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) <u>40,000</u>
240,000
Less: Closing stock (200 units x $120) <u>24,000 </u> <u>216,000</u>
Gross profit 54,000
Less: Selling and administrative expenses:
Variable selling and administrative 36,000
Fixed selling and administrative expenses <u>15,000</u> <u>51,000</u>
Net profit 3<u>,000</u><u> </u>
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) <u>20,000</u>
200,000
Less: Closing stock (200 units x $100) <u>20,000</u>
180,000
Add: Variable selling and administrative <u>36,000</u> <u>216,000</u>
Contribution 54,000
Less: Fixed cost:
Fixed production cost 40,000
Fixed selling and administrative expenses <u>15,000</u> <u>55,000</u>
Net loss <u> (1,000) </u>
Profit reconciliation statement
Closing stock Net profit/loss
$ $
Absorption costing 24,000 3,000
Less: Marginal costing <u>20,000</u> <u>(1,000)</u>
Difference <u>4,000 </u> <u> 4,000</u>
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.
