct labour hour
1.5
0.5
(b)
Una Ltd
Income Statement for the year ended 31 March 2020
Sales (43,000 ´ $300)
Less Cost of goods sold:
Opening inventory
Add Cost of goods manufactured (W1)
Less
Closing inventory (W2)
Add Under-absorption of fixed manufacturing overheads (W3)
Gross profit
Less Variable non-manufacturing overheads (W4)
Fixed non-manufacturing overheads
Net profit
$
－
9,450,000
9,450,000
420,000
9,030,000
20,000
860,000
1,200,000
$
12,900,000
2.5
1
9,050,000
3,850,000
2,060,000
1,790,000
Workings:
(W1) Cost of goods manufactured = 45,000 × [(2.5 × $30) + (2 × $40) + $35 + (2 × $10)]
= $9,450,000
(W2) Closing inventory = $9,450,000 × 45,000 – 43,000/45,000
= $420,000
(W3) Under-absorption of fixed manufacturing overheads = $920,000 – (45,000 × 2 × $10)
= $20,000
(W4) Variable non-manufacturing overheads = 43,000 ´ $20
= $860,000
1
1
0.5
1
0.5
0.5
ABSORPTION COSTING AND
MARGINAL COSTING
Ch. 2 0 Classwork Questions
2020 – 2021 DSE
1
Calculation of predetermined overhead absorption rate
Question 1
Winter Ltd calculates its overhead absorption rate annually on the basis of machine hours. For the year ended
31 December 2012, the total budgeted manufacturing overheads were $345,000 and the total budgeted
machine hours were 25,000 hours.
(a) Calculate the predetermined overhead absorption rate for the year ended 31 December 2012.
Given the following information:
Machine hour consumed per unit
Product A
Product B
Product C
3.5 hours
5 hours
7 hours
(b) Calculate the predetermined overhead absorption rate for each unit of product A, B and C for the year
ended 31 December 2012.
Answers
(a)
Predetermined overhead absorption rate = $345,000 ÷ 25,000 = $13.8 per machine hour
(b)
Predetermined overhead absorption rate of:
Product A: $13.8 x 3.5 = $48.3 per unit
Product B: $13.8 x 5 = $69 per unit
Product C: $13.8 x 7 = $96.6 per unit
2
Question 2
Lemon & Co is a manufacturer that produces a single product. The firm planned to produce 100,000 units for
the year ended 31 December 2016. Budgeted fixed manufacturing overheads for the year amounted to
$1,000,000. The fixed production overheads were absorbed based on the number of units produced.
In January 2017, the following actual information for the year ended 31 December 2016 became available:
Production
80,000 units
Fixed manufacturing overheads
$1,000,000
Required:
(a)
Calculate the fixed manufacturing overhead absorption rate.
(3 marks)
(b)
State the amount of fixed manufacturing overheads over- or under-absorbed.
(3 marks)
Answers
(a)
Fixed manufacturing overhead absorption rate under normal costing
= $1,000,000 ÷ 100,000
1
= $10 per unit
(b)
0.5
Over- or under-absorption of fixed manufacturing overheads under normal costing
= $1,000,000 – (80,000 × $10)
1
= $200,000 (under-absorption)
0.5
3
Question 3
Data of a firm for the past period are as follows:
Total machine hours
8,000
Number of material requisitions
350
Number of purchase orders
200
Number of production runs
200
Production overheads:
$
Absorption base:
Short run variable costs
560,000
Machine hours
Production scheduling costs
600,000
Production runs
Stores receiving costs
50,000
Purchase orders executed
Materials handling costs
70,000
Requisitions raised
(a)
Calculate the production overhead absorption rate for each of the four production overheads activities.
(b)
Assume 6,000 machine hours, 50 production runs, 100 purchase orders and 200 material requisitions
were incurred on product P1, calculate the production overheads absorbed for P1.
