CHAPTER 3: COST SHEET:

ABSORPTION AND MARGINAL

COSTING
Chapter objectives:
The objective of this chapter is to introduce to the readers the formats of cost sheets under
absorption and marginal costing methods. In particular, the following are the learning
objectives:
Learning objective 1: Gross profit and contribution
Learning objective 2: Product cost and period cost
Learning objective 3: Cost sheet - absorption costing and marginal costing

LO1: GROSS PROFIT AND CONTRIBUTION

GROSS PROFIT
Gross profit is the difference between the selling price and the cost of goods sold.
We may write:
Gross profit = Sales – Cost of goods sold
For example, if the sale value is $ 1,000 and the cost of goods sold is $ 600, the gross
profit is ($ 1,000 – 600) or $400.
Cost of goods sold
The cost of goods sold is the total cost of producing the goods (cost of procuring stock-
in-trade) and bringing them to the location and condition of sale. In the context of a firm
that is engaged in manufacturing, total costs include the following cost elements:
 Direct material cost
 Direct employee cost
 Direct expenses
 Variable production overheads
 Fixed production overheads
Production overheads are also called manufacturing overheads.

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Direct costs, which are traced to the cost object, are variable costs. Fixed production
overheads, which are not traced to the cost object, are assigned to the cost object on some
equitable bases.
Operating profit
Operating profit is the difference between gross profit and operating expenses. For
example, if the gross profit is $ 400 and the total amount of operating expenses is $ 300,
the operating profit is ($400 – 300) or $ 100.
Operating expenses consist of the following cost elements:
 Variable Marketing, selling and distribution overheads
 Fixed Marketing, selling and distribution overheads
 Variable Administrative overheads
 Fixed administrative overheads
Usually, almost all administrative overheads are fixed. They do not change with the
change in the production volume. Managerial decisions can increase or reduce fixed costs
but not in a short period. For example, accounting expenses, legal expenses, and
corporate office expenses do not change in a short period.
CONTRIBUTION
Variable costs vary in direct proportion to the change in the volume of activity. In the
context of the product cost, the activity volume is measured in terms of the number of
units produced/sold. Additional resources representing variable costs are consumed only
when an additional unit is produced/sold. Direct material cost, direct employee cost and
direct expenses are variable costs. The contribution from a product is the difference
between the selling price and the variable costs of producing and selling one unit of the
product.
Contribution per unit = Selling price per unit – Variable costs producing and selling per unit
Total contribution = Sales for the period – Total variable costs for the period
Operating profit = Total contribution for the period – Total fixed costs for the period
Marginal cost
The cost of producing an additional unit is also called the marginal cost.
Example 3.1 (Variable costs or marginal costs)
Fact pattern

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One unit of the finished product (P) is produced by converting two units of a particular
raw material (M) costing $ 3 per unit. An employee (E), who is paid $6 per hour, spends
two hours converting M into P. A contractor (C) paints P to protect it from the vagaries of
weather and to make it look beautiful. C is paid $ 5 to paint each unit of the product (P).
The firm sells the product P at $ 50 per unit. Salespersons, selling P, are paid a
commission of 10 per cent of the selling price.
Required
How much does P contribute towards recovering fixed costs and generating a surplus?
Analyses
The cost for producing an additional unit of P is ($3*2 + $6*2 + $5) or $23. The total
variable costs of producing and selling P is ($23 + 5) or $28. Thus, one unit of P
contributes ($ 50 – 28) or $ 22 towards recovering fixed costs and generating a surplus.
Box 3.1: Gross profit and Contribution
Gross profit
Gross profit = Sales – Cost of goods sold
The cost of goods sold is the total cost (variable costs plus fixed costs) of producing or
procuring (in a merchandising business) the units sold and the cost incurred to bring
the goods to the location and condition of sale. The cost of goods sold does not include
the costs of marketing the goods.
Contribution
Contribution per unit = Selling price per unit – Variable costs per unit
Total contribution = Sales – Total variable costs of producing and selling the number
of units sold
Variable cost is the total of the variable costs incurred to produce (or procure) the
number of units sold and the variable marketing costs.

