Question

At the end of April 2016, Kingston Productions Ltd had 350 units of product MK120 in store. For the month of May 2016, the company budgeted to produce 5,000 units of the product at a selling price of $2,000 each. Fixed production, administration and selling expenses were expected to be $1,500,000, $1,000,000 and $800,000 respectively. During the month, the company produced 4,500 units of the product. On May 31, 2016, there were 550 units of the product on hand. The following cost information relating to the product was made available at the end of May 2016:

                            Cost per unit

Details	$
Direct material	300
Direct labour	350
Variable production overheads	300
Total	950

Required:

(a)   What was the fixed production overhead cost per unit for Product MK120? (4 marks)

(b)   Determine the full cost per unit in May 2016 for Product MK120. (4 marks)

(c)   How many units of Product MK120 were sold in May 2016? (4 marks)

(d)   Calculate the profit for May 2016 using the marginal costing approach. (10 marks)

(e)   Compare the profit result above using absorption costing techniques. (12 marks)

(f)    Reconcile the profit results obtained above. (6 marks)

(g)   Explain to the management team why absorption costing would be the preferred method for reporting to external stakeholders. (4 marks)

(h)   State three (3) differences between the information provided by the financial accounting system and the management accounting system. (6 marks)

Answer 1

a Fixed production cost per unit Total manufacturing cost Total production units production cost per unit $1,500,000 5,000 $300 $300 $350 b Full Product Cost-Absorption costing Direct Material Direct Labor Variable manufacturing Overhead Fixed manufacturing cost Total Product Cost per unit $300 $300 $1,250 Opening stock Production units Total units available for sale Closing stock Sales Units 350 4,500 4,850 550 4,300 Product Cost- Marginal costing Direct Material Direct Labor Variable manufacturing Overhead Total Product Cost per unit $300 $350 $300 $950 d $8,600,000 Kingston Productions Ltd Income Statement- Marginal Costing Sales Less : Variable Cost of Goods Sold Variable Cost of Goods Sold Contribution Margin Less: Fixed Cost Manufacturing Overhead $1,500,000 Administrative expenses $1,000,000 Selling expenses $800,000 Net Operating Income(loss) $4,085,000 $4,515,000 $3,300,000 $1,215,000 e $8,600,000 Kingston Productions Ltd Income Statement-Absorption Costing Sales Less: Cost of Goods Sold Unadjusted cost of goods sold $5,375,000 Add: Production volume variance (500 units * $300) $150,000 Cost of Goods Sold Gross Profit Less: Operating expenses Administrative expenses $1,000,000 Selling expenses $800,000 Net Operating Income(loss) $5,525,000 $3,075,000 $1,800,000 $1,275,000 f Reconciliation of Operating Income Variable costing net operating income (loss) Fixed manufacturing overhead included in closing stock Absorption costing net operating income (loss) $1,215,000 $60,000/200 units * $300 per unit $1,275,000 g Absorption costing method includes fixed manufacturing overhead in it. The full product cost is in line with GAAP compliance for external reporting purpose h i) Information provided by management accounting is used for internal purpose and information provided by financial reporting is used for external purpose ii) Information provided by management accounting is used for decisions making like make or buy, sell or process further, division or department continue or discontinue, etc. Information provided by financial reporting is usually for statutory purposes iii) Information provided by management accounting is customised and tailor made where as financial accounting is driven by accounting standard bodies and regulatory agencies