4
Answers
(a)
Overhead absorption rate for Short run = ($560,000 ÷ 8,000) = $70 per machine hour
Overhead absorption rate for Production scheduling = ($600,000 ÷ 200) = $3,000 per production
runs
Overhead absorption rate for Stores receiving = ($50,000 ÷ 200) = $250 per purchase orders
Overhead absorption rate for Materials handling = ($70,000 ÷ 350) = $200 per material requisitions
(b)
The production overheads absorbed for P1
= 6,000 x $70 + 50 x $3,000 + 100 x $250 + 200 x $200
= $635,000
5
Question 4
J Hui operates a plant producing custom-made shoes. There are two manufacturing departments: cutting and
assembly. The budgeted manufacturing overheads and levels of activity for the year ended 31 December 2010
were as follows:
Cutting department
Assembly department
Manufacturing overheads
$250,000
$320,000
Machine hours
1,000,000
200,000
Direct labour hours
160,000
800,000
Job No. 334 was completed during the year. It consumed 5,000 and 850 machine hours in the cutting and
assembly departments, respectively, and 760 and 3,600 direct labour hours in the cutting and assembly
departments, respectively.
(a)
Calculate the manufacturing overheads of Job No. 334, using a plant-wide predetermined overhead
absorption rate based on direct labour hours.
(b) Calculate the manufacturing overheads of Job No. 334, using departmental predetermined overhead
absorption rates for each manufacturing department. The absorption base for cutting and assembly
department is machine hours and direct labour hours respectively.
6
(a)
Plant-wide predetermined overhead absorption rate
= ($250,000 + $320,000) ÷ (160,000 + 800,000)
= $0.59375 per direct labour hour
(b)
Departmental predetermined overhead absorption rate for the cutting department
= $250,000 ÷ 1,000,000
= $0.25 per machine hour
Departmental predetermined overhead absorption rate for the assembly department
= $320,000 ÷ 800,000
= $0.4 per direct labour hour
7
Question 5
Wimo Ltd is a decoration company, using job costing approach to calculate the project cost. The following
is the budgeted information of the company in 2014:
$
Direct materials
389 000
Indirect materials
555 000
Direct labour
238 000
Indirect labour
742 000
Administrative overheads
618 000
Budgeted level of activity includes:
Machine hours
39 000 hours
Direct labour hours
8 000 hours
Since Wimo Ltd only has one department, it has used a plant-wide production overheads absorption rate
based on machine hours to allocate production overheads.
REQUIRED:
(a)
Calculate (to two decimal places) the pre-determined production overhead absorption rate in 2014.
(b)
Explain the situations that are suitable for the plant-wide pre-determined production overheads
absorption rate.
8
Answers
(a)
Pre-determined production overhead absorption rate
2
= ($555 000 + $742 000) ÷ 39 000
= $33.26 per machine hour
(b)
Suitable situations:
2
-
Only one department in the company
-
There are more than one department in the company, but each department had similar usage
time
9
Question 6
DS Company has two production departments: the machining department and the assembly department.
Two products, Product X and Product Y, are produced by both departments. The actual production of
Product X and Y in 2014 was 10,000 units and 15,000 units respectively. The budgeted production in 2015
was expected to be 20% more than the actual production in 2014. The budgeted production overheads of
the machining and assembly departments in 2015 were $560,000 and $743,000 respectively. The hourly
wage rate for all departments is $32.
The budgeted direct labour cost of each product is as below:
Product X
Product Y
Machining department
$48
$64
Assembly department
$80
$32
The budgeted machine hours of each product are as below:
Product X
Product Y
Machinery department
3 hours
2 hours
Assembly department
1.5 hours
2.5 hours
The absorption rate of the machining department and assembly department are based on machine hours
and direct labour hours respectively.
REQUIRED:
(a)
Calculate (to two decimal places) the predetermined production overhead absorption rates of
machining and assembly departments in 2015 respectively.
(b)
State the reason for adopting different absorption bases for machining and assembly departments in
2015.
10
(a)
The budgeted production overhead absorption rate of the machinery department:
$560,000
3 ×10,000 ×120% + 2 ×15,000 ×120%
＝ $7.78 per machine hour
The budgeted production overhead absorption rate of the assembly department:
$743,000
$80 ÷ $32 ´ 10,000 ´ 120% + $32 ÷ $32 ´ 15,000 ´ 120%
= $15.48 per direct labour hour
(b)
Machining department: machine-oriented
Assembly department: labour-oriented
11
Question 7
Terry Co calculates the predetermined overhead absorption rate for the business based on machine hours.
