Profit Statements (Cambridge International A-Level Accounting)

Profit statements using absorption costing

Spec point — how to prepare costing and profit statements using absorption costing

What are profit statements?

• Profit statements show the profit or loss made from selling a product/service

How do I prepare a profit statement using absorption costing?

• STEP 1 Calculate the sales revenue

  • Selling price per unit × number of units sold

• STEP 2 Calculate the cost of sales

  • Start with opening inventory

  • Add production cost

    • Including the fixed costs

  • Subtract closing inventory

• STEP 3 Calculate the gross profit

  • Sales revenue - cost of sales

• STEP 4 Adjust for the under-absorption or over-absorption to find the profit or loss

  • Add overheads over-absorbed
  • Subtract overheads under-absorbed

• STEP 5 Subtract any other non-production costs to calculate the profit or loss

Layout of a profit statement using absorption costing

Worked Example Jane manufactures a single product. She uses a system of absorption costing.

The following budgeted data is available for one unit of the product.

	$
Selling price	14
Direct materials	4
Direct labour	3

Budgeted production: 20 000 units per month

Budgeted fixed overheads: $23 000 per month

On 1 August, Jane held 2 000 units.

The following actual results are available.

Sales: 12 000 units

Production: 18 000 units

Fixed overheads: $25 000

Prepare the profit statement for the month of August to calculate the profit or loss.

Answer:

• Sales revenue $14 × 12 000 = $168 000

• Production cost

  • Direct materials $4 × 18 000 = $72 000
  • Direct labour $3 × 18 000 = $54 000
  • Fixed overheads 25 000 ÷ 20 000 = $1.25 per unit $1.25 × 18 000 = $22 500
  • Total

$72 000 + $54 000 + $22 500 = $148 500

• Opening inventory ($4 + $3 + $1.25) × 2 000 = $16 500

• Closing inventory Opening inventory + Production - Sales = 2 000 + 18 000 - 12 000 = 8 000 units ($4 + $3 + $1.25) × 8 000 = $66 000

• Calculate the overheads that are over-absorbed or under-absorbed

  • Actual overheads - Overheads absorbed

25 000 - 22 500 = 2 500 under-absorbed

Profit statement for the month of August

		$
Revenue		168 000
Cost of sales:
Opening inventory	16 500
Production costs	148 500
Less: Closing inventory	(66 000)	(99 000)
Gross profit		69 000
Less: Overheads under-absorbed		(2 500)
Profit for the month		66 500

Final answer: Profit for August is $66 500