Absorption costing | Variable costing | Reconciliation Statement | Problems and solutions
Arjun EP
Absorption Costing | External Costing | Traditional Costing
Absorption costing is a traditional costing system.
It is also called full absorption, conventional costing or traditional costing and external costing.
It includes variable cost and fixed cost manufacturing.
Absorption costing includes direct materials, direct labour, variable manufacturing cost and fixed manufacturing cost in product cost.
It includes administrative cost, selling and distribution cost in period cost.
But it does not include fixed manufacturing cost in period cost.
The main object of the business company is to earn more and more profit.
Success or failure of the company is depended on profit.
The income statement measures profit or loss of the company.
There are two types of methods to find out profit and loss from income statement.
Absorption costing and variable costing are two methods to prepare income statement.
Absorption costing is suitable for internal as well as external users but variable costing is suitable for internal users with management decision.
Direct materials, direct labour, variable manufacturing cost and fixed manufacturing cost = Production units × Cost per unit
Period cost under absorption costing = Administrative cost + Selling and distribution cost
Total variable, selling and distribution cost = Sales units × Cost per unit
Variable Costing | Internal Costing | Direct Costing
Variable costing is also known as internal costing, direct costing and marginal costing.
Variable cost helps to administrator to solve the problem about production planning.
Under this method, production cost is calculated on variable basis.
Variable costing includes direct materials, direct labour and variable manufacturing cost in product cost.
It includes fixed manufacturing cost, administrative, selling and distribution cost in period cost.
Direct materials, direct labour, variable manufacturing cost:
= Production units x Cost per unit
Period costing under variable costing = Fixed manufacturing cost + Administrative cost + S&D cost
Total variable, selling and distribution cost = Sales units × Cost per unit
Sold units = Opening stock + Production – Closing stock
Reconciliation of Difference in Net Cost
If there is no difference in the size of opening stock and closing stock, in such a condition net income of absorption costing and variance costing is same.
The difference between opening stock, closing stock and fixed manufacturing overhead are the main cause of difference in net income.
These differences can be solved by reconciliation.
Where:
|
Difference in stock units |
= Difference in income ÷ Fixed cost per unit |
|
According to variable costing, Opening stock in units |
= Closing stock in units − Difference in stock units |
|
According to absorption costing, Opening stock in units |
= Closing stock in units + Difference in stock units |
|
|
|
|
According to variable costing, Closing stock– Opening stock |
= Difference |
|
According to absorption costing, Opening stock – Closing stock |
= Difference |
Reconciliation Statement
|
Particulars |
Amount |
|
Net income as per variable costing |
xxxx |
|
Add: Closing stock (units @ FCPU) |
xxxx |
|
Less: Opening stock (units @ FCPU) |
(xxx) |
|
Net income as per absorption costing |
xxxx |
Or
Reconciliation Statement
|
Particulars |
Amount |
|
Net income as per absorption costing |
xxxx |
|
Add: Opening stock (units @ FCPU) |
xxxx |
|
Less: Closing stock (units @ FCPU) |
(xxx) |
|
Net income as per variable costing |
xxxx |
Or
Reconciliation Statement
|
Particulars |
Year 1 |
Year 2 |
|
Net income as per variable costing |
xxxx |
xxxx |
|
Net income as per absorption costing |
xxxx |
xxxx |
|
Different in income |
xxxx |
xxxx |
|
Opening stock in units |
xxxx |
xxxx |
|
Closing stock in units |
xxxx |
xxxx |
|
Different stock in units (A) |
xxxx |
xxxx |
|
Fixed cost per unit (B) |
x |
x |
|
Different in income (A x B) |
xxxx |
xxxx |
Keep in Mind (KIM)
|
FMC = fixed manufacturing cost per unit |
|
|
FCPU = fixed cost per unit |
= Fixed manufacturing cost ÷ Normal output |
|
SFOR = standard fixed overhead rate |
|
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Accounting Equation |
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Journal Entries in Nepali |
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Journal Entries |
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Journal Entry and Ledger |
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Ledger |
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Subsidiary Book |
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Cashbook |
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Trial Balance and Adjusted Trial Balance |
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Bank Reconciliation Statement (BRS) |
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Depreciation |
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Financial Accounting and Analysis (All videos) |
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Analysis of Financial Statement |
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######
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 3A
Nepal Beverages Limited produces mineral water. It sales its product in 10 liter’s pet jar.
