Question 4 (a)
Income statements under variable costing and absorption costing for two years
15 marks
- Time to write
- About 30 minutes
Question
Question 4 (a) · 15 marksPrepare the Income Statement under (i) Variable Costing and (ii) Absorption Costing, from the data below.
| Details | Year 2011-12 | Year 2012-13 |
|---|---|---|
| Opening Inventory | Nil | 10,000 |
| Production | 66,000 | 56,000 |
| Sales | 56,000 | 62,000 |
| End Inventory | 10,000 | 4,000 |
Direct Materials Rs. 320
Direct labour Rs. 380
Variable Manufacturing Overheads Rs. 50
Variable Cost of Production (standard) Rs. 750
Sales Commission @ 5% of Sales Value
Selling Price per unit Rs. 1300
The Annual Budget for Fixed Manufacturing Overheads is Rs. 72,00,000 for a budgeted production of 60,000 units. Fixed Selling and Administrative Overhead are budgeted at Rs. 30,00,000.
Reworded from the university paper: names and figures differ, the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- Prepare the Income StatementDraw the format first (heading, columns, dates), then fill in the figures from your working.
What the paper leaves open
The unit figures after the table are printed without a heading; they are read as the standard cost and selling price per unit.
Write it in this order
- Read the data; tick every adjustment as you plan it 2 min
- 1 Working: unit costs, overhead rate and under/over-absorption 3 marks 5 min
- 2 Variable costing income statement 5 marks 9 min
- 3 Absorption costing income statement 5 marks 9 min
- 4 Reconciliation 2 marks 3 min
- Check: every adjustment used, both sides agree, dates in 2 min
Try it first. About 30 minutes for 15 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
- Variable cost of production per unit = ₹320 + ₹380 + ₹50 = ₹750.
- Sales commission = 5% of ₹1,300 = ₹65 per unit sold (variable selling cost).
- Fixed manufacturing overhead rate = ₹72,00,000 ÷ 60,000 units = ₹120 per unit.
- Absorption (full) cost of production per unit = ₹750 + ₹120 = ₹870.
- Fixed overhead absorbed: 2011-12: 66,000 × ₹120 = ₹79,20,000, over-absorbed by ₹7,20,000; 2012-13: 56,000 × ₹120 = ₹67,20,000, under-absorbed by ₹4,80,000 (against ₹72,00,000 each year).
(i) Income statement under variable costing
| Particulars | 2011-12 (₹) | 2012-13 (₹) |
|---|---|---|
| Sales (56,000 and 62,000 units × ₹1,300) | 7,28,00,000 | 8,06,00,000 |
| Less: Variable cost of goods sold @ ₹750 | 4,20,00,000 | 4,65,00,000 |
| Less: Sales commission @ 5% | 36,40,000 | 40,30,000 |
| Contribution | 2,71,60,000 | 3,00,70,000 |
| Less: Fixed manufacturing overheads | 72,00,000 | 72,00,000 |
| Less: Fixed selling and administrative overheads | 30,00,000 | 30,00,000 |
| Profit | 1,69,60,000 | 1,98,70,000 |
(Opening and closing stocks are valued at the variable cost of ₹750 per unit, so only the cost of the units sold appears.)
(ii) Income statement under absorption costing
| Particulars | 2011-12 (₹) | 2012-13 (₹) |
|---|---|---|
| Opening inventory @ ₹870 | Nil | 87,00,000 |
| Add: Cost of production @ ₹870 (66,000 and 56,000 units) | 5,74,20,000 | 4,87,20,000 |
| Less: Closing inventory @ ₹870 (10,000 and 4,000 units) | 87,00,000 | 34,80,000 |
| Cost of goods sold at standard | 4,87,20,000 | 5,39,40,000 |
| Less: Over-absorbed / Add: Under-absorbed fixed overhead | (7,20,000) | 4,80,000 |
| Adjusted cost of goods sold | 4,80,00,000 | 5,44,20,000 |
| Sales | 7,28,00,000 | 8,06,00,000 |
| Gross profit | 2,48,00,000 | 2,61,80,000 |
| Less: Sales commission @ 5% | 36,40,000 | 40,30,000 |
| Less: Fixed selling and administrative overheads | 30,00,000 | 30,00,000 |
| Profit | 1,81,60,000 | 1,91,50,000 |
Reconciliation of the two profits
| Particulars | 2011-12 (₹) | 2012-13 (₹) |
|---|---|---|
| Profit under variable costing | 1,69,60,000 | 1,98,70,000 |
| Fixed overhead in closing stock (10,000 and 4,000 units × ₹120) | 12,00,000 | 4,80,000 |
| Less: Fixed overhead in opening stock (nil and 10,000 units × ₹120) | Nil | 12,00,000 |
| Profit under absorption costing | 1,81,60,000 | 1,91,50,000 |
In 2011-12 stock rose by 10,000 units, so absorption costing shows ₹12,00,000 more profit (fixed overhead carried forward in stock). In 2012-13 stock fell by 6,000 units, so absorption costing shows ₹7,20,000 less profit.
Where the 15 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Working: unit costs, overhead rate and under/over-absorption | 3 |
| 2 | Variable costing income statement | 5 |
| 3 | Absorption costing income statement | 5 |
| 4 | Reconciliation | 2 |
| Total | 15 |
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