At the end of March 2019, it is estimated that 60,000 machine hours would be used during the next
financial year.
Estimated fixed production overheads for the year would be $720,000, while variable production
overheads would be $5 per machine hour throughout the year.
Actual production overhead for the year amounted to $1,000,000 and the actual number of machine hours
was 50,000 hours.
Required:
(a) Calculate the predetermined overhead absorption rate for the year ended 31 March 2020. (2 marks)
(b) Is there any over-absorption or under-absorption for the year? Show your calculations.
(2 marks)
(c) Based on your answer in (b), state the accounting treatment and its impact on the net profit for the
year ended 31 March 2020.
(2 marks)
(d) State an example of a variable manufacturing cost which would increase with an increase in machine
hours.
(1 mark)
(Total: 7 marks)
12
(a)
Predetermined overhead absorption rate:
($720,000 ÷ 60,000) + $5 = $17 per machine hour
(b)
Production overheads absorbed (50,000 x $17) = $850,000
Actual production overheads = $1,000,000
Under-absorbed production overheads = $1,000,000 - $850,000 = $150,000
(c)
Under-absorbed production overheads would increase the cost of goods sold. The amount would be debited to
the profit and loss account. Net profit for the year would be decreased by $150,000.
(d)
Electricity / Maintenance and repairment of machines (Any reasonable answer)
13
Question 8
14
15
Income Statements under Marginal Costing and Absorption Costing
l
No Opening Inventory
Question 9
The following are the cost data relating to December 2010 and the management of Free Company wants
to know more about the company’s cost in a more organized way.
$
Total material cost
90,000
Total labour cost
71,500
Total expenses
40,000
Indirect labour
38,000
Direct materials
55,000
Indirect expenses
16,500
Non-manufacturing overheads
56,000
Indirect material, indirect labor and indirect expense are incurred in the production process.
REQUIRED:
(a)
Prepare a statement showing prime cost and total production cost and total cost from the above data.
16
The following are the budgeted information for January 2011:
$ per unit
Direct material cost
6
Selling price
22
Direct labour cost
4
Variable production overheads
3
Sales commission
2
Fixed production overheads: $13,500 per month
The fixed production overheads are absorbed on the budgeted activity level. Budgeted production and sales
were 5,400 units. There was no opening stock on 1 January 2011. Actual production and sales volume in
January 2011 were 4,500 units and 4,000 units respectively. The selling price and variable costs were the
same as the budgeted whereas the actual fixed production overheads were $15,120.
REQUIRED:
(b)
(c)
Prepare income statements for the month ended 31 January 2011 using
(1)
marginal costing and
(2)
absorption costing.
Prepare a statement to reconcile the difference in net profit under marginal and absorption costing.
17
(a)
Statement showing prime cost, total production cost and total cost
$
Direct materials
55,000
Direct labour (71,500 - 38,000)
33,500
Direct expenses (40,000 - 16,500)
23,500
Prime cost
112,000
Manufacturing overheads ($38,000 + $16,500 + ($90,000 - $55,000))
89,500
Total production cost
201,500
Non-manufacturing overheads
56,000
Total cost
257,500
(b) (1)
Free Company
Income statement for the month ended 31 January 2011 (Marginal)
$
Sales ($22 x 4,000)
$
88,000
Less: Variable cost of goods sold
Direct material cost ($6 x 4,500)
27,000
Direct labour cost ($4 x 4,500)
18,000
Variable production overheads ($3 x 4,500)
13,500
58,500
Less: Closing inventory [58,500 / 4,500) x 500]
(6,500)
52,000
Product contribution margin
36,000
Less: Variable costs: Sales commission ($2 x 4,000)
(8,000)
Contribution
28,000
Less: Fixed production overheads
(15,120)
Net profit
12,880
18
.(b) (2)
Free Company
Income statement for the month ended 31 January 2011 (Absorption)
$
Sales ($22 x 4,000)
$
88,000
Less: Cost of goods sold
Direct material cost ($6 x 4,500)
27,000
Direct labour cost ($4 x 4,500)
18,000
Variable production overheads ($3 x 4,500)
13,500
Fixed production overheads [(13,500 / 5,400) x 4,500]
11,250
69,750
Less: Closing inventory [(6 + 4 + 3 + 2.5) x 500]
(7,750)
62,000
Add: Under-absorption of FPO (15,120 – 11,250)
3,870
65,870
Gross profit
22,130
Less: Sales commission ($2 x 4,000)
(8,000)
Net profit
14,130
(c)
Statement to reconcile net profit under two costing approach
$
$
Net profit under absorption costing
14,130
Less: Fixed production overhead in closing inventory (2.5 x 500)
1,250
Net profit under marginal costing
12,880
19
Question 10
Willie Company started production of Product Z on 1 January 2017. The following is the cost information
for the year ended 31 December 2017:
$/unit
Direct material
15
Direct labour
8
Variable production overheads
6
Variable selling and administrative expenses
2
Additional information:
(i)
Product Z was sold at $50 per unit.
