Chapter 22
Absorption and Marginal Costing
QUESTION 1
The following balances were extracted from the books of Peter Co Ltd as at 31 December 2012:
$
Sales
329,680
Raw material purchases
112,400
Raw material carriage inwards
8,600
Selling and distribution expenses
6,128
Factory workers’ wages
63,700
Rent and rates (office 60% : factory 40%)
13,175
Factory expenses
2,976
Subcontracting charges
800
Administration expenses
32,895
Interest revenue
1,218
Inventory as at 1 January 2012:
Raw materials
41,212
Work-in-progress
10,060
Finished goods
31,500
Production machinery at net book value, 1 January 2012 (cost $218,500)
Office fixtures and equipment at net book value, 1 January 2012 (cost $95,000)
180,500
48,750
Additional information:
(i)
Inventory as at 31 December 2012:
$
Raw materials
38,430
Work-in-progress
9,828
Finished goods
(ii)
27,300
Depreciation to be provided for:
Office fixtures and equipment
Production machinery
15% on cost
20% on net book value
Required:
Prepare the following financial statements for the year ended 31 December 2012:
(a)
A manufacturing account
(7.5 marks)
(b)
An income statement (ending with gross profit)
(2.5 marks)
Answer
(a)
Peter Co Ltd
Manufacturing Account for the year ended 31 December 2012
$
Opening inventory of raw materials
Add Purchases
Carriage inwards
112,400
8,600
Less Closing inventory of raw materials
Cost of raw materials consumed
Factory workers’ wages
Subcontracting charges
Prime cost
Factory overheads: Rent and rates ($13,175  40%)
Factory expenses
Depreciation: Production machinery ($180,500  20%)
5,270
2,976
36,100
Add Opening work-in-progress
Less Closing work-in-progress
Manufacturing cost of goods completed
$
41,212
0.5
0.5
0.5
121,000
162,212
(38,430)
123,782
63,700
800
188,282
0.5
0.5
0.5
0.5
1
0.5
44,346
232,628
10,060
242,688
(9,828)
232,860
1
0.5
0.5
0.5
(b)
Peter Co Ltd
Income Statement for the year ended 31 December 2012
$
Sales
Less Cost of goods sold:
Opening inventory
Add Manufacturing cost of goods completed
Cost of goods available for sale
Less Closing inventory
Gross profit
31,500
232,860
264,360
(27,300)
$
329,680
0.5
0.5
0.5
(237,060)
92,620
0.5
0.5
QUESTION 2
Michael Chan, the owner of a factory that makes gift items, did not keep proper books of accounts. However, he was
able to provide the following information:
31 May 2012
31 May 2013
$267,500
$149,300
—
$750
$31,600
$26,700
$3,650
$4,850
$49,500
$75,000
Accounts payable
$167,800
$121,300
Office furniture and fixtures at cost
$135,000
$135,000
Factory machinery at cost
$405,000
$405,000
$78,000
?
$175,600
?
Accounts receivable
Prepaid insurance
Inventories: Raw materials
Work-in-progress
Finished goods
Accumulated depreciation: Office furniture and fixtures
Factory machinery
The following is a summary of his company’s bank account for the financial year ended 31 May 2013:
Balance b/f
Bank
$
97,500 Carriage outwards
$
7,200
Cash sales
Accounts receivable
65,078
714,980
Electricity
Factory expenses
Factory workers’ wages
Office expenses
Rates and insurance
Office staff salaries
Selling expenses
Drawings
Accounts payable
Balance c/f
5,700
52,500
136,100
15,600
2,670
145,700
48,500
147,500
239,480
76,608
877,558
877,558
Additional information:
(i)
One-third of the expenses for electricity and rates and insurance are to be allocated to the office and the
remainder to the factory.
(ii)
Depreciation is to be provided on all non-current assets at 10% of net book value.
