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
Critical Thinking about Cost Flow It is simple to overlook an important aspect of cost flow within a manufacturing operation. If you see that have taken note of an important co

Question 1 Discuss the various elements of cost Question 2 Explain the various stages involved in the distribution of factory overheads Question 3 Define activity-based

Jones Company operates within a monopolistically competitive industry. The estimated demand for its products is given by the following inverse demand function P = 1760 - 12Q

CVP for Multiple Products What number of businesses sells only one manufactured goods? The reality is that firms usually give us the diverse product line, and the individual pr

Each unit of a product requires four components. The average number of components is 4.25 due to component failure. Purchasing higher quality components can reduce the average numb

You are given the following information about a sole trader as at 1 January 2012: The value of assets and liabilities were: Non-current assets at net book value £16,800

Question P A RT A Borrico ltd manufacture a single product and they had currently introduced a system of budgeting and variance analysis. The subsequent information i

ADescribe the impact of different types of standards on motivations, and specifically, the likely effect on motivation of adopting the labor standard recommended for Geeta & Compan

Process Cost Report This is a commonly employed statement that traces the flow of units produced and costs incurred in the production process. The report is prepared for every

A 20-year bond pays a coupon of 8 percent per year (coupon paid semi-annually). The bond has a par value of $1000. What will the bond sell for if the nominal YTM is: a) 10 per