- 20 Marks
Question
LADUGBO Limited, a company which manufactures and sells a single product named BETA, has the following data relating to the year 2015:
| Particulars | N |
|---|---|
| Selling Price | 45.00 |
| Direct Material Cost | 10.00 |
| Direct Wages Cost | 4.00 |
| Variable Overhead Cost | 2.50 |
The following forecasts of sales and production are expected during the first six months of 2015:
| Particulars | January-March | April-June |
|---|---|---|
| Sales (units) | 60,000 | 90,000 |
| Production (units) | 70,000 | 100,000 |
- Fixed production overhead costs are budgeted at N400,000 per annum. Normal production level is 320,000 units per annum.
- Variable selling and distribution cost is N1.50 per unit sold, while fixed administration cost is N240,000 per annum.
You are required to:
Prepare profit statements for each of the two quarters, in a columnar format, using the absorption costing approach. (20 Marks)
Answer
| Particulars | January-March | April-June |
|---|---|---|
| Sales (N) | 2,700,000 | 4,050,000 |
| Less: Production Costs: | ||
| – Direct Material (N) | 700,000 | 1,000,000 |
| – Direct Wages (N) | 280,000 | 400,000 |
| – Variable Overhead (N) | 175,000 | 250,000 |
| – Fixed Production Overhead (N) | 87,500 | 125,000 |
| Less: Closing Inventory (N) | 177,500 | 355,000 |
| Total Production Costs (N) | 1,065,000 | 1,597,500 |
| Gross Profit (N) | 1,635,000 | 2,452,500 |
| (Under)/Over-Absorbed Overhead | (12,500) | 25,000 |
| Net Production Costs (N) | 1,622,500 | 2,477,500 |
| Less: Selling Costs | ||
| – Variable Selling Costs (N) | (90,000) | (135,000) |
| – Fixed Administration (N) | (60,000) | (60,000) |
| Net Profit (N) | 1,472,500 | 2,282,500 |
Working:
- Valuation of Closing Inventory:
- Direct Material: N10.00
- Direct Wages: N4.00
- Variable Overhead: N2.50
- Fixed Overhead: N1.25
- Total cost per unit: N17.75
- Closing Inventory:
January-March: 10,000 units x N17.75 = N177,500
April-June: 20,000 units x N17.75 = N355,000 - Fixed Overhead Rate:
N400,000 ÷ 320,000 units = N1.25 per unit - Over/(Under)-Absorbed Overhead:
January-March: (70,000 – 80,000) x N1.25 = (N12,500)
April-June: (100,000 – 80,000) x N1.25 = N25,000
- Tags: Absorption Costing, Fixed Overhead, Profit Statement, Variable Overhead
- Level: Level 1
- Topic: Costing Methods
- Series: NOV 2014
- Uploader: Dotse