The normal annual level of operations is 36,000 units. Data for the last financial years 2020 was as follows:
|
Production |
40,000 units |
|
Sales |
32,000 units |
|
Selling price per units |
$60 |
|
Costs per units: |
|
|
Direct materials |
$14 |
|
Direct labors |
$12 |
|
Variable manufacturing overheads |
$8 |
|
Fixed manufacturing overheads |
$2,16,000 (based on normal output) |
|
Administrative costs: |
|
|
Fixed |
$50,000 |
|
Variable |
5% of sales revenue |
|
Selling and distribution overhead: |
|
|
Fixed |
$30,000 |
|
Variable |
5% of selling price per unit |
There was no opening stock of finished goods and the work-in-progress.
You are required to: (i) Prepare an income statement based on direct costing for the year ended 2021
(ii) Prepare an income statement based on absorption costing for the year ended 2021
(iii) Reconciliation statement
[Answer: (i) $320,000 (ii) $368,000]
SOLUTION:
Given and working note:
|
Sold units |
= |
Opening stock + Production – Closing stock |
|
32,000 |
= |
Nil + 40,000 – Closing stock |
|
Closing stock |
= |
8,000 units |
|
Again, |
|
|
|
Fixed cost per unit [FCPU] |
= |
Factory overhead ÷ Normal output |
|
|
= |
$216,000 ÷ 36,000 units |
|
|
= |
$6 |
Income Statement under Variable Costing
For 40,000 cases
|
Particulars |
|
Amount |
||
|
Sales revenue |
[32,000 units @ $60] |
19,20,000 |
||
|
(A) |
19,20,000 |
|||
|
Variable cost: |
|
|
||
|
|
Direct materials |
[40,000 units @ $12] |
4,80,000 |
|
|
|
Direct labour |
[40,000 units @ $14] |
5,60,000 |
|
|
|
Variable manufacturing cost |
[40,000 units @ $8] |
3,20,000 |
|
|
|
Cost of production @ $34) |
13,60,000 |
||
|
Add: |
Beginning inventory |
[0 units @ $34] |
– |
|
|
Less: |
Ending inventory |
[8,000 units @ $34] |
2,72,000 |
|
|
|
COGS (B) |
10,88,000 |
||
|
|
Gross contribution (A – B) |
8,32,000 |
||
|
Less: |
Variable administrative cost |
[sales @5% = 19,20,000@5%] |
(96,000) |
|
|
Less: |
Variable S&D cost |
[40,000 x 60@5%] |
(1,20,000) |
|
|
|
Net contribution |
6,16,000 |
||
|
Less: |
Fixed manufacturing cost |
[given] |
216,000 |
|
|
|
Fixed administrative cost |
[given] |
50,000 |
|
|
|
Fixed S&D cost |
[given] |
30,000 |
(2,96,000) |
|
Net Income |
$3,20,000 |
|||
Income Statement under Absorption Costing
For 40,000 cases
|
Particulars |
|
Amount |
||
|
Sales revenue |
[32,000 units @ $60] |
19,20,000 |
||
|
(A) |
19,20,000 |
|||
|
Manufacturing cost: |
|
|
||
|
|
Direct materials |
[40,000 units @ $12] |
4,80,000 |
|
|
|
Direct labour |
[40,000 units @ $14] |
5,60,000 |
|
|
|
Variable production cost |
[40,000 units @ $8] |
3,20,000 |
|
|
|
Fixed manufacturing cost |
[40,000 units @ $6] |
2,40,000 |
|
|
|
Cost of production @ 40) |
16,00,000 |
||
|
Add: |
Beginning inventory |
[0 units @ $40] |
Nil |
|
|
Less: |
Ending inventory |
[8,000 units @ $40] |
3,20,000 |
|
|
|
COGS before adjustment |
12,80,000 |
||
|
Add: |
Under absorption |
|
– |
|
|
Less: |
Over absorption |
[$240,000 A.C. – $216,000 V.C.] |
24,000 |
|
|
|
COGS after adjustment (B) |
12,56,000 |
||
|
|
Gross profit (A–B) |
6,64,000 |
||
|
Less: |
Variable administrative cost |
|
96,000 |
|
|
|
Variable S&D cost |
|
120,000 |
|
|
Less: |
Fixed administrative cost |
|
50,000 |
|
|
|
Fixed S&D cost |
|
30,000 |
(2,96,000) |
|
Net Income |
$3,68,000 |
|||
Reconciliation Statement
|
Particulars |
Amount |
