Cambrige AS and A Level Accounting Notes (9706)/ ZIMSEC  Advanced Accounting Level Notes: Absorption Costing: Statement of Profit Worked Example

The Question

Zambe Ltd produces one product –desks.Each desk is budgeted to require 4 kg of wood at \$3 per kg, 4 hours of labour at \$2 per hour, and variable production overheads of \$5 per unit. Fixed production overheads are budgeted at \$20,000 per month and average production is estimated to be 10,000 units per month. The selling price is fixed at \$35 per unit. There is also a variable selling cost of \$1 per unit and fixed selling cost of \$2,000 per month. During the first two months Zambe expects the following levels of activity:

 January February Production 11 000 units 9 500 units Sales 9 000 units 11 500 units

Required:

1. Prepare a cost card using absorption costing
2. Set out budget Profit Statements for the months of January and February

Solution

• Based on what we have learnt here and here the cost card is easy to create
 Cost Per Unit \$ Materials(4kgx\$3) 12 Labour(4hrsx\$2) 8 Variable Overheads 5 Fixed Overheads (\$20 000÷ 10 000) 2 \$27
• The cost per unit is therefore \$27
• We can also create the Absorption Statements of Profit for both February and January

Statement of Profit for January

 Workings January Sales (9000x35) 315 000 Cost of Sales: Opening Inventory ---- ----- Finished Desks for the period (11000x27) 297 00 Less Closing Inventory (2000x27) (54 000) (243 000) Standard Gross Profit (9000x8) 72 000 Adjustment for over/under absorption (22000-20000) 2 000 Actual Gross Profit 74 000 Less Selling Costs Variable selling costs (9000x1) 9 000 Fixed selling costs 2 000 (11 000) Actual Net Profit 63 000

Statement of Profit for February

 Workings February Sales (11500x35) 402 500 Cost of Sales: Opening Inventory (2000x27) 54 000 Finished Desks for the period (9500x27) 256 500 Less Closing Inventory ----- (----) (310 500) Standard Gross Profit (9000x8) 92 000 Adjustment for over/(under) absorption of fixed overheads (19000-20000) (1 000) Actual Gross Profit 91 000 Less:Selling Costs Variable Selling Costs (11500x1) (11 500) Fixed Selling Costs (2 000) 13 500 Actual Net Profit 77 500
• Costs are absorbed using units but they could also be absorbed on another basis for example labour hours if the question so directs

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