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Week 05 Example 2 Question

The document discusses variable vs absorption costing methods using an example company called Browning Ltd that makes a single product. It provides information on Browning's unit production costs, budgeted production and sales volumes, actual production and sales for three months, and budgeted overhead costs. The production director believes absorption costing would be better for internal reporting to account for the high fixed production overhead costs. The required tasks are to: a) Calculate the marginal cost per unit, b) Prepare variable cost income statements for each month, c) Prepare absorption cost income statements for each month, and d) Reconcile the monthly profit differences between the two methods.

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21 views1 page

Week 05 Example 2 Question

The document discusses variable vs absorption costing methods using an example company called Browning Ltd that makes a single product. It provides information on Browning's unit production costs, budgeted production and sales volumes, actual production and sales for three months, and budgeted overhead costs. The production director believes absorption costing would be better for internal reporting to account for the high fixed production overhead costs. The required tasks are to: a) Calculate the marginal cost per unit, b) Prepare variable cost income statements for each month, c) Prepare absorption cost income statements for each month, and d) Reconcile the monthly profit differences between the two methods.

Uploaded by

jumar2
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Introduction to Management Accounting Week 05 Example 2 Variable vs absorption costing Browning Ltd makes a single product and budgets

to produce and sell 17,000 units per month at the following unit cost (): Direct materials 2 Direct Labour 6 Production overhead 4 Total production cost 12 Selling price was 17 per unit over the last quarter and actual activity was as follows: Month 1 units Month 2 units Month 3 units Production 15,000 18,000 19,000 Sales 14,000 16,500 21,000 Opening stock 1,000 2,500 Closing stock 1,000 2,500 500 Selling and administration overheads are budgeted to total 15,000 per month and the production overheads are budgeted to total 68,000 per month. The production director is concerned with the level of fixed production overheads which have risen to 25% of total production costs and she believes that the marginal costing approach currently used in the companys management accounts does not give sufficient attention to these fixed costs. She suggests that an absorption costing approach would produce more reliable figures, arguing that if absorption costing is required for external financial reporting we should use the same system for internal control and avoid the need for reconciliations. Required: a) Calculate the marginal cost of a finished unit. b) Prepare a variable (marginal) cost income statement for each of the three months. c) Prepare an absorption cost income statement for each of the three months. d) Provide a reconciliation of the monthly profits from the two systems.

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