EMERALD ISLE

KNITTERS LTD.

GROUP MEMBERS

1- BILAL ASIF SP10-MM-0026

2- MUHAMMAD GHAZANFAR SP10-MM-0063

3- SYED MURTAZA ALI SP10-MM-0121

COMPANY PROFILE

Location- IrelandOwner- Marry O’ MearaSize- Small company having 10 employees

onlyBusiness- ManufacturingProduct- Traditional wool fisherman’s sweaterSelling places- In department stores and

clothing store chainsAccountant- Sean MacLafferty

INDUSTRY INTRODUCTION

Grows at faster pace in the mid 17th century

Declined in the 18th century

Stagnated in the first half of the 19th century

Sheep population today is around 3.5 million

POINTS TO REMEMBER

PRODUCT COST It is the cost directly attributable to the product In absorption costing the fixed manufacturing

overhead is included in the product cost In variable costing fixed manufacturing is not

considered as the part of the product cost

PERIOD COST It is the cost which relates to the period of production In absorption costing other costs such as

administration, selling, distribution etc. considered as period cost

In variable costing besides other cost the fixed manufacturing overhead is also considered as the period cost

REASONS FOR THE DIFFERENCEIF,1- Production = Sales

AC NI = VC NI

2- Production > Sales AC NI > VC NI

3- Production < Sales AC NI < VC NI

CALCULATION OF PRODUCT COST

ABSORPTION VARIABLE DM DMDL DLVMOH VMOHFMOH --------

Product Cost Product Cost

HOW ABSORPTION COSTING MISGUIDES THE DECISION MAKINGOne real and one hypothetical example

clarifies the misguiding of the absorption costing for the business decision making

Through absorption costing the decision maker has left with the unanswerable queries

If production is high the net income is high even the sales remain the same

Manager wonders for the reasons whether low selling price, more efficient operations or other factors

ACTUAL SCENARIOBASIC DATA Rs.Selling / unit 20VMC / unit 7FMOH / unit 150,000V S&A / unit 1F S&A / unit 90,000

YEAR 1 YEAR 2 YEAR 3 TOTAL

Units in beginning inventory 0 0 5000 -----Units produced 25,000 25,000 25,000

75,000Units sold 25,000 20,000 30,000 75,000Units in ending inventory 0 5,000 0

-----

PRODUCT COST

ABSORPTION VARIABLE 7 7 6 -- 13 7

o For all three years

ABSORPTION COSTING Rs.

YEAR 1 YEAR2Sales 500,000

400,000Less: COGSBeg. Inv. 0 0Add: COGM(25000*13) 325,000 325,000GAFS 325,000 325,000Less: End. Inv. 0 65,000COGS 325,000

260,000Gross Margin 175,000

140,000Less: S&A Expenses 115,000

110,000Net Operating Income 60,000 30,000

Rs.YEAR 3 TOTAL

Sales 600,0001,500,000

Less: COGSBeg. Inv. 65,000 --Add: COGM(25000*13) 325,000 975,000GAFS 390,000 975,000Less: End. Inv. 0 --COGS 390,000

975,000Gross Margin 210,000

525,000Less: S&A Expenses 120,000

345,000Net Operating Income 90,000 180,000

VARIABLE COSTING Rs.YEAR 1 YEAR2

Sales 500,000 400,000Less: VCOGSBeg. Inv. 0 0Add: VCOGM(25000*7) 175,000 175,000GAFS 175,000 175,000Less: End. Inv. 0 35,000VCOGS 175,000 140,000Add: V S&A Expenses 25,000 200,000 20,000

160,000Contribution Margin 300,000 240,000Less: Fixed Expenses FMOH 150,000 150,000F S&A Expenses 90,000 240,000 90,000 240,000Net Operating Income 60,000 0

Rs.YEAR 3 TOTAL

Sales 600,0001,500,000

Less: VCOGSBeg. Inv. 35,000 --Add: VCOGM(25000*7) 175,000 525,000GAFS 210,000 525,000Less: End. Inv. 0 --VCOGS 210,000 525,000Add: V S&A Expenses 30,000 240,000 75,000

600,000Contribution Margin 360,000 900,000Less: Fixed Expenses FMOH 150,000 150,000F S&A Expenses 90,000 240,000 90,000 720,000Net Operating Income 120,000 180,000

RECONCILIATIONYEAR1 YEAR2 YEAR3

Variable Costing Net Income 60,000 0 120,000Add: Deferred cost in inventory 0 30,000 0 under absorption costing (5,000*6)Less: Released cost in inventory 0 0 30,000

under absorption costing (5,000*6)Absorption Costing Net Income 60,000 30,000 90,000

HYPOTHETICAL SCENARIOBASIC DATA Rs.Selling / unit 25VMC / unit 10FMOH / unit 300,000V S&A / unit 1F S&A / unit 200,000

YEAR 1 YEAR 2 YEAR 3 TOTAL

Units in beginning inventory 0 0 10,000 -----Units produced 40,000 50,000 30,000

120,000Units sold 40,000 40,000 40,000 120,000Units in ending inventory 0 10,000 0 -----

PRODUCT COST

ABSORPTION VARIABLE

YEAR1 YEAR2 YEAR3VMC 10 10 10

10FMOH 7.5 6 10

--TOTAL 17.5 16 20

10

ABSORPTION COSTING Rs.

YEAR 1 YEAR2Sales 1,000,000

1,000,000Less: COGSBeg. Inv. 0 0Add: COGM 700,000 800,000GAFS 700,000 800,000Less: End. Inv. 0 160,000COGS 700,000

640,000Gross Margin 300,000

360,000Less: S&A Expenses 240,000

240,000Net Operating Income 60,000

120,000

Rs.YEAR 3 TOTAL

Sales 1,000,000 3,000,000Less: COGSBeg. Inv. 160,000 --Add: COGM 600,000 2,100,000GAFS 760,000 2,100,000Less: End. Inv. 0 --COGS 760,000

2,100,000Gross Margin 240,000

900,000Less: S&A Expenses 240,000

720,000Net Operating Income 0

180,000

VARIABLE COSTING Rs.

YEAR 1 YEAR2Sales 1,000,000

1,000,000Less: VCOGSBeg. Inv. 0 0Add: VCOGM 400,000 500,000GAFS 400,000 500,000Less: End. Inv. 0 100,000VCOGS 400,000 400,000Add: V S&A Expenses 40,000 440,000 40,000

440,000Contribution Margin 560,000 560,000Less: Fixed Expenses FMOH 300,000 300,000F S&A Expenses 200,000 500,000 200,000

500,000Net Operating Income 60,000 60,000

Rs.YEAR 3 TOTAL

Sales 1,000,000 3,000,000Less: VCOGSBeg. Inv. 100,000 --Add: VCOGM 300,000 1,200,000GAFS 400,000 1,200,000Less: End. Inv. 0 --VCOGS 400,000 1,200,000Add: V S&A Expenses 40,000 440,000 120,000

1,220,000Contribution Margin 560,000

1,680,000Less: Fixed Expenses FMOH 300,000 900,000F S&A Expenses 200,000 500,000 600,000

1,500,000Net Operating Income 60,000

180,000

RECONCILIATIONYEAR1 YEAR2 YEAR3

Variable Costing Net Income 60,000 60,000 60,000Add: Deferred cost in inventory 0 60,000 0 under absorption costing (10,000*6)Less: Released cost in inventory 0 0 60,000

under absorption costing (10,000*6)Absorption Costing Net Income 60,000 120,000 0

ANYQUESTIONS???????????????

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