The following data are related to the manufacture of a standard product during the month of July 2009. Raw materials consumed Rs.15,000 Direct wages Rs. 9,000 Machine hours worked 900 hours Machine hours rate Rs.5 Administrative overheads 20% of works cost Selling overheads Re.0.50 per unit Units produced 17,100 Units Sold 16,000 @ Rs.4 per unit Prepare a cost sheet from the above to show: a. The cost per unit b. The profit per unit sold and profit for the period Hint: Profit = 24000
Answer :
Sales 64,000
Raw materials 15,000
Direct wages 6,000
Variable and fixed OH 10,000
Administrative overheads 9000
Profit 24,000
Q6. Write the differences between absorption costing and management costing.
Answer : What is Absorption Costing?
A management cost accounting method of expensing all the costs related with the production of a particular product is known as absorption costing. Absorption costing utilizes the total overhead costs and total direct costs related with producing a product as the cost base. The GAAP need absorption costing for external reporting. Generally accepted accounting principles (GAAP) require the absorption costing for the external reporting.
ABSORPTION COSTING VS MARGINAL COSTING
| 1) Both fixed and variable cost are considered for product costing and inventory valuation. | 1) Only variable cost is considered for product costing and inventory valuation. |
| 2) The fixed cost is charged to cost of production.
Each product is to bear a reasonable share of fixed cost and profitability of product is thus influenced by subjective apportionment of fixed cost. |
2) Treatment of fixed overhead is different. Fixed cost is considered as a period cost. And profitability of different product is judged by P/V ratio. |
| 3) Presentation of cost is on conventional pattern. Net profit of each product is determined after deducting fixed overheads. | 3) Production of data is oriented to highlight the total contribution and contribution from each product. |
| 4) The difference in the magnitude of opening stock and closing stock affects the unit cost of production due to the impact of related fixed overheads. | 4) The difference in the magnitude of opening stock and closing stock does not affect the unit cost of production. |
Limitations of Absorption Costing–
1) In practice, this method employs highly arbitrary method of apportionment of overhead. This reduces the practical utility of cost data for control purposes.
2) Under absorption costing, fixed cost relating to closing stock is carried forward to the next year. Similarly, fixed cost relating to opening stock is charged to current year instead of previous year. Thus under this method, all the fixed cost is not charged against the revenue of the year in which they are incurred. It is an unsound practice.
3) Under the absorption costing collection of cost data is not very useful fir decision making., because the process of assigning product cost a reasonable share of fixed overhead obscures cost-volume-profit relationship.
4) Under the absorption costing, behavior pattern of cost is not highlighted and thus many s\situations which can be utilized under the marginal costing are likely to go unnoticed under the absorption costing.
