Answer :
Answer:
Submarine Company
Income statement under absorption costing
$ $
Sales (1,800 units x $150) 270,000
Less: Full cost:
Direct material (2,000 units x $40) 80,000
Direct labour (2,000 units x $50) 100,000
Variable overhead (2,000 units x $10) 20,000
Fixed overhead (2,000 units x $20) 40,000
240,000
Less: Closing stock (200 units x $120) 24,000 216,000
Gross profit 54,000
Less: Selling and administrative expenses:
Variable selling and administrative 36,000
Fixed selling and administrative expenses 15,000 51,000
Net profit 3,000
Submarine Company
Income statement using marginal costing
$ $
Sales (1,800 units x $150) 270,000
Less: Variable costs:
Direct material (2,000 units x $40) 80,000
Direct labour (2,000 units x $50) 100,000
Variable overhead (2,000 units x $10) 20,000
200,000
Less: Closing stock (200 units x $100) 20,000
180,000
Add: Variable selling and administrative 36,000 216,000
Contribution 54,000
Less: Fixed cost:
Fixed production cost 40,000
Fixed selling and administrative expenses 15,000 55,000
Net loss (1,000)
Profit reconciliation statement
Closing stock Net profit/loss
$ $
Absorption costing 24,000 3,000
Less: Marginal costing 20,000 (1,000)
Difference 4,000 4,000
The difference of $4,000 in net profit is as a result of $4,000 difference in closing inventory.
Explanation:
In marginal costing, variable costs are deducted from sales in order to obtain the contribution margin. Net profit is calculated by deducting fixed costs from the contribution margin. Closing stock is valued at marginal cost per unit in marginal costing. Closing stock is the difference between production units and sales units. Marginal cost is the sum total of all variable costs.
In absorption costing, full costs are deducted from sales in order to obtain the gross profit. Net profit is the difference between gross profit and selling and administrative expenses. Closing stock is valued at full cost in absorption costing. Full cost is the aggregate of variable costs per unit and fixed costs per unit.