|
Net income as per variable cost |
320,000 |
|
Add: Closing stock (8,000 units @ $6) |
48,000 |
|
Less: Opening stock (0 units @ $6) |
Nil |
|
Net income as per absorption cost |
$368,000 |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 3B
ABC Manufacturing Company has following information related to a product:
|
Year |
Production |
Sales |
Sales price per unit |
|
2019 |
170,000 |
140,000 |
$25 |
|
2020 |
140,000 |
160,000 |
$25 |
Other information:
|
Normal production 150,000 units |
Variable cost per unit: |
Administrative and selling cost: |
|
Fixed production cost $750,000 |
Direct materials $5 |
Variable 5% of sales |
|
|
Direct labour $6 |
Fixed $325,000 |
|
|
Production cost $4 |
|
Required: (1) Income statement under variable costing for 2020 and 2021
(2) Income statement under absorption costing for 2020 and 2021;
(3) Reconciliation statement
[Answer: Variable costing 150,000 and 325,000;
Absorption costing 300,000 and 225,000]
SOLUTION:
Given and working note:
|
Sold units |
= |
Opening stock + Production – Closing stock |
|
140,000 |
= |
Nil + 170,000 – Closing stock |
|
Closing stock |
= |
30,000 |
Closing stock of last year becomes opening stock of current year
|
Sold units |
= |
Opening stock + Production – Closing stock |
|
140,000 |
= |
30,000 + 140,000 – Closing stock |
|
Closing stock |
= |
10,000 |
Fixed cost per unit [FCPU]
= Factory overhead old ÷ Normal output
= $750,000 ÷ 150,000 units
= $5
Income Statement under Variable Costing
170,000 and 140,000 units
|
Particulars |
Year 2020 |
Year 2021 |
||
|
Sales revenue |
[sold units @ $25] |
35,00,000 |
40,00,000 |
|
|
(A) |
35,00,000 |
40,00,000 |
||
|
Variable cost: |
|
– |
|
|
|
|
Direct materials |
[production @ $5] |
8,50,000 |
7,00,000 |
|
|
Direct labour |
[production @ $6] |
10,20,000 |
8,40,000 |
|
|
Variable production cost |
[production @ $4] |
6,80,000 |
5,60,000 |
|
|
Cost of production (amount ÷ units = $15) |
25,50,000 |
24,00,000 |
|
|
Add: |
Beginning inventory |
[units @ $15] |
– |
4,50,000 |
|
Less: |
Ending inventory |
[units @ $15] |
(450,000) |
(150,000) |
|
|
COGS (B) |
21,00,000 |
24,00,000 |
|
|
|
Gross contribution (A – B) |
14,00,000 |
16,00,000 |
|
|
Less: |
Variable selling and admt cost |
[sales@5%] |
(175,000) |
(200,000) |
|
|
Net contribution |
12,25,000 |
14,00,000 |
|
|
Less: |
Fixed production cost |
|
(750,000) |
(750,000) |
|
|
Fixed selling and admt cost |
|
(325,000) |
(325,000) |
|
Net Income |
$1,50,000 |
$3,25,000 |
||
Income Statement under Absorption Costing
170,000 and 140,000 units
|
Particulars |
Year 2020 |
Year 2021 |
||
|
Sales revenue |
[sold units @ $25] |
35,00,000 |
40,00,000 |
|
|
(A) |
35,00,000 |
40,00,000 |
||
|
Manufacturing cost: |
|
– |
|
|
|
|
Direct materials |
[production @ $5] |
8,50,000 |
7,00,000 |
|
|
Direct labour |
[production @ $6] |
10,20,000 |
8,40,000 |
|
|
Variable production cost |
[production @ $4] |
6,80,000 |
5,60,000 |
|
|
Fixed production cost |
[production @ $5] |
8,50,000 |
7,00,000 |
|
|
Cost of production (amount ÷ units = $20) |
34,00,000 |
28,00,000 |
|
|
Add: |
Beginning inventory |
[units @ $20] |
– |
6,00,000 |
|
Less: |
Ending inventory |
[units @ $20] |
(600,000) |
(200,000) |
|
|
COGS before adjustment |
28,00,000 |
32,00,000 |
|
|
Add: |
Under absorption |
[compare with variable costing] |
– |
