Part B - Exercise Lecture 6 Answers PDF

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Part B - Exercise Lecture 6 Answers...

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ELQ6: Simpson: Solution a) advantages of absorption  complying with GAAP requirements in showing the total cost of manufacturing product in one place  total production costs will be included in the selling price and hence will be recovered from customers advantages of variable (marginal) costing  measuring the contribution which helps in rationalising the decision making process in the short-term  helps the company to set a price that only covers variable costs and gain a price competitive advantage than those competitors who use absorption costing.  Avoiding recording under/over recovery of overheads. b) i) Q1

Q2

Q3

Q4

Sales

750000

700000

800000

800000

Op st +prod -cl st u/o rec Cost of sales Gross profit S+A o/h Net profit

0 525000 0 525000 0 525000 225000 100000 125000

0 595000 105000 490000 -10000 480000 220000 100000 120000

105000 490000 35000 560000 5000 565000 235000 100000 135000

35000 525000 0 560000 0 560000 240000 100000 140000

Total profit

520000

Abs costing

Q1

Q2

Q3

Q4

Sales

750000

700000

800000

800000

Op st +prod -cl st

0 450000 0 450000 75000 525000 225000 100000 125000

0 510000 90000 420000 75000 495000 205000 100000 105000

90000 420000 30000 480000 75000 555000 245000 100000 145000

30000 450000 0 480000 75000 555000 245000 100000 145000

Marginal costing

Prod o/h Cost of sales Gross profit S+A o/h Net profit Total profit

520000

ii) Comment  





In quarter 1, there is no inventory so both profits are equal In quarter 2, production > sales, so inventory increased and profit under absorption should be > profit under variable. Difference is equal to the fixed manufacturing cost in closing inventory (0.5 x 30,000 units = £15,000) In quarter 3, sales > production, so inventory decreased and profit under variable should be > profit under absorption. Difference is equal to the difference between fixed manufacturing costs in opening stock and fixed manufacturing costs in closing stock (0.5 x 30,000 – 0.5 x 10,000) In quarter 4, sales > production, so inventory decreased and profit under variable should be > profit under absorption. Difference is equal to the fixed manufacturing costs in opening stock (0.5 x 10,000)...