Question

PB13.

Answer 1

Answer:

                       Submarine Company

Income statement under absorption costing

                                                                        $                 $

Sales (1,800 units x $150)                                              270,000

Less: Full cost:

Direct material (2,000 units x $40)             80,000                                                                                                                                                                                                                                              

Direct labour (2,000 units x $50)                100,000

Variable overhead (2,000 units x $10)        20,000

Fixed overhead (2,000 units x $20)            40,000

                                                                       240,000

Less: Closing stock (200 units x $120)        24,000        216,000

Gross profit                                                                         54,000

Less: Selling and administrative expenses:

Variable selling and administrative                                    36,000

Fixed selling and administrative expenses  15,000          51,000

Net profit                                                                                3,000    

                             Submarine Company      

Income statement using marginal costing

                                                                         $                  $                

Sales (1,800 units x $150)                                              270,000

Less: Variable costs:

Direct material (2,000 units x $40)             80,000                                                                                                                                                                                                                                              

Direct labour (2,000 units x $50)                100,000

Variable overhead (2,000 units x $10)        20,000

                                                                       200,000

Less: Closing stock (200 units x $100)        20,000        

                                                                       180,000

Add: Variable selling and administrative     36,000       216,000

Contribution                                                                       54,000

Less: Fixed cost:

Fixed production cost                                    40,000

Fixed selling and administrative expenses  15,000          55,000

Net loss                                                                               (1,000)      

                                 Profit reconciliation statement

                                        Closing stock         Net profit/loss

                                                 $                           $

Absorption costing               24,000                 3,000

Less: Marginal costing          20,000                 (1,000)

Difference                             4,000                     4,000

The difference of $4,000 in net profit is as a result of $4,000 difference in closing inventory.

                                     

Explanation:

In marginal costing, variable costs are deducted from sales in order to obtain the contribution margin. Net profit is calculated by deducting fixed costs from the contribution margin. Closing stock is valued at marginal cost per unit in marginal costing. Closing stock is the difference between production units and sales units. Marginal cost is the sum total of all variable costs.

In absorption costing, full costs are deducted from sales in order to obtain the gross profit. Net profit is the difference between gross profit and selling and administrative expenses. Closing stock is valued at full cost in absorption costing. Full cost is the aggregate of variable costs per unit and fixed costs per unit.