Absorption Costing: Statement of Profit Worked Example

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Absorption Costing: Statement of Profit Worked Example

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:

JanuaryFebruary
Production11 000 units9 500 units
Sales9 000 units11 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 Overheads5
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

WorkingsJanuary
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 Profit74 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

WorkingsFebruary
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 Profit91 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

To access more topics go the ZIMSEC Advanced Level Accounting page

To access more topics go to the Cambridge AS/A level page

By |2018-08-16T08:52:26+00:00August 16th, 2018|Cambridge AS A Level Accounting, Notes, ZIMSEC A Level Accounting|Comments Off on Absorption Costing: Statement of Profit Worked Example

About the Author:

He holds an Honours in Accountancy degree from the University of Zimbabwe. He is passionate about technology and its practical application in today's world.
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