Question

Karya company is a family-owned firm located in Indonesia. The company produces a single product that is a handcrafted musical instrument called gamelan which similar to a xylophone. The following data for periods 1 to 4 are given below: £ Direct materials per unit 100 Direct labor per unit 150 Variable non-manufacturing overhead per unit 50 Selling price per unit 550 Budgeted fixed manufacturing overhead per period 60,000 Normal activity or budgeted activity is 5,000 units and actual production and sales for the four periods (1-4) are as follows: Sales (units) Production (units) Period 1 5,000 5,000 Period 2 4,000 5,000 Period 3 5,500 4,500 Period 4 4,500 5,000 Questions: 1) Determine the product (inventoriable) cost per unit under: a) Absorption costing [1 mark] b) Variable costing. [1 mark] 2) Prepare the statement of profit and loss for periods 1-4 under absorption costing by using the gross margin approach. [12 marks] 2 3) Prepare the statement of profit and loss for periods 1-4 under variable costing by using the contribution margin approach. [12 marks] 4) Reconcile the absorption and variable costing operating profit figures for each period and explain the differences in the operating profits resulting from the use of the two costing methods. [5 marks] 5) Define the absorption costing system and variable costing system. Discuss the arguments for and against the inclusion of fixed manufacturing overhead in stock valuation for internal profit measurement purposes. [3 marks] 6) Under what circumstances will the operating profit under the variable costing be identical to that under absorption costing? Relate your answer to the results for the previous calculation of operating profit of Karya company for questions 2) and 3).

Answer 1

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Please hit LIKE button if this helped. For any further explanation, please put your query in comment, will get back to you. Absorption Variable Part 1 Direct Material 100 $ 100 150 Direct Labor 150 Fixed Factory Overhead $60,000/5,000 S 12 $ 262 $ Cost of Goods Manufactured 250 Part 2 Sale Units $550 $ 2,750,000 $ 2,200,000 $ 3,025,000 2,475,000 Sales Less: Cost of Goods Sold $262,000 $ Opening Inventory $ 1,310,000 $ 1,310,000 $ 1,179,000 $ 1,310,000 1,310,000 $ 1,310,000 1,441,000 1,310,000 $ -262,000 '$ 1,310,000 $ 1,048,000 1,441,000 1,440,000 $ 1,152,000 1,584,000 1,296,000 250,000 $ 200,000 $ 275,000 $ 225,000 Production Units*$262 Add: Cost of Goods Manufactured Cost of Goods Available for Sale $ -131,000 $ 1,179,000 Less: Closing Inventory Closing Units$262 Cost of Goods Sold Gross Profit Sale Units $50 Less: Variable Non Manufacturing Overhead $ 1,071,000 $ 1,190,000 $ 952,000 1,309,000 Net Operating Income Working-1 Cost of Goods Manufactured: Direct Material 100 Direct Labor 150 Fixed Factory O $60,000/5,000 12 Cost of Goods Manufactured 262 Working-2 Period 1 Period 2 Period 3 Period 4 Beginning Inventory 1,000 Add: Production 5,000 4,500 5,000 5,000 -5,000 -4.500 Less: Sale -4.000 -5,500 Ending Inventory 1,000 500 Part 3 $ 2,475,000 Sale Units $550 2,750,000 $ 2,200,000 $ 3,025,000 Sales Less: Cost of Goods Sold $ 250,000 $ $ Opening Inventory Add: Cost of Goods Manufactured Production Units $250 1,250,000 $ 1,250,000 1,125,000 1,250,000 1.250.000 $ 1,250,000 $ 1,375,000 $ 1,250,000 Cost of Goods Available for Sale Less: Closing Inventory Closing Units $250 S -250,000 $ $125,000 Less: Overeapplied Overheads-Fixed Cost of Goods Sold (5,000-4,500) $12 -6,000 $ 1,250,000 $ 1,000,000 $1,369,000 $1,125,000 $ 1,500,000 $ 1,200,000 $ 1,656,000 $ 1,350,000 Gross Profit -200,000 -275,000 $ 225,000 Less: Variable Non Manufacturing Overhead Contribution Margin Sale Units $50 $ -250,000 $ $ 1,250,000 $ 1,000,000 $ 1,381,000 $ 1,125,000 Less: Fixed Manufacturing Cost -60,000 $ -60,000 $ -60,000 $ -60,000 $ 1,190,000 $ Net Operating Income 940,000 1,321,000 1,065,000 Part 4 Reconcilliation $ 1,071,000 Absorption Income 1,190,000 S 952,000 1,309,000 Less: Ending Inventory $12 Add: Beginning Inventory $12 -12.000 $ 6,000 12,000 $ $ 1,321.000 Variable Income 1.190.000 $ $1,065,000 940.000