Required:
Prepare the following financial statements for the year ended 31 May 2013:
(a)
A manufacturing account
(8.5 marks)
(b)
An income statement (ending with gross profit)
(5.5 marks)
Answer
(a)
Michael Chan
Manufacturing Account for the year ended 31 May 2013
$
Opening inventory of raw materials
Add Purchases (Workings)
Less Closing inventory of raw materials
Cost of raw materials consumed
Factory workers’ wages
Prime cost
Factory overheads: Factory expenses
Depreciation on factory machinery
[($405,000 – $175,600)  10%]
2
Electricity ($5,700  3 )
2
Rates and insurance [($2,670 – $750)  3 ]
Add
$
31,600
192,980
224,580
(26,700)
197,880
136,100
333,980
0.5
2
0.5
0.5
52,500
0.5
0.5
22,940
1
3,800
0.5
1,280
80,520
1
414,500
3,650
418,150
(4,850)
413,300
Opening work-in-progress
Less Closing work-in-progress
Manufacturing cost of goods completed
0.5
0.5
0.5
Workings:
Bank
Balance c/f
Total Accounts Payable
$
239,480 Balance b/f
121,300 Credit purchases (balancing figure)
360,780
$
167,800
192,980
360,780
0.5
0.5
0.5
0.5
(b)
Michael Chan
Income Statement for the year ended 31 May 2013
$
Sales (Workings)
Less Cost of goods sold:
Opening inventory
Add Manufacturing cost of goods completed
Cost of goods available for sale
Less Closing inventory
Gross profit
49,500
413,300
462,800
(75,000)
$
661,858
3.5
0.5
0.5
(387,800)
274,058
0.5
0.5
Workings:
Balance b/f
Credit sales (balancing figure)
Total Accounts Receivable
$
267,500 Bank
596,780 Balance c/f
864,280
$
714,980
149,300
864,280
0.5
0.5
0.5
0.5
Total sales for the year ended 31 May 2013:
Cash sales
Credit sales
$
65,078
596,780
661,858
0.5
0.5
0.5
Note: You may attempt Question 3 after studying Chapter 23.
QUESTION 3
Good News Ltd manufactures a single product. Its financial year ends on 31 December. There was no opening
inventory in 2013. The following information was extracted from its books:
2013
Units produced
32,000
Units sold
32,000
Cost and price data for 2012 and 2013:
Selling price per unit
$110
Direct materials cost per unit produced
$9
Direct labour cost per unit produced
$8
Variable manufacturing overheads per unit sold
$13
The company also incurred fixed manufacturing overheads of $96,000 per annum in 2013.
Non-manufacturing overheads for the past two years are as follows:
Variable non-manufacturing overheads
Fixed non-manufacturing overheads
Required:
(a)
Calculate the unit production costs under:
$12 per unit sold
$70,000 per annum
(b)
(c)
(i)
absorption costing;
(ii)
marginal costing.
(2 marks)
(1 mark)
Prepare an income statement for the year ended 31 December 2013 using:
(i)
absorption costing;
(4.5 marks)
(ii)
marginal costing.
(4.5 marks)
Calculate the break-even sales in units and in dollars for the year ended 31 December 2013. (4 marks)
(Rounded up to the next unit or dollar)
Answer
(a)
(i)
Unit production costs under absorption costing = $9 + $8 + $13 + ($96,000  32,000)
= $33
(b)
(ii)
Unit production costs under marginal costing = $9 + $8 + $13 = $30
(i)
Under absorption costing:
(2 marks)
(1 mark)
Good News Ltd
Income Statement for the year ended 31 December 2013
$000
Sales (32,000  $110)
Less Cost of goods sold (32,000  $33)
Gross profit
Less Variable non-manufacturing overheads (32,000  $12)
384
Fixed non-manufacturing overheads
70
Net profit
(ii)
(454)
2,010
1
1
0.5
1
0.5
0.5
Under marginal costing:
Good News Ltd
Income Statement for the year ended 31 December 2013
$000
Sales
Less Variable cost of goods sold (32,000  $30)
Product contribution margin
Less Variable non-manufacturing overheads
Total contribution margin
Less Fixed manufacturing overheads
Fixed non-manufacturing overheads
Net profit
(c)
$000
3,520
(1,056)
2,464
96
70
$000
3,520
(960)
2,560
(384)
2,176
(166)
2,010
0.5
1
0.5
0.5
0.5
0.5
0.5
0.5
Break-even sales in units = ($96,000 + $70,000)  ($2,176,000  32,000)
= $166,000  $68
= 2,442 units
(2 marks)
Break-even sales in dollars = $166,000  ($2,176,000  $3,520,000)
= $268,530
QUESTION 4
(2 marks)
Master Ltd commenced operations on 1 January 2012 and manufactures a single product. The following information
is available for its first year of operations.
