QUESTION ONE Dabwiso Limited uses a standard costing system. The standard cost per unit of Product D is as follows: K Direct material 2 500 Direct labour 1 200 Production overheads: Variable 600 Fixed 500 Standard production cost 4 800 Standard selling price 7 500 The standard fixed production overhead absorption rate was based on a budgeted activity of 10,000 units. During Period 4, Production was 10,000 units as planned but sales were only 8,000 units. There was a total fixed production overhead variance of K500 000 adverse. All units were sold at K7,500 each. There were no opening inventory at the beginning of the period. Other costs incurred during the period were in relation to selling and distribution, and administration. These were as follows: Variable Fixed Selling and distribution 20% of sales K3 000 000 Administration – K5 000 000 Required: (a) Prepare operating Profit statement for Period 4 using Absorption costing and Marginal costing. (b) Prepare a reconciliation of the difference between the Profit/Loss under absorption costing and under marginal costing and explain the reason for the difference.
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
QUESTION ONE
Dabwiso Limited uses a
K
Direct material 2 500
Direct labour 1 200
Production
Fixed 500
Standard production cost 4 800
Standard selling price 7 500
The standard fixed production overhead absorption rate was based on a budgeted activity of 10,000 units.
During Period 4, Production was 10,000 units as planned but sales were only 8,000 units. There was a total fixed production overhead variance of K500 000 adverse. All units were sold at K7,500 each.
There were no opening inventory at the beginning of the period. Other costs incurred during the period were in relation to selling and distribution, and administration. These were as follows:
Variable Fixed Selling and distribution 20% of sales K3 000 000
Administration – K5 000 000
Required:
(a) Prepare operating Profit statement for Period 4 using Absorption costing and Marginal costing.
(b) Prepare a reconciliation of the difference between the
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