Ask Me Help Desk - Absorption and marginal costing

absorption and marginal costing

We have the following questions of which my friend and I are getting different answers in regards to the profit earned under the two techniques. Can you please help and please show all the working and steps involved. Please show the income statements under both techniques.

The following data relate to XYZ company which makes and sells computers.

Production 1,00,000 units
Sales 80,000 units
Selling price/unit Rs.15
Direct materials Rs. 2,50,000
Direct labour Rs. 3,00,000
Factory overheads:
Variable Rs. 1,00,000
Fixed Rs. 2,50,000
Selling and Distribution overheads:
Variable Rs. 1,00,000
Fixed Rs. 2,00,000

You are required to present income statements using (a) absorption costing and (b) marginal costing. Find the profit earned in using the two different techniques.

Quote:

Originally Posted by MissyNeha014

We have the following questions of which my friend and I are getting different answers in regards to the profit earned under the two techniques. Can you please help and please show all the working and steps involved. Please show the income statements under both techniques.

The following data relate to XYZ company which makes and sells computers.

Production 1,00,000 units
Sales 80,000 units
Selling price/unit Rs.15
Direct materials Rs. 2,50,000
Direct labour Rs. 3,00,000
Factory overheads:
Variable Rs. 1,00,000
Fixed Rs. 2,50,000
Selling and Distribution overheads:
Variable Rs. 1,00,000
Fixed Rs. 2,00,000

You are required to present income statements using (a) absorption costing and (b) marginal costing. Find the profit earned in using the two different techniques.

How about you present your work and we will comment

Sure no worries. Here are the income statements that I have prepared:

(a) Under absorption costing

Direct material 2,50,000
Direct labour 3,00,000
Variable overheads 2,00,000
Total marginal cost 7,50,000
Add: Fixed overheads 4,50,000
Total cost of production 12,00,000
Less: Closing stock 2,40,000
Cost of goods sold 9,60,000
Profit (bal fig) 2,40,000
Sales 12,00,000

Hence in part (a) my profit is 2,40,000

(b) Under marginal costing

Direct material 2,50,000
Direct labour 3,00,000
Variable overheads 2,00,000
Total marginal cost 7,50,000
Less: Closing stock 1,50,000
Cost of goods sold 6,00,000
Contribution 6,00,000
Sales 12,00,000

Profit = Contribution - Fixed cost
Profit = 6,00,000 - 4,50,000
Profit = 1,50,000

Hence in part (b) my profit is 1,50,000

It would be helpful if you would leave the , out, the. Out then we could read the figures

Quote:

Originally Posted by paraclete

it would be helpful if you would leave the , out, the. out then we could read the figures

Better?

(a) Under absorption costing

Direct material 250000
Direct labour 300000
Variable overheads 200000
Total marginal cost 750000
Add: Fixed overheads 450000
Total cost of production 1200000
Less: Closing stock 240000
Cost of goods sold 960000
Profit (bal fig) 240000
Sales 1200000

Hence in part (a) my profit is 240000

(b) Under marginal costing

Direct material 250000
Direct labour 300000
Variable overheads 200000
Total marginal cost 750000
Less: Closing stock 150000
Cost of goods sold 600000
Contribution 600000
Sales 1200000

Profit = Contribution - Fixed cost
Profit = 600000 - 450000
Profit = 150000

Hence in part (b) my profit is 150000

Looks like you have answered the problem but what happened to the selling costs these are not part of the manufacturing cost

I find the part a profit to be 180000 and the part b to be 130000

Quote:

Originally Posted by paraclete

looks like you have answered the problem but what happened to the selling costs these are not part of the manufacturing cost

i find the part a profit to be 180000 and the part b to be 130000

which costs would those be?
I have included the direct costs as can be seen
the factory overheads and selling and dist overheads have been included as per their classification of variable and fixed costs

I'm not sure which costs I'm missing? Please explain further.

Quote:

Originally Posted by MissyNeha014

which costs would those be?
i have included the direct costs as can be seen
the factory overheads and selling and dist overheads have been included as per their classification of variable and fixed costs

im not sure which costs im missing? please explain futher.

Whether selling costs are fixed or variable they are not included in manufacturing costs in either method. The difference in the methodologies lies in the inclusion of fixed manufacturing overheads in product cost and thus inventory valuation. The absorption method carries some of these costs forward in inventory, the direct method does not, thus you get a different profit result.

the only point of determining whether selling costs are fixed or variable is to measure the impact on profit of changes in volume, this you were not asked to do.

Quote:

Originally Posted by paraclete

Whether selling costs are fixed or variable they are not included in manufacturing costs in either method. The difference in the methodologies lies in the inclusion of fixed manufacturing overheads in product cost and thus inventory valuation. The absorption method carries some of these costs forward in inventory, the direct method does not, thus you get a different profit result.

the only point of determining whether selling costs are fixed or variable is to measure the impact on profit of changes in volume, this you were not asked to do.

Assuming that no other costs are involved other than the figures provided, what would the profit amoumt to?

Quote:

Originally Posted by MissyNeha014

Assuming that no other costs are involved other than the figures provided, what would the profit amoumt to?

I answered that earlier

Quote:

I find the part a profit to be 180000 and the part b to be 130000