Marginal Costing: Statement of Profit Worked Example

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Marginal Costing: Statement of Profit Worked Example

Cambrige AS and A Level Accounting Notes (9706)/ ZIMSECĀ  Advanced Accounting Level Notes: Marginal Costing: Statement of Profit 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 marginal costing
  2. Set out Statements of profit for the months of January and February

Solution

  • Below is the cost card, we have also included a calculation of standard profit per unit though it’s not required
Cost Per Unit
Materials(4kg x $3)12
Labour(4hrs x $2)8
Variable Overheads5
Marginal Cost per unit

$25

Selling price35
Marginal cost(25)
Variable selling cost(1)
Contribution Per Unit

$9 per unit

  • Now the Statements of Profit for January
Zambe Ltd Marginal Costing Statement of Profit for the month of January
WorkingsJanuary
Sales(9000x35)315 000
Cost of Sales:
Opening Inventory---------
Materials(11 000x12)132 000
Labour(11 000x8)88 000
Variable Overheads(11 000x5)

55 000

275 000
Less:Closing Inventory(2 000x25)

(50 000)

(225 000)

90 000
Less: Variable Selling Costs(9 000x1)

(9 000)

Contribution81 000
Less: Fixed Costs(20 000)
Selling(2 000)
Actual Net Profit

$59 000

  • Under cost of sales the elements were deliberately shown to emphasise the point that fixed overheads are not included, we could have simply used $25/cost per unit instead as was done with closing inventory
Zambe Ltd Marginal Costing Statement of Profit for the month of January
WorkingsFebruary
Sales(11500x35)402 500
Cost of Sales:
Opening Inventory(2000x25)50 000
Finished Desks for the period(9500x25)237 500
Less Closing Inventory-----

(----)

(287 500)

115 000
Less: Variable selling costs(11 500x1)

(11 500)

Contribution103 500
Less:Fixed Costs(20 000)
Selling Expenses(2 000)
Actual Net Profit

$81 500

  • For the month of January we have used the cost card to calculate the value of inventory instead of showing the breakdown in the statement of profit

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By |2018-09-04T09:58:46+00:00September 4th, 2018|Cambridge AS A Level Accounting, Notes, ZIMSEC A Level Accounting|Comments Off on Marginal 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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