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Numerical Problems

Brief Answer Questions

1. Following information is provided to you:

Sales Rs. …………………………4,00,000

Variable manufacturing overhead …….30,000

Direct materials…………………………………. 50,000

Fixed manufacturing overhead  …………………50,000

Direct labour ……………………………………… 80,000

Fixed administrative overhead………………….20,000

Variable administrative overhead……….. 10,000

Required: Income statement under variable costing.

Solution

                                                            Income Statement under Variable Costing

ParticularsRs.Rs.
        Sales revenue ……………………………………………………………………………… 4,00,000
Less: Variable manufacturing cost of goods sold:  
        Direct material………………………………………………………………………………50,000 
        Direct labour…………………………………………………………………………………80,000 
        Variable manufacturing overhead ……………………………………………………….30,000 
        Variable cost of goods manufactured……………………………………………………1,60,000 
Add: Beginning inventory ……………………………………………………………………….0 
 1,60,000 
Less: Ending inventory …………………………………………………………………………..01,60,000
        Gross contribution margin……………………………………………………………..2,40,000
Less: Non-manufacturing cost:      
   Variable administrative overhead………………………………………………………..		10,00010,000
        Net contribution margin2,30,000
Less: Fixed cost:       
  Fixed manufacturing overhead ………………………………………………………….		50,000 
        Fixed administrative overhead……………………………………………………………20,00070,000
        Net income………………………………………………………………………………….1,60,000

2. A manufacturing company supplied the following particulars for the year ending 31st Chaitra 2070:

Production ……………………………………………………………… 25,000 units

Sales ………………………………………………………………………. 20,000 units

Closing stock ……………………………………………………………. 5,000 units

Variable manufacturing overhead ………………………… Rs. 10 per unit

Fixed manufacturing overhead …………………………………. Rs. 150,000

Variable selling and administrative cost ………………….. Rs. 2 per unit

Fixed selling and administrative cost ………………………….. Rs. 40,000

Unit selling price ……………………………………………………………… Rs. 25

Required: Income statement under variable costing

Ans: Rs. 70,000

Solution

                                                            Income Statement under Variable Costing

ParticularsRs.Rs.
Sales revenue @ Rs. 25…………………………………………………………………………
Less: Variable cost of goods sold @ Rs. 10………………………………………………….
Add: Beginning stock @ Rs. 10…………………………………………………………………
Less: Closing stock @ Rs. 10…………………………………………………………………..		  250,000 – (50,000)500,000
Gross contribution margin ……………………………………………………………………
Less: Non-manufacturing variable cost………………………………………………………..         Variable selling and administrative overhead @ Rs. 2……………………………….		 300,000   40,000
Net contribution margin ………………………………………………………………………….
Less: Fixed cost:        
Manufacturing overhead ………………………………………………………………….        
Selling and administrative overhead ……………………………………………………		    150,000 40,000260,000     190,000
Net income ……………………………………………………………………………………….70,000

3. A company manufactures a single product; the operating date for period is given below:

Production units …………………….. 2,000 units      Fixed manufacturing cost ………………….. Rs. 5,000

Sales units ……………………………… 1,500 units      Fixed selling overhead …………………….. Rs. 10,000

Prime cost ………………………… Rs. 18 per unit      Variable selling overhead ……………….. 5% of sales

Selling price per unit ……………………… Rs. 40

Required: Income statement under variable costing

Ans: Rs. 15,000

Solution

                                                            Income Statement under Variable Costing

ParticularsRs.Rs.
Sales revenue (1,500 units @ Rs. 40)…………………………………………………………
Less: Variable manufacturing cost of goods sold:        
Prime cost (2,000 units @ Rs. 18)………………………………………………………        
Less: Closing stock (500 unit s@ Rs. 18)………………………………………………		    36,000 9,00060,000     27,000
Gross contribution margin ……………………………………………………………………
Less: Non-manufacturing variable cost………………………………………………………..
Variable selling and administrative overhead (5% of sales) 		 33,000   3,000
Net contribution margin ………………………………………………………………………….
Less: Fixed cost:        
Fixed manufacturing cost………………………………………………………………….        
Fixed selling overhead ……………………………………………………………………		    5,000 10,00030,000     15,000
Net income ……………………………………………………………………………………….15,000

4. Following information is provided to you:

Sales Rs. 3,00,000

Variable manufacturing overhead      Rs. 30,000

Direct materials 60,000

Fixed manufacturing overhead       50,000

Direct labour . 80,000

Fixed administrative overhead      20,000

Variable administrative overhea 10,000

Required:

  • Income statement under absorption costing.

Ans: Rs. 50,000

Solution

                                                          Income Statement under Absorption Costing

ParticularsRs.Rs.
        Sales revenue ……………………………………………………………………………… 3,00,000
Less: Cost of goods sold:  
        Direct material………………………………………………………………………………60,000 
        Direct labour…………………………………………………………………………………80,000 
        Variable manufacturing overhead……………………………………………………….30,000 
        Fixed manufacturing overhead…………………………………………………………..50,000 
        Cost of goods manufactured……………………………………………………………..2,20,000 
Add: Beginning inventory ……………………………………………………………………….0 
 2,20,000 
Less: Ending inventory …………………………………………………………………………..02,20,000
        Gross margin………………………………………………………………………………80,000
Less: Non-manufacturing cost:        
Variable administrative overhead ……………………………………………………….		10,000 
        Fixed administrative overhead  ………………………………………………………….20,00030,000
        Net income………………………………………………………………………………….50,000

5. A manufacturing company with normal capacity of 20,000 units furnished you the following information:

Beginning inventory………………… 3,000 units….. Fixed manufacturing overhead …………. Rs. 50,000

Units produced during the year . 18,000 units….. Units sold during the year …………….. 20,000 units

Standard variable cost …………………. Rs. 6.50….. Unit selling price ………………………………….. Rs. 12

Fixed selling and distribution overheads Rs. 5,000

Required:

  • Income statement under absorption costing

Ans: Rs. 50,000

Solution

Given:

            Normal capacity (NC)           = 20,000 units

            Total manufacturing fixed cost (TMFC) = Rs. 50,000

            Manufacturing fixed per unit   = =  = Rs. 2.50

            Closing stock                       = Opening stock + Production – Sales = 3,000 + 18,000 – 20,000 = 1,000 units

                                                          Income Statement under Absorption Costing

ParticularsRs.
        Sales revenue (Rs 12 ´ 20,000)……………………………………………………………………..2,40,000
Manufacturing cost of goods sold :       
  Standard variable cost                     (Rs. 6.50 ´ 18,000 units) ……………………………….       
  Fixed manufacturing overhead          (Rs. 2.50 ´ 18,000 units)……………………………….		  1,17,000 45,000
Manufacturing cost of production          @ Rs. 9 per unit
Add: Opening stock                                (Rs. 9 ´ 3,000)……………………………………………
Less: Closing stock                                 (Rs. 9 ´ 1,000)……………………………………………
Add: Under absorption of manufacturing fixed cost (50,000 – 45,000)		1,62,000 27,000 (9,000) 5,000
Manufacturing cost of goods sold  ……………………………………………………………………..1,85,000
Gross profit margin …………………………………………………………………………………………55,000
Less: Non-manufacturing cost:        
Fixed selling and distribution overheads……………………………………………………………		  5,000
Net profit before tax …………………………………50,000
  • Net income as per variable costing is Rs. 8,00,000. Beginning and ending inventory is 20,000 units and 25,000 units respectively. Manufacturing cost of production @ Rs. 10 per unit under absorption costing and variable manufacturing overhead was Rs. 4 per unit

Required: Calculate net income under absorption costing

Ans: Rs. 8,30,000

Solution

Given:

            Manufacturing fixed cost per unit   = Mfg. cost of production per unit – Var. mfg. overhead per unit

                                                            = Rs. 10 – Rs. 4 = Rs. 6

                                                 Calculation of Reconcile Profit under Absorption Costing

ParticularsRs.
        Net profit as per variable costing …………………………………………………………………………..
Add: Fixed mfg. cost of closing stock (25,000 ´ 6)…………………………………………………………….. Less: Fixed mfg. cost of opening stock (20,000 ´ 6)……………………………………………………………		8,00,000 1,50,000 (1,20,000)
        Net profit as per absorption costing ……………………………………………………………………8,30,000

OR

        Net profit as per variable costing      = Profit as per absorption costing ± Change in stock in unit × Mfg. FCPU

                                                           = 800,000 + (25,000 – 20,000) × 6

                                                           = Rs. 530,000

Short Answer Questions

The transactions of ABC Company for the first year of operation were as follows:

Production units ……………………………………………………………… 50,000

Sales unit………………………………………………………………………… 50,000

Selling price per unit ………………………………………………………… Rs. 25

Variable cost per unit:

………………………………………………………………………….. Direct material …….. Rs. 6

…………………………………………………………………………….. Direct labour……… Rs. 3

…………………………………………….. Variable manufacturing overheads …….. Rs. 2

…………………………………. Variable selling and distribution overheads …….. Rs. 2

Fixed cost per year:

………………………………………………………….. Manufacturing overheads Rs. 2,00,000

…………………………………………… Office and administrative overheads Rs. 2,00,000

……………………………………………… Selling and distribution overheads Rs. 1,50,000

Required:

  • (a)                      Income statement under variable costing
  • (b)                      Income statement under absorption costing.

