COST ACCOUNTING

Cost Accounting

Cost Accounting

Income Statements

Contribution Margin (Variable) Income Statement

For the year ended December 31, 20__

Sales (345,000 × $29.00)

 

$10,005,000

LESS: TOTAL VARIABLE COSTS:

 

 

VARIABLE MFG. COSTS

1960000

 

VARIABLE SELLING & OPERATING COSTS

414000

 

 

 

2374000

CONTRIBUTION MARGIN

 

$7,631,000

LESS: TOTAL FIXED COSTS:

 

 

FIXED MFG. COSTS

1600000

 

FIXED SELLING & ADMIN. COSTS

1200000

 

 

 

2800000

NET OPERATING INCOME

 

$4,831,000

Absorption Costing Income Statement

For the year ended December 31, 20__

SALES

 

$10,005,000

LESS: COST OF GOODS SOLD:

 

 

BEG. FIN.GOODS INV.

xxx

 

PLUS: COGM

3560000

 

 

 

 

GOODS AVAILABLE FOR SALE

3560000

 

LESS: END. FIN. GOODS INV.

489500

 



 

 

COST OF GOODS SOLD

 

3070500



 

 

GROSS MARGIN(PROFIT)

 

$6,934,500

LESS:

 

 

SELLING & ADMIN. EXPENSES (FIXED)

1200000

 

SELLING & ADMIN. EXPENSES (VARIABLE)

414000

 

 

 

1614000

NET OPERATING INCOME

 

$5,320,500

Ratios

Contribution Margin Ratio

CM Ratio = Contribution Margin / Sales

= 7,631,000/10,005,000

= 0.76

Gross Profit Ratio

Gross Profit Ratio = (Gross profit / Net sales) × 100

= (6,934,500/10,005,000) x 100

= 69.31

Operating (Net) Income Ratio (Contribution Margin)

Net Profit Ratio = (Net profit / Net sales) × 100

= (4,831,000/10,005,000) x 100

= 48.29%

Operating (Net) Income Ratio (Absorption Costing)

Net Profit Ratio = (Net profit / Net sales) × 100

= (5,320,500/10,005,000) x 100

= 53.18%

Reconciliation

Net operating Income (Absorption) = $5,320,500

Net operating Income (Contribution Margin) = $4,831,000

Now,

$5,320,500- $4,831,000 = $489500

$489500/55,000 units = $ 8.9

The $8.9 per unit difference is present in inventory costs. Essentially $489500 [55,000 units x $8.9] in costs were deferred to the next accounting period under Absorption costing.

Reasons for Dissimilar Profits

Fixed and Variable Costs

In absorption costing or full costing, no distinction is made between fixed and variable costs. The production cost of a product is made up of materials, direct labor and direct expenses and a share of factory fixed overheads. On the other hand, marginal costing is a method of presenting cost data wherein fixed and variable costs are separated for purposes of managerial decision making. This method takes into account the variable cost only rather than the full production cost, which results in dissimilar profit figures.

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