Question

Question 18

A business enterprise has the following budgeted marginal costing profit and loss account for the month ended 31 December 2018

GHS000                            GHS000

                                     Sales                                                                                   48

                                    Cost of sales:

                                          Opening stock                         3

                                          Production costs                  36

                                          Closing stock                          (7)

                                                                ( 32)

                                                                              16

                                    Other variable costs:

Selling                                                                                       (3.2)

Contribution                                                                                    12.8

                                     Fixed costs:

                                        Production overheads                                                              (4)

Administration                                                                          (3.6)

Selling                                                                                          (1.2)

                                     Net profit                                                                                        4.0

The standard cost per unit is:

                                                                   GHS

Direct materials (1kg)                               8

Direct labour (3 hours)                            9

Variable overhead (3 hours)                  3

                                                                   20

Budgeted selling price per unit            30

The normal level of activity is 2,000 units per month. Fixed production costs are budgeted at GHS4,000 per month and absorbed on the normal level of activity of units produced.

Required

1. Prepare a budgeted profit and loss account under absorption costing for the month ended 31 December 2018.
2. Reconcile the profits under these two methods and explain why a business may prefer to use marginal costing rather than absorption costing.

Answer 1

Calculation of Absorption Rate Per Unit
Particulars	Amount in GHS
Direct Material	8
Direct Labour	9
Variable Production Overheads	3
Fixed Production Overheads Absorption rate	2
(4000/2000)
Absorption Rate	22
Particulars	Amount in GHS 000's	Amount in GHS 000's
Sales		48
Cost of Sales
Opening Inventory (3/20*22)	3.3
Add: Production Cost (36/20*22)	39.6
Les: Closing Inventory (7/20*22)	-7.7	35.2
Gross Profit at Normal		12.8
Less: Admin & Selling Expenses		-8
(3.2+3.6+1.2)
Net Profit		4.8