(ii) The budgeted production and sales units for 2017 were both 200,000 units.
(iii) The fixed production overheads were absorbed based on the number of units produced.
(iv) Budgeted and actual fixed production overheads for 2017 were the same at $800,000.
(v)
The actual production and sales units for 2017 were 220,000 units and 180,000 units respectively.
(vi) The actual selling and administrative expenses for 2017 were $120,000.
(vii) Any over- or under-absorption of fixed production overheads should be adjusted in the cost of goods
sold.
20
Required:
(a)
Prepare the income statement for the year ended 31 December 2017 using the absorption costing
system.
(b)
Prepare a statement to reconcile the difference in net profit for the year ended 31 December 2017
between the absorption costing and marginal costing systems.
(c)
In addition to the difference in net profit, explain one difference between two systems.
21
(a)
Willie Company
Income statement for the year ended 31 December 2017
$
Sales ($50 × 180,000)
$
9,000,000
½
Less: Cost of goods sold
Direct material ($15 × 220,000)
3,300,000
½
Direct labour ($8 × 220,000)
1,760,000
½
Variable production overheads ($6 × 220,000)
1,320,000
½
Fixed production overheads [$4(W1) x 220,000]
880,000
1
7,260,000
Less: Closing inventory ($7,260,000 × 40,000/220,000)
1,320,000
1
5,940,000
Less: Over-absorption fixed production overheads
($880,000 - $800,000)
80,000
1
5,860,000
Gross profit
Less: Selling and administrative expenses
3,140,000
½
480,000
1
2,660,000
½
($2 × 180,000 + $120,000)
Net profit
(7)
(W1)
Predetermined fixed production overhead absorption rate
= $800,000 / 200,000 = $4
22
(b)
Statement to reconcile the net profit for the year ended 31 December 2017
$
Net profit under an absorption costing system
Less:
2,660,000
½
160,000
1
2,500,000
½
Absorption of fixed production overheads in the closing inventory
($4 × 40,000)
Net profit under a marginal costing system
(2)
(c)
Difference:
–
Max.2
Inventory value under an absorption costing system includes fixed and variable
production costs while inventory value under a marginal costing system only includes
variable production costs.
–
Income statement under an absorption costing system shows the gross profit of the
company while the income statement under a marginal costing system shows the
contribution of the company.
(2 marks for each relevant difference, max. 2 marks)
11 marks
23
l
Have Opening Inventory (OIFO = CIFO)
Question 11
Snowball Ltd produces a single product. The company uses absorption costing but is considering adopting
marginal costing instead. It wants to compare the results under these two costing systems.
Fixed production overheads are absorbed at the rate of $30 per unit, based on the normal production level
of 400,000 units per annum. Actual fixed production overheads were same as the budgeted production
overheads.The company’s year-end date is 31 December. The following information was extracted from
the books:
2018
Production Unit
380,000
Sales Unit
370,000
Cost and price data for 2017 and 2018:
$
Direct materials per unit produced
34
Direct labour per unit produced
12
Variable production overheads per unit produced
9
Selling price per unit
170
24
Non-manufacturing overheads for the past two years are as follows:
Variable non-manufacturing overheads
$27 per unit sold
Fixed non-manufacturing overheads
$8,000,000 per annum
As at 31 December 2018, 90,000 units of the product remained unsold.