50,000 |
|
Less: |
Over absorption |
[compare with variable costing] |
1,00,000 |
– |
|
|
COGS after adjustment (B) |
27,00,000 |
32,50,000 |
|
|
|
Gross profit (A–B) |
8,00,000 |
7,50,000 |
|
|
Less: |
Variable selling and admt cost |
[sales@5%] |
(175,000) |
(200,000) |
|
Less: |
Fixed selling and admt cost |
|
(325,000) |
(325,000) |
|
Net Income |
$3,00,000 |
$2,25,000 |
||
Reconciliation Statement
|
Particulars |
Year 2020 |
Year 2021 |
|||
|
Net income as per variable costing |
150,000 |
325,000 |
|||
|
Add: Closing stock |
30,000 |
10,000 |
@ $5 |
150,000 |
50,000 |
|
Less: Opening stock |
Nil |
30,000 |
@ $5 |
Nil |
(150,000) |
|
Net income as per absorption costing |
$300,000 |
$225,000 |
|||
Closing stock of year 1 becomes opening stock of year 2, here $30,000
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 3C
ABC Manufacturing Company has following information related to a product:
|
Year |
Production |
Sales |
Sales price per unit |
|
2019 |
6,000 |
4,000 |
$300 |
|
2020 |
4,000 |
5,000 |
$300 |
|
2021 |
5,000 |
6,000 |
$300 |
Other information:
|
Normal production 5,000 units |
Variable cost per unit: |
Administrative and selling cost: |
|
|
Fixed production cost $500,000 |
Direct materials |
$60 |
Variable 5% of sales |
|
|
Direct labour |
$30 |
Fixed $100,000 |
|
|
Variable production cost |
$10 |
|
|
|
Total |
$100 |
|
Required: (1) Income statement under variable costing for 2019, 2020 and 2021
(2) Income statement under absorption costing for 2019, 2020 and 2021
(3) Reconciliation statement
[Answer: Variable costing: 2019= $140,000; 2020 = $325,000; 2021 = $510,000;
Absorption costing: 2019 = $340,000; 2020 = $225,000; 2021 = $410,000]
SOLUTION:
Given and working note:
Year 2019
|
Sold units |
= |
Opening stock + Production – Closing stock |
|
4,000 |
= |
Nil + 6,000 – Closing stock |
|
Closing stock |
= |
2,000 |
Closing stock of last year becomes opening stock of current year
Year 2020
|
Sold units |
= |
Opening stock + Production – Closing stock |
|
5,000 |
= |
2,000 + 4000 – Closing stock |
|
Closing stock |
= |
1,000 |
Year 2021
|
Sold units |
= |
Opening stock + Production – Closing stock |
|
6,000 |
= |
1,000 + 5000 – Closing stock |
|
Closing stock |
= |
Nil |
Fixed cost per unit [FCPU]
= Factory overhead old ÷ Normal output
= $500,000 ÷ 50,000 units
= $100
Income Statement under Variable Costing
6,000; 4,000 and 5,000 units
|
Particulars |
Year 2019 |
Year 2020 |
Year 2021 |
||
|
Sales revenue |
[sold units @ $200] |
12,00,000 |
15,00,000 |
18,00,000 |
|
|
(A) |
12,00,000 |
15,00,000 |
18,00,000 |
||
|
Variable cost: |
|
|
|
|
|
|
|
Direct materials |
[production @ $60] |
3,60,000 |
2,40,000 |
3,00,000 |
|
|
Direct labour |
[production @ $30] |
1,80,000 |
1,20,000 |
1,50,000 |
|
|
Variable production cost |
[production @ $10] |
60,000 |
40,000 |
50,000 |
|
|
Cost of production ($ ÷ units = $100) |
$6,00,000 |
$4,00,000 |
$5,00,000 |
|
|
Add: |
Beginning inventory |
[units @ $100] |
– |
2,00,000 |
1,00,000 |
|
Less: |
Ending inventory |
[units @ $100] |
(200,000) |
(100,000) |
Nil |
|
|
COGS (B) |
4,00,000 |
500,000 |
6,00,000 |
|
|
|
Gross contribution (A – B) |
800,000 |
10,00,000 |
12,00,000 |
|
|
Less: |
Variable selling and admt cost |
[sales@5%] |
(60,000) |
(75,000) |
(90,000) |
|
|
Net contribution |
7,40,000 |
9,25,000 |
11,10,000 |
