Reconciliation between Profit Statements (Cambridge International AS Accounting)

Profit statements using marginal costing

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

    • **Excluding **the fixed costs

  • Subtract closing inventory

• STEP 3 Calculate the** contribution**

  • Revenue - variables

• STEP 4 Subtract the fixed costs

Layout of a profit statement using marginal costing

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

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

	$
Selling price	14
Direct materials	4
Direct labour	3

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
  • Total

$72 000 + $54 000 = $126 000

• Opening inventory ($4 + $3) × 2 000 = $14 000
• Closing inventory *Opening inventory + Production - Sales * *= 2 000 + 18 000 - 12 000 * = 8 000 units ($4 + $3) × 8 000 = $56 000

Profit statement for the month of August

		$
Revenue		168 000
Cost of sales:
Opening inventory	14 000
Production costs	126 000
Less: Closing inventory	(56 000)	(84 000)
Contribution		84 000
Less: Fixed overheads		(25 000)
Profit for the month		59 000

Final answer: Profit for August is $57 000

Reconciliation between absorption and marginal costing

Spec point — how to prepare a statement reconciling the reported profits using marginal costing and absorption costing

How is reconciliation between absorption and marginal costing done?

• A statement reconciling the reported profits using absorption and marginal costing is prepared

• A difference arises because of fixed manufacturing overheads being treated differently

  • In marginal costing, fixed manufacturing overheads are charged fully to the period
  • In absorption costing, fixed manufacturing overheads are absorbed into product cost and can be carried forward in closing inventory or released from opening inventory

• When opening inventory is greater than the closing inventory

  • Marginal profit is higher than absorption profit

• When closing inventory is greater than opening inventory

  • Absorption profit is higher than marginal profit

How is inventory valued using absorption and marginal costing?

• In absorption costing, fixed costs are absorbed into inventory

  • Fixed manufacturing overheads are included when calculating the value of inventory
  • When calculating value of opening inventory: Opening スペース units スペース かける 開き括弧 Total スペース direct スペース costs スペース たす スペース Variable スペース manufacturing スペース overheads スペース たす スペース Fixed スペース manufacturing スペース overheads 閉じ括弧
  • When calculating value of closing inventory: Closing スペース units スペース かける スペース 開き括弧 Total スペース direct スペース costs スペース たす スペース Variable スペース manufacturing スペース overheads スペース たす スペース Fixed スペース manufacturing スペース overheads 閉じ括弧

• In marginal costing, fixed costs are excluded from inventory

  • Only variable costs are included when calculating the value of inventory
  • When calculating value of opening inventory: Opening スペース units スペース かける スペース 開き括弧 Total スペース direct スペース costs スペース たす スペース Variable スペース manufacturing スペース overheads 閉じ括弧
  • When calculating value of closing inventory: Closing スペース units スペース かける 開き括弧 Total スペース direct スペース costs スペース たす 狭い空白文字 Variable スペース manufacturing スペース overheads 閉じ括弧

How is a reconciliation statement prepared?

• STEP 1 Calculate profit as per absorption costing

  • Start with sales revenue

  • Subtract production cost which includes:

    • Direct materials
    • Direct labour
    • Other direct costs
    • Variable manufacturing overheads
    • Fixed manufacturing overheads

  • Subtract operating expenses

    • Administration costs
    • Selling & distribution costs

• STEP 2 Add the difference in opening inventory

  • Calculate opening inventory for absorption costing
  • Calculate opening inventory for marginal costing
  • Calculate the difference in opening inventory value

• STEP 3 Subtract the difference in closing inventory

  • Calculate closing inventory for absorption costing
  • Calculate closing inventory for marginal costing
  • Calculate the difference in closing inventory value

• STEP 4 Check that the value equals the profit as per marginal costing

  • Start with sales revenue

  • Subtract production costs which includes:

    • Direct materials
    • Direct labour
    • Other direct costs
    • Variable manufacturing overheads

  • Subtract operating expenses

    • Administration costs
    • Selling & distribution costs

*Example of a cost reconciliation statement *

Worked Example With absorption costing:

• Profit: $9 200
• Opening inventory: $1 600
• Closing inventory: $2 000

With marginal costing:

• Profit: $9 100
• Opening inventory: $1 500
• Closing inventory: $1 800

Prepare a statement reconciling the profit from absorption costing and marginal costing.

Answer:

Calculate the difference in the inventory values

*Difference in opening inventory: 1 600 - 1 500 = 100 *

*Difference in closing inventory: 2 000 - 1 800 = 200 *

	$
Profit from absorption costing	9 200
Difference in opening inventory	100
Less: Difference in closing inventory	(200)
Profit from marginal costing	9 100