REQUIRED:
(a)
Calculate the unit production costs for 2018 under:
(i)
Absorption costing
(ii) Marginal costing
(b)
Prepare an income statement for the year ended 31 December 2018, using:
(i)
Absorption costing
(ii) Marginal costing
(c)
Reconcile the profit figure between absorption costing and marginal costing.
25
(a) (i)
Unit production costs under absorption costing = $34 + $12 + $9 + $30 = $85
(ii) Unit production costs under marginal costing = $34 + $12 + $9 = $55
(b)
(i)
Under absorption costing:
Snowball Ltd
Income Statement for the year ended 31 December 2018
$000
Sales (370,000 ´ $170)
Less
$000
62,900
Cost of goods sold:
Opening inventory (W1)
Add
6,800
Cost of goods manufactured (380,000 ´ $85)
32,300
39,100
Less
Closing inventory (90,000 ´ $85)
7,650
31,450
Add
Under-absorption of fixed production overheads (W2)
600
Gross profit
Less
32,050
30,850
Variable non-manufacturing overheads (370,000 ´ $27)
9,990
Fixed non-manufacturing overheads
8,000
Net profit
17,990
12,860
W1: Opening inventory in units = 370,000 + 90,000 - 380,000 = 80,000 units
Opening inventory in value = 80,000 ´ $85 = $6,800,000
W2: Under-absorption of fixed production overheads = (400,000 - 380,000) ´ $30
= $600,000
26
(ii) Under marginal costing:
Snowball Ltd
Income Statement for the year ended 31 December 2018
$000
$000
Sales
Less
62,900
Cost of goods sold:
Opening inventory (80,000 ´ $55)
Add
4,400
Cost of goods manufactured (380,000 ´ $55)
20,900
25,300
Less
Closing inventory (90,000 ´ $55)
4,950
20,350
Product contribution margin
42,550
Less
9,990
Variable non-manufacturing overheads
Total contribution margin
Less
32,560
Fixed production overheads (400,000 ´ $30)
12,000
Fixed non-manufacturing overheads
8,000
20,000
Net profit
12,560
(c)
Statement to reconcile net profit under two costing approach
$
Net profit under absorption costing
12,860,000
Add: Fixed production overhead in opening inventory ($80,000 x $30)
240,000
252,860
Less: Fixed production overhead in closing inventory (90,000 x $30)
270,000
Net profit under marginal costing
12,560,000
27
Question 12
The following information is available for a firm producing and selling a single product:
Budgeted costs (at normal level activity of 240,000 unit)
$
Direct material and labour
264,000
Variable production overhead
48,000
Fixed production overhead
144,000
Variable selling and administration overhead
24,000
Fixed selling and administration overhead
96,000
576,000
The fixed production overhead absorption rates are based upon normal level activity per period.
During the period just ended, 260,000 units of product were produced and 230,000 units were
sold at $3 per unit.
At the beginning of the period, 40,000 units were in stock. They were valued at the budgeted costs
as shown above.
Actual costs incurred were as per budget.
28
REQUIRED:
(a) Prepare the absorption costing and marginal costing statement for the period.
(b) Reconcile the profit figure between absorption costing and marginal costing.
(c) State the situation in which the profit figures calculated under both absorption costing and
marginal costing would be the same.
29
30
(b)
Statement to reconcile net profit under two costing approach
$
Net profit under absorption costing
145,000
Add: Fixed production overhead in opening inventory ($40,000 x $0.6)
24,000
169,000
Less: Fixed production overhead in closing inventory (70,000 x $0,6)
270,000
Net profit under marginal costing
127,000
(c) No opening inventory and closing inventory.
31
Question 13
Treasure Ltd manufactures a single product. The company's financial year ends on 31 December. Inventory
as at 1 January 2009 amounted to 3,000 units, with a value of $216,000 (under absorption costing). The
company incurred fixed production overheads of $798,000 in 2009.
