Question

Townley Records produces music CDs. The company plans to produce and sell 12,000 CDs each quarter and have an inventory of 2,000 CDs at the start of Q1. The selling price of each CD is $6 and the variable cost is $1. The production and non-production overheads are estimated at $24,000 and $30,000 a quarter, respectively. The results for the year, expressed in the number of CDs, are as follows: 01 02 03 04 Total Sales 9,000 16,000 6,000 13,000 44,000 Production 14,000 12,000 11,000 10,000 47,000 Calculate the Q1 profits (a) using absorption costing, and (b) using variable costing. (c) Explain why the profits differ. (Assume the total of actual overhead incurred was as forecast).

Answer 1

CALCULATION 44000 6 AMOUNT $) AMOUNT ($) 2,64,000 2000* 1.51 47000*1.51 ABSORPTION COSTING SALES (WORKING NOTE 1) COST OF GOODS SOLD (WORKING NOTE 1 & 2] OPENING STOCK ADD: COST OF GOODS MANUFACTURED COST OF GOODS AVAILABLE FOR SALE LESS: CLOSING STOCK GROSS PROFIT LESS: NON PRODUCTION OVERHEAD PROFIT 3,020 70,970 73,990 7,550 5000*1.51 -66 440 1,97,560 30,000 1,67,560 |oi 03 WORKING NOTE 1 PARTICULARS OPENING STOCK PRODUCTION TOTAL QUANTITY AVAILABLE FOR SALE SALES CLOSING STOCK (BALANCING FIGURE) lon 2,000 14,000 16,000 9,000 7,000 7,000 12,000 19,000 16,000 3,000 3,000 11,000 14,000 6,000 8,000 04 8,000 10,000 18,000 13,000 5,000 TOTAL 20,000 47,000 67,000 44,000 23,000 WORKING NOTE 2 MANUFACTURING EXPENES PER UNIT = VARIABLE COST PER UNIT PRODUCTION OVERHEAD PER UNIT 1+24,000/47,000 1.51 $ (b) CALCULATION 44000*6 44000*1 AMOUNT($) 2,64,000 -44,000 2,20,000 VARIABLE COSTING SALES LESS: VARIABLE COST CONTRIBUTION LESS: PRODUCTION OVERHEAD NON-PRODUCTION OVERHEAD PROFIT 24,000 30,000 54,000 1,66,000 DIFFERENCE IN PROFIT PROFIT AS PER ABSORPTION COSTING PROFIT AS PER VARIABLE COSTING DIFFERENCE 1,67,560 1,66,000 1,560 PROFIT IN ABSORPTION COSTING IS 4,560 $ HIGHER THAN VARIABLE COSTING BECAUSE QUANTITY PRODUCED IS MORE THAN UNIT SOLD,PRODUCTION OVERHEAD IS DEFERRED IN INVENTORY THAT CAUSES A HIGHER PROFIT IN ABSORPTION COSTING. DIFFERENCE IN PROFIT CALCULATION DIFFERENCE IN STOCK (CLOSING-OPENING STOCK = 5000-2000) PRODUCTION PVERHEAD DEFERRED IN INVENTORY ( 24000 $/47,000 UNIT = .52$ PER UNIT) 3,000 1,560