|
|
Less: |
Fixed production cost |
|
(500,000) |
(500,000) |
(5,00,000) |
|
|
Fixed selling and admt cost |
|
(100,000) |
(100,000) |
(100,000) |
|
Net Income |
1,40,000 |
3,25,000 |
5,10,000 |
||
Income Statement under Absorption Costing
6,000; 4,000 and 5,000 units
|
Particulars |
Year 2019 |
Year 2020 |
Year 2021 |
||
|
Sales revenue |
[sold units @ $25] |
12,00,000 |
15,00,000 |
18,00,000 |
|
|
(A) |
12,00,000 |
15,00,000 |
18,00,000 |
||
|
Manufacturing cost: |
|
|
|
|
|
|
|
Direct materials |
[production @ $60] |
3,60,000 |
2,40,000 |
3,00,000 |
|
|
Direct labour |
[production @ $30] |
1,80,000 |
1,20,000 |
1,50,000 |
|
|
Variable production cost |
[production @ $10] |
60,000 |
40,000 |
50,000 |
|
|
Fixed production cost |
[production @ $100] |
6,00,000 |
4,00,000 |
5,00,000 |
|
|
Cost of production (amount ÷ units = $200) |
12,00,000 |
8,00,000 |
10,00,000 |
|
|
Add: |
Beginning inventory |
[units @ $200] |
– |
4,00,000 |
2,00,000 |
|
Less: |
Ending inventory |
[units @ $200] |
(400,000) |
(200,000) |
– |
|
|
COGS before adjustment |
8,00,000 |
10,00,000 |
12,00,000 |
|
|
Add: |
Under absorption |
[compare with variable costing] |
|
1,00,000 |
|
|
Less: |
Over absorption |
[compare with variable costing] |
1,00,000 |
|
|
|
|
COGS after adjustment (B) |
7,00,000 |
11,00,000 |
12,00,000 |
|
|
|
Gross profit (A–B) |
5,00,000 |
4,00,000 |
6,00,000 |
|
|
Less: |
Variable admt and selling cost |
[sales@5%] |
(60,000) |
(75,000) |
(90,000) |
|
Less: |
Fixed admt and selling cost |
|
(100,000) |
(100,000) |
(100,000) |
|
Net Income |
3,40,000 |
2,25,000 |
4,10,000 |
||
Reconciliation Statement
|
Particulars |
Year 2019 |
Year 2020 |
Year 2021 |
||||
|
Net income as per variable costing |
1,40,000 |
3,25,000 |
5,10,000 |
||||
|
Add: Closing stock |
2,000 |
1,000 |
Nil |
@ $100 |
2,00,000 |
1,00,000 |
Nil |
|
Less: Opening stock |
Nil |
2,000 |
1,000 |
@ $100 |
Nil |
(200,000) |
(100,000) |
|
Net income as per absorption costing |
3,40,000 |
2,25,000 |
4,10,000 |
||||
Closing stock of year 1 becomes opening stock of year 2, here $2,000 and 1,000
WHEN QUESTION IS GIVEN IN VARIABLE OR ABSORPTION COSTING
Sometime variable costing or absorption costing is given in the question.
In such a condition, you can be asked to calculate:
When question is given in variable costing you are asked to calculate absorption costing and reconciliation statement.
When question is given in absorption costing you are asked to calculate variable costing and reconciliation statement.
The Relationships between Production, Sales and Profit
|
Conditions |
Result |
Reason |
|
Sales = Production |
Profit of variable costing = Profit of absorption costing |
No change in inventory |
|
Sales > Production |
Profit of variable costing > Profit of absorption costing |
Decrease in inventory |
|
Sales < Production |
Profit of variable costing < Profit of absorption costing |
Increase in inventory |
Or
|
Profit of variable costing = Profit of absorption costing |
No change in inventory |
No opening , no closing stock* |
|
Profit of variable costing > Profit of absorption costing |
Decrease in inventory |
Opening stock > Closing stock |
|
Profit of variable costing < Profit of absorption costing |
Increase in inventory |
Opening stock < Closing stock |
*Sometime opening stock and closing stock may be equal.