Information on unit variable costs in 2008 and 2009:
$
Direct materials
15
Direct labour
22
Variable production overheads
21
2009
Production (units)
57,000
Sales (units)
59,000
Selling and administrative overheads are as follows:
Variable selling and administrative expenses
$19 per unit sold
Fixed selling and administrative expenses
$180,000 per annum
The selling price of the product in 2008 and 2009 was $260 per unit.
Required
(a)
Prepare an income statement for the year ended 31 December 2009 using marginal costing.
(b)
Prepare a statement to reconcile the net profit under two costing approach.
(Suppose fixed production overheads are absorbed based on the units produced in absorption costing.)
32
(a)
(b)
FPO absorbed per unit = $798,000 / 57,000 units = $14/unit
Statement to reconcile net profit under two costing approach
$
Net profit under absorption costing
9,791,000
Add: Fixed production overhead in opening inventory
($216,000 - $174,000) or (3,000 units x $14)
42,000
9,833,000
Less: Fixed production overhead in closing inventory ($14 x 1,000)
14,000
Net profit under marginal costing
9,819,000
l
Have Opening Inventory (OIFO =/= CIFO) ***
33
Question 14 ***
Soap Company manufactures soap and sells it at $6 per unit. The company’s information for the year ended
31 December 2014 is as follows:
(i)
Variable production cost per unit
$
(ii)
Direct material
2
Direct labour
1.8
Production overheads
0.4
Direct labour is $30 per hour.
(iii) On 1 January 2014, the company had 2,000 units of inventory. The total production cost was $15,500,
including the variable production cost of $10,760 and the remaining fixed production overhead.
(iv) Production overheads are composed of fixed and variable elements. It was the company’s policy to
allocate the variable production overheads according to the number of units produced. The company
adopted the predetermined overhead absorption rate to absorb the fixed production overheads into
the product based on direct labour hours. The rate was $4 per direct labour hour.
(v)
Budgeted fixed production overhead is the same as the actual fixed production overhead.
34
(vi) In 2014, the company budgeted to produce 150,000 units of products, but 140,000 units were actually
produced. The sales revenues amounted to $660,000.
(vii) The sales commission of each unit of soap is 5% of the selling price. An office clerk is employed on
a monthly salary of $4,000.
(viii) The inventory cost is calculated with weighted average cost method.
REQUIRED:
(a)
Prepare the income statement for the year ended 31 December 2014 using the absorption costing.
(b)
With reference to the net profit obtained in (a) and the net profit obtained with marginal costing,
prepare a statement and adjust the differences between them.
(c)
State and explain one advantage of adopting marginal costing over absorption costing.
35
(a)
Soap Company
Income statement for the year ended 31 December 2014 (Absorption costing)
$
Sales
$
660,000
Less: Cost of goods sold
Opening inventory
15,500
Direct material ($2 × 140,000)
280,000
Direct labour ($1.8 × 140,000)
252,000
Production overheads
- Variable ($0.16(W1) × 140,000)
22,400
- Fixed ($0.24 (W1) × 140,000)
33,600
603,500
Less: Closing inventory
136,000
[$603,500 ÷ (140,000 + 2,000) × 32,000(W2)]
467,500
Add: Under absorption of production overheads
2,400
(150,000 × $0.24(W1) – $33,600)
469,900
Gross profit
190,100
Less: Sales commission ($660,000 × 5%)
33,000
Salaries of office clerk ($4,000 × 12)
48,000
Net profit
81,000
109,100
(W1)
Fixed production overhead absorbed by each unit = $4 × ($1.8 ÷ $30) = $0.24
Variable production overhead of each unit = $0.4 - $0.24 = $0.16
(W2)
Closing inventory = 2,000 + 140,000 – ($660,000 ÷ $6) = 32,000 units
36
(b)
Net profit reconciliation statement for the year ended 31 December 2014
$
Net profit based on absorption costing
$
109,100
Add: Fixed production overheads absorbed by opening inventory
4,740
($15,500 – $10,760)
113,840
Less: Fixed production overheads absorbed by closing inventory
-
based on absorption costing
-
based on marginal costing
136,000
[ O.I $10,760 + VPC ($2 + $1.8 + $0.16) × 140,000]
÷ (OI 2,000 +P 140,000) × CI 32,000}
(127,360)
Net profit based on marginal costing
(c)
8,640
105,200
Advantage:
Ÿ
Fixed production costs are sunk costs which may not be useful in decision-making
Ÿ
Marginal costing prevents the company from manipulating net profits through adjustments of
inventory level.
