Question

Question 2 Ayman International Fixture produces and sells many office fixtures. In order to ensure its sustainability, the company has opened a new plant for the production of digital table this year, 2018. The operation of the plant has started in March. The top management is anxious to see the profitability of the new digital table and thus has asked that a statement of profit and loss to be prepared. The following information relate to March and April 2018: March Beginning inventory (units) Units produced Units sold 10,000 8,000 April 2,000 10,000 9,000 RM 300 60 300,000 Selling price per unit Selling and administrative expenses: Variable per unit Fixed (total) Manufacturing costs: Direct material per unit Direct labor cost per unit Variable manufacturing overhead cost per unit Fixed manufacturing overhead cost (total) 100 20 100,000 Required: (a) Assume the company uses absorption costing, i. Determine the unit product cost. ii. Prepare a statement of profit and loss for March and April (6 marks) (b) Assume the company uses variable costing. i. Determine the unit product cost. ii. Prepare a statement of profit and loss for March and April. (6 marks) (c) Explain the reason for any difference in the value of ending inventory balance under the two costing methods and the impact of this difference on reported net operating income. (3 marks) (d) Generally, the top management is not quite happy with the performance in March and April. As a quick action plan to boost the reported profit, the production department has doubled the production in May. However the sales and marketing department was only able to sell 10,000 units. Assume that the cost structure remains the same, prepare the following: i. a statement of profit and loss for May using an absorption costing. ii. a statement of profit and loss for May using a variable costing. (6 marks) (e) Refer to your answer in Requirement (d). Is it a good strategy to increase the production level in order to show good performance? Discuss. (4 marks) [Total: 25 marks)

Answer 1

Answer-a(i):

Calculation of unit product cost under Absorption Costing: RM 100 80 Direct material cost per unit Direct labour cost per unit Variable manufacturing cost per unit Fixed manufacturing overhead cost per unit (100,000/10,000) Unit product cost 20 10 210

Answer-a(ii):

STATEMENT OF PROFIT AND LOSS (Under Absorption Costing) March RM April RM RM 2,400,000 RM 2,700,000 2,100,000 2,100,000 420,000 420,000 2,100,000 2,520,000 210,000 Sales Cost of goods sold: Beginning inventory Cost of goods produced Cost of goods available for sale Less: Ending inventory Cost of goods sold: Gross Margin Less: Selling and administrative costs: Variable Fixed Operating income 1,680,000 720,000 2,310,000 390,000 480,000 300,000 540,000 300,000 780,000 (60,000) 840,000 (450,000)

Answer-b(i):

Calculation of unit product cost under Variable Costing: Direct material cost per unit Direct labour cost per unit Variable manufacturing cost per unit Unit product cost RM 100 80 201 200

Answer-b(ii):

STATEMENT OF PROFIT AND LOSS (Under Variable Costing) March RM April RM RM 2,400,000 RM 2,700,000 2,000,000 2,000,000 400,000 400,000 2,000,000 2,400,000 200,000 Sales Cost of goods sold: Beginning inventory Cost of goods produced Cost of goods available for sale Less: Ending inventory Cost of goods sold: Less: Variable Selling and administrative cost Contribution Margin Less: Fixed costs: Manufacturing overhead cost Selling and administrative cost Operating income 1,600,000 480,000 320,000 2,200,000 540,000 (40,000) 100,000 300,000 100,000 300,000 400,000 (80,000) 400,000 (440,000

Answer-c:

Ending Inventory: Under absorption costing Under variable costing Difference March 420,000 400,000 20,000 April 210,000 200,000 10,000

The above difference is due to inclusion of fixed manufacturing overhead in unit product cost under absorption costing.