lecture (4)

Absorption Costing Method

Exercise (1)

You have the following data From the records of the Egyptian company
for October month 2022 (EGP):

Units produced during the month 10000 - units sold 9900 at LE 45 Pounds
per unit, opening stock Finished goods 1000 units - Closing stock Finished
goods 1100 units - Raw material purchased LE 120000 - Paid freight charges
LE 10000, Wages Paid LE 35000 – Direct expenses LE 25000 - Total Factory
Overhead Cost is 20% of the prime cost - showroom expenses LE 18000 -
Advertising expenses LE 15000 - Insurance expense for company buildings
LE 10000 - Bank interest paid LE 9155.

The cost of stock as follows:

Stock types (LE) Opening stock Closing stock

Raw material 15000 20000
Work in process (WIP) 17500 24000
Finished goods 21550 23705
Required:

Prepare Cost & income statement for the month of October 2022, according
to the Absorption costing method.

1
 Solution
Cost & Income statement Under Absorption Costing Method
Sales revenue (9900 units × LE 45) 445500

Direct materials used 125000

Direct labor 35000

Direct expenses 25000

Prime costs (Direct costs) 185000

+ Total factory Overhead costs (20% of prime 37000

cost)
Total factory costs 222000

+ cost of opening work in process 17500

(-) cost of closing work in process (24000)

Cost of finished production during period 215500

+ cost of opening finished goods 21550

Cost of production available for sale 237050

(-) cost of closing finished goods (23705)

= Cost of production sold 213345

+ Marketing Cost (18000 + 15000) 33000

= Cost of Sales (246345)

= Gros Profit 199155

(-) Administrative expenses (10000 + 9155) (19155)

= Net Profit 180000

2
Notes
(1) Cost Materials used:
= Opening stock of material + Raw material purchased + Paid
freight charges - closing stock of raw material
= 15000 + 120000 + 10000 – 20000
= 145000 – 20000 = LE 125000

(2) Marketing Cost:

= showroom expenses + Advertising expenses.
= LE 15000 + LE 18000 = LE 33000.
(3) Administrative expenses:
= Insurance expense for company buildings + Bank interest paid
= LE 10000 + LE 9155 = LE 19155.
(4) Quantity equation:
Opening (beginning) finished goods inventory + units produced during
period = Closing (Ending) finished goods inventory + sales quantity
during period.

(5) Closing (Ending) finished goods inventory (units) = Opening

(beginning) finished goods inventory + units produced during period - sales
quantity during period.

= 1000 + 10000 – 9900 = 1100 units.

3
(6) Cost equation:
Cost of Closing finished goods inventory = Closing finished goods inventory
(units) x Cost per unit from finished production.
= 1100 units x LE 21.55 = LE 23705
Cost per unit from finished production during current period =
𝐂𝐨𝐬𝐭 𝐨𝐟 𝐟𝐢𝐧𝐢𝐬𝐡𝐞𝐝 𝐠𝐨𝐨𝐝𝐬 𝐝𝐮𝐫𝐢𝐧𝐠 𝐩𝐞𝐫𝐢𝐨𝐝
𝐔𝐧𝐢𝐭𝐬 𝐩𝐫𝐨𝐝𝐮𝐜𝐞𝐝 𝐝𝐮𝐫𝐢𝐧𝐠 𝐩𝐞𝐫𝐢𝐨𝐝
𝐋𝐄 𝟐𝟏𝟓𝟓𝟎𝟎
= 𝑳𝑬 𝟐𝟏. 𝟓𝟓
𝟏𝟎𝟎𝟎𝟎 𝐮𝐧𝐢𝐭𝐬

4
Exercise (2) P 91.

The following is the data extracted from the records of the Zia Spinning and
Weaving Factory during the month of March 2020

1- Units produced during the month 2000, units sold 1500 at LE 50 Pounds
per unit.

2- Cost per unit was: Direct materials LE 15 - direct wages LE 5 - indirect

industrial costs LE8 - marketing costs LE7

3- Administrative and general expenses during the month amounted to

LE2500

4- There was no work in process at the beginning or end of the month, and
no finished goods at the beginning of the month.