2012
Units sold
86,000
Units manufactured
94,000
Cost and price data for 2012:
$
Selling price per unit
240
Variable production costs per unit produced
58
Variable administrative and marketing costs per unit sold
15
The company incurred fixed production overheads of $282,000 in 2012. Fixed administrative and marketing costs in
2012 totalled $110,000.
Required:
(a)
(b)
Prepare an income statement for the year ended 31 December 2012 using:
(i)
absorption costing;
(6 marks)
(ii)
marginal costing.
(6 marks)
Reconcile the difference in net profit between the two costing approaches.
(2 marks)
Answer
(a)
(i)
Under absorption costing:
Master Ltd
Income Statement for the year ended 31 December 2012
$000
Sales (86,000  $240)
Less Cost of goods sold:
Manufacturing cost of goods completed (W1)
5,734
Less Closing inventory (W2)
(488)
Gross profit
Less Variable administrative and marketing costs (86,000  $15)
1,290
Fixed administrative and marketing costs
110
Net profit
$000
20,640
(5,246)
15,394
(1,400)
13,994
1
1.5
1
0.5
1
0.5
0.5
Workings:
(W1)
Manufacturing cost of goods completed = 94,000  [$58 + ($282,000  94,000)]
= 94,000  ($58 + $3)
= $5,734,000
(W2)
Closing inventory = (94,000  86,000)  $61
= $488,000
(ii)
Under marginal costing:
Master Ltd
Income Statement for the year ended 31 December 2012
$000
Sales
Less Variable cost of goods sold:
$000
20,640
0.5
Variable manufacturing cost of goods completed (94,000  $58)
Less Closing inventory [(94,000  86,000)  $58]
Product contribution margin
Less Variable administrative and marketing costs (86,000  $15)
Total contribution margin
Less Fixed production overheads
Fixed administrative and marketing costs
Net profit
(b)
5,452
(464)
282
110
1
(4,988)
15,652
(1,290)
14,362
(392)
13,970
1
0.5
1
0.5
0.5
0.5
0.5
The difference in net profit is reconciled as follows:
Net profit under absorption costing
Less Fixed production overheads absorbed in closing inventory (8,000  $3)
Net profit under marginal costing
$000
13,994
(24)
13,970
0.5
1
0.5
QUESTION 5
Treasure Ltd manufactures a single product. The company’s financial year ends on 31 December. Inventory as at 1
January 2014 amounted to 3,000 units, with a value of $216,000 (under absorption costing). The company incurred
fixed production overheads of $798,000 in 2014.
Information on unit costs in 2013 and 2014:
$
15
22
21
Direct materials
Direct labour
Variable production overheads
2014
57,000
59,000
Production (units)
Sales (units)
Selling and administrative overheads are as follows:
Variable selling and administrative expenses
Fixed selling and administrative expenses
$19 per unit sold
$180,000 per annum
The selling price of the product in 2013 and 2014 was $260 per unit.
Required:
(a) Calculate the unit production costs for 2014 under:
(i) absorption costing;
(ii) marginal costing.
(b) Prepare an income statement for the year ended 31 December 2014 using:
(i) absorption costing;
(ii) marginal costing.
(c) Reconcile the difference in net profit between the two costing approaches.