Key concepts
Cost of goods sold, contribution, gross profit, operating profit
Self-test questions
Self-test question 3.1
Fill in the blanks

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(a) Sales: $ 20,000, variable cost of production : $ 6,000, Fixed production overheads: $
4,000; Variable marketing overheads: $ 3,000; Fixed marketing overheads: $ 2,000, Total
contribution: $ [ ]
(b) Sales: $ 50,000, variable cost of production: $ 15,000, Fixed production overheads: $
6,000; Variable marketing overheads: $ 5,000; Fixed marketing overheads: $ 7,000,
Gross profit: $ [ ]

LO 2: PRODUCT COST AND PERIOD COST

Product costs are included in determining the cost of the items included in the inventory.
They are recognised as expenses when the product is sold. Product costs are also called
inventoriable costs.
Period costs are costs that are not included in the cost of the items included in the
inventory. They are recognised as expenses in the period in which incurred.
ABSORPTION COSTING
Under absorption costing (also called, total absorption costing), the costs incurred in
producing the product and bringing them to the location of sale are considered product
costs. Product cost consists of direct material costs, direct employee costs, direct
expenses, variable production overheads and fixed production overheads. It also includes
costs incurred to bring the items in the location of sale.
Marginal costing (Variable costing)
Under marginal costing, variable costs incurred in producing the product are considered
product costs. Product cost consists of direct material costs, direct employee costs, direct
expenses, and variable production overheads. Unlike absorption costing, fixed production
overheads are not included in the product cost. The Product cost includes costs incurred
to bring the items in the location of sale.
Throughput costing (Super variable costing)
Under throughput costing (also called, super-variable costing), only the direct material
costs are considered product costs. The costs of converting the direct materials into the
finished product are considered period costs.
Example 3.2 (Product cost and period cost)
Fact pattern

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A firm produces the product K. During the year 2023, it incurred the following costs to
produce 1,000 units of the product K:
Amount $
Direct material costs [$ 5*1,000] 5,000
Direct employee costs [$ 6*1,000] 6,000
Direct expenses [$ 2*1,000] 2,000
Variable production overheads [$ 4*1,000] 4,000
Fixed production overheads allocated to the product 3,000

The firm sells K at $ 40 per unit. During the year it sold 800 units of K. There was no
opening stock of K. The operating expenses for the year were $ 2,000.
Required
Calculate the operating profit for the year under the absorption costing method, marginal
costing method and throughput costing method.
Analyses
Absorption Marginal Throughput
costing costing costing
Amount $ Amount $ Amount $
A. Sales ($40 × 800) 32,000 32,000 32,000
B. Cost of Production:
Direct material cost 5,000 5,000 5,000
Direct employee cost 6,000 6,000 6,000
Direct expenses 2,000 2,000 2,000
Variable production overheads 4,000 4,000 4,000
Fixed production overheads 3,000 3,000 3,000
Total cost of producing 1,000 units of K 20,000 20,000 20,000
C. Cost of closing inventory (200 units of K) 4,000 3,400 1,000
D. Cost of goods sold (B -C) 16,000 16,600 19,000
E. Administrative costs 2,000 2,000 2,000
F. Operating profit (A – D -E) 14,000 13,400 11,000

Note that the operating profit is highest in the case of absorption costing because total
production cost is considered as the product cost. It is lowest when the throughput costing
method is applied because only direct material costs are considered as the product cost.
GAAP Requirement
IAS 2 (Ind AS 2) prescribes the absorption costing principle for determining the
inventory cost. GAAP requires entities to value inventories at cost. However, if the net
realisable value (NRV) is lower than the cost, inventories should be valued at NRV.

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Key Concepts
Absorption costing, marginal costing, period cost, product cost, throughput costing,
Self-test question 3.2
Fill in the blanks
Variable production costs: $ 60,000, including direct material cost of $ 40,000, Fixed
production overheads: $ 20,000, Variable marketing overheads: $ 10,000; Fixed
marketing overheads: $ 15,000; Number of units produced: 20,000; Finished goods stock:
4,000 units; Cost of finished goods inventory:
(a) under absorption costing: $ [ ]
(b) under marginal costing: $ [ ]
(c) under throughput costing: $ [ ]

LO 3: COST SHEET
ABSORPTION COSTING METHOD
In absorption costing total production cost is considered as product cost.
The cost sheet (with hypothetical figures) under the absorption costing system is
presented in table 3.1 below:
Table 3.1: Format for presenting the cost sheet under absorption costing
Particulars Amount
($)
1. Direct material cost 30,000
2. Direct Employees cost 40,000
3. Direct expenses 5,000
4. Prime Cost (1+2+3) 75,000
5. Production overheads (Variable overheads + Allocated fixed 25,000
overheads)
6. Works Cost (Factory Cost) (4+5) 100,000
7. Decrease/(Increase) in work-in-process (WIP) 16,000
8. (Recoveries) (such as, sale of scrap) (1,000)
9. Cost of production/operation (6+7+8) 115,000
10. Cost of finished goods purchased 20,000
11. Total cost of production and purchase (9+10) 135,000
12. Decrease/ (Increase) in cost of finished goods 10,000
13. self/captive consumption (such as, distribution as samples) (5,000)
14