At the end of April 2016 Kingston Productions Ltd had 350 un

At the end of April 2016, Kingston Productions Ltd had 350 units of product MK120 in store. For the month of May 2016, the company budgeted to produce 5,000 units of the product at a selling price of $2,000 each. Fixed production, administration and selling expenses were expected to be $1,500,000, $1,000,000 and $800,000 respectively. During the month, the company produced 4,500 units of the product. On May 31, 2016, there were 550 units of the product on hand. The following cost information relating to the product was made available at the end of May 2016:

                            Cost per unit

Details

$

Direct material

300

Direct labour

350

Variable production overheads

300

Total

950

Required:

What was the fixed production overhead cost per unit for Product MK120? (2 marks)

Determine the full cost per unit in May 2016 for Product MK120. (2 marks)

How many units of Product MK120 were sold in May 2016? (2 marks)

Calculate the profit for May 2016 using the marginal costing approach. (5 marks)

Compare the profit result above using absorption costing techniques. (6 marks)

Reconcile the profit results obtained above. (3 marks

Details	$
Direct material	300
Direct labour	350
Variable production overheads	300
Total	950

Solution

Statement of Fixed Production Overhead Per Unit

Cost

Amount (A)

Cost per Unit (A/5000)

Fixed production Overheads

$ 1,500,000.00

$                             300.00

Statement of full cost per Unit

Details

Cost per Unit

Direct Material

$              300.00

Direct Labor

$              350.00

Variable Overheads

$              300.00

Fixed production Overheads

$              300.00

Full Cost Per Unit

$          1,250.00

Working note 1 - Selling and Administration are indirect cost hence not included in full cost per unit.

Statement of Unit Sold during May

(A) Units Produced

4500

(B) Closing Stock

550

(C ) Opening Stock

350

(D= A+C-B) Units Sold

4300

Profits for May (Marginal Costing)

Revenue(4300*2000)

$ 8,600,000.00

Less - Costs

Direct Material (300 Per unit)

$ 1,290,000.00

Direct Labour (350 Per unit)

$ 1,505,000.00

Variable Overheads (300 per Unit)

$ 1,290,000.00

Total Variable Cost

$ 4,085,000.00

Contribution Margin

$ 4,515,000.00

Less- Fixed Overheads

$ 3,300,000.00

Net Income

$ 1,215,000.00

Profits for May (Absorption Costing)

Sales

$ 8,600,000.00

Less - Cost of Goods Sold*

$ 5,375,000.00

Gross Profit

$ 3,225,000.00

Less - Expenses

Selling Expenses

$      800,000.00

Administration Expenses

$ 1,000,000.00

Net Profit

$ 1,425,000.00

*Working note 2

Cost of Goods Sold

Units Sold

4300

Cost Per Unit (300+350+300+300)

$          1,250.00

Cost of Goods Sold (Units sold*Cost per Unit)

$ 5,375,000.00

Reconciliation of net Profit

Profit as per Marginal Costing

$ 1,215,000.00

Profit as per Absorption Technique

$ 1,425,000.00

Difference

$      210,000.00

Change in Inventory

700 Units

Fixed Production cost per Unit

$              300.00

Total Inventory Value

$      210,000.00

Statement of Fixed Production Overhead Per Unit
Cost	Amount (A)	Cost per Unit (A/5000)
Fixed production Overheads	$ 1,500,000.00	$                             300.00