Notes:
The traditional techniques of profit reporting are marginal costing and absorption cost. These two techniques have different impacts on profit (and stock) because of the way they treat fixed costs.
In marginal costing:
- Fixed costs are treated as period cost and is written off to the Income Statement in the period incurred.
- Marginal costing involves ascertaining marginal cost and then contribution can be computed
- Fixed costs are treated as product costs.
- It involves ascertaining total costs which enables profit to be calculated.
Solution:
Company X
(a) Marginal Income Statement For the Year Ended 31/12/2006
Sales(10,000 x$20) | 200,000 | |
Less: | ||
Variable Cost of Goods Sold | ||
Production cost (11,000 x $12) | 132,000 | |
Closing Stock(1,000 x 12) | (12,000) | (120,000) |
| GROSS MARGIN | 80,000 | |
Less: | ||
Variable non-production overheads | ||
Variable selling and distribution expenses (10,000 x $1.50) | (15,000) | |
| CONTRIBUTION MARGIN | 65,000 | |
Less: | ||
Fixed Costs | ||
Fixed production overhead | 22,000 | |
Fixed selling and distribution expense | 20,000 | |
Fixed general expenses | 15,000 | (57,000) |
| NET INCOME | 8,000 |
(b) Income Statement For the Year Ended 31/12/2006 Under Absorption Costing Approach
Sales(10,000 x$20) | 200,000 | |
Less: | ||
Cost of Goods Sold | ||
Production cost (11,000 x $14) | 154,000 | |
Closing Stock(1,000 x 14) | (14,000) | (140,000) |
| GROSS PROFIT | 60,000 | |
Less: | ||
Operating expenses | ||
Selling and distribution expenses (10,000 x $1.50) | (15,000) | |
| CONTRIBUTION MARGIN | 65,000 | |
Less: | ||
Fixed Costs | ||
Fixed production overhead | 22,000 | |
Fixed selling and distribution expense | 20,000 | |
Fixed general expenses | 15,000 | (50,000) |
| NET INCOME | 10,000 |
- Management Accounting Question No TCA1-Comparing Absorption Cost And Marginal Costing
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- Answer To Accounting Test Question No. 1 On Activity Based Costing
- Answer To Management Accounting Question No:ABC2 on Activity Based Costing
- Activity Based Costing Question No.5 (with answer)
- Management Accounting Question ABC No2 On Activity Based Costing
- Activity Based Costing As a One Step Attribution System Compared To Other Traditional Systems
FCCA,CA(MIA)with more than 26 years of post-qualifying working experiences. Previous working stints with one of the big accounting four,Regional GFC & Group Treasurer in a group of Malaysian and Group CFO in Singapore public listed concern.Also author to another very popular free educational accounting cum finance blog:http://basiccollegeaccounting.com under the branding of College Accounting Coach.
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