Question 4 (a)
Income statements for two years under absorption costing and marginal costing
12 marks
- Time to write
- About 24 minutes
Question
Question 4 (a) · 12 marksPQR Ltd. has given its figures for 2022 and 2023: (12)
| Particulars | 2022 | 2023 |
|---|---|---|
| Sales (in units) | 2,40,000 | 2,40,000 |
| Production (in units) | 2,40,000 | 4,80,000 |
| Selling Price (per unit, Rs.) | 22 | 22 |
| Variable Manufacturing Cost (per unit, Rs.) | 12 | 12 |
| Fixed Manufacturing Cost, annual (Rs.) | 14,40,000 | 14,40,000 |
| Variable Marketing and Administrative cost (per unit, Rs.) | 1.50 | 1.50 |
| Fixed Marketing and Administrative costs (Rs.) | 6,00,000 | 6,00,000 |
Using Absorption Costing, prepare the income statement for both years.
Using Marginal Costing, prepare the income statement for both years.
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
No normal capacity is given; fixed manufacturing overhead is absorbed on each year's actual production.
Write it in this order
- Read the data; tick every adjustment as you plan it 2 min
- 1 Workings absorption rates, closing stock 2 marks 3 min
- 2 Absorption costing statements 5 marks 8 min
- 3 Marginal costing statements 4 marks 7 min
- 4 Reconciliation 1 mark 2 min
- Check: every adjustment used, both sides agree, dates in 2 min
Try it first. About 24 minutes for 12 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.
- There is no opening stock in 2022, and production equals sales, so there is no closing stock at the end of 2022.
- In 2023, closing stock = 4,80,000 − 2,40,000 = 2,40,000 units.
- Absorption costing: fixed manufacturing cost is absorbed on each year's actual production, as no normal capacity is given (paper note). 2022: ₹14,40,000 ÷ 2,40,000 = ₹6 a unit, so full manufacturing cost is ₹12 + ₹6 = ₹18 a unit. 2023: ₹14,40,000 ÷ 4,80,000 = ₹3 a unit, so full manufacturing cost is ₹12 + ₹3 = ₹15 a unit.
- Marginal costing: stock is valued at variable manufacturing cost of ₹12 a unit.
(i) Income statements under absorption costing
| Particulars | 2022 (₹) | 2023 (₹) |
|---|---|---|
| Sales at ₹22 a unit (A) | 52,80,000 | 52,80,000 |
| Variable manufacturing cost of production | 28,80,000 | 57,60,000 |
| Fixed manufacturing cost absorbed | 14,40,000 | 14,40,000 |
| Cost of production | 43,20,000 | 72,00,000 |
| Less: Closing stock (2023: 2,40,000 units at ₹15) | 0 | 36,00,000 |
| Cost of goods sold (B) | 43,20,000 | 36,00,000 |
| Gross profit (A − B) | 9,60,000 | 16,80,000 |
| Variable marketing and administrative cost at ₹1.50 a unit | 3,60,000 | 3,60,000 |
| Fixed marketing and administrative cost | 6,00,000 | 6,00,000 |
| Total marketing and administrative cost (C) | 9,60,000 | 9,60,000 |
| Net profit (A − B − C) | 0 | 7,20,000 |
(ii) Income statements under marginal costing
| Particulars | 2022 (₹) | 2023 (₹) |
|---|---|---|
| Sales at ₹22 a unit (A) | 52,80,000 | 52,80,000 |
| Variable manufacturing cost of production at ₹12 | 28,80,000 | 57,60,000 |
| Less: Closing stock (2023: 2,40,000 units at ₹12) | 0 | 28,80,000 |
| Variable manufacturing cost of goods sold | 28,80,000 | 28,80,000 |
| Variable marketing and administrative cost at ₹1.50 | 3,60,000 | 3,60,000 |
| Total variable cost of sales (B) | 32,40,000 | 32,40,000 |
| Contribution (A − B) | 20,40,000 | 20,40,000 |
| Fixed manufacturing cost | 14,40,000 | 14,40,000 |
| Fixed marketing and administrative cost | 6,00,000 | 6,00,000 |
| Total fixed cost (C) | 20,40,000 | 20,40,000 |
| Net profit (A − B − C) | 0 | 0 |
In 2022 production equals sales, so both methods give the same result (no profit, no loss). In 2023 absorption costing shows ₹7,20,000 more profit, because 2,40,000 units of closing stock carry ₹3 each of fixed manufacturing cost (2,40,000 × ₹3 = ₹7,20,000) into the next year, while marginal costing charges the whole ₹14,40,000 to 2023. Sales are the same in both years, so the marginal costing profit, which moves only with sales, is the same too.
Where the 12 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Workings (absorption rates, closing stock) | 2 |
| 2 | Absorption costing statements | 5 |
| 3 | Marginal costing statements | 4 |
| 4 | Reconciliation | 1 |
| Total | 12 |
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