MAMarginal & absorption costing

There are several ways of getting the answer to this question - here is one way!! The contribution per unit is 14 - 6.40 = 7.60. So the total contribution is 22,000 x 7.60 = 167200 So the marginal costing profit is 167200 - 92000 = 75200. The absorption rate is 92,000/20,000 = 4.60 per unit. The inventory fell by 1000 units. So the absorption costing profit is 75200 - (1000 x 4.60) = 70600

kindly explain where the 22000 units came from I can't locate it from the question

Please help the question below; From the following data for a company which started operation at the beginning of the year, discuss the contention that “marginal costing rewards sales whereas absorption costing rewards production”. January February March Sales 6,000 7,500 5,000 Production 8,000 7,000 16,000 1. Selling price = $120 per unit 2. Production cost per unit Direct materials $30 Direct labor $20 Variable overheads $15 Fixed overhead $25 (this is based on an estimated normal level of 22,500 units per quarter)

@abobo96 I don't think this is a practice kit question, it seems more of a study text example to me. It requires you to compare profits from both the costing methods, for which you'll have to make separate income statements using both the costing techniques. This is a lengthy procedure and cannot be done completely here. So, i'll do it in as simple way as possible. Profit Using Marginal Costing: For January: Contribution = SP - Marginal Cost = 120 - (30+20+15) Contribution = 55 (per unit sold) Profit = Total Contribution - Fixed Costs Profit = 55x6000 - 25x(22500/3) = 330,000 - 25x7500 Profit = 330,000 - 187,500 Profit = 142,500 Profit using Absorption Costing for January: Inventory Levels increase by 2,000. So, Abs. Profit = 142,500 + 25x2000 = 142,500 + 50000 Abs. Profit = 192,500 Absorption Costing results in profit being greater than Marginal Costing due to the fact that production is greater than sales. Meaning that the unsold units have carried some part of fixed costs with them in their valuation, resulting in expenses being less than marginal costing and hence profit being higher. For February using Marginal Costing: Profit = 55 x 7,500 - 187,500 = 412,500 - 187,500 Profit = 225,000 Profit using Absorption Costing: Closing Inventory = 2,000 (opening) + 7,000(prod.) - 7,500 (sold) Closing Inventory = 1,500 Inventory decreases by 500 (2,000-1,500) Abs. Profit = 225,000 - 12,500(25x500) Abs. Profit = 212,500 Absorption Costing results in lower profit than Marginal Costing due to the fact that the opening inventory of 2,000 carried that Fixed Cost which was not deducted in January. This Fixed Cost increased the total expenses for the period and hence a lower profit. While in Marginal Costing, the same amount of 187,500 was deducted. We can summarize that Absorption Costing results in Higher Profits when Production is greater than Sales (as in January) and Lower Profits when Production is lower than Sales (as in February). While the opposite is happening with Marginal Costing i.e Profits are lower when Sales<Production (in Jan) and higher when Sales>Production (in Feb). I really, really want Sir @johnmoffat to improvise this answer. Cause i don't think i can answer you the way he does, plus i want him to correct me if i'm wrong or having any lacking in my analysis.

Thank you for the answer!

@abobo96 said: Thank you for the answer!

You are welcome :)

please help, Dexter Company produces and sells a single product, a wooden hand loom for weaving small items such as scarves. Selected cost and operating data relationg to the product for two years are given below: Selling price per unit 50 Manufacturing costs: Variable per unit produced: Direct materials 11 Direct labour 6 Variable overhead 3 Fixed per year 120,000 Selling and administrative costs: Variable per unit sold 5 Fixed per year 70,000 Year 1 Year 2 Units in beginning inventory 0 2,000 Units produced during the year 10,000 6,000 Units sold during the year 8,000 8,000 Units in ending inventory 2,000 0 1. Assume that the company uses absorption costing (a) Compute the unit product cost in each year. (b) Prepare an income statement for each year. 2. Assume that the company uses variable costing (a) Compute the unit product cost in each year (b) Prepare an income statement for each year. 3. Reconcile the variable costing and absorption costing net income figures.

Given that you must have an answer to this question in the same book in which you found the question, there is no point in asking me to provide an answer as well. Ask about whatever it is in the printed answer that you do not understand and then I will try and help you! (I assume of course that you have watched my free lectures. The lectures are a complete course for Paper F2 and cover everything needed to be able to pass the exam well.) "Variable costing" is not a term used in Paper F2 - the correct term is "Marginal Costing". I suggest that you use a Revision Kit from one of the ACCA approved publishers - they use the correct terms and have questions that are exam-standard questions.

Please: Dexter Company produces and sells a single product, a wooden hand loom for weaving small items such as scarves. Selected cost and operating data relationg to the product for two years are given below: Selling price per unit 50 Manufacturing costs: Variable per unit produced: Direct materials 11 Direct labour 6 Variable overhead 3 Fixed per year 120,000 Selling and administrative costs: Variable per unit sold 5 Fixed per year 70,000 Year 1 Year 2 Units in beginning inventory 0 2,000 Units produced during the year 10,000 6,000 Units sold during the year 8,000 8,000 Units in ending inventory 2,000 0 1. Assume that the company uses absorption costing (a) Compute the unit product cost in each year. (b) Prepare an income statement for each year. 2. Assume that the company uses variable costing (a) Compute the unit product cost in each year (b) Prepare an income statement for each year. 3. Reconcile the variable costing and absorption costing net income figures.