Determine profit in long-term, Cost Accounting

Determine Profit in Long-Term

To demonstrate the point about profit in the long-term, let us assume that a company sells and makes a single product.  There are no opening stocks of the product at the beginning of period 1, for that the variable production cost is Ksh.4 and the sales price Ksh.6 per unit. However fixed costs are Ksh.2, 000 per period, of that Ksh.1, 500 are fixed production costs,

 

Period

Period 2

Sales

1,200 units

1,800 units

Production

1,500 units

1,500 units

What would the profit be in all period utilizing the following methods of costing?

a) Absorption costing.  Suppose usual output is 1,500 units per period.

b) Marginal costing.

Solution

It is significant to notice that even if sales and production volumes in each period are different and then the profit for each period via absorption costing will be different from the profit via marginal costing, over the full period, net production equals sales volume, the net cost of sales is the similar, and hence the net profit is the same via either method of accounting.

a) Absorption costing: the absorption rate for fixed production overhead is,

= £ 1,500/£1,500 units

= £ 1 per unit

 

Period 1

Period 2

Period 3

 

Ksh.

Ksh.

Ksh.

Ksh.

Ksh.

Ksh.

Sales

 

7,200

 

10,800

 

 

Production costs

 

 

 

 

 

 

     Variable

6,000

 

6,000

 

12,000

 

     Fixed

1,500

 

1,500

 

 3,000

 

 

7,500

 

7,500

 

15,000

 

Add opening stock b/f

      -

 

1,500

 

        -

 

 

7,500

 

9,000

 

15,000

 

Less closing stock c/f

1,500

 

-

 

-

 

Production cost of sales

6,00

 

9,000

 

 

 

(Under-)/over-absorbed overhead

-

 

-

 

 

 

Total production costs

 

6,000

 

9,000

 

15,000

Gross profit

 

1,200

 

1,800

 

3,000

Other costs

 

  500

 

  500

 

1,000

Net profit

 

  700

 

1,300

 

2,000

b) Marginal Costing

 

Period 1

Period 2

Period 3

 

Ksh.

Ksh.

Ksh.

Ksh.

Ksh.

Ksh.

          Sales

 

7,200

 

10,800

 

10,800

       Variable production cost

6,000

 

6,000

 

12,000

 

        Add opening stock b/f

      -

 

1,200

 

-

 

 

6,000

 

7,200

 

12,000

 

          Less closing stock c/f

1,200

 

-

 

-

 

 Variable production cost of sales

 

4,800

 

7,200

 

12,000

         Contribution

 

2,400

 

3,600

 

6,000

          Fixed costs

 

2,000

 

2,000

 

4,000

         Profit

 

400

 

1,600

 

2,000

Posted Date: 2/7/2013 12:03:55 AM | Location : United States







Related Discussions:- Determine profit in long-term, Assignment Help, Ask Question on Determine profit in long-term, Get Answer, Expert's Help, Determine profit in long-term Discussions

Write discussion on Determine profit in long-term
Your posts are moderated
Related Questions
Variance Analysis This section describes how labour, material and overhead variances are calculated and what causes every of those variances. A chart is given also to describe

Determine Profit by Using Absorption Costing Assuming the fixed overhead absorption rate was Ksh.3 per litre, then what would be the profit utilizing absorption costing? a)

A local government authority owns and operates a leisure centre with numerous sporting facilities, residential accommodation, a cafeteria and a sports shop. The summer season lasts

Calculation of Deductions - Wages Department A range of deductions are complete from gross earnings when computing the net payment because of the employee, that deductions may


The Accountant has also asked for you to assist in preparing the statement of financial position (balance sheet) for the Construction in Building partnership for the year ended 30

Questions 8-10 rely on the following data. FrontGrade Systems allocates manufacturing over- head based on machine hours. Each connector should require 11 machine hours. According t

Me ole cock spaniel plc. makes 3 products, details as follows:   Apples (£)       Pears (£)         Cockneys (£)   Selling price        60               80

Facts:   James (age 58, SS# 123-34-4439) and Martha (age 56; SS# 233-23-9050) Williams are married. James works at a major retailer as manager of the early shift. Martha is a nu

Calculate the today's cash value of a car that can be leased with $5000 down, bi-weekly payments of $199 over 4 years and a buy-back value of $15,000 at the end of the lease if the