Answer
(a) (i) Unit production costs under absorption costing = $15 + $22 + $21 + ($798,000  57,000)
= $72
(ii) Unit production costs under marginal costing = $15 + $22 + $21 = $58
(b) (i)
Under absorption costing:
Treasure Ltd
Income Statement for the year ended 31 December 2014
$000
Sales (59,000  $260)
Less
15,340
Cost of goods sold:
Opening inventory
216
Add Manufacturing cost of goods completed (57,000  $72)
4,104
Cost of goods available for sale
4,320
Less Closing inventory [(3,000 + 57,000  59,000)  $72]
(72)
Gross profit
Less
$000
Variable selling and administrative expenses (59,000  $19)
Fixed selling and administrative expenses
Net profit
(4,248)
11,092
1,121
180
(1,301)
9,791
(ii)
Under marginal costing:
Treasure Ltd
Income Statement for the year ended 31 December 2014
$000
Sales
Less Variable cost of goods sold:
Opening inventory (3,000  $58)
Add Variable manufacturing cost of goods completed (57,000  $58)
Variable cost of goods available for sale
Less Closing inventory (1,000  $58)
Product contribution margin
Less Variable selling and administrative expenses
Total contribution margin
Less Fixed production overheads
Fixed selling and administrative expenses
Net profit
(c)
$000
15,340
174
3,306
3,480
(58)
(3,422)
11,918
(1,121)
10,797
798
180
(978)
9,819
The difference in net profit is reconciled as follows:
Net profit under absorption costing
Add Fixed production overheads released from opening inventory
{3,000  [($216,000  3,000)  ($15 + $22 + $21)]}
Less Fixed production overheads absorbed in closing inventory (1,000  $14)
Net profit under marginal costing
$000
9,791
42
9,833
(14)
9,819
0.5
1
1
0.5
Note: You may attempt Question 6 after studying Chapter 23.
QUESTION 6
Johnny Ltd makes a single product. For the year ended 30 June 2013, the product was sold for $350 per unit. The
company incurred fixed factory overheads of $1,400,000 during the year. The following information was also
extracted from its books:
Variable marketing costs
$36 per unit sold
Fixed marketing costs
$1,260,000 per annum
Fixed administrative costs
$1,960,000 per annum
Unit costs:
$
Direct materials
130
Direct labour
50
Variable factory overheads
13
Inventory, 1 January 2013
Nil
Production (units)
50,000
Sales (units)
50,000
Required:
(a)
Prepare an income statement for the year ended 30 June 2013 using marginal costing.
(5 marks)
(b)
Calculate the unit contribution margin.
(c)
To increase the net profit in the coming year, the marketing manager proposed cutting the selling price by 10%
(1 mark)
and spending $40,000 more on advertising. The sales volume was projected to increase by 30%. Advise, with
calculations, whether the company should adopt this proposal.
(5 marks)
Answer
(a)
Johnny Ltd
Income Statement for the year ended 30 June 2013
$000
Sales (50,000  $350)
Less Variable cost of goods sold [50,000  ($130 + $50 + $13)]
Product contribution margin
Less Variable marketing costs (50,000  $36)
Contribution margin
Less Fixed factory overheads
Fixed marketing costs
Fixed administrative costs
Net profit
(b)
Unit contribution margin = $6,050,000  50,000 = $121
1,400
1,260
1,960
$000
17,500
(9,650)
7,850
(1,800)
6,050
(4,620)
1,430
0.5
1
0.5
0.5
0.5
0.5
0.5
0.5
0.5
(1 mark)
(c)
Revised selling price = $350  90% = $315
(0.5 marks)
Revised unit contribution margin = $315  ($130 + $50 + $13 + $36) = $86
(1 mark)
Revised sales volume = 50,000  130% = 65,000 units
(0.5 marks)
$000
Contribution margin (65,000  $86)
Less Fixed factory overheads
Fixed marketing costs ($1,260,000 + $40,000)
Fixed administrative costs
Net profit
$000
5,590
1,400
1,300
1,960
0.5
0.25
0.5
0.25
(4,660)
930
0.5
The company should not adopt the proposal as this will reduce the net profit by $500,000 ($1,430,000 
$930,000).
(1 mark)
QUESTION 7
David Ltd makes a shampoo product Z. It has maintained the product’s selling price at $380 per unit for a number of
years. The company’s financial year ends on 31 March. The following data was extracted from its books:
Year ended 31 March 2013
Units produced
63,000
Units sold
58,000
Unit costs for the years ended 31 March 2012 and 2013:
Direct materials
$40
Direct labour
$35
Variable manufacturing overheads
$17
For the year ended 31 March 2013, the opening inventory of 20,000 units was valued at $2,140,000 (under
absorption costing). During the year, the company incurred fixed manufacturing overheads of $945,000.