(2 marks for each relevant advantage, max. 2 marks)
37
Question 15 ***
Peter Company produces components for other companies for the production of computers. The following
is the actual cost information for the year ended 31 March 2016:
Direct materials
$560,000
Direct labour
$660,000
Variable production overheads
$640,000
Fixed production overheads
$420,000
Variable selling and distribution expenses
$0.3 per unit
Fixed selling and distribution expenses
$130,000
During the year ended 31 March 2016, the company produced 320,000 units of goods. On 1 April 2015,
there were 3,000 units of inventory at $8.12 per unit in the warehouse and the total variable production
cost were $20,400. On 31 March 2016, there were 4,000 units of goods. All the goods had already been
sold to customers at $9 per unit. Lee Company bought bulk quantities of goods from Peter Company
totaling 60,000 units, less 10% discount from Peter Company.
38
The fixed production overheads were absorbed based on the number of units produced. Budgeted fixed
production overhead is $540,000 and budgeted production unit is 360,000 units.
The company adopted a weighted average method to calculate the inventory cost.
REQUIRED:
(a)
Prepare the income statement for the year ended 31 March 2016 using absorption costing.
(b)
Prepare a statement to reconcile the net profit calculated in (a) and the net profit under marginal
costing.
(c)
State one non-financial factor that Peter Company would consider when buying components from
suppliers.
39
Marks
(a)
Peter Company
Income statement for the year ended 31 March 2016
$
Sales {($9 × 90% × 60,000) + [$9 × (320,000 – 60,000 – 4,000 + 3,000)]}
$
2,817,000
1
Less: Cost of goods sold
Opening inventories (3,000 × $8.12)
24,360
½
Direct materials
560,000
½
Direct labour
660,000
½
Variable production overheads
640,000
½
Absorbed fixed production overheads
480,000
1
2,364,360
Less: Closing inventory ($2,364,360 ÷ 323,000 × 4,000)
29,280
½
2,335,080
Less: Over-absorbed fixed production overheads
($480,000 – $420,000)
60,000
½
2,275,080
Gross profit
542,920
Less: Selling and distribution expenses (319,000 × $0.3 + $130,000)
225,700
½
Net profit
316,220
½
(6)
40
(b)
Statement to reconcile the net profit
$
Net profit under absorption costing
Add:
$
316,220
½
3,960
1
5,993
1
314,187
½
Absorption of fixed production overheads in opening inventory
Absorption costing
24,360
Marginal costing
(20,400)
Less: Absorption of fixed production overheads in closing inventory
Absorption costing
29,280
Marginal costing
{[OI $20,400 + VPC ($560,000 + $660,000 +
23,287
$640,000) ÷ OI and P 323,000 ´ CI 4,000]
Net profit under marginal costing
(3)
Marks
(c)
Factors:
Max. 2
- whether suppliers can delivery components on time
- whether the quality of components from suppliers is same as self production
(2 marks for each relevant factor, max. 2 marks)
11 marks
41
Question 16 *****
Ryan Limited started operation in October 2014, specialising in the production of Part Y for the production
of washing machines. The company has adopted absorption costing. It has two production departments:
Department A mainly uses machines for production and Department B mainly uses manual labour. The
cost information for the six months ended 31 March 2015 is as follows:
(i)
Sales and production volume (units)
October – December
January – March
Sales
40,000
52,000
Production
45,000
50,000
The selling price for each month is $120 per unit.
(ii)
Material consumed:
Cost per unit ($)
Material P
8
Material Q
4
(iii) Department A and Department B have to use 0.75 machine hours and 0.3 machine hours to produce
a unit of Part Y respectively.
(iv) Department A and Department B have to use 0.5 labour hours and 1 labour hour to produce a unit of
Part Y respectively.
(v)
The basic wages rate for two two departments is $30 per hour. If the production hour per quarter for
Department A exceeds 22,500 hours, the overtime wages rate would increase by $11 and included in
the direct labour cost.