Ans: (a) Rs. 50,000 and (b) Rs. 50,000

Solution

(a)                                                         Income Statement under Variable Costing

ParticularsRs.
        Sales revenue (50,000 ´ 25) 12,50,000
Less: Variable mfg cost of goods sold :         Direct material                          @ Rs. 6 ´ 50,000 units ………………………….         Direct labour                            @ Rs. 3´ 50,000 units……………………………         Variable mfg. Overhead             @ Rs. 2 ´ 50,000 units…………………………..  3,00,000 1,50,000 1,00,000       
Variable mfg cost of production @ Rs. 11 per unit …………………………………………. Add: Opening stock …………………………………………………………………………….. Less: Closing stock ……………………………………………………………………………….5,50,000 Nil Nil     
Variable mfg cost of goods sold 5,50,000
Gross contribution margin 7,00,000
Less: Variable non-manufacturing cost:         Variable selling and distribution @ Rs. 2 ´ Sales units ……………………………..     1,00,000
Net contribution margin 6,00,000
Less: Fixed cost /Period cost:         Manufacturing overheads…………………………………………………………………         Office and administrative overheads ……………………………………………………         Selling and distribution ……………………………………………………………………  2,00,000 2,00,000 1,50,000      5,50,000
Net profit before tax ……………………………………………………………………………50,000


(b)                                                      Income Statement Under Absorption Costing

ParticularsRs.Rs.
        Sales revenue (50,000 ´ 25)…………………………………………………………… 12,50,000
Manufacturing cost of goods sold :         Direct material                          @ Rs. 6 ´ 50,000 units ………………………..         Direct labour                            @ Rs. 3´ 50,000 units………………………….         Variable mfg. Overhead             @ Rs. 2 ´ 50,000 units…………………………         Fixed mfg overhead                   @ Rs. 4 ´ 50,000 ………………………………  3,00,000 1,50,000 1,00,000 2,00,000 
Manufacturing cost of production @ Rs. 15 per unit …………………………………….. Add: Opening stock …………………………………………………………………………… Less: Closing stock ……………………………………………………………………………..7,50,000 Nil Nil 
Manufacturing cost of goods sold …………………………………………………………… 7,50,000
Gross profit margin ……………………………………………………………………………. 5,00,000
Less: Non-manufacturing cost:         Variable selling and distribution @ Rs. 2 ´ Sales units ……………………………         Fixed office and administrative overheads …………………………………………..         Fixed selling and distribution …………………………………………………………..  1,00,000 2,00,000 1,50,000      4,50,000
Net profit before tax ………………………………………………………………………….50,000

Working notes:

1.         If normal capacity is not available in the question,

            Then normal capacity = Production units = 50,000 units

2.         Manufacturing fixed cost per unit =  =  = Rs. 4

  • Birat Shoe Company produces a single product. The cost characteristics of the product and of the manufacturing plant are given below:
Production units ……………………………………………………………………………………………….6,000
Sales units ……………………………………………………………………………………………………..5,000
Variable cost per unit: 
        Direct material……………………………………………………………………………………………Rs. 2
        Direct labour……………………………………………………………………………………………..Rs. 4
        Variable manufacturing overheads…………………………………………………………………..Re. 1
        Variable selling and administrative overheads……………………………………………………..Rs. 3
Fixed cost per year: 
        Manufacturing overheads……………………………………………………………………………..30,000
        Selling and administrative overheads ……………………………………………………………….10,000
Selling price per unit………………………………………………………………………………………..Rs. 20

Required:

  • (a)                      Income statement under variable costing
  • (b)                      Income statement under absorption costing.

Ans: (a) Rs. 10,000 (b) Rs. 15,000

Solution

(a)                                                        Income Statement Under Variable Costing

ParticularsRs.Rs.
        Sales………………………………………………………………………………………. 1,00,000
Less: Variable mfg. cost of goods sold:         Direct material ………………………………………………… @ Rs. 2 ´ 6,000 units         Direct labour cost ……………………………………………. @ Rs. 4 ´ 6,000 units         Variable mfg. overhead ……………………………………… @ Rs. 1 ´ 6,000 units……………………………………………………………………………………………..  12,000 24,000 6,000 
Variable mfg cost of production …………………………………………. @ Rs. 7 per unit …………………………………………………………………………………………….. Add: Opening stock …………………………………………………………………………… Less: Closing stock …………………………………………………. @ Rs. 7 ´ 1,000 units ……………………………………………………………………………………………..42,000 – (7,000) 
Variable Manufacturing cost of goods sold ………………………………………………… 35,000
        Gross contribution margin ………………………………………………………………  Less: Non mfg. variable cost:         Selling and administrative overheads @ Rs. 3 ´ 5,000…………………………….    15,00065,000   15,000
        Net contribution margin Less: Fixed costs:         Mfg. overheads …………………………………………………………………………..         Selling and administrative overheads ………………………………………………..      30,000 10,000 50,000     40,000
Net profit before tax ……………………………………………………………………………10,000

(b)                                                      Income Statement Under Absorption Costing

ParticularsRs.Rs.
        Sales………………………………………………………………………………………………………. 1,00,000
Less: Mfg. cost of goods sold:         Direct material                          @ Rs. 2 ´ 6,000 units………………………………………….         Direct labour cost                      @ Rs. 4 ´ 6,000 units………………………………………….         Variable mfg. overhead              @ Rs. 1 ´ 6,000 units………………………………………….         Fixed mfg. overhead                  @ Rs. 5 ´ 6,000………………………………………………..  12,000 24,000 6,000 30,000 
Mfg cost of production                       @ Rs. 12 per unit …………………………………………….. Add: Opening stock                          ……………………………………………………………………. Less: Closing stock                            @ Rs. 12 ´ 1,000 units ……………………………………….72,000 – (12,000) 
Manufacturing cost of goods sold ………………………………………………………………………….. 60,000
        Gross profit margin …………………………………………………………………………………….. Less: Non-mfg. costs:         Variable selling and administrative overheads @ Rs. 3 ´ 5,000……………………….. 15,000         Fixed selling and administrative overheads ……………………………………………….. 10,000      25,00040,000     25,000
Net profit before tax …………………………………………………………………………………………15,000

Working notes:

1.         Closing stock = Opening stock + Production – Sales = Nil + 6,000 – 5,000 = 1,000 units

2.         Manufacturing fixed cost per unit =   =  = Rs. 5

  • A company provides you the following information:
  • Normal capacity …………………………………………. 2,00,000 units per year                                          
  • Variable manufacturing overhead ……………………………… Rs 20 per unit
  • Fixed manufacturing overhead ……………………………………… Rs 3,00,000                                          
  • Variable selling expenses …………………………………………… Rs 2 per unit
  • Fixed selling expenses …………………………………………………. Rs 1,00,000                                          
  • Unit sale price …………………………………………………………………….. Rs 25
  • The operating result for the year ending December of the last year were as follows:
  • ………………………………………………………………………………………….. Sales ……………………………………………………………………………… 1,50,000 units                                           
  • …………………………………………………………………………………. Production                      1,80,000 units

Required:

  1. (a)                      Income statement under variable costing
  2. (b)                      Reconciled profit under absorption costing

Ans: (a) Rs. 50,000 (b) Rs. 95,000

Solution

(a)                                                        Income Statement Under Variable Costing

ParticularsRs.Rs.
       Sales revenue (Rs. 25 ´ 1,50,000 units)…………………………………………………37,50,000
Variable manufacturing cost of goods sold :        Standard variable mfg. expenses       (Rs. 20 ´ 1,80,000)…………………………..  36,00,000 
Manufacturing cost of production          @ Rs. 20 per unit  ………………………….. Add: Opening stock                               (Rs. 20 ´ Nil)………………………………….. Less: Closing stock                                (Rs. 20 ´ 30,000 units)………………………36,00,000 Nil 6,00,000 
Manufacturing cost of goods sold …………………………………………………………..30,00,000
Gross contribution margin……………………………………………………………………. Less: Non-manufacturing variable cost:        Variable selling expenses                 (Rs. 2 ´ Sales units)………………………….    3,00,0007,50,000   3,00,000
Net contribution margin……………………………………………………………………….. Less: Fixed cost:        Manufacturing expenses ……………………………………………………….. 3,00,000        Selling expenses…………………………………………………………………. 1,00,0004,00,0004,50,000 4,00,000
Net profit before tax …………………………………………………………………………….50,00050,000

b.                                             Calculation of Reconciled Profit under Absorption Costing

ParticularsRs.
Net profit as per variable costing……………………………………………………………………………….. Add: Fixed manufacturing cost of closing stock (MFCPU ´ Closing stock units = Rs. 1.50 ´ 30,000)50,000 45,000
  Less: Fixed manufacturing cost of opening stock (MFCPU ´ Closing stock units = Rs. 1.50 ´ Nil)….95,000 0
Net profit as per absorption costing………………………………………………………………………..95,000

Working notes:

            Manufacturing fixed cost per unit           = =  = Rs. 1.5

            Closing stock                                     = Opening stock + Production – Sales

                                                                    = Nil + 1,80,000 – 1,50,000  = 30,000 units

  • A manufacturing company with normal capacity of 50,000 units supplied you with the following particulars for the year ending Chaitra 30, 2074.
Production ……………………………………………………………………………………………………..55,000 units
Sales……………………………………………………………………………………………………………60,000 units
Closing stock ………………………………………………………………………………………………….5,000 units
Fixed selling and administrative cost……………………………………………………………………….Rs. 90,000
Unit variable manufacturing cost …………………………………………………………………………..Rs. 6
Unit fixed manufacturing overhead ………………………………………………………………………..Rs. 3
Unit variable selling and administrative cost………………………………………………………………Rs. 2
Unit selling price ………………………………………………………………………………………………Rs. 15
  1. Required:
  2. (a)                              Income statement under internal reporting system
  3. (b)                              Reconciliation statement showing the profit of external reporting system
  4. (c)                               Give the reasons of difference in net profit, if any.

