QUESTION 1 Dee and Co. Limited makes and sells a particular product. At the moment, the company uses absorption costing to measure profits and inventory values. The cost per unit of each item of the product is as follows: GHe Direct material (6 kilograms@GHé9per kilo) 54 Direct labour (5 hours@GHe8per hour) 40 Fixed production overhead 30 The fixed production overhead figure has been calculated on the basis of a budgeted normal volume of 32,000 units per annum. The fixed production overhead incurred amount to GH₵960,000 per annum. Costs relating to sales, distribution and administration are: Fixed GH₵ 420,000 per annum Variable 15% of the sales value. There were no units of finished goods inventory at 1st July 2021. The selling price per unit is GH₵220. The number of units produced and sold for the last two quarters of 2021 are detailed below: Third quarter of 2021 (units) Fourth quarter of 2021 (units) Production 7,000 10,000 Sales 6,000 9,000 The company is contemplating of whether to reject absorption costing and adopt marginal costing as alternative for profit reporting and inventory valuation. Required: a) Prepare the income statements for the last two quarters of 2021 using absorption costing and marginal costing. b) Reconcile profit for the third quarter in (a) above. c) There seem to be arguments for and against absorption costing and marginal costing techniques. d) State two (2) arguments to contrast absorption costing and marginal costing
QUESTION 1
Dee and Co. Limited makes and sells a particular product. At the moment, the company uses absorption costing to measure profits and inventory values. The cost per unit of each item of the product is as follows:
GHe
Direct material (6 kilograms@GHé9per kilo) 54
Direct labour (5 hours@GHe8per hour) 40
Fixed production
The fixed production overhead figure has been calculated on the basis of a budgeted normal volume of 32,000 units per annum. The fixed production overhead incurred amount to GH₵960,000 per annum. Costs relating to sales, distribution and administration are:
Fixed GH₵ 420,000 per annum
Variable 15% of the sales value.
There were no units of finished goods inventory at 1st July 2021. The selling price per unit is GH₵220.
The number of units produced and sold for the last two quarters of 2021 are detailed below:
|
|
Third quarter of 2021 (units) |
Fourth quarter of 2021 (units) |
|
Production |
7,000 |
10,000 |
|
Sales |
6,000 |
9,000 |
The company is contemplating of whether to reject absorption costing and adopt marginal costing as alternative for profit reporting and
Required:
a) Prepare the income statements for the last two quarters of 2021 using absorption costing and marginal costing.
b) Reconcile profit for the third quarter in (a) above.
c) There seem to be arguments for and against absorption costing and marginal costing techniques.
d) State two (2) arguments to contrast absorption costing and marginal costing
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