Absorption and Variable Cost

March 19, 2022March 20, 2022 Study Notes NepalPosted in Uncategorized

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

Particulars	Rs.	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 …………………………………………………………………………..	0	1,60,000
Gross contribution margin……………………………………………………………..		2,40,000
Less: Non-manufacturing cost: Variable administrative overhead………………………………………………………..	10,000	10,000
Net contribution margin		2,30,000
Less: Fixed cost: Fixed manufacturing overhead ………………………………………………………….	50,000
Fixed administrative overhead……………………………………………………………	20,000	70,000
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

Particulars	Rs.	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 40,000	260,000 190,000
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

Particulars	Rs.	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 9,000	60,000 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 10,000	30,000 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

Particulars	Rs.	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 …………………………………………………………………………..	0	2,20,000
Gross margin………………………………………………………………………………		80,000
Less: Non-manufacturing cost: Variable administrative overhead ……………………………………………………….	10,000
Fixed administrative overhead ………………………………………………………….	20,000	30,000
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

Particulars	Rs.
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

Particulars	Rs.
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

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

Particulars		Rs.
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

Particulars	Rs.	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

Particulars	Rs.	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…………………………….	15,000	65,000 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

Particulars	Rs.	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	25,000	40,000 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:

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

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

Solution

(a) Income Statement Under Variable Costing

Particulars	Rs.	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)………………………….	3,00,000	7,50,000 3,00,000
Net contribution margin……………………………………………………………………….. Less: Fixed cost: Manufacturing expenses ……………………………………………………….. 3,00,000 Selling expenses…………………………………………………………………. 1,00,000	4,00,000	4,50,000 4,00,000
Net profit before tax …………………………………………………………………………….	50,000	50,000

b. Calculation of Reconciled Profit under Absorption Costing

Particulars	Rs.
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

Required:
(a) Income statement under internal reporting system
(b) Reconciliation statement showing the profit of external reporting system
(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

Particulars	Rs.	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)……………..	1,20,000	5,40,000 1,20,000
Net contribution margin……………………………………………………………………. Less: Fixed cost: Manufacturing overhead ……………………………………………………………… Selling and distribution expenses……………………………………………………..	1,50,000* 90,000	4,20,000 2,40,000
Net profit before tax …………………………………………………………………………		1,80,000

b. Reconciliation statement showing the profit of External Reporting System

Particulars	Rs.
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

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

Particulars	Rs.	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 …….	30,000	1,80,000 30,000
Net contribution margin …………………………………………………………………………. Less: Fixed cost: Manufacturing overheads………………………………………………………………… Office overheads ………………………………………………………………………….. Marketing expenses ……………………………………………………………………….	30,000 20,000 10,000	1,50,000 60,000
Net profit ………………………………………………………………………………………….		90,000

b. Calculation of Reconciled Profit as per Absorption Costing

Particulars	Rs.
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:

(a) Income statement under absorption costing
(b) Profit under variable costing

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

Solution

(a) Income Statement under Absorption Costing

Particulars	Rs.	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

Particulars	Rs.
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:

Particulars	Cost 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

Particulars	Rs.	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

Particulars	Rs.
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

Particulars	Rs.	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 50,000	2,32,000 1,34,000
Net profit…………………………………………………………………………………………..		98,000

b. Calculation of Reconciled Profit as per Variable Costing

Particulars	Rs.
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 Sales	20,000 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 unit	Rs. 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

Particulars	Amount (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	400,000240,000240,00080,000	15,00,000
Total manufacturing cost @ Rs. 24Add: Beginning inventory 20,000@ Rs. 24Less: Ending inventory 10,000 @ Rs. 24	960,000480,000(240,000)
Cost of goods sold unadjusted Less: Over absorption of fixed cost	12,00,00020,000
Cost of goods sold adjusted		(11,80,000)
Gross profit Less: Non-manufacturing cost: Fixed selling cost Variable selling expenses 50,000@ Rs. 2	40,000100,000	320,000 (140,000))
Net income		180,000

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 1	Year 2
Production units…………………………………………………………………………….. Sales units……………………………………………………………………………………	30,000 26,000	28,000 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

Particulars	Rs.	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. 19	532,000 76,000
Less: Closing stock @ Rs. 19	608,000 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

Particulars	Rs.
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:

Particulars	Year 1	Year 2
Opening stock in units …………………………………………………………………………. Add: Production units …………………………………………………………………………..	– 30,000	4,000 28,000
Available units …………………………………………………………………………………… Less: Sales units ………………………………………………………………………………..	30,000 26,000	32,000 30,000
Closing stock in units ………………………………………………………………………..	4,000	2,000