Administrative and marketing overheads for the past two years are as follows:
Variable administrative and marketing overheads
Fixed administrative and marketing overheads
$23 per unit sold
$14,428,000 per annum
Required:
(a)
(b)
Prepare an income statement for the year ended 31 March 2013 using:
(i)
absorption costing;
(7 marks)
(ii)
marginal costing.
(6 marks)
Reconcile the difference in net profit between the two costing approaches.
(3 marks)
Answer
(a)
(i)
Under absorption costing:
David Ltd
Income Statement for the year ended 31 March 2013
$000
Sales (58,000  $380)
Less Cost of goods sold:
Opening inventory
Add Manufacturing cost of goods completed (Workings)
2,140
6,741
$000
22,040
1
0.5
2
Cost of goods available for sale
Less Closing inventory [(20,000 + 63,000  58,000)  $107]
Gross profit
Less Variable administrative and marketing overheads (58,000  $23)
Fixed administrative and marketing overheads
Net profit
8,881
(2,675)
1,334
14,428
(6,206)
15,834
(15,762)
72
1
0.5
1
0.5
0.5
Workings:
(ii)
Unit production costs = $40 + $35 + $17 + ($945,000  63,000) = $107
(1.5 marks)
Manufacturing costs of goods completed = 63,000  $107 = $6,741,000
(0.5 marks)
Under marginal costing:
David Ltd
Income Statement for the year ended 31 March 2013
$000
Sales
Less Variable cost of goods sold:
Opening inventory [20,000  ($40 + $35 + $17)]
Add Variable manufacturing cost of goods completed
(63,000  $92)
Variable cost of goods available for sale
Less Closing inventory (25,000  $92)
Product contribution margin
Less Variable administrative and marketing overheads
Total contribution margin
Less Fixed manufacturing overheads
Fixed administrative and marketing overheads
Net loss
(b)
$000
22,040
0.5
1,840
0.5
5,796
7,636
(2,300)
1
945
14,428
(5,336)
16,704
(1,334)
15,370
(15,373)
(3)
1
0.5
0.5
0.5
0.5
0.5
0.5
The difference in net profit is reconciled as follows:
Net profit under absorption costing
Add Fixed manufacturing overheads released from opening inventory
{20,000  [($2,140,000  20,000)  ($40 + $35 + $17)]}
Less Fixed manufacturing overheads absorbed in closing inventory (25,000  $15)
Net loss under marginal costing
$000
72
300
372
(375)
(3)
0.5
1
1
0.5
QUESTION 8
Snowball Ltd produces a single product. The company uses absorption costing but is considering adopting marginal
costing instead. It wants to compare the results under these two costing systems.
Fixed production overheads were absorbed at the rate of $30 per unit, based on the normal production level of
400,000 units per annum. The company’s year-end date is 31 December. The following information was extracted
from the books:
2013
Production in units
380,000
Sales in units
370,000
Cost and price data for 2012 and 2013:
$
Direct materials per unit produced
34
Direct labour per unit produced
12
Variable production overheads per unit produced
Selling price per unit
9
170
Non-manufacturing overheads for the past two years are as follows:
Variable non-manufacturing overheads
Fixed non-manufacturing overheads
$27 per unit sold
$8,000,000 per annum
As at 31 December 2013, 90,000 units of the product remained unsold.
Required:
(a)
(b)
(c)
Calculate the unit production costs for 2013 under:
(i)
absorption costing;
(1 mark)
(ii)
marginal costing.
(1 mark)
Prepare an income statement for the year ended 31 December 2013, using:
(i)
absorption costing;
(8.5 marks)
(ii)
marginal costing.
(6.5 marks)
Reconcile the difference in net profit between the two costing approaches.