42
(vi) A royalty of $10 has to be paid for every unit produced.
(vii) The predetermined overhead absorption rate for the two departments is:
Department A
$30 per machine hour
Department B
$10 per direct labour hours
The normal production level is 45,000 units per quarter.
The actual fixed production overheads and budgeted apportioned production overheads of the two
departments are the same.
(viii) The actual administrative and selling expenses are:
October – December
January – March
$520,000
$580,000
The administrative expenses remain unchanged for the two quarters while the selling expenses
varies with the sales unit.
(ix) The company has adopted the weighted average cost method to calculate the cost of inventory.
REQUIRED:
(a)
Prepare an income statement for the three months ended 31 March 2015 using the absorption costing
method.
(b)
Prepare an income statement for the three months ended 31 March 2015 using the marginal costing
method.
(c) Prepare a statement to reconcile the net profit under marginal and absorption costing.
43
(a)
Ryan Limited
Income statement for the three months ended 31 March 2015 (Absorption costing)
$
Sales (52,000 × $120)
$
6,240,000
Less: Cost of goods sold
Opening inventories (W1)
497,500
Add: Cost of production (W2)
5,002,500
5,500,000
Less: Closing inventories
300,000
[($5,500,000 ÷ $55,000) × 3,000]
5,200,000
Less: Over-absorption fixed production overheads (W3)
Gross profit
162,500
5,037,500
1,202,500
Less: Administrative and selling expenses
580,000
Net profit
622,500
44
(b)
Ryan Limited
Income statement for the three months ended 31 March 2015 (Marginal costing)
$
Sales
$
6,240,000
½
Less: Variable costs of goods sold
Opening inventories [($12 + $45 + $10) × 5,000]
335,000
1
Add: Cost of production
3,377,500
1
[($12 + $10) × 50,000 + $777,500 + $1,500,000]
3,712,500
Less: Closing inventories
1
[($3,712,500 ÷ 55,000) × 3,000]
202,500
Product Contribution margin
3,510,000
2,730,000
Less: Variable selling expenses
1
[($580,000 – $520,000) ÷ ($52,000 – $40,000) ×52,000]
260,000
Total contribution margin
2,470,000
Less: Fixed costs
Administrative expenses ($580,000 – $260,000)
320,000
½
1,012,500
½
Production overheads
-
Department A ($30 × 45,000 × 0.75)
-
Department B ($10 × 45,000)
450,000
Net profit
1,782,500
687,500
45
½
(W1)
$
Direct materials ($8 + $4)
12
Direct labour (0.5 × $30 + 1 × $30)
45
Royalty
10
Fixed production overheads
-
Department A (30 × $0.75)
22.5
-
Department B (10 × $1)
10
Production cost per unit
99.5
Opening inventories = $99.5 × 5,000
497,500
(W2)
Cost of production (exclude direct labour)
2,725,000
[($99.5 - $45) × 50,000]
Direct labour
- Department A (22,500 × $30 + 2,500 × $41)
777,500
- Department B ($30 × 50,000)
1,500,000
5,002,500
(W3)
Department A Absorbed (50,000× 0.75 × $30) – Actual (45,000× 0.75 × $30)
112,500
Department B Absorbed (50,000 x 1 x $10) – Actual (45,000 × 1 x $10)
50,000
Over-absorption fixed production overheads
162,500
46
(c)
Statement to reconcile the net profit
$
Net profit under absorption costing
Add:
$
622,500
Absorption of fixed production overheads in opening inventory
Absorption costing
497,500
Marginal costing
335,000
162,500
785,000
Less: Absorption of fixed production overheads in closing inventory
Absorption costing
300,000
Marginal costing
202,500
Net profit under marginal costing
97,500
687,500
47
Past Paper Questions
Question 17 (DSEPP Q2)
48
49
Question 18 (2012 DSE Q4)
50
51
Question 19 (2016 DSE Q3)
52
53
Question 20 (2017 DSE Q6)
54
55
Question 21 (2018 DSE Q3)
56
57
Question 22 (2019 DSE Q6)
58
59
Question 23 (2005 AL Q2(a))
60
61
Question 24 (2011 AL Q3)
62
63
64
65