Keep in Mind (KIM)
|
If production = sales, net income will be same for variable costing and absorption costing. |
|
If there are not opening stock and closing stock, net income of variable costing = absorption costing. |
|
If sales > production, net income of variable costing will be more than absorption costing. |
|
If sales < production, net income of variable costing will be less than absorption costing. |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 3D [production = sales]
Rupandehi Biscuits (P) Ltd keeps its accounting under variable costing system. Following data is available on 31st December:
Income Statement under Variable Costing
For 10,000 units
|
Particulars |
Amount |
|||
|
Sales revenue |
[10,000 units @ $20] |
200,000 |
||
|
(A) |
200,000 |
|||
|
Variable cost: |
|
|
||
|
|
Direct materials |
[10,000 units @ $2] |
20,000 |
|
|
|
Direct labour |
[10,000 units @ $3] |
30,000 |
|
|
|
Variable manufacturing cost |
[10,000 units @ $1.5] |
15,000 |
|
|
|
Cost of production |
65,000 |
||
|
Add: |
Beginning inventory |
[0 units @ $6.5] |
Nil |
|
|
Less: |
Ending inventory |
[0 units @ $6.5] |
Nil |
|
|
|
COGS (B) |
65,000 |
||
|
|
Gross contribution (A – B) |
135,000 |
||
|
Less: |
Variable administrative cost |
[10,000 @ $1] |
(10,000) |
|
|
Less: |
Variable S&D cost |
[10,000 @ $0.50] |
(5,000) |
|
|
|
Net contribution |
120,000 |
||
|
Less: |
Fixed manufacturing cost |
|
20,000 |
|
|
|
Fixed administrative cost |
|
10,000 |
|
|
|
Fixed selling and distribution cost |
|
+20,000 |
(50,000) |
|
Net Income |
$70,000 |
|||
Additional information:
Normal output is 20,000 units.
Production is 10,000 units and sales are 10,000 units.
Required: (1) Absorption Costing; (1) Reconciliation Statement
[Answer: Absorption costing = $70,000]
SOLUTION:
Fixed cost per unit [FCPU]
= Factory overhead ÷ Normal output
= $20,000 ÷ 20,000 unit
= $1
Income Statement under Absorption Costing
For 10,000 units
|
Particulars |
Amount |
|||
|
Sales revenue |
[10,000 units @ $20] |
200,000 |
||
|
(A) |
200,000 |
|||
|
Manufacturing cost: |
|
|
||
|
|
Direct materials |
[10,000 units @ $2] |
20,000 |
|
|
|
Direct labour |
[10,000 units @ $3] |
30,000 |
|
|
|
Variable production cost |
[10,000 units @ $1.5] |
15,000 |
|
|
|
Fixed manufacturing cost |
[10,000 units @ $1] |
10,000 |
|
|
|
Cost of production @ $7.5) |
75,000 |
||
|
Add: |
Beginning inventory |
[0 units @ $7.5] |
Nil |
|
|
Less: |
Ending inventory |
[0 units @ $7.5] |
Nil |
|
|
|
COGS before adjustment |
75,000 |
||
|
Add: |
Under absorption |
[$20,000 in V.C. – $10,000 A.C.] |
10,000 |
|
|
Less: |
Over absorption |
|
– |
|
|
|
COGS after adjustment (B) |
85,000 |
||
|
|
Gross profit (A–B) |
115,000 |
||
|
Less: |
Variable administrative cost |
|
10,000 |
|
|
|
Variable S&D cost |
|
5,000 |
|
|
Less: |
Fixed administrative cost |
|
20,000 |
|
|
|
Fixed S&D cost |
|
10,000 |
(45,000) |
|
Net Income |
70,000 |
|||
Reconciliation Statement
|
Particulars |
Amount |
|
Net income as per variable cost |
70,000 |
|
Add: Closing stock (0 units @ $1) |
|
|
Less: Opening stock (0 units @ $1) |
|
|
Net income as per absorption cost |
70,000 |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 3E [production < sales]
Duggar Snacks (P) Ltd manufactures brand Kurmure in three sizes: big, medium and small. It keeps its accounting in variable costing. The following information is related to medium size on 31st December:
Income Statement under Variable Costing
For 45,000 units
|
Particulars |
Amount |
|||
|
Sales revenue |