(3 marks)
Answer
(a)
(b)
(i)
Unit production costs under absorption costing = $34 + $12 + $9 + $30 = $85
(1 mark)
(ii)
Unit production costs under marginal costing = $34 + $12 + $9 = $55
(1 mark)
(i)
Under absorption costing:
Snowball Ltd
Income Statement for the year ended 31 December 2013
$000
Sales (370,000  $170)
Less Cost of goods sold:
Opening inventory (W1)
6,800
Add Manufacturing cost of goods completed (380,000  $85)
32,300
Cost of goods available for sale
39,100
Less Closing inventory (90,000  $85)
(7,650)
31,450
Add Under-absorption of fixed production overheads (W2)
600
Gross profit
Less Variable non-manufacturing overheads (370,000  $27)
9,990
Fixed non-manufacturing overheads
8,000
Net profit
$000
62,900
1
2
1
1
(32,050)
30,850
(17,990)
12,860
1
0.5
1
0.5
0.5
Workings:
(W1) Opening inventory in units = 370,000 + 90,000  380,000 = 80,000 units
Opening inventory in value = 80,000  $85 = $6,800,000
(W2) Under-absorption of fixed production overheads = (400,000  380,000)  $30
= $600,000
(1 mark)
(1 mark)
(ii)
Under marginal costing:
Snowball Ltd
Income Statement for the year ended 31 December 2013
$000
Sales
Less Variable cost of goods sold:
Opening inventory (80,000  $55)
Add Variable manufacturing cost of goods completed
(380,000  $55)
Variable cost of goods available for sale
Less Closing inventory (90,000  $55)
Product contribution margin
Less Variable non-manufacturing overheads
Total contribution margin
Less Fixed production overheads (400,000  $30)
Fixed non-manufacturing overheads
Net profit
(c)
$000
62,900
0.5
4,400
1
20,900
25,300
(4,950)
1
12,000
8,000
(20,350)
42,550
(9,990)
32,560
(20,000)
12,560
1
0.5
0.5
1
0.5
0.5
The difference in net profit is reconciled as follows:
Net profit under absorption costing
Add Fixed production overheads released from opening inventory (80,000  $30)
Less Fixed production overheads absorbed in closing inventory (90,000  $30)
Net profit under marginal costing
$000
12,860
2,400
15,260
(2,700)
12,560
0.5
1
1
0.5
QUESTION 9
Jumbo Ltd manufactures a single product. Fixed factory overheads were absorbed at the rate of $12 per unit, based
on the normal production level of 360,000 units per annum. For the year ended 31 December 2012, both sales and
production volumes increased considerably. As at 1 January 2012, the inventory consisted of
90,000 units.
The financial year of the company ends on 31 December. Its production and sales data are as follows:
2012
Production in units
430,000
Sales in units
490,000
Selling price per unit
$180
Unit costs for 2011 and 2012:
Direct materials
$45
Direct labour
$31
Variable factory overheads
$10
Non-manufacturing costs for the year ended 31 December 2012 are as follows:
Variable non-manufacturing costs
Fixed non-manufacturing costs
$18 per unit sold
$12,000,000 per annum
Required:
(a)
Prepare an income statement for the year ended 31 December 2012 using:
(i)
absorption costing;
(7.5 marks)
(ii)
marginal costing.
(6.5 marks)
(b)
Reconcile the difference in net profit between the two costing approaches.
(3 marks)
Answer
(a)
(i)
Under absorption costing:
Jumbo Ltd
Income Statement for the year ended 31 December 2012
$000
Sales (490,000  $180)
Less Cost of goods sold:
8,820
Opening inventory [90,000  ($45 + $31 + $10 + $12)]
Add Manufacturing cost of goods completed (430,000  $98)
42,140
Cost of goods available for sale
50,960
Less Closing inventory [(90,000 + 430,000  490,000)  $98]
(2,940)
48,020
Less Over-absorption of fixed factory overheads
(840)
[(430,000  360,000)  $12]
Gross profit
Less Variable non-manufacturing costs (490,000  $18)
8,820
Fixed non-manufacturing costs
12,000
Net profit
(ii)
1
1
1
1
(47,180)
41,020
(20,820)
20,200
1
0.5
1
0.5
0.5
Under marginal costing:
Jumbo Ltd
Income Statement for the year ended 31 December 2012
$000
Sales
Less Variable cost of goods sold:
Opening inventory [90,000  ($45 + $31 + $10)]
Add Variable manufacturing cost of goods completed
(430,000  $86)
Variable cost of goods available for sale
Less Closing inventory (30,000  $86)
Product contribution margin
Less Variable non-manufacturing costs
Total contribution margin
Less Fixed factory overheads (360,000  $12)
Fixed non-manufacturing costs
Net profit
(b)
$000
88,200
$000
88,200
0.5
7,740
1
36,980
44,720
(2,580)
1
4,320
12,000
(42,140)
46,060
(8,820)
37,240
(16,320)
20,920
1
0.5
0.5
1
0.5
0.5
The difference in net profit is reconciled as follows:
Net profit under absorption costing
Add Fixed factory overheads released from opening inventory (90,000  12)
Less Fixed factory overheads absorbed in closing inventory (30,000  $12)
Net profit under marginal costing
$000
20,200
1,080
21,280
(360)
20,920
QUESTION 10
The following information was extracted from the books of Carrie Chow’s business for the year ended
31 December 2013:
Turnover: Finished goods
Raw materials
6.3 times
6 times
Opening inventory to closing inventory: Finished goods
Raw materials
2:3
1:2
0.5
1
1
0.5
Factory overheads amounted to 20% of the manufacturing cost of goods completed. The business achieved a net profit
ratio of 17% for the year ended 31 December 2013.