Ans: a) Rs. 180,000 b) Rs. 165,000

Solution

(a)                                                 Income Statement under Internal Reporting System

ParticularsRs.Rs.
        Sales revenue (Rs. 15 ´ 60,000 units)……………………………………………….9,00,000
Variable manufacturing cost of goods sold :         Variable manufacturing cost             (Rs. 6 ´ 55,000)…………………………..  3,30,000 
Manufacturing cost of production          @ Rs. 6 per unit  ……………………….. Add: Opening stock                                (Rs. 6 ´ 10,000 units)……………………. Less: Closing stock                                 (Rs. 6 ´ 5,000 units)………………………3,30,000 60,000 (30,000) 
Manufacturing cost of goods sold ………………………………………………………3,60,000
Gross contribution margin………………………………………………………………… Less: Non-manufacturing variable cost:         Variable selling and administrative expenses (Rs. 2 ´ Sales units)……………..1,20,0005,40,000 1,20,000
Net contribution margin……………………………………………………………………. Less:  Fixed cost:         Manufacturing overhead  ………………………………………………………………         Selling and distribution expenses……………………………………………………..1,50,000* 90,0004,20,000 2,40,000
Net profit before tax …………………………………………………………………………1,80,000

b.                                  Reconciliation statement showing the profit of External Reporting System

ParticularsRs.
Net profit as per variable costing………………………………………………………………………………. Add: Fixed manufacturing cost of closing stock (Rs. 3 ´ 5,000)…………………………………………..1,80,000 15,000
  Less: Fixed manufacturing cost of opening stock (Rs. 3 ´ 10,000)……………………………………….1,95,000 30,000
Net profit as per absorption costing………………………………………………………………………..1,65,000

OR

            Here, closing stock 5,000 units is less than opening stock 10,000 units so, absorption costing shows low profit by Rs. (10,000 – 5,000) ´ 3 = Rs. 15,000.

\         Reconcile under absorption costing = 1,80,000 – 15,000 = Rs. 1,65,000

  • Following information were supplied by a manufacturing concern for the year ended 30th Chaitra 2070:
  • Normal capacity………………………………………………………. 10,000 units
  • Production ……………………………………………………………….. 9,000 units
  • Sales……………………………………………………………………….. 10,000 units
  • Opening inventory ……………………………………………………. 2,000 units
  • Prime cost per unit …………………………………………………………… Rs. 17
  • Variable production overheads per unit……………………………….. Rs. 5
  • Variable selling and administrative OH per unit…………………… Rs. 3
  • Selling price per unit ………………………………………………………… Rs. 40
  • Periodic fixed cost:
  • ………………………………………………………………… Production overheads Rs. 30,000
  • ……………………………………………………………………….. Office overheads Rs. 20,000
  • …………………………………………………………………… Marketing expenses Rs. 10,000
  • Required:
  • (a)                      Income statement under variable costing
  • (b)                      Reconciled profit under absorption costing

Ans: (a) Rs. 90,000 (b) Rs. 87,000

Solution

Given:

1.         Normal capacity          = 10,000 units

2.         Closing stock              = Opening stock + Production – Sales = 2,000 + 9,000 – 10,000 = 1,000 units

3.         Manufacturing fixed cost per units (MFCPU) =  =  = Rs. 3

a.                                                          Income Statement Under Variable Costing

ParticularsRs.Rs.
Sales @ Rs. 40 each ……………………………………………………………………………. 4,00,000
Less: Variable manufacturing cost of goods sold:         Prime cost @ Rs. 17 each ´ 9,000 units ………………………………………………         Variable manufacturing overheads @ Rs. 5 each ´ 9,000 units …………………..    1,53,000 45,000 
Variable manufacturing cost of production @ Rs. 22 each ……………………………….. Add: Opening stock @ Rs. 22 each ´ 2,000 units …………………………………………. Less: Closing stock @ Rs. 22 each ´ 1,000 units…………………………………………..1,98,000 44,000 (22,000) 
Variable manufacturing cost of goods sold ………………………………………………….. 2,20,000
Gross contribution margin ……………………………………………………………………… Less: Non-manufacturing variable cost:         Variable selling and administrative overheads @ Rs. 3 each ´ 10,000 units …….    30,0001,80,000   30,000
Net contribution margin …………………………………………………………………………. Less: Fixed cost:         Manufacturing overheads…………………………………………………………………         Office overheads …………………………………………………………………………..         Marketing expenses ……………………………………………………………………….    30,000 20,000 10,0001,50,000       60,000
Net profit ………………………………………………………………………………………….90,000

b.                                             Calculation of Reconciled Profit as per Absorption Costing

ParticularsRs.
Net profit as per variable costing…………………………………………………………………………………. Add: Fixed manufacturing cost of closing stock (3 ´ 1,000)………………………………………………….90,000 3,000
  Less: Fixed manufacturing cost of opening stock (3 ´ 1,000)…………………………………………………93,000 6,000
Net profit as per absorption costing………………………………………………………………………………87,000
  • A manufacturing company furnishes you the following information:
  • Normal capacity ………………………………………………………… 12,000 units
  • Production ……………………………………………………………….. 10,000 units
  • Sales ………………………………………………………………………… 10,000 units
  • Ending inventory ………………………………………………………… 2,000 units
  • Other information:
  • Fixed selling and administrative cost…………………………………. Rs. 8,000
  • Fixed factory overhead cost per unit ………………………………………. Rs. 3
  • Standard variable cost per unit ………………………………………………. Rs. 5
  • Selling price per unit ………………………………………………………….. Rs. 15

Required:

  1. (a)                      Income statement under absorption costing
  2. (b)                      Profit under variable costing

Ans: (a) Rs. 56,000 (b) Rs. 56,000

Solution

(a)                                                      Income Statement under Absorption Costing

ParticularsRs.Rs.
        Sales revenue (10,000 units @ Rs. 15) (a)………………………………………….150,000
Manufacturing cost of goods sold :         Standard variable cost @ Rs. 5…………………………………………………………         Fixed factory overhead @ Rs. 3……………………………………………………………………………………………….  50,000 30,000 
                Add: Beginning inventory (Rs. 8 × 2,000)……………………………………………………………………………………………….80,000 16,000 
                Less: Ending inventory (Rs. 8 × 2,000)………………………………………………..96,000 16,000 
          Add: Under absorption of fixed factory overhead ……………………………………         [(12,000 units @ Rs. 3) – 30,000]………………………………………………………80,000 6,000  86,000
Gross contribution margin …………………………………………………………………. 64,000
Less:  Non-manufacturing cost:         Fixed selling and administrative cost ……………………………………………………………………………………………….   8,000
Net income ………………………………………………………………………………………56,000

b.                                                          Reconciled Profit under Variable Costing

ParticularsRs.
Net profit as per absorption costing……………………………………………………………………………. Add: Fixed factory overhead of beginning inventory (2,000 units × Rs. 3) ………………………………56,000 6,000
  Less: Fixed factory overhead of beginning inventory (2,000 units × Rs. 3)………………………………62,000 6,000
Net profit as per variable costing…………………………………………………………………………….56,000
  • The cost abstract of an undertaking was as follows:
ParticularsCost in Rs.
Direct material …………………………………………………………………………………….Rs. 10,80,000
Direct labour ………………………………………………………………………………………270,000
Variable manufacturing cost ……………………………………………………………………180,000
Variable selling and distribution expenses ……………………………………………………80,000
  • Budgeted normal output was 1,00,000 units with Rs. 2,00,000 fixed manufacturing overhead. The fixed selling and distribution expenses were Rs. 50,000.
  • The operations of the year ended Dec. of the last year were:
  • Opening stock …………………………………………………………… 10,000 units                                          
  • Production ……………………………………………………………….. 90,000 units
  • Sales ………………………………………………………………………… 80,000 units                                          
  • Sales price per unit ……………………………………………………… Rs. 30 units
  • Required: (a) Income statement under absorption costing.  (b) Reconciled profit under variable costing.

