Please solve this Accounting problem.

Question

The unit selling price and unit production costs of Silver Craft Ltd were as follows for the month of April 2019:-

Selling price Rs120

Direct materials Rs22

Direct labour Rs17

Variable overheads Rs30

Fixed production overheads are based on a monthly production of 4000 units and amounted to Rs 80000.

During the month of April the firm had an opening inventory of 1000 units, produced 5000 units and had sold 3500 units.

Other monthly costs include:-

Fixed selling overheads Rs7000

Fixed administration overheads Rs12000

Fixed distribution overheads Rs6000

Variable selling overheads 5% of sales value



Required:

1. Profit statement based upon Marginal Approach 
2. Profit statement based upon Absorption Approach 
3. A statement reconciling profits based upon the two approaches.

Answer 1

Marginal costing system use only variable cost that relates to production to value its inventory whereas the asorption costing techniques uses both variable cost that relates to production.

Marginal production cost per unit

Direct material 22

Direct labor 17

Variable cost 30

Total 69

Asorption cost per unit will always start from where the Marginal cost ends, therefore

Variable cost per unit 69

Overhead Absorption rate (80k/4k) 20

Total 89

Now the marginal costing statement profit for the month of April

Sales (120 x 3500) 420000

cost of sales

Opening inventory (1000 * 69) 69000

Production (4000 * 69) 276000

closing inventory ((1k + 4k - 3.5k) * 69) (103500) 179400

Gross contribution 240600

Variable selling overhead (5% of 420K) (21000)

Net contribution 157500

Fixed expenses:

Fixed production overhead 80000

fixed selling overhead 7000

fixed Administrative overhead 12000

Fixed distribution overhead 6000 105000

Net profit 52500

Now the Asorption costing statement profit for the month of April

Sales (120 x 3500) 420000

Variable cost of sales

Opening inventory (1000 * 89) 89000

Production (4000 * 89) 356000

closing inventory ((1k + 4k - 3.5k) * 89) (108500) 311500

Gross profit 108500

Administration expense:

Variable selling overhead 21000

fixed selling overhead 7000

fixed Administrative overhead 12000

Fixed distribution overhead 6000 46000

Net profit 62500

Reconciliation statement

The difference is showing as a result of the closing and opening inventory elements because under the marginal costing, fixed production overhead is not considered thereby making the closing inventory lesser than the absorption costing techniques. Therefore the opposite will be done to reconcile

Balance as per marginal 52500

Add closing Inventory of OAR (80k/4k) (1500 * 20) 30000

Opening inventory of OAR (80K/4K) (1000 *20) (20000)

Balance as per absorption costing techniques 62500