Required:

Prepare cost and income statement for the month of March 2020, according
to the Absorption costing method.

5
 Solution
Cost & Income under Absorption costing
Sales revenue (1500x50) 75000
Direct materials used (2000x15) 30000
Direct labor (2000x5) 10000
Prime costs 40000
Factory overhead (2000x8) 16000
Cost of production available for sale 56000
(-) cost of closing finished goods (14000)
Cost of production sold 42000

Marketing Cost (1500x7) 10500

Cost of Sales (52500)
Gross Profit 22500
Administration expenses (2500)
Net Profit 20000

Notes
(1) Quantity equation:
Opening (beginning) finished goods inventory + units produced during
period = Closing (Ending) finished goods inventory + sales quantity
during period.

Closing (Ending) finished goods inventory (units) = Opening (beginning)

finished goods inventory + units produced during period - sales quantity
during period.

= 0 + 2000 – 1500 = 500 units.

6
(2) Cost equation:
Cost of Closing finished goods inventory = Closing finished goods inventory
(units) x Cost per unit from finished production.
= 500 units x LE 28 = LE 14000
Cost per unit from finished production during current period =
𝐂𝐨𝐬𝐭 𝐨𝐟 𝐟𝐢𝐧𝐢𝐬𝐡𝐞𝐝 𝐠𝐨𝐨𝐝𝐬 𝐝𝐮𝐫𝐢𝐧𝐠 𝐩𝐞𝐫𝐢𝐨𝐝
𝐔𝐧𝐢𝐭𝐬 𝐩𝐫𝐨𝐝𝐮𝐜𝐞𝐝 𝐝𝐮𝐫𝐢𝐧𝐠 𝐩𝐞𝐫𝐢𝐨𝐝
𝐋𝐄 𝟓𝟔𝟎𝟎𝟎
= 𝑳𝑬 𝟐𝟖
𝟐𝟎𝟎𝟎 𝐮𝐧𝐢𝐭𝐬

7
Exercise (3) P 93.
The following is the data of Ezzat Spinning and Weaving Factory during
the month of March 2021
1- Units produced and sold from product 500 units.
2- The unit of product requires 2 meters of material (X) at a price of LE 10
per square meter and 3 meters of material (Y) at the price of LE 5 per square
meter.
3- Production passes through the cutting and detailing centers. The data of
the two centers are as follows:
Data Cutting Detailing
Labor hour per unit 1 2
Labor rate per hour (LE) 5 3
Factory overhead (FOH) 100% of direct labor 50% of direct labor
applied rate

4 - Marketing costs LE 2000 per month in addition to a sales commission

of LE 1 per unit.

5- Administrative costs during the month LE 1000

Required:
Prepare cost & income statement for the month of March 2021 assuming
the Gross profit rate is 25% of the cost of sales and determine the selling
price of the unit.

8
 Solution
Cost & Income under absorption costing
Sales revenues (500 units x ?) 36875
Direct materials
Material (X) = (500 units x 2 x 10) 10000
Material (Y) = (500 units x 3 x 5) 7500
Direct labor
Cutting = (500 units x 1 x 5) 2500
Detailing = (500 units x 2 x 3) 3000

Prime costs 23000

Factory overhead
Cutting = LE 2500 x 100% 2500
Detailing = LE 3000 x 50% 1500
Total Factory overhead 4000
Cost of production sold 27000

Marketing Cost (500 units x LE 1) + LE 2000 2500

Cost of sales (29500)

Gross profit (LE 29500 x 25%) 7375

Administrative expenses (1000)

Net profit 6375

9
Notes:
(1) Total Factory overhead (FOH):
Cutting = LE 2500 x 100% = LE 2500.
Detailing = LE 3000 x 50% = LE 1500.
Total Factory overhead (FOH) = LE 2500 + LE 1500 = LE 4000.

(2) Gross Profit = Cost of Sales x 25%

= LE 29500 x 25% = LE 7375.

(3) Sales revenue = Cost of Sales + Gross Profit

= LE 29500 + LE 7375 = LE 36875.

(4) Selling price per unit = LE36875 ÷ 500 = LE 73.75

10