A manufacturing company had the following relevant information:
………………………………………………………………………….. Direct material …….. Rs. 6
…………………………………………………………………………….. Direct labour……… Rs. 6
………………………………………….. Variable manufacturing cost per unit……… Rs. 5
………………………………………………………………….. Selling price per unit …… Rs. 30
………………………………………. Fixed manufacturing overhead per unit……… Rs. 5
………………………………………………………………… Fixed selling expenses Rs 72,000
……………………………………………………………. Variable selling expenses 6% of sales
………………………………………………………………………… Normal capacity 30,000 units

	Year 1	Year 2
Production units …………………………………………………………….. Sales units ……………………………………………………………………	25,000 23,000	25,000 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 1	Year 2
Opening stock ……………………………………………………………………………………. Add: Production …………………………………………………………………………………..	– 25,000	2,000 25,000
Available units…………………………………………………………………………………….. Less: Sales ………………………………………………………………………………………..	25,000 23,000	27,000 26,000
Closing stock ……………………………………………………………………………………	2,000	1,000

a. Income Statement Under Absorption Costing

Particulars	Rs.	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

Particulars	Rs.
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

A company provides you the following information relating to two months:

	Baishak	Jestha
Sales (units)………………………………………………………………………. Production (units) ………………………………………………………………..	4,000 8,000	6,000 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

Particulars	Baishakh (Rs.)	Jestha (Rs.)
Sales revenue @ Rs. 20	80,000	120,000
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 …………………………………………….	40,000	60,000
Net contribution margin ………………………………………………………………………….	40,000	60,000
Less: Fixed cost: Factory overhead …………………………………………………………………………. Selling and administrative expenses ……………………………………………………	24,000 8,000	24,000 8,000
Total fixed cost …………………………………………………………………………….	32,000	32,000
Net profit ………………………………………………………………………………………….	8,000	28,000

Income Statement under Absorption Costing

Particulars	Baishakh (Rs.)	Jestha (Rs.)
Sales revenue @ Rs. 20	80,000	120,000
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 sold	52,000	78,000
Gross profit before adjustment ………………………………………………………………… Less: Under absorption of fixed factory overhead …………………………………………..	28,000 –	42,000 18,000
Gross profit after adjustment ……………………………………………………………………	28,000	24,000
Less: Non-manufacturing cost: Selling and administrative expenses	8,000	8,000
Net income ……………………………………………………………………………………….	20,000	16,000

Rara Manufacturing Company furnishes the following information:

Particulars	Baishakh	Jestha
Sales (units)………………………………………………………………………..	20,000	20,000
Production (units)…………………………………………………………………	23,000	27,000
Normal capacity (unit)…………………………………………………………….	25,000	25,000
Variable overheads per unit ……………………………………………………..	Rs.12	Rs.15
Fixed selling overheads ………………………………………………………….	Rs.1,00,000	Rs.1,20,000
Fixed overheads …………………………………………………………………. )	Rs.1,00,000	Rs.1,25,000
Selling price per unit …………………………………………………………….. )	Rs.25	Rs.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

Particulars	Baishakh	Jestha
@	Rs.	@	Rs.
Sales revenue …………………………………………………………………..	25	5,00,000	30	6,00,000
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…………………………………………..	16	3,68,000 Nil (48,000) 8,000 –	20	5,40,000 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 1,00,000	2,22,000 1,20,000
Net profit before tax………………………………………………………………….	72,000	1,02,000

Income Statement under Variable Costing

Particulars	Baishakh	Jestha
@	Rs.	@	Rs.
Sales revenue ……………………………………………………………….	25	5,00,000	30	6,00,000
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…………………………………………………………………	12	2,76,000 Nil (36,000)	15	4,05,000 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 1,00,000	3,09,000 1,25,000 1,20,000
Net profit before tax……………………………………………………………..	60,000	64,000

(b) Reconciliation Statement

Particulars	Baishakh (Rs.)	Jestha (Rs.)
Net income under absorption costing…………………………………………………………. Net income under variable costing……………………………………………………………..	72,000 60,000	1,02,000 64,000
Difference in net income……………………………………………………………………….. .	12,000	38,000
Difference in value of closing stock …………………………………………………………… Less: Difference in value of opening stock …………………………………………………..	12,000 –	50,000 12,000
Difference in inventory value ………………………………………………………………..	12,000	38,000

Working notes:
1. Changes in inventory:

Particulars	Baishakh (Rs.)	Jestha (Rs.)
Opening stock ……………………………………………………………………………… Add: Production…………………………………………………………………………………..	Nil 23,000	3,000 27,000
Goods available …………………………………………………………………………… Less: Sales………………………………………………………………………………………..	23,000 20,000	30,000 20,000
Closing stock ……………………………………………………………………………..	3,000	10,000

Particulars	Baishakh	Jestha
Total manufacturing fixed cost ………………………………………………………………….	1,00,000	1,25,000
Manufacturing fixed cost per unit ………………………………………………………………	4	5

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 costs	Variable costs
Direct material…………………………………………………………………………….. Direct labour………………………………………………………………………………. Manufacturing overheads……………………………………………………………….. Selling and administrative expenses…………………………………………………..	— — 2,70,000 1,80,000	4,80,000 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