Ans: a) Rs. 730,000 b) Rs. 710,000

Solution

(a)                                                      Income Statement under Absorption Costing

ParticularsRs.Rs.
        Sales revenue (Rs. 30 ´ 80,000 units ) (a)………………………………………….24,00,000
Manufacturing cost of goods sold :         Direct material                                (Rs. 12 ´ 90,000 units)…………………….         Direct labour                                  (Rs. 3 ´ 90,000 units)………………………         Variable factory overhead                 (Rs. 2 ´ 90,000 units)………………………         Fixed manufacturing overhead          (Rs. 2 ´ 90,000 units)………………………  10,80,000 2,70,000 1,80,000 1,80,000 
Manufacturing cost of production          @ Rs. 19 per unit ………………………… Add: Opening stock                                (Rs. 19 ´ 10,000)…………………………… Less: Closing stock                                 (Rs. 19 ´ 20,000)…………………………… Add:  Under absorption of manufacturing fixed cost ……………………………………….17,10,000 1,90,000 (3,80,000) 20,000 
Manufacturing cost of goods sold  (b)……………………………………………………. 15,40,000
Gross profit margin (a – b = c)……………………………………………………………… 8,60,000
Less:  Non-manufacturing cost:         Variable selling and distribution expenses (Rs. 1 ´ 80,000)………………………..         Fixed selling and distribution expenses                …………………………………  80,000 50,000    1,30,000
Net profit before tax …………………………………………………………………………..7,30,000

b.                                               Calculation of Reconciled Profit under Variable Costing

ParticularsRs.
Net profit as per absorption costing……………………………………………………………………………. Add: Fixed manufacturing cost of opening stock (MFCPU ´ Opening stock units = Rs. 2 ´ 10,000)..7,30,000 20,000
  Less: Fixed manufacturing cost of closing stock (MFCPU ´ Closing stock units = Rs. 2 ´ 20,000)….7,50,000 40,000
Net profit as per variable costing…………………………………………………………………………….7,10,000

Working notes:

            Fixed manufacturing cost per unit =   = Rs. 2

            Closing stock                 = Opening stock + Production – Sales = 10,000 + 90,000 – 80,000 = 20,000 units

  • The data relating to income statement of a company have been provided below:
  • Normal capacity………………………………………………………. 25,000 units
  • Production ……………………………………………………………… 27,000 units
  • Sales ………………………………………………………………………. 28,000 units
  • Closing inventory ……………………………………………………… 2,000 units
  • Other information:
  • ………………………………………………………………….. Selling price per unit……. Rs. 30
  • …………………………………………………………………….. Prime cost per unit………… 13
  • ……………………………………………… Variable works overheads per unit…………… 5
  • ……………………………… Variable office and selling overheads per unit…………… 3
  • ………………………………………………………………. Fixed works overheads… 1,00,000
  • ………………………………………………. Fixed office and selling overheads ….. 50,000

Required:

  • (a)                      Income statement under absorption costing
  • (b)                      Reconcile profit under variable costing (Don’t waste your time in preparing variable costing)

Ans: (a) Net profit as per AC = Rs. 98,000 (b) Net profit as per VC = Rs. 1,02,000

Solution

a.                                                       Income Statement Under Absorption Costing

ParticularsRs.Rs.
Sales @ Rs. 30 each…………………………………………………………………………….. 8,40,000
Less: Manufacturing cost of goods sold         Prime cost @ Rs. 13 per unit ´ 27,000 units ………………………………………….         Variable work overhead @ Rs. 5 per unit ´ 27,000 units…………………………….         Fixed work overhead @ Rs. 4 per unit´ 27,000 units………………………………..  3,51,000 1,35,000 1,08,000 
Manufacturing cost of production @ Rs. 22 per unit……………………………………….. Add: Opening stock @ Rs. 22 per unit ´ 3,000 units……………………………………….. Less: Closing stock @ Rs. 22 per unit ´ 2,000 units………………………………………. Less: Over absorption of fixed work overhead………………………………………………5,94,000 66,000 (44,000) (8,000) 
Manufacturing cost of goods sold……………………………………………………………… 6,08,000
Gross profit margin ……………………………………………………………………………… Less: Non-manufacturing cost:         Variable office and selling overheads @ Rs. 3 per unit ´ 28,000 units ……………         Fixed office and selling overheads ……………………………………………………..    84,000 50,0002,32,000     1,34,000
Net profit…………………………………………………………………………………………..98,000

b.                                               Calculation of Reconciled Profit as per Variable Costing

ParticularsRs.
Net profit as per absorption costing………………………………………………………………………………. Add: Fixed manufacturing cost of opening stock (4 ´ 3,000)…………………………………………………98,000 12,000
  Less: Fixed manufacturing cost of closing stock (4 ´ 2,000)…………………………………………………..1,10,000 8,000
Net profit as per variable costing…………………………………………………………………………………..1,02,000

Working notes:

1.         Opening stock         = Closing stock + Sales – Production = 2,000 + 28,000 – 27,000 = 3,000 units

2.         Fixed work overhead per unit =  = Rs. 4

  • A company manufacturing 40,000 units supplied you the following information for the year ending Chaitra 30, 2072.
Opening stock Sales20,000 units 50,000 units
Over absorption of fixed manufacturing cost (@ Rs. 2 per unit ) Fixed selling expenses Direct material cost per unit Direct labour cost per unit Variable manufacturing cost per unit Variable selling expenses per unit Selling price per unitRs. 20,000 Rs. 40,000 Rs. 10 Rs. 6 Rs. 6 Rs. 2 Rs. 30

Required:

  • a.                        Income statement under absorption costing.
  • b.                        Explain briefly the reasons for difference in profit under absorption costing and variable costing method.

Ans: (a) Rs. 180,000

Solution

  • a.              Income Statement under Absorption Costing
ParticularsAmount (Rs.)Amount (Rs.)
Sales revenue 50,000@ Rs. 30Less: Cost of goods sold: Direct material 40,000 @ Rs. 10 Direct labour 40,000 @ Rs. 6 Variable manufacturing overhead @ Rs. 6 Fixed manufacturing cost @ Rs. 2  400,000240,000240,00080,00015,00,000
Total manufacturing cost @ Rs. 24Add: Beginning inventory 20,000@ Rs. 24Less: Ending inventory 10,000 @ Rs. 24960,000480,000(240,000) 
Cost of goods sold unadjusted Less: Over absorption of fixed cost12,00,00020,000 
Cost of goods sold adjusted (11,80,000)
Gross profit Less: Non-manufacturing cost: Fixed selling cost Variable selling expenses 50,000@ Rs. 2  40,000100,000320,000  (140,000))
Net income180,000
  • b.                            Generally, the net profit reported by absorption and variable costing method is found different. The main reason for difference between variable and absorption costing profit is the difference in valuation of inventory under these two methods.
  • A company had the following relevant information:
  • Direct material per unit  Rs. 6………………………………. Direct labour per unit      Rs. 5
  • Variable manufacturing cost per unit Rs. 4………………. Variable selling expense per unit      Rs. 2
  • Selling price per unit Rs. 30………………… Fixed manufacturing overhead      Rs. 120,000
  • Fixed selling expenses Rs. 80,000……………………………………… Normal capacity                                                            30,000 units
Year 1Year 2
Production units…………………………………………………………………………….. Sales units……………………………………………………………………………………30,000 26,00028,000 30,000
  • Required:
  • (a)                      Income Statement under absorption costing system for year 2
  • (b)                      Profit from variable costing system
  • (c)                      Give the reasons of difference in net profit, if any.

Ans: (a) Rs. 182,000 (b) Rs. 190,000

Solution 

 (a)                                              Income Statement under Absorption Costing for Year 2

ParticularsRs.Rs.
        Sales revenue…………………………………………………………………………….. 900,000
Less: Manufacturing cost of goods sold :         Direct materials @ Rs. 6…………………………………………………………………         Direct labour @ Rs. 5…………………………………………………………………….         Variable manufacturing cost @ Rs. 4………………………………………………….         Fixed manufacturing overhead @ Rs. 4……………………………………………….  168,000 140,000 112,000 112,000 
        Manufacturing cost of production @ Rs. 19 per unit ……………………………….. Add: Opening stock @ Rs. 19532,000 76,000 
          Less: Closing stock @ Rs. 19608,000 38,000 
  Add: Under absorption of fixed manufacturing overhead (120,000 – 112,000)570,000 8,000  578,000
        Gross profit margin ………………………………………………………………………. 322,000
Less: Non-manufacturing cost:         Variable selling expenses ……………………………………………………………….         Fixed selling expenses  60,000 80,000    140,000
Net income ………………………………………………………………………………………182,000

(b)                                                     Profit from Variable Costing System for Year 2

ParticularsRs.
        Net income as per absorption costing system …………………………………………………………… Add: Fixed manufacturing overhead of opening stock (4,000 units @ Rs. 4)………………………………182,000 16,000
Less: Fixed manufacturing overhead of closing stock (2,000 units @ Rs. 4)………………………………198,000 8,000
Net income as per variable costing system …………………………………………………………………190,000

Working notes:

ParticularsYear 1Year 2
Opening stock in units …………………………………………………………………………. Add: Production units …………………………………………………………………………..– 30,0004,000 28,000
Available units …………………………………………………………………………………… Less: Sales units ………………………………………………………………………………..30,000 26,00032,000 30,000
Closing stock in units ………………………………………………………………………..4,0002,000
  1. A manufacturing company had the following relevant information:
  2. ………………………………………………………………………….. Direct material …….. Rs. 6
  3. …………………………………………………………………………….. Direct labour……… Rs. 6
  4. ………………………………………….. Variable manufacturing cost per unit……… Rs. 5
  5. ………………………………………………………………….. Selling price per unit …… Rs. 30
  6. ………………………………………. Fixed manufacturing overhead per unit……… Rs. 5
  7. ………………………………………………………………… Fixed selling expenses Rs 72,000
  8. ……………………………………………………………. Variable selling expenses 6% of sales
  9. ………………………………………………………………………… Normal capacity 30,000 units
Year 1Year 2
Production units …………………………………………………………….. Sales units ……………………………………………………………………25,000 23,00025,000 26,000

Required:

  • (a)                      Income statement under variable costing system for year 2
  • (b)                      Profit from absorption costing system without preparing income statement.