[50,000 units @ $20] |
10,00,000 |
||
|
(A) |
10,00,000 |
|||
|
Variable cost: |
|
|
||
|
|
Direct materials |
[45,000 units @ $3] |
135,000 |
|
|
|
Direct labour |
[45,000 units @ $2] |
90,000 |
|
|
|
Variable manufacturing cost |
[45,000 units @ $1] |
45,000 |
|
|
|
Cost of production |
270,000 |
||
|
Add: |
Beginning inventory |
[15,000 units @ $6] |
90,000 |
|
|
Less: |
Ending inventory |
[10,000 units @ $6] |
(60,000) |
|
|
|
COGS (B) |
300,000 |
||
|
|
Gross contribution (A – B) |
700,000 |
||
|
Less: |
Variable administrative cost |
[45,000 @ $0] |
Nil |
|
|
Less: |
Variable S&D cost |
[50,000 @ $1] |
(50,000) |
|
|
|
Net contribution |
650,000 |
||
|
|
Fixed manufacturing cost |
|
150,000 |
|
|
|
Fixed administrative cost |
|
50,000 |
|
|
|
Fixed selling and distribution |
|
200,000 |
(400,000) |
|
Net Income |
250,000 |
|||
Additional information:
· Normal output is 50,000 units.
· Production is 45,000 units and sales are 50,000 units.
Required: (a) Absorption costing; (b) Reconciliation statement
[Answer: Absorption costing = $235,000]
SOLUTION:
Fixed cost per unit [FCPU]
= Fixed overhead ÷ Normal output
= $150,000 ÷ 50,000 units
= $3
Income Statement under Absorption Costing
For 45,000 units
|
Particulars |
Amount |
|||
|
Sales revenue |
[50,000 units @ $20] |
10,00,000 |
||
|
(A) |
10,00,000 |
|||
|
Manufacturing cost: |
|
– |
||
|
|
Direct materials |
[45,000 units @ $3] |
1,35,000 |
|
|
|
Direct labour |
[45,000 units @ $3] |
90,000 |
|
|
|
Variable production cost |
[45,000 units @ $1] |
45,000 |
|
|
|
Fixed manufacturing cost |
[45,000 units @ $3] |
1,35,000 |
|
|
|
Cost of production @ $9) |
4,05,000 |
||
|
Add: |
Beginning inventory |
[15,000 units @ $9] |
1,35,000 |
|
|
Less: |
Ending inventory |
[10,000 units @ $9] |
(90,000) |
|
|
|
COGS before adjustment |
4,50,000 |
||
|
Add: |
Under absorption |
[150,000 in VC – 135,000 AC] |
15,000 |
|
|
Less: |
Over absorption |
|
– |
|
|
|
COGS after adjustment (B) |
4,65,000 |
||
|
|
Gross profit (A–B) |
5,35,000 |
||
|
Less: |
Variable administrative cost |
|
Nil |
|
|
|
Variable S&D cost |
|
50,000 |
|
|
Less: |
Fixed administrative cost |
|
50,000 |
|
|
|
Fixed S&D cost |
|
200,000 |
(300,000) |
|
Net Income |
235,000 |
|||
Reconciliation Statement
|
Particulars |
Amount |
|
Net income as per Variable Cost |
250,000 |
|
Add: Closing stock (10,000 units @ $3) |
30,000 |
|
Less: Opening stock (15,000 units @ $3) |
(45,000) |
|
Net income as per Absorption Cost |
235,000 |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 3F [production > sales]
Cello Writing Instrument (P) Ltd manufactures different kinds of ball pens. The following information is obtained for particular ball pen on 31st December:
Income Statement under Absorption Costing
For 50,000 units
|
Particulars |
Amount |
|||
|
Sales revenue |
[45,000 units @ $20] |
900,000 |
||
|
(A) |
900,000 |
|||
|
Manufacturing cost: |
|
|
||
|
|
Direct materials |
[50,000 units @ $3] |
150,000 |
|
|
|
Direct labour |
[50,000 units @ $2] |
100,000 |
|
|
|
Variable production cost |
[50,000 units @ $1] |
50,000 |
|
|
|
|
|
|
|
|
|
Fixed manufacturing cost |
[50,000 units @ $3] |
150,000 |
|
|
|
Cost of production @ $9 |
450,000 |
||
|
Add: |
Beginning inventory |
[15,000 units @ $9] |
135,000 |
|
|
Less: |
Ending inventory |
[10,000 units @ $9] |
(90,000) |
|
|
|
COGS before adjustment |
495,000 |
||
|
Add: |
Under absorption |
|
15,000 |
|
|
|
COGS after adjustment (B) |
510,000 |
||
|
|
Gross profit (A–B) |
390,000 |
||
|
Less: |
Variable administrative cost |
|
