Question

PA15.

Answer 1

Answer:

                                         Happy Trails

                        Income statement using variable costing

                                                                $                      $  

Sales                                                                         1,900,500                                                                                

Less: Variable costs:

Direct material (27,000 units x $15)        405,000  

Direct labour (27,000 units x $15)           405,000

Variable overhead (27,000 units x $3)   81,000

                                                                  891,000

Less: Closing stock (8,000 units x $33)  264,000  

                                                                  627,000

Add: Variable selling and administrative 133,000       760,000

Contribution                                                                    1,140,500

Less: Fixed cost:

Fixed production cost (27,000 x $25)         675,000

Fixed selling and administrative expenses 300,000    975,000

Net profit                                                                           165,500

                           Profit reconciliation statement

                                  Closing stock         Net profit

                                             $                         $

Absorption costing         464,000                365,500

Less: Marginal costing    264,000                165,500

Difference                        200,000               200,000

The difference of $200,000 in net profit is as a result of $200,000 difference in closing inventory.

Explanation:

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