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Sales Price = $20 per unit
costs card:
material cost = $2 per unit
labour cost = $3 per unit
variable production cost = $3 per unit
fixed production overhead = $4 per unit
variable selling cost = $1 per unit
fixed selling overhead = $2 per unitBoth types of fixed overheads were based on a budget of 10,000 cakes a year.
In the first year of production, the only difference from the budget was the Dundee produced 11,000 cakes and sold 9000.What is the profit made under an absorption costing system and marginal costing system?
I have a problem with this sir! Could you help me?
You really must watch my free lectures on absorption and marginal costing, because I work through a very similar example in my lectures!!
The contribution per unit is 20 – (2 + 3 + 3 + 1) = $11 per unit.
Therefore the total contribution is 9,000 x $11 = $99,000.
The fixed overheads were budgeted as 10,000 x (4 + 2) = $60,000 and this total stays fixed regardless of how many are actually produced.
Therefore the total profit using marginal costing is 99,000 – 60,000 = $39,000.
For absorption costing you can calculate the profit all over again, but given that we already know the marginal profit it is must faster to use the fact that the only difference ever between the marginal and absorption profit is the change in inventory multiplied by the fixed production costs per unit. Here the inventory increased by 11,000 – 9,000 = 2,000 units and therefore the absorption profit is higher than the marginal profit by 2,000 x $4, and so is $47,000.
Again, all of this is explained (with examples) in my free lectures. The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well.
Thank you so much!
SIR, you calculate the change in inventory of 2000 by deducting 11,000 production units against 9000 sales units.
Change in inventory consists of (opening inventory – closing inventory)
BUT how would that be an increase in inventory? Why do we produce more units than we can actually sell?
Secondly could you please help me calculate closing inventory with the following example?
For example:
sales units = 12000
production units = 8000
opening inventory = 3000I know that we need closing inventory to calculate the cost of goods sold.
opening inventory——–3000
production units———–8000
closing inventory————?
cost of goods sold———-0BUT we are not told the COGS to calculate closing inventory (how would I do that?)
If they produce more units that they sell, then automatically the inventory will increase. (And similarly if they sell more than they produce then they must be selling some of the inventory and therefore the inventory will fall.)
In your example, if they start with 3,000 units and produce 8,000 units, they then have 11,000 units. Since the only have 11,000 units available then they cannot possibly sell more than 11,000 units – selling 12,000 units is impossible. If they had sold 9,000 units then they would have 11,000 – 9,000 – 2,000 units left in inventory.
The cost of goods sold is nothing to do with the calculation of the number of units in inventory.
Have you watched my free lectures?
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