Particulars	Rs.	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 cost	12,80,000 – (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	3,00,000	5,10,000 3,00,000
Net profit before tax ………………………………………………………………………….		2,10,000

Alpha Manufacturing Company

Income Statement under Variable Costing for the year ending 2064

Particulars	Rs.	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…………………	1,20,000	7,20,000 1,20,000
Net contribution margin …………………………………………………………………. Less: Fixed cost………………………………………………………………………………… Mfg. overheads ………………………………………………………………………….. Selling and administrative overheads …………………………………………………	2,70,000 1,80,000	6,00,000 4,50,000
Net profit before tax …………………………………………………………………………..	1,50,000	1,50,000

(b) Reconciliation Statement

Particulars	Rs.
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

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:

Items	Variable Costing	Absorption Costing
Variable manufacturing cost for 6000 units ………………………………..	Rs. 60,000	Rs. 60,000
Fixed manufacturing overhead charged …………………………………….	25,000	30,000
Fixed selling and administrative cost ………………………………………..	40,000	40,000
Variable selling cost per unit ………………………………………………….	2	2
Selling price per unit ……………………………………………………………	30	30

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

Particulars	Rs.	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 ……………………………………………………………………..	30,000	30,000

Income Statement Under Variable Costing

Particulars	Rs.	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 40,000	90,000 65,000
Net profit before tax …………………………………………………………………………		25,000

Kathmandu Manufacturing Company provides you the following information:
Selling price per unit Rs. 42
Direct material cost Rs. 8 per unit
Direct labour cost Rs. 5 per unit
Direct expenses Rs. 2 per unit
Fixed factory overheads (Normal)…………………………………………………………………. Rs. 4,40,000
Fixed office and selling overheads ……………………………………………………………….. Rs. 2,50,000
Variable factory overheads …………………………………………………………….. Rs. 3 per unit
Production 50,000 units
Closing stock 8,000 units
Opening stock 3,000 units
Value of opening stock:
Under variable costing ……………………………………………………………………………. Rs. 23 per unit
Under absorption costing ……………………………………………………………………………. Rs. 30 per unit
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

Particulars	Rs.	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 2,50,000	10,65,000 6,90,000
Net profit before tax …………………………………………………………………………….		3,75,000

(b) Income Statement Under Absorption Costing

Particulars	Rs.	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 ……………………………………………….	2,50,000	6,68,000 2,50,000
Net profit before tax ………………………………………………………………………………		4,18,000

Particulars	Rs.
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

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 overheads	10,00,000 200,000180,000200,00080,000
Contribution margin Less: Fixed manufacturing overheads Non-manufacturing overheads	340,000200,00080,000
Net income	60,000

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

Particulars	Rs.	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……………………………………………………..	225,000 202,500 225,000 225,000	10,75,000
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 80,000	261,500 166,000
Net Income ……………………………………………………………………………		95,500

The income statement of a company as on 31^st 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 adjustment	Rs.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

Particulars	Rs.	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	1,000	8,000 1,000
Net contribution margin Less: Fixed cost / Periodic cost:……………………………………………………………….. Factory overheads ………………………………………………………………………… Office and selling overheads ……………………………………………………………..	2,000 1,000	7,000 3,000
Net profit before tax …………………………………………………………………………….		4,000

(b) Reconciliation Statement

Particulars	Rs.
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

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

Particulars	Rs.	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 47,000	1,80,000 77,000
Net profit before tax ……………………………………………………………………………		1,03,000

(b) Reconciliation Statement

Particulars	Rs.
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:

Particulars	Rs.
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

Particulars	Rs.	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

Particulars	Rs.
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:

Year	First year	Second year
Opening stock…………………………………………………………………………….	1,500 units	1,000 units
Closing stock………………………………………………………………………………	1,000 units	2,000 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

Particulars	Year-1	Year-2
Net profit as per variable costing………………………………………………….	x + 22,500	x – 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………………………………………………………………	1,500	1,000
Less: Closing stock in units ……………………………………………………….	1,000	2,000
Changes in stock ……………………………………………………………………	500	(1,000)
(´) Manufacturing fixed cost per unit ………………………………………….	Rs. 45	Rs. 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

Particulars	Year 1	Year 2
Net income under absorption costing……………………………………………………… Let Net income under variable costing……………………………………………………………..	x x+12,000	x x-6,000
Difference in net income……………………………………………………………………. Rs.	(12,000)	6,000
Ending inventory in units………………………………………………………………………… Beginning inventory in units……………………………………………………………………..	2,000 4,000	3,000 2,000
Difference in inventory (a)………………………………………………………………………. Manufacturing fixed cost per unit (b)……………………………………………………… Rs.	(2,000) 6	1,000 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 1^st year will be beginning inventory of 2^nd year automatically.

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