Moona Inc. produces Mobile phones. Information of the company's operations last year appear below: Fixed cost: Fixed Manufacturing overhead Rs 40,000 Fixed Selling & Administrative Rs 60,000 Selling Price per unit Rs 100 Variable cost per unit: Direct Materials Rs 30 Direct labor Rs 10 Variable Manufacturing Overhead Rs 5 Variable Selling & Administrative Rs 2 Units In beginning Inventory 0 Units Produced 2000 Units sold 1900 Required: a. Compute the unit product cost under both absorption and variable costing.(0.5 Marks) b. Prepare an income statement for the year using absorption costing.( 0.75 Marks) c. Prepare a contribution format income statement for the year using variable costing. (0.75 Marks) Prepare a report reconciling the difference in net operating income between absorption and variable costing for the year. (0.5 Marks)
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Moona Inc. produces Mobile phones. Information of the company's operations last year appear below:
|
Fixed cost: |
|
|
Fixed Manufacturing |
Rs 40,000 |
|
Fixed Selling & Administrative |
Rs 60,000 |
|
|
|
|
Selling Price per unit |
Rs 100 |
|
|
|
|
Variable cost per unit: |
|
|
Direct Materials |
Rs 30 |
|
Direct labor |
Rs 10 |
|
Variable Manufacturing Overhead |
Rs 5 |
|
Variable Selling & Administrative |
Rs 2 |
|
|
|
|
Units In beginning Inventory |
0 |
|
Units Produced |
2000 |
|
Units sold |
1900 |
Required:
a. Compute the unit product cost under both absorption and variable costing.(0.5 Marks)
b. Prepare an income statement for the year using absorption costing.( 0.75 Marks)
c. Prepare a contribution format income statement for the year using variable costing. (0.75 Marks)
- Prepare a report reconciling the difference in net operating income between absorption and variable costing for the year. (0.5 Marks)
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