Cost & Management Accounting By Product Lecture-27 Mian Ahmad Farhan (ACA)

Example Main product By product Opening stock ----- ----- Production during the year 4,000 800 Closing stock 400 100 Cost incurred 64,000 ----- Cost of 3600 units (64,000/4000x3600) 57,600 ----- Sales price (Per unit) 30 2.50 Further processing cost 0.50

Method-1 Treat as an other income Sales (3600 x 30) 1,08,000 Less Cost of goods sold Opening stock ---- Production cost 64,000 Less Closing stock (16 x 400) 6,400 57,600 Gross Profit 50,400 Add Other income 1,400 51,800

Sales of By Product (700 x 2.5) 1,750 Less Further Processing cost (700 x 0.5) 350 1400

Method-2 Treat as a deduction from cost of goods sold Sales (3600 x 30) 1,08,000 Less Cost of goods sold Opening stock ---- Production cost 64,000 Less Closing stock (16 x 400) 6,400 57,600 Less Sales value of By Product 1400 56,200 Gross Profit 51,800

Method-3 Treat as a deduction from cost of goods manufactured Sales (3600 x 30) 1,08,000 Less Cost of goods sold Opening stock ---- Production cost (64,000 – 1,400) 62,600 Less Closing stock (62,600 x 10%) 6,260 56,340 Gross Profit 56,660

Realizable Value Production cost on By Product 800 x 2.50 = 2,000 Additional cost on By Product 800 x 0.50 = 400 1,600

Method-4 (Realizable Value) Treat as a deduction from cost of goods manufactured Sales (3600 x 30) 1,08,000 Less Cost of goods sold Opening stock ---- Production cost (64,000 – 1,600) 62,400 Less Closing stock (62,400/4,000=15.6 x 400) 6,240 56,160 Gross Profit 51,840

Cost Elements Direct Material Direct Labor FOH Variable & Fixed Cost Variable Cost

Absorption Costing & Marginal Costing 100 units Marginal Costing Direct Material Rs. 80 per unit 8,000 5,000 3,000 2,000 5,000 18,000 16,000 2,000 14,000 Direct Labor Rs. 50 per unit Factory Overhead Variable FOH Fixed FOH Product Cost Fixed Cost (Period Expenses)

Cost Per Unit Absorption Costing = 18,000 / 100 = Rs 180 Marginal Costing = 16,000 / 100 = Rs 160

a – All units Sold b- No. of units sold 80 No. of units in stock 20 100 C- No. of units sold 110 Selling price Rs. 240 per unit

A- All Units Sold Absorption costing Marginal costing Sales (110 x 240) 24,000 24,000 Less Product cost 100 x 180 18,000 16,000 100 x 160 Gross profit 6,000 Contribution margin 8,000 Less Fixed cost 0 (2000) Profit 6,000 6,000

B- 80 units sold & 20 units in stock Absorption costing Marginal costing Sales 110 x 240 26,400 26,400 Less Production cost 10 x 180 = 18,00 10 x 160 = 16,00 100 x 180= 18,000 100 x 160 =16,000 19,800 17,600 Profit 6,600 Contribution Margin 8,800 Less Fixed cost 2,000 6,800

Absorption costing Marginal costing Sales 80 x 240 19,200 19,200 C- 110 units sold Absorption costing Marginal costing Sales 80 x 240 19,200 19,200 Less Production cost 100 x 180 = 18,000 100 x 160 = 16,000 20 x 180 = (3600) 20 x 160 = (3,200) 14,600 12,800 Profit 4,800 Contribution Margin 6,400 Less Fixed cost 2,000 4,400