Ans: (a) Rs. 69,200 (b) Rs. 64,200

Solution 

Working notes:

Year 1Year 2
Opening stock ……………………………………………………………………………………. Add: Production …………………………………………………………………………………..– 25,0002,000 25,000
Available units…………………………………………………………………………………….. Less: Sales ………………………………………………………………………………………..25,000 23,00027,000 26,000
Closing stock ……………………………………………………………………………………2,0001,000

a.                                                       Income Statement Under Absorption Costing

ParticularsRs.Rs.
Sales revenue (26,000 @ Rs. 30)……………………………………………………………… 780,000
Less: Variable cost of goods sold:         Direct materials (25,000 @ Rs. 6)……………………………………………………….         Direct labour (25,000 @ Rs. 6)…………………………………………………………..         Variable manufacturing cost (25,000 @ Rs. 6)………………………………………..  150,000 150,000 125,000 
          Add: Opening stock (2,000 @ Rs. 17)………………………………………………….425,000 34,000 
          Less: Closing stock (1,000 @ Rs. 17)…………………………………………………..459,000 17,000  442,000
Gross contribution margin ……………………………………………………………………… Less: Variable selling expenses ………………………………………………………………. 338,000 46,800
Net contribution margin………………………………………………………………………….. Less: Periodic/Fixed cost         Fixed manufacturing cost (Normal capacity 30,000 @ Rs. 5)……………………….         Fixed selling expenses ……………………………………………………………………291,200   150,000 72,000
Net income ……………………………………………………………………………………….69,200

(b)                                                       Reconciled Profit under Absorption Costing

ParticularsRs.
Net profit as per variable costing …………………………………………………………………………………. Add: Fixed manufacturing cost of closing stock (1,000 units @ Rs. 5)………………………………………69,200 5,000
  Less: Fixed manufacturing cost of opening stock (2,000 units @ Rs. 5)……………………………………74,200 10,000
Net profit as per absorption costing ………………………………………………………………………….64,200
  1. A company provides you the following information relating to two months:
BaishakJestha
Sales (units)………………………………………………………………………. Production (units) ………………………………………………………………..4,000 8,0006,000 2,000
Sales price per unit ……………………………………………………………… Direct manufacturing cost per unit ……………………………………………. Fixed factory overhead per unit ……………………………………………….. Fixed factory overhead (Total)…………………………………………………. Selling and administrative expenses …………………………………………. Rs. 20 Rs. 10 Rs. 3 Rs. 24,000 Rs. 8,000

Required:

  • (a)                      Income statement under marginal costing
  • (b)                      Income statement under absorption costing

Ans: (a) Rs. 8,000; Rs. 28,000 (b) Rs. 20,000 ; Rs. 16,000

solution

  • Income Statement under Marginal Costing
ParticularsBaishakh (Rs.)Jestha (Rs.)
Sales revenue @ Rs. 2080,000120,000
Less: Variable manufacturing cost of goods sold:         Direct manufacturing cost @ Rs. 10…………………………………………………….         Add: Opening stock @ Rs. 10……………………………………………………………         Less: Closing stock @ Rs. 10…………………………………………………………….  80,000 – 40,000  20,000 40,000  
Total variable manufacturing cost of goods sold …………………………………………….40,00060,000
Net contribution margin ………………………………………………………………………….40,00060,000
Less: Fixed cost:         Factory overhead ………………………………………………………………………….         Selling and administrative expenses ……………………………………………………  24,000 8,000  24,000 8,000
        Total fixed cost …………………………………………………………………………….32,00032,000
Net profit ………………………………………………………………………………………….8,00028,000
  •  


  • Income Statement under Absorption Costing
ParticularsBaishakh (Rs.)Jestha (Rs.)
Sales revenue @ Rs. 2080,000120,000
Less: Manufacturing cost of goods sold:         Direct manufacturing cost @ Rs. 10…………………………………………………….         Fixed factory overhead @ Rs. 3…………………………………………………………         Add: Opening stock @ Rs. 13……………………………………………………………         Less: Closing stock @ Rs. 13…………………………………………………………….  80,000 24,000 – (52,000)  20,000 6,000 52,000 –
Total manufacturing cost of goods sold52,00078,000
Gross profit before adjustment ………………………………………………………………… Less: Under absorption of fixed factory overhead …………………………………………..28,000 –42,000 18,000
Gross profit after adjustment ……………………………………………………………………  28,00024,000
Less: Non-manufacturing cost:         Selling and administrative expenses  8,000  8,000
Net income ……………………………………………………………………………………….20,00016,000
  1. Rara Manufacturing Company furnishes the following information:
ParticularsBaishakhJestha
Sales (units)………………………………………………………………………..20,00020,000
Production  (units)…………………………………………………………………23,00027,000
Normal capacity (unit)…………………………………………………………….25,00025,000
Variable overheads per unit ……………………………………………………..Rs.12Rs.15
Fixed selling overheads ………………………………………………………….Rs.1,00,000Rs.1,20,000
Fixed overheads …………………………………………………………………. )Rs.1,00,000Rs.1,25,000
Selling price per unit …………………………………………………………….. )Rs.25Rs.30
  • Required:
  • (a)                      Income statement under direct and traditional costing
  • (b)                      Reconciliation statement between two methods

Ans: (a) Net profit Under AC: Rs. 72,000 and Rs. 1,02,000;
Under VC = Rs. 60,000 and Rs. 64,000 (b) Rs. 12,000 and Rs. 38,000

solution

(a)                                                      Income Statement under Absorption Costing

ParticularsBaishakhJestha
@Rs.@Rs.
        Sales revenue …………………………………………………………………..255,00,000306,00,000
Manufacturing cost of goods sold :         Variable overheads …………………………………………………………….         Fixed overheads ………………………………………………………………..  12 4  2,76,000 92,000  15 5  4,05,000 1,35,000
Mfg cost of production ……………………………………………………………….. Add: Opening stock………………………………………………………………….. Less: Closing stock……………………………………………………………………. Add: Under absorption of mfg. fixed cost…………………………………………. Less: Over absorption of mfg. fixed cost…………………………………………..163,68,000 Nil (48,000) 8,000 –205,40,000 48,000 (2,00,000) – (10,000)
Manufacturing cost of goods sold y ……………………………………………….. 3,28,000 3,78,000
Gross profit margin (x-Y)…………………………………………………………….. Less: Non-mfg. cost:         Fixed selling overheads………………………………………………………..1,72,000   1,00,0002,22,000   1,20,000
Net profit before tax………………………………………………………………….72,0001,02,000

                                                            Income Statement under Variable Costing

ParticularsBaishakhJestha
@Rs.@Rs.
        Sales revenue ……………………………………………………………….255,00,000306,00,000
Variable manufacturing cost of goods sold :         Variable overheads …………………………………………………………  12  2,76,000  15  4,05,000
Variable Mfg cost of production ………………………………………………… Add: Opening stock………………………………………………………………. Less: Closing stock…………………………………………………………………122,76,000 Nil (36,000)154,05,000 36,000 (1,50,000)
Variable manufacturing cost of goods sold y………………………………….. 2,40,000 2,91,000
Net contribution margin (x-Y)……………………………………………………. Less: Fixed cost:         Fixed overheads …………………………………………………………….         Fixed selling overheads…………………………………………………….2,60,000   1,00,000 1,00,0003,09,000   1,25,000 1,20,000
Net profit before tax……………………………………………………………..60,00064,000

(b)                                                                     Reconciliation Statement

