Chapter 7, Problem 1AE

1.

To determine

Introduction: Absorption costing is a technique for calculating cost of product by taking indirect expense and direct cost into consideration.

To check: Worksheet and complete the calculation

Answer to Problem 1AE

Complete worksheet is given below

Explanation of Solution

Data	Amount $	`Amount $
Cost of wool	200,000
Cost of separation process	40,000
Sales value of intermediate product at split off point
Un-dyed coarse wool	120,000
Un-dyed fine wool	150,000
Un-dyed superfine wool	60,000
Cost of further processing
Un-dyed coarse wool	50,000
Un-dyed fine wool	60,000
Un-dyed superfine wool	10,000
Sales value of end products
Un-dyed coarse wool	160,000
Un-dyed fine wool	240,000
Un-dyed superfine wool	90,000
Calculation of requirement using formula
Analysis of the profitability of the overall operation
Combine final sale value		490,000
Less: costs of production the ending products.
Un-dyed coarse wool	200,000
Un-dyed fine wool	40,000
Un-dyed superfine wool	120,000	360,000
		130,000

Analysis of sell or process further	Coarse	Fine	Super fine
Final sales value after further processing	160,000	240,000	90,000
Less: sales value at the split off point	120,000	150,000	60,000
Incremental revenue from further processing	40,000	90,000	30,000
Less: cost of further processing	50,000	60,000	10,000
Profit or loss of further processing	(10,000)	30,000	20,000

Profit or loss:

Data	Amount $	`Amount $
Cost of wool	200,000
Cost of separation process	40,000
Sales value of intermediate product at split off point
Un-dyed coarse wool	120,000
Un-dyed fine wool	150,000
Un-dyed superfine wool	60,000
Cost of further processing
Un-dyed coarse wool	50,000
Un-dyed fine wool	60,000
Un-dyed superfine wool	10,000
Sales value of end products
Un-dyed coarse wool	160,000
Un-dyed fine wool	240,000
Un-dyed superfine wool	90,000
Calculation of requirement using formula
Analysis of the profitability of the overall operation
Combine final sale value		490,000
Less: costs of production the ending products.
Un-dyed coarse wool	200,000
Un-dyed fine wool	40,000
Un-dyed superfine wool	120,000	340,000
		150,000

Analysis of sell or process further	Coarse	Fine	Super fine
Final sales value after further processing	160,000	240,000	90,000
Less: sales value at the split off point	120,000	150,000	60,000
Incremental revenue from further processing	40,000	90,000	30,000
Less: cost of further processing	30,000	60,000	10,000
Profit or loss of further processing	10,000	30,000	20,000

2.

To determine

Introduction: Absorption costing is a technique for calculating cost of product by taking indirect expense and direct cost into consideration.

To prepare: Traditional format income statement and Contribution format income statement

Answer to Problem 1AE

Income statement and Contribution format income statement is given below:

Explanation of Solution

Data	Amount $	`Amount $
Cost of wool	290,000
Cost of separation process	40,000
Sales value of intermediate product at split off point
Un-dyed coarse wool	100,000
Un-dyed fine wool	110,000
Un-dyed superfine wool	90,000
Cost of further processing
Un-dyed coarse wool	50,000
Un-dyed fine wool	60,000
Un-dyed superfine wool	10,000
Sales value of end products
Un-dyed coarse wool	180,000
Un-dyed fine wool	210,000
Un-dyed superfine wool	90,000
Calculation of requirement using formula
Analysis of the profitability of the overall operation
Combine final sale value		480,000
Less: costs of production the ending products.
Un-dyed coarse wool	290,000
Un-dyed fine wool	40,000
Un-dyed superfine wool	120,000	450,000
		30,000

Analysis of sell or process further	Coarse	Fine	Super fine
Final sales value after further processing	180,000	210,000	90,000
Less: sales value at the split off point	100,000	110,000	90,000
Incremental revenue from further processing	80,000	100,000	0
Less: cost of further processing	50,000	60,000	10,000
Profit or loss of further processing	30,000	40,000	(10,000)

1. Thus the overall profit of operation is $30,000 if final products are from intermediate products
2. Thus, further processing profit of coarse wool is $30,000. Fine wools $40,000 and super fine wool is $10,000
3. Overall operation profit:

Particular	Amount	Amount
Combined sales value ($180,000+210,000+90,000$)		480000
Less: costs of product the end products	290000	440,000
Cost of wool	40000
Cost of separation process	110000
Combined cost dyeing ($50,000+60,000$)
Profit		40,000