Illustration 1
MAXWEL Ltd. produces a single product Boost. The following figures relate to Boost for the period: 2017-
2018.
Pror
50%
100%
Activity Level
Sales and production (units)
400
800
8,00,000
16,00,000
Sales
Production costs:
Variable
3,20,000
1,60,000
6,40,000
1,60,000
- Fixed
Selling and distribution costs:
- Variable
1,60,000 3,20,000
Fixed
2,40,000 2,40,000
The normal level of activity for the year is 800 units. Fixed costs are incurred evenly throughout the year,
and actual fixed costs are the same as budgeted. There were no stocks of Boost at the beginning of
the year.
In the first quarter, 220 units were produced and 160 units were sold.
Required:
(a) What would be the fixed production costs absorbed by Boost if absorption costing is followed?
(b) What would be the under/over-recovery of overheads during the period?
(c) What would be the profit as per absorption costing?
(d) What would be the profit as per marginal costing?
Answers
Answer:
Terms in this set (13) costing system which treats all costs of production as product costs, regardless weather they are variable or fixed. The cost of a unit of product under absorption costing method consists of direct materials, direct labor and both variable and fixed overhead.
Remember the following under absorption costing: ... Fixed manufacturing overhead costs are applied to units PRODUCED and not just unit sold. Income statement shows Sales – Cost of Goods sold = Gross Margin (or Gross Profit) – Operating Expenses = Net Income and is based on the number of units SOLD.
Reporting profit with Marginal Costing
In a marginal cost system the opening and closing inventory is measured at its marginal cost. The cost per unit only includes the variable costs of production. Profit is measured by comparing revenue to the cost of goods sold in the period and then deducting other expenses.
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