ParticularsBaishakh (Rs.)Jestha (Rs.)
Net income under absorption costing…………………………………………………………. Net income under variable costing……………………………………………………………..72,000 60,0001,02,000 64,000
Difference in net income……………………………………………………………………….. .12,00038,000
Difference in value of closing stock …………………………………………………………… Less: Difference in value of opening stock …………………………………………………..12,000 –50,000 12,000
Difference in inventory value ………………………………………………………………..12,00038,000
  • Working notes:
  • 1.                            Changes in inventory:
ParticularsBaishakh (Rs.)Jestha (Rs.)
        Opening stock ……………………………………………………………………………… Add: Production…………………………………………………………………………………..Nil 23,0003,000 27,000
        Goods available …………………………………………………………………………… Less: Sales………………………………………………………………………………………..23,000 20,00030,000 20,000
        Closing stock ……………………………………………………………………………..3,00010,000
  • 2.
ParticularsBaishakhJestha
Total manufacturing fixed cost ………………………………………………………………….1,00,0001,25,000
Manufacturing fixed cost per unit ………………………………………………………………45
  1. The Alpha manufacturing company produced 80,000 units of a new product during 2070 and sold 60,000 units at Rs. 25 per unit. Costs and other related information were as follows:
Fixed costsVariable costs
Direct material…………………………………………………………………………….. Direct labour………………………………………………………………………………. Manufacturing overheads……………………………………………………………….. Selling and administrative expenses…………………………………………………..— — 2,70,000 1,80,0004,80,000 4,00,000 1,60,000 1,20,000
  • There was no ending work-in-process inventory
  • Normal capacity per annum 90,000 units

Required:

  • Comparative income statements for the year 2070 using
  • (a)                      Traditional costing
  • (b)                      Marginal costing
  • (c)                      Reconciliation statement

Ans: (a) Rs. 2,10,000 and (b) Rs. 1,50,000 (c) Rs. 60,000

Solution

a.                                                                  Alpha Manufacturing Company

                                        Income Statement under Absorption Costing for the year ending 2064

ParticularsRs.Rs.
        Sales revenue @ Rs. 25 × 60,000 units……………………………………………… 15,00,000
Less: Manufacturing cost of goods sold :         Direct material ……………………………………………… @ Rs. 6 × 80,000 units         Direct labour ………………………………………………… @ Rs. 5 × 80,000 units         Variable manufacturing overheads ……………………… @ Rs. 2 × 80,000 units         Fixed manufacturing overheads …………………………. @ Rs. 3 × 80,000 units  4,80,000 4,00,000 1,60,000 2,40,000 
Mfg cost of production ………………………………………………….. @ Rs. 16 per unit Add: Opening stock ………………………………………………………………………….. Less: Closing stock ……………………………………………… @ Rs. 16 ´ 20,000 units Add: Under absorption of fixed manufacturing cost12,80,000 – (3,20,000) 30,000 
Manufacturing cost of goods sold ………………………………………………………….. 9,90,000
        Gross profit margin …………………………………………………………………….. Less: Non-manufacturing costs:         Variable selling and administrative overheads @ Rs. 2 ´ 60,000……. 1,20,000         Fixed selling and administrative overheads …………………………….. 1,80,000      3,00,0005,10,000     3,00,000
Net profit before tax ………………………………………………………………………….2,10,000


                                                                    Alpha Manufacturing Company

                                          Income Statement under Variable Costing for the year ending 2064

ParticularsRs.Rs.
        Sales revenue @ Rs. 25 × 60,000 units……………………………………………… 15,00,000
Less: Variable manufacturing cost of goods sold :         Direct material                                   @ Rs. 6 × 80,000 units…………………         Direct labour                                     @ Rs. 5 × 80,000 units…………………         Variable manufacturing overheads       @ Rs. 2 × 80,000 units…………………  4,80,000 4,00,000 1,60,000 
Mfg cost of production                                @ Rs. 13 per unit ………………………. Add: Opening stock …………………………………………………………………………… Less: Closing stock                                    @ Rs. 13 ´ 20,000 units ……………….10,40,000 – (2,60,000) 
Variable manufacturing cost of goods sold ………………………………………………… 7,80,000
        Gross contribution margin ……………………………………………………………… Less: Non-mfg. variable costs:         Variable selling and administrative overheads @ Rs. 2 ´ 60,000…………………    1,20,0007,20,000   1,20,000
        Net contribution margin …………………………………………………………………. Less: Fixed cost…………………………………………………………………………………         Mfg. overheads …………………………………………………………………………..         Selling and administrative overheads …………………………………………………    2,70,000 1,80,0006,00,000     4,50,000
Net profit before tax …………………………………………………………………………..1,50,0001,50,000

(b)                                                                     Reconciliation Statement

ParticularsRs.
Net income under absorption costing………………………………………………………………………….. Net income under variable costing……………………………………………………………………………..2,10,000 1,50,000
Difference in net income……………………………………………………………………………………….60,000
Ending inventory in units………………………………………………………………………………………… Beginning inventory in units……………………………………………………………………………………..20,000 –
Difference in inventory (a)………………………………………………………………………………………..20,000
Manufacturing fixed cost per unit (b)……………………………………………………………………………3
Difference in inventory value (a × b)………………………………………………………………………..60,000

Working notes:

            Closing stock = Opening stock + Production – Sales  = Nil + 80,000 units – 60,000 units = 20,000 units

            Direct material cost per unit = = Rs. 6

            Direct labour cost per unit = = Rs. 5

            Variable manufacturing overheads per unit = = Rs. 2

            Variable selling and administrative expenses per unit = = Rs. 2

            Standard fixed manufacturing overhead rate (SFOR) = = = Rs. 3

  1. A company uses direct costing for internal control purposes and absorption costing for external reporting purposes. The following differences are located while comparing the two statements:
ItemsVariable CostingAbsorption Costing
Variable manufacturing cost for 6000 units ………………………………..Rs. 60,000Rs. 60,000
Fixed manufacturing overhead charged …………………………………….25,00030,000
Fixed selling and administrative cost ………………………………………..40,00040,000
Variable selling cost per unit ………………………………………………….22
Selling price per unit ……………………………………………………………3030
  • Management also projected the following data for the inventory:                                                                            
Beginning inventory units …………………………………………………………………………………1000
Production units ……………………………………………………………………………………………6,000
Goods available ……………………………………………………………………………………………7,000
Sales units ………………………………………………………………………………………………….5000
Closing stock units …………………………………………………………………………………………2000
  • Cost of beginning inventory is the same as the cost of production in the period.

Required:

  • Income statement by using absorption costing and variable costing approach.

Ans: Rs. 30,000 and Rs. 25,000

Solution

                                                          Income Statement under Absorption Costing

ParticularsRs.Rs.
        Sales revenue (Rs 30 ´ 5,000)…………………………………………………….1,50,000
Manufacturing cost of goods sold :         Variable manufacturing cost             (Rs. 10 ´ 6,000 units) ………………..         Fixed manufacturing overhead          (Rs. 5 ´ 6,000 units)…………………..  60,000 30,000 
Manufacturing cost of production          @ Rs. 15 per unit …………………… Add:  Opening stock                                (Rs. 15 ´ 1,000)………………………. Less: Closing stock                                 (Rs. 15 ´ 2,000)………………………. Less: Over absorption of manufacturing fixed cost (30,000 – 25,000)…………….90,000 15,000 (30,000) (5,000) 
Manufacturing cost of goods sold  …………………………………………………..70,000
Gross profit margin ………………………………………………………………………80,000
Less:  Non-manufacturing cost:         Variable selling overheads               (Rs. 2 ´ Sales units)…………………..         Fixed selling and administrative overhead……………………………………….  10,000 40,000    50,000
Net profit before tax ……………………………………………………………………..30,00030,000

                                                            Income Statement Under Variable Costing

ParticularsRs.Rs.
        Sales revenue (Rs. 30 ´ 5,000 units)………………………………………………..1,50,000
Variable manufacturing cost of goods sold :         Variable manufacturing cost             (Rs. 10 ´ 6,000 units) …………………..  60,000 
Manufacturing cost of production          @ Rs. 10 per unit  ……………………… Add: Opening stock                                (Rs. 10 ´ 1,000)………………………….. Less: Closing stock                                 (Rs. 10 ´ 2,000 units)……………………60,000 10,000 (20,000) 
Manufacturing cost of goods sold ………………………………………………………50,000
Gross contribution margin………………………………………………………………… Less:  Non-manufacturing variable cost:         Variable selling expenses                 (Rs. 2 ´ Sales units)…………………….. 1,00,000   10,000
Net contribution margin……………………………………………………………………. Less:  Fixed cost:         Manufacturing expenses ………………………………………………………………         Selling and administrative expenses…………………………………………………25,000 40,00090,000 65,000
Net profit before tax …………………………………………………………………………25,000
  1. Kathmandu Manufacturing Company provides you the following information:
  2. Selling price per unit    Rs. 42
  3. Direct material cost Rs. 8 per unit
  4. Direct labour cost Rs. 5 per unit
  5. Direct expenses Rs. 2 per unit
  6. Fixed factory overheads (Normal)…………………………………………………………………. Rs. 4,40,000
  7. Fixed office and selling overheads ……………………………………………………………….. Rs. 2,50,000
  8. Variable factory overheads …………………………………………………………….. Rs. 3 per unit
  9. Production     50,000 units
  10. Closing stock   8,000 units
  11. Opening stock 3,000 units
  12. Value of opening stock:
  13. Under variable costing ……………………………………………………………………………. Rs. 23 per unit
  14. Under absorption costing ……………………………………………………………………………. Rs. 30 per unit
  15. Under absorption of fixed factory overheads……………………………………………………….. Rs. 40,000

