Hi guys,

I have an absorption costing query on the profit statement, here are the notes:

Selling price per unit = £20
Sales for year 1 = 10,000
Production = 20,000
Production Cost Per Unit = £10

YEAR ONE
Sales (£20 x 10,000) 200,000
Cost Of Sales::

Opening Stock (£10 x 0) 0
Cost of Prod (£10 x 20,000) 200,000
----------
200,000
-C/Stock (£10 x 10,000) (100,000)
-----------
Cost Of Sales (100,000)
GROSS PROFIT 100,000

So in year two the closing stock of 100,000 would be carried forward as opening stock in year 2... but if the production cost per unit was to go to £15. Would I have to value the opening stock as either:

a) £10 x 10,000 = £100,000 like the closing stock from year one
or
b) £15 x 10,000 = £150,000 using the new production cost per unit (becuase I would have to value the closing stock using the £15)

Thanks for your help any replies and views would be much appreciated :)

I would go with 10,000 x 10.

Why?

Because these are finished goods. They only cost you 10 to make, not 15.

So what if production costs have risen to 15, apply that 15 to new costing.

Treat this inventory on a FIFO basis.

I wish to talk more about this, but I am too tired too.

I would go with 10,000 x 10.

Why?

Because these are finished goods. They only cost you 10 to make, not 15.

So what if production costs have risen to 15, apply that 15 to new costing.

Treat this inventory on a FIFO basis.

I wish to talk more about this, but I am too tired too.


Thank you CaptainForest,

Taken what you have said into account the difference between marginal and absorption costing :

Sales = Production = no difference in Profit (Absorption vs Marginal)
Sales > Production = marginal will yield more profit
Production > sales = Absorption will yield more profit

but in one of my questions if I use the same technique in what u have said in my question, when sales > production the absorption costingyields more profit but it shouldn't do?

I think this is two separate issues.

Sales > Production will reduce stock
Using FIFO concept, the closing stock should be 15 (assume stock produced in year 1 all sold)

Sales < Production will increase stock
The stock should have 2 value, 10 and 15. You may use perpatual costing method or weighted average costing method to determine stock value/unit. (Total stock value should be the same)