Additional information:
Work-in-progress, 1 January 2013
$36,840
Work-in-progress, 31 December 2013
$29,520
Sales
$1,615,000
Carriage inwards paid
$50,290
General expenses paid
$273,000
Manufacturing wages
$242,000
Depreciation: Delivery vans
$36,000
Depreciation: Office furniture
$9,000
Prepayments and accruals as at 31 December 2012 and 2013 are as follows:
31 December 2012
31 December 2013
Prepaid general expenses
$10,000
$7,000
Accrued general expenses
$3,000
$5,000
Accrued carriage inwards
$21,000
$2,800
Prepaid carriage inwards
$7,500
$6,950
Required:
Prepare the following financial statements for the year ended 31 December 2013:
(a)
A manufacturing account
(9 marks)
(b)
An income statement
(9 marks)
Answer
(a)
Carrie Chow
Manufacturing Account for the year ended 31 December 2013
$
68,480
652,160
32,640
753,280
(136,960)
616,320
242,000
858,320
216,410
1,074,730
36,840
1,111,570
(29,520)
1,082,050
Opening inventory of raw materials (W5)
Add Purchases (balancing figure)
Carriage inwards ($50,290 – $21,000 + $2,800 + $7,500 – $6,950)
Less Closing inventory of raw materials (W5)
Cost of raw materials consumed
Manufacturing wages
Prime cost
Factory overheads (W4)
Add Opening work-in-progress
Less Closing work-in-progress
Manufacturing cost of goods completed
1.5
0.5
2
1.5
0.5
0.5
1
0.5
0.5
0.5
(b)
Carrie Chow
Income Statement for the year ended 31 December 2013
$
Sales
Less Cost of goods sold:
$
$
1,615,000
0.5
Opening inventory of finished goods (W3)
Manufacturing cost of goods completed (balancing figure)
129,200
1,082,050
1,211,250
(193,800)
Less Closing inventory of finished goods (W3)
Gross profit (W2)
Less Expenses:
General expenses
($273,000 + $10,000 – $7,000 – $3,000 + $5,000)
Depreciation: Delivery vans
Office furniture
Net profit (W1)
1.5
0.5
(1,017,450)
597,550
278,000
36,000
9,000
45,000
(323,000)
274,550
Workings:
(W1) Net profit = Sales  17% = $1,615,000  17% = $274,550
(W2)
Gross profit = $274,550 + $323,000 = $597,550
(W3)
Cost of good sold  Average inventory of finished goods = 6.3 times
Average inventory of finished goods = ($1,615,000  $597,550)  6.3 = $161,500
Opening inventory of finished goods = $161,500  2  2/5 = $129,200
Closing inventory of finished goods = $161,500  2  3/5 = $193,800
(W4)
Factory overheads = Manufacturing cost of goods completed  20%
= $1,082,050  20%
= $216,410
(W5)
Cost of raw materials consumed  Average inventory of raw materials = 6 times
Average inventory of raw materials = $616,320  6 = $102,720
Opening inventory of raw materials = $102,720  2  1/3 = $68,480
Closing inventory of raw materials = $102,720  2  2/3 = $136,960
1.5
1
2
0.5
0.5
1