Determine Cost per Unit By Using Marginal and Absorption Costing
The given information was extracted from the book of a company for the year ended on date 31/12/2001.
Output 100000 units
Production costs
Direct labour cost Shs 5 Million
Direct material cost Shs 2 million
Variable overheads Shs 2 million
Fixed overheads Shs 4 million
Units sold 90,000
Selling price per unit Shs 100.00
Suppose closing stocks at the ending of the earlier period were nil.
Required
Utilizing both marginal and absorption costing find out
i. Cost per unit
ii. Prepare the income statement
Solution
Marginal costing
i. Cost per unit = (5 + 2 + 2)/100,000 million
= Shs.90
Note:
Merely variable costs are considered. Fixed overheads are not involved in the cost per unit.
∴Total units sold = 90,000 x 90
= Shs 8,100,000
∴Closing stock value = 10,000 x 90
= Shs 900,000
Total costs or variable for the goods produced
= 100,00 x 90
= shs.9,000,000
= cost of finished goods
Absorption costing
Cost per unit = (5,000,000 + 2,000,000 +2,000,000 + 4,000,000)/100,000
= Shs 130
Note
All costs variable and fixed are considered in arriving on the cost per unit.
∴Total cost of units sold = 130 x 90000
= Shs 11,700,000
Closing stock = 10,000 x 130 = 1300000
Total costs for goods produced = Shs 1,300,000
= cost of finished goods
ii. Income statement for the year ended on date 31.12.2001
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Using
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MARGINAL COSTING
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ABSORPTION COST
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Shs
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Shs
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Sales 90,000 x 100
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9,000,000
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9,000,000
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Cost of sales
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Opening stock
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Nil
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Nil
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Cost of finished goods
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9,000,000
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13,000,000
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Cost of goods available for sale
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9,000,000
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13,000,000
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Less closing stock
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(900,000)
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(13,000,000)
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Cost of goods sold
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(8,100,000)
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11,700,00
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GROSS PROFIT/LOSS
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900,000
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(2,700,000)
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Period costs
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Fixed overheads
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(400,000)
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-________
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Net loss
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(3,100,000)
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2,700,000
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