30,000 |
|
|
|
Variable S & D cost |
[45,000 units @ $1] |
45,000 |
|
|
Less: |
Fixed administrative cost |
|
50,000 |
|
|
|
Fixed selling and distribution cost |
|
100,000 |
(225,000) |
|
Net Income |
$165,000 |
|||
Required: (1) Variable costing; (2) Reconciliation statement
[Answer: (1) $180,000; (2) $Different of stock value (45,000 – 30,000) = $15,000;
Hints: Fixed manufacturing cost = $165,000]
SOLUTION:
Income Statement under Variable Costing
For 50,000 units
|
Particulars |
Amount |
|||
|
Sales revenue |
[45,000 units @ $20] |
900,000 |
||
|
(A) |
900,000 |
|||
|
Variable cost: |
|
|
||
|
|
Direct materials |
[50,000 units @ $3] |
150,000 |
|
|
|
Direct labour |
[50,000 units @ $2] |
100,000 |
|
|
|
Variable manufacturing cost |
[50,000 units @ $1] |
50,000 |
|
|
|
Cost of production @ $6) |
300,000 |
||
|
Add: |
Beginning inventory |
[15,000 units @ $6] |
90,000 |
|
|
Less: |
Ending inventory |
[10,000 units @ $6] |
(60,000) |
|
|
|
COGS (B) |
330,000 |
||
|
|
Gross contribution (A – B) |
570,000 |
||
|
Less: |
Variable administrative cost |
[given] |
(30,000) |
|
|
Less: |
Variable S&D cost |
[45,000 @ $1] |
(45,000) |
|
|
|
Net contribution |
495,000 |
||
|
Less: |
Fixed manufacturing cost |
[$150,000 AC + $15,000 under absorbed] |
165,000 |
|
|
|
Fixed administrative cost |
[given] |
50,000 |
|
|
|
Fixed S&D cost |
[given] |
100,000 |
(315,000) |
|
Net Income |
180,000 |
|||
Reconciliation Statement
|
Particulars |
Amount |
|
Net income as per absorption costing |
165,000 |
|
Add: Opening stock (15,000 units @ $3) |
45,000 |
|
Less: Closing stock (10,000 units @ $3) |
(30,000) |
|
Net income as per variable costing |
180,000 |
Fixed manufacturing cost per unit given in the question $3
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#####
Problems and Answers of Absorption and Variable Costing |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 3A
Max Company uses direct costing for internal control purchase and absorption costing for external reporting purpose. The following differences are located while comparing the two statements.
|
Items |
Variable Costing |
Absorption Costing |
|
|
Variable manufacturing cost |
$60,000 |
$60,000 |
|
|
Fixed manufacturing cost 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 1,000 |
Sales units 5,000 |
|
Production units 6,000 |
Closing stock units 2,000 |
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
[Answers: Net profit = $30,000; $25,000]
*Over absorption $5,000]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 3B
XYZ Ltd uses direct costing for internal control purposes and absorption costing for external reporting purposes. The company uses the following unit costs for the one product it manufactures:
Projected cost per unit:
Direct materials $60
Direct labour $38
Variable manufacturing $12
Fixed manufacturing cost $10 (Based on 10,000 units per month)
Variable selling and administrative cost $8
Fixed selling and administrative cost $5.60 (Based on 10,000 units per month)
The projected selling price is $160 per unit.
The fixed costs remain fixed within the relevant range of 4,000 to 16,000 units of production.
Management has also projected the following data for the month:
Opening stock 2,000 units
Production 9,000 units
Sales 7,500 units
Required: projected income statement under direct costing and absorption costing.
[Answer: Variable costing: $1,59,000, Absorption costing: $1,74,000;
* Under absorption cost =100,000 – 90,000 = 10,000]
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