Budgeted profit statement using traditional absorption costing
(A) The budgeted profit statement using traditional absorption costing:
Absorption rate for machine department = (504.000)/(420.000) = 1.2
XYI = 1, 2 × 2 hours = 2. 4
YZT = 1, 2 × 5 hours = 6
ABW = 1, 2 × 4 hours = 4. 8
Absorption rate for assembly department = (437.000)/(530.000) = 0.825
XYI = 0,825 × 7 hours = 5.775
YZT = 0,825 × 3 hours = 2.475
ABW = 0,825 × 2 hours = 1.65
Total cost per unit shows in table 1:
XYI YZT ABW
Variable cost (£) 32 84 65
Overheads:
Machine department (£)
Assembly department (£)
2.4
5.775
6
2.475
4.8
1.65
Total cost per unit (£) 40.175 92.475 71.45
Table 1 Cost per Unit
Profit Statement:
Table 2 Profit Statement:
XYI YZT ABW TOTAL (£)
Revenue (£) Selling price × units 45 × 50,000 = 2.250.000 95 × 40,000 = 3.800.000 73 × 30,000 = 2.190.000
8,240,000
Cost of sales (£) Cost per unit ×units 40.175 × 50.000 = 2,008,750 92.475 × 40.000 = 3,699,000 71.45 × 30.000 = 2,143,500
(7,851,250)
Profit (£) 241,250 101,000 46,500 388,750
(B) The budgeted profit statement using activity based costing:
Rate XYI YZT ABW
Machining services (£) 357.000/420.000 = 0.85 0.85 × 100,000 = 85,000 0.85 × 200,000= 170,000 0.85 × 120,000 = 102,000
Assembly services (£) 318.000/530.000 = 0.6 0.6 × 350,000 = 210,000 0.6 × 120,000 = 72,000 0.6 × 60,000 = 36,000
Set-up costs (£) 26.000/520 = 50 50 × 120 = 6,000 50 × 200 = 10,000 50 × 200 = 10,000
Order processing (£) 156.000/32.000 = 4.875 4.875 × 8,000 = 39,000 4.875 × 8,000 = 39,000 4.875 × 16,000 = 78,000
Purchasing (£) 84.000/11.200 = 7.5 7.5 × 3,000 = 22,500 7.5 × 4,000 = 30,000 7.5 × 4,200 = 31,500
Total (£) 362,500 321,000 257,500
units 50,000 40,000 30,000
Overhead per unit (£) = total/units 7.25 8.025 8.5833333
Table 3 Overhead
Total cost per unit :
XYI YZT ABW
Variable cost (£) 32 84 65
Overheads (£) 7.25 8.025 8.5833333
Total cost (£) 39.25 92.025 73.5833333
Table 4 Total Cost per unit
Profit statement:
Table 5 Profit Statement
XYI YZT ABW TOTAL (£)
Revenue (£) 45 × 50,000 = 2,250,000 95 × 40,000 = 3,800,000 73 × 30,000 = 2,190,000
8,240,000
Cost of sales (£) 39.25 × 50,000 = 1,962,500 92.025 × 40,000 = 3,681,000 73.5833333 × 30,000 = 2,207,500
(7,851,000)
Profit (£) 287,500 119,000 (17,500) 389,000
Table 6: Comparison between ABC and the Traditional Method
Profit per product line Total profit (£)
XYI YZT ABW
Traditional Method 241,250 101,000 46,500 388,750
ABC 287,500 119,000 (17,500) 389,000
Difference (46,250) (18,000) 64,000 (250)
Comment on the above results obtained from ABC & absorption costing in terms of profit per product line and unit cost per unit. (150 words).
Use one diagram here if you wish
Question 2
Essay.
It has been said that ‘modern developments such as ABC are sometimes implemented because they are fashionable and not because they provide extra information to management.
Discuss the above statement. (850 words)
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