Required:

  • (a)                      Income statement under direct costing
  • (b)                      Income statement under full costing
  • (c)                       Reconciliation statement

Ans: (a) VC = Rs. 3,75,000 (b) AC = Rs. 4,18,000 (c) difference in stock valuation Rs. 43,000

Solution

Given:

            Sales = Opening stock + Production – Closing stock      = 3,000 + 50,000 – 8,000 = 45,000 units

            Total standard manufacturing fixed cost = Rs. 4,40,000

            Total manufacturing fixed cost = 4,40,000 – 40,000 = Rs. 4,00,000

(a)                                                        Income Statement Under Variable Costing

ParticularsRs.Rs.
Sales @ Rs. 42 each ´ 45,000 units ………………………………………………………….. 18,90,000
Variable manufacturing cost of goods sold         Direct material cost:                @ Rs. 8 each ´ 50,000 units ………………………         Direct labour cost                   @ Rs. 5 each ´ 50,000 units……………………….         Direct expenses:                    @ Rs. 2 each ´ 50,000 units……………………….         Variable factory overheads:     @ Rs. 3 each ´ 50,000……………………………..  4,00,000 2,50,000 1,00,000 1,50,000 
Variable manufacturing cost of production @ Rs. 18 each ………………………………… Add: Opening stock: @ Rs. 23 each ´ 3,000………………………………………………… Less: Closing stock: @ Rs. 18 each ´ 8,000…………………………………………………9,00,000 69,000 (1,44,000) 
Variable manufacturing cost of goods sold …………………………………………………… 8,25,000
Contribution margin ………………………………………………………………………………. Less: Fixed cost / Periodic cost:         Factory overheads …………………………………………………………………………           Office and selling overheads ……………………………………………………………..      4,40,000 2,50,00010,65,000     6,90,000
Net profit before tax …………………………………………………………………………….3,75,000

(b)                                                      Income Statement Under Absorption Costing

ParticularsRs.Rs.
Sales @ Rs. 42 each……………………………………………………………………………….. 18,90,000
Less: Manufacturing cost of goods sold :         Direct material cost:                      @ Rs. 8 ´ 50,000 units ………………………….         Direct labour cost:                        @ Rs. 5 ´ 50,000 units…………………………..         Direct expenses:                          @ Rs. 2 ´ 50,000 units ………………………….         Variable factory overheads:           @ Rs. 3 each ´ 50,000 units ……………………         Fixed factory overheads:               @ Rs. 8 each ´ 50,000 units ……………………  4,00,000 2,50,000 1,00,000 1,50,000 4,00,000 
Manufacturing cost of production           @ Rs. 26 each …………………………………… Add: Opening stock:                            @ Rs. 30 ´ 3,000…………………………………. Less: Closing stock:                            @ Rs. 26 ´ 8,000…………………………………. Add: Under absorption of manufacturing fixed cost ……………………………………………13,00,000 90,000 (2,08,000) 40,000 
Manufacturing cost of goods sold………………………………………………………………… 12,22,000
Gross profit margin ………………………………………………………………………………… Less: Non-manufacturing cost:         Fixed office and administrative overheads ……………………………………………….    2,50,0006,68,000   2,50,000
Net profit before tax ………………………………………………………………………………4,18,000

(c)                                                                     Reconciliation Statement

ParticularsRs.
        Net profit as per absorption costing……………………………………………………………………….. Less: Net profit as per variable costing ………………………………………………………………………….4,18,000 3,75,000
Difference in net profit ……………………………………………………………………………………………43,000
Difference in value of closing stock  = (2,08,000 – 1,44,000)………………………………………………… Less: Difference in value of opening stock (90,000 – 69,000)………………………………………………..64,000 21,000
Difference in stock valuation ……………………………………………………………………………………43,000
  1. The income statement of a small publication house selling 4,000 sets of book in the last year printed at a capacity output is as follows:
Sales revenue (4,000 sets of book @Rs. 250 per set) Less: Variable cost: Material cost Labour cost Manufacturing overheads Selling and distribution overheads10,00,000 200,000180,000200,00080,000
Contribution margin Less: Fixed manufacturing overheads Non-manufacturing overheads340,000200,00080,000
Net income60,000

         Small publication house has made projection of selling 4,300 sets of book for the current year. There is no beginning stock of book but expected ending stock of 200 sets of book for the current year. The unit cost and selling price will remain unchanged for the current year.

  • Required: Income statement under absorption costing.

Ans: Rs. 95,500

Solution

  • Income Statement under Absorption costing
ParticularsRs.Rs.
        Sales Revenue (4,300 × Rs. 250) ……………………………………………………… Less: Manufacturing cost of goods sold:         Materials (4,500 @ Rs. 50) ………………………………………………………………         Labour @ Rs. 45……………………………………………………………………………         Variable Manufacturing cost @ Rs. 50………………………………………………….         Fixed Manufacturing cost @ Rs. 50……………………………………………………..    225,000 202,500 225,000 225,00010,75,000
          Less: Closing stock (200 @ Rs. 195) …………………………………………………..877,500 39,000 
          Less: Over valuation of Fixed Mfg. Cost  (225,000 – 200,000)……………………..838,500 25,000  813,500
        Gross profit       …………………………………………………………………………… Less: Non-manufacturing overhead:         Variable selling and distribution overheads…………………………………………….         Fixed non-manufacturing overheads  …………………………………………………..    86,000 80,000261,500     166,000
        Net Income      ……………………………………………………………………………95,500
  1. The income statement of a company as on 31st Chaitra last year has been given as under:
Production units…………………………………………………………………………………………..1,200
Sales units…………………………………………………………………………………………………1,000
Sales revenue @ Rs.12…………………………………………………………………………………Rs.12,000
Less: Cost of goods sold:         Variable manufacturing costs @ Rs. 4…………………………………………………………         Fixed manufacturing overheads@ Rs. 2……………………………………………………….  Rs.4,800 2,400
        Cost of production @ Rs. 6………………………………………………………………………Rs.7,200
        Add: Beginning inventory (Rs.6 ´ 200 units)…………………………………………………..1,200
        Total cost of goods available for sale…………………………………………………………..Rs.8,400
        Less: Ending inventory (Rs. 6 ´ 400 units)…………………………………………………….Rs.2,400
        Cost of goods sold…………………………………………………………………………………6,000
        Gross profit before adjustment…………………………………………………………………..Rs.6,000
        Add: Over absorption of fixed manufacturing overhead …………………………………….Rs. 400
Gross profit after adjustmentRs.6,400
Less: Non-manufacturing costs:         Variable selling and administrative costs @ Re. 1……………………………………. 1,000         Fixed selling and administrative costs …………………………………………………. 1,000    2,000
Net profit ………………………………………………………………………………………………….Rs. 4,400

Required:

  • (a)                      Income statement under variable costing.
  • (b)                      Reconciliation statement to disclose the difference in net profit.

Ans: (a) Rs. 4,000 (b) Rs. 400

Solution

            Budgeted fixed manufacturing costs   = Fixed cost applied – Over absorption of fixed costs

                                                                 = Rs. 2400 – Rs. 400 = Rs. 2,000

(a)                                                        Income Statement Under Variable Costing

ParticularsRs.Rs.
Sales @ Rs. 12……………………………………………………………………………………. 12,000
Less: Variable manufacturing cost of goods sold         Variable mfg. overheads:        @ Rs. 4 each ´ 1,200……………………………….  4,800 
Variable manufacturing cost of production @ Rs. 4 each …………………………………. Add: Opening stock: @ Rs. 4 each ´ 200……………………………………………………. Less: Closing stock: @ Rs. 4 each ´ 400……………………………………………………..4,800 800 (1,600) 
Variable manufacturing cost of goods sold …………………………………………………… 4,000
        Gross contribution margin ………………………………………………………………… Less: Non-mfg. variable cost:         Selling and distribution overhead @ Rs. 1 ´ 1,000    1,0008,000   1,000
        Net contribution margin Less: Fixed cost / Periodic cost:………………………………………………………………..         Factory overheads …………………………………………………………………………           Office and selling overheads ……………………………………………………………..    2,000 1,0007,000     3,000
Net profit before tax …………………………………………………………………………….4,000

(b)                                                                     Reconciliation Statement

ParticularsRs.
Net income under absorption costing…………………………………………………………………………….. Net income under variable costing………………………………………………………………………………..4,400 4,000
Difference in net income…………………………………………………………………………………………….400
Ending inventory in units…………………………………………………………………………………………… Beginning inventory in units………………………………………………………………………………………..400 200
Difference in inventory (a)………………………………………………………………………………………….. Manufacturing fixed cost per unit (b)………………………………………………………………………………200 2
Difference in inventory value (a × b)…………………………………………………………………………..400
  1. A company has followed the full costing method in its pricing policy of the product. The income statement based of absorption costing is given below:
Sales in unit…………………………………………………………………………………………………….10,000
Sales revenue………………………………………………………………………………………………….Rs. 4,00,000
Less:  Cost of goods sold: 
        Beginning inventory @ Rs 25 ´ 2000 unit ………………………………………………………….50,000
        Direct material @ Rs 10 ´ 9,000 units ………………………………………………………………90,000
        Direct labour @ Rs. 10 ´ 9,000 units ……………………………………………………………….90,000
        Variable overhead @ Rs 2 ´ 9000 units ……………………………………………………………18,000
        Fixed overhead @ Rs. 3 ´ 9000 units ………………………………………………………………27,000
        Total cost of goods available for sales…………………………………………………………..2,75,000
        Less:  Ending inventory @ Rs. 25 ´ 1000 units …………………………………………………..25,000
        Cost of goods sold……………………………………………………………………………………2,50,000
        Gross margin before adjustment……………………………………………………………………..1,50,000
Less:   Fixed cost under absorbed………………………………………………………………………….3,000
        Gross margin after adjustment…………………………………………………………………….1,47,000
Less:   Other fixed cost……………………………………………………………………………………….47,000
        Net income before tax………………………………………………………………………………..1,00,000

Required:

  • (a)                      Conversion of conventional income statement into variable costing income statement
  • (b)                      Reconciliation statement
  • (c)                      Explain the reasons of difference in net profit, if any.

