Reconciliation of Marginal Costing and Absorption Costing Profits Example

/, Notes, ZIMSEC A Level Accounting/Reconciliation of Marginal Costing and Absorption Costing Profits Example

Reconciliation of Marginal Costing and Absorption Costing Profits Example

Cambrige AS and A Level Accounting Notes (9706)/ ZIMSECĀ  Advanced Accounting Level Notes: Reconciliation of marginal costing and absorption costing profits

  • As has been said here, due to changes in inventory levels from period to period
  • The profit figures obtained using absorption costing and marginal costing method might vary
  • It is now time to look at an 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 the Profit Statements for January and February using Absorption Costing
  2. Set out Statements of profit for the months of January and February using Marginal costing
  3. Prepare a reconciliation for absorption and marginal costing profits for both January and February

Solution

Zambe Ltd Absorption Costing Statement of Profit for the month of 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

Zambe Ltd Absorption Costing Statement of Profit for the month of 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

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

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

Zambe Ltd Absorption Costing and Marginal Costing Reconciliation
JanuaryFebruary
Profit using Absorption Costing63 00077 500
Less Fixed Overheads in closing inventory
($2x2 000)
(4 000)----
Add Fixed Overheads in opening inventory:
($2x2 000)
------4 000
Profit According to Marginal Costing

59 000

81 500

To access more topics go the ZIMSEC Advanced Level Accounting page

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

By |2018-09-04T17:59:20+00:00September 4th, 2018|Cambridge AS A Level Accounting, Notes, ZIMSEC A Level Accounting|Comments Off on Reconciliation of Marginal Costing and Absorption Costing Profits 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.
%d bloggers like this: