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