Ans: (a) Rs. 1,03,000 (b) Rs. (3,000)

solution

Given:

            Total fixed overhead       = Recorded under absorption costing + Fixed cost under absorbed

                                               = 27,000 + 3,000 = Rs. 30,000

(a)                                                        Income Statement Under Variable Costing

ParticularsRs.Rs.
Sales ………………………………………………………………………………………………. 4,00,000
Less: Variable manufacturing cost of goods sold         Direct material cost                 @ Rs. 10 ´ 9,000……………………………………         Direct labour cost                   @ Rs. 10 ´ 9,000……………………………………         Variable mfg. overheads:        @ Rs. 2 ´ 9,000……………………………………..  90,000 90,000 18,000 
Variable manufacturing cost of production @ Rs. 22 each ……………………………….. Add: Opening stock: @ Rs. 22 each ´ 2,000……………………………………………….. Less: Closing stock: @ Rs. 22 each ´ 1,00………………………………………………….1,98,000 44,000 (22,000) 
Variable manufacturing cost of goods sold ………………………………………………….. 2,20,000
        Net contribution margin ………………………………………………………………….. Less: Fixed cost / Periodic cost:         Factory overheads …………………………………………………………………………           Other fixed cost…………………………………………………………………………….    30,000 47,0001,80,000     77,000
Net profit before tax ……………………………………………………………………………1,03,000

(b)                                                                     Reconciliation Statement

ParticularsRs.
Net income under absorption costing……………………………………………………………………………. Net income under variable costing……………………………………………………………………………….1,00,000 1,.03,000
Difference in net income…………………………………………………………………………………………(3,000)
Ending inventory in units…………………………………………………………………………………………… Beginning inventory in units………………………………………………………………………………………..1,000 2,000
Difference in inventory (a)…………………………………………………………………………………………. Manufacturing fixed cost per unit (b)……………………………………………………………………………..(1,000) 3
Difference in inventory value (a × b)…………………………………………………………………………..(3,000)
  • The variable costing income statement of a Ltd. company is as follows:
ParticularsRs.
Sales revenue……………………………………………………………………………………………….8,40,000
Less:  Variable cost of sales: 
        Beginning inventory @ Rs. 18 ´ 3,000 units……………………………………………………..54,000
        Direct material cost @ Rs. 5 ´ 27,000 units……………………………………………………..1,35,000
        Direct labour cost @ Rs. 8 ´ 27,000 units………………………………………………………..2,16,000
        Variable manufacturing overhead @ Rs. 5 ´ 27,000 units…………………………………….1,35000
        Total cost of goods available ………………………………………………………………………5,40,000
Less:  Ending inventory @ Rs.18 ´ 2000 units…………………………………………………………36,000
        Total variable cost of sale ………………………………………………………………………….5,04,000
        Contribution margin ………………………………………………………………………………….3,36,000
Less: Fixed manufacturing overhead……………………………………………………………………1,00,000
        Net income before tax ………………………………………………………………………………2,36,000
  • Normal capacity 25,000 units and Sales 28,000 units
  • Required:
  • (a)                      Conversion of variable costing into absorption costing
  • (b)                      Reconciliation statement
  • (c)                      Explain briefly the over absorption of fixed manufacturing overhead cost

Ans: (a) Net profit after tax Rs. 2,32,000 (b) Difference in net profit = Rs. (4,000)

solution

Given:

            Total manufacturing fixed cost (TMFC) = Rs. 1,00,000

            Normal capacity (NC) = 25,000 units

            Manufacturing fixed cost per unit =  =  = Rs. 4

a.                                                       Income Statement Under Absorption Costing

ParticularsRs.Rs.
Sales @…………………………………………………………………………………………. 8,40,000
Manufacturing cost of goods sold :         Direct material cost                            @ Rs. 5 ´ 27,000 units ………………..         Direct labour cost                              @ Rs. 8 ´ 27,000 units…………………         Variable overheads                            @ Rs. 5 ´ 27,000 units ………………..         Fixed manufacturing costing                @ Rs. 4 ´ 27,000 units…………………  1,35,000 2,16,000 1,35,000 1,08,000 
Manufacturing cost of production                 @ Rs. 22…………………………………. Add: Opening stock                                   @ Rs. 22 ´ 3,000 units ……………….. Less: Closing stock                                   @ Rs. 22 ´ 2,000 units ……………….. Less: Over absorption of Mfg. fixed cost…………………………………………………..5,94,000 66,000 44,000 (8,000) 
Manufacturing cost of goods sold…………………………………………………………… 6,08,000
Net profit before tax………………………………………………………………………….2,32,000

b.                                                                      Reconciliation Statement

ParticularsRs.
Net income under absorption costing………………………………………………………………………….. Net income under variable costing……………………………………………………………………………..2,32,000 2,36,000
Difference in net income………………………………………………………………………………………….(4,000)
Ending inventory in units………………………………………………………………………………………… Beginning inventory in units……………………………………………………………………………………..2,000 3,000
Difference in inventory (a)……………………………………………………………………………………….. Manufacturing fixed cost per unit (b)……………………………………………………………………………(1,000) 4
Difference in net profit (a × b)…………………………………………………………………………………(4,000)
  • A manufacturing company reporting income under absorption costing system furnished you with the following data:
YearFirst yearSecond year
Opening stock…………………………………………………………………………….1,500 units1,000 units
Closing stock………………………………………………………………………………1,000 units2,000 units
  • Standard fixed manufacturing overhead rate is Rs. 45 per unit.
  • The company converted its income statement under absorption costing into variable costing technique and found difference in net income reporting as under. The first year showed an excess profit of Rs. 22,500 and a loss of Rs 45,000 in the second year.

Required:

  • Reconciliation statement under variable costing system explaining the reasons for difference in net income reporting

Solution

                                                       Reconciliation Statement under Variable Costing

ParticularsYear-1Year-2
Net profit as per variable costing………………………………………………….x + 22,500x – 45,000
Less:  Net profit as per absorption costing………………………………………x (Let)x (Let)
Difference in net profit……………………………………………………………22,500(45,000)
Opening stock in units………………………………………………………………1,5001,000
Less: Closing stock in units ……………………………………………………….1,0002,000
Changes in stock ……………………………………………………………………500(1,000)
(´)    Manufacturing fixed cost per unit ………………………………………….Rs. 45Rs. 45
Changes in stock valuation …………………………………………………….22,500(45,000)
  • The variable costing statement of a company showed Rs. 12,000 more profit than the absorption costing statement with the ending inventory of 2,000 units in the first year. The same costing system showed less profit of Rs. 6,000 with the ending balance of inventory of 3,000 units in the second year. The company used Rs. 10 as variable costs and Rs.6 as standard fixed costs for the both years.

Required:

  • Reconciliation statement to show the causes of differences in profit.

Ans: Rs. (12,000) and Rs. 6,000

Solution

                                                                         Reconciliation Statement

ParticularsYear 1Year 2
Net income under absorption costing……………………………………………………… Let Net income under variable costing……………………………………………………………..x x+12,000x x-6,000
Difference in net income……………………………………………………………………. Rs.(12,000)6,000
Ending inventory in units………………………………………………………………………… Beginning inventory in units……………………………………………………………………..2,000 4,0003,000 2,000
Difference in inventory (a)………………………………………………………………………. Manufacturing fixed cost per unit (b)……………………………………………………… Rs.(2,000) 61,000 6
Difference in inventory value (a × b)…………………………………………………… Rs.(12,000)6,000

Working notes:

i.          Difference in inventory =  =  = (2,000)

ii.         Beginning inventory in units          = Ending inventory in unit – Difference in unit of inventory

                                                            = 2,000 – (2,000) = 4,000 units

iii.         Ending inventory of 1st year will be beginning inventory of 2nd year automatically.

l

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