Variable Costing and Absorption Costing
By: Dipspunks • April 29, 2017 • Course Note • 2,509 Words (11 Pages) • 1,292 Views
Variable and Absorption Costing
A.Gyawali.TU
Problem 1. A manufacturing company with a normal capacity of 30,000 units furnished you with the following information.
Beginning inventory units 4,000
Units produced during the year 25,000
Units sold during the year 20,000
Standard variable costs Rs.16 per unit
Fixed factory overhead at normal capacity Rs.600,000
Fixed selling and distribution costs Rs.150,000
Unit selling price Rs.50
Required
a) Income statement under absorption costing
b) Reconciled profit under variable costing
(Ans.: a) Net income under AC = Rs.30,000 b) Income under VC = (Rs.70,000))
Problem 2. A manufacturing company with normal capacity of 20,000 units furnished you the following information:
Beginning inventory units 3,000
Units produced during the year 18,000
Units sold during the year 20,000
Standard variable cost per unit Rs.6.50
Fixed factory overhead at normal capacity Rs.50,000
Fixed selling & distribution cost Rs.5,000
Unit selling price Rs.12
Required
a) Income statement under absorption costing
b) Reconciled profit under variable costing( Ans . Rs 50,000)
Problem 3. A manufacturing company with normal capacity of 50,000 units supplied you with the following particulars for the year ending Chaitra 31, . . .
Production 55,000 units
Sales 60,000 units
Closing stock 5,000 units
Unit variable manufacturing cost Rs.6.00
Unit fixed manufacturing overhead Rs.3.00
Unit variable selling & administrative cost Rs.2
Fixed selling & administrative cost Rs.90,000
Unit selling price Rs.15
Required
a) Variable costing income statement
b) Reconciled profit under absorption costing( Rs 180000)
Problem 4.
Hypothetical Ltd furnishes the following information for its three different periods:
Year 1 | Year 2 | Year 3 | |
Production (Units) | 10,000 | 10,000 | 10,000 |
Sales (units) | 10,000 | 5,000 | 15,000 |
Sales price per unit, Rs. 12
Variable cost per unit, Rs. 6
Fixed costs per year (at normal capacity of 10,000 units), Rs. 40,000
Standard fixed overhead rate: Rs. 4 per unit.
Show the profit under variable and absorption costing in different years.
Ans: Rs. 30,000(AC), Rs. 50,000(VC)
Problem 5.Hypothetical Ltd had the following relevant information for years 1 and 2:
Standard variable costs per unit | Rs. 6 |
Sales price per unit | 10 |
Fixed manufacturing overhead (at normal capacity of 1,50,000 units) | 3,00,000 |
Selling and administrative expenses | |
Fixed | 1,30,000 |
Variable (percent of sales) | 5 |
Production volume: units Year 1 | 1,70,000 |
2 | 1,40,000 |
Sales volume: 1 | 1,40,000 |
2 | 1,60,000 |
There was no inventory at the beginning of year 1. Income tax rate is 35 per cent.
Required:
1. Prepare income statements for the two years under absorption costing and variable costing.
2. Show a reconciliation of the difference in net income for the two years (1 and 2) taken together.
Ans: Rs.78,000 and 58,500(AC),
Rs.39,000 and 84,500(VC)
Problem 6.The following data relate to Strong Company Limited for three years:
Year 1 | Year 2 | Year 3 | |
Units produced | 1,00,000 | 80,000 | 70,000 |
Units sold | 60,000 | 90,000 | 1,00,000 |
Unit selling price | Rs.5 | Rs.5 | Rs.5 |
Unit variable manufacturing cost | 2 | 2 | 2 |
Unit variable selling and administrative cost | 0.50 | 0.50 | 0.50 |
Total fixed manufacturing cost | Rs.1,00,000 | ||
Total fixed selling and administrative expenses | 50,000 | ||
Normal capacity (Units) | 1,00,000 | ||
Inventory at the beginning of year 1 | Nill |
You are required to prepare income statements for three years individually and collectively under absorption costing and variable costing methods, assuming that actual costs are in conformity with budgeted costs. You are also required to account for difference, if any, in the result report under the two methods.
Ans: Absorption costing profit: Rs. 40,000 (year 1), Rs. 65,000(year 2). Rs. 70,000 (year3), Rs. 1,75,000(Years 1-3); Variable costing profit: Zero (year 1), Rs. 75,000(year 2), Rs. 1,00,000(years 3), Rs 1,75,000 (years 1-3).
Problem 7. A mill has provided the cost for the annual normal capacity output of 50,000 kg.
– Direct material cost per kg is Rs.10.
– Direct labour cost per kg is Rs.8.
– Manufacturing overheads per kg is Rs.10 (50% fixed).
– Selling and distribution overheads per kg is Rs.4 (25% variable).
– The selling price per kg is Rs.35. The annual fixed administrative expenses incurred Rs.100,000.
– The mill sold 50,000 kg in the last year.
– The store ledger recorded 10,000 kg of beginning inventory and 15,000 kg of ending inventory in the period.
Required: Income statement based on variable costing (Ans=Rs 1,50,000)
Problem 8. A company has followed the full costing method in its pricing policy of the product. The income statement based on absorption costing is given below.
Sales in units | 10,000 |
Sales revenue | Rs. 400,000 |
Less: Cost of goods sold: | Rs. |
Beginning inventory 2,000 units @ Rs.25 | 50,000 |
Direct materials 9,000 @ Rs. 10 | 90,000 |
Direct labor 9000 @ Rs.10 Variable overhead 9,000 @ Rs. 2 | 90,000 18,000 |
Fixed overhead 9,000 @ Rs. 3 | 27,000 |
Total cost of goods available for sales | 275,000 |
Less ending inventory 1,000 @ Rs. 25 | 25,000 |
Cost of goods sold | 250,000 |
Gross margin before adjustment | 150,000 |
Less: Fixed cost under absorbed | 3,000 |
Gross margin after adjustment | 147,000 |
Less: Other costs | 47,000 |
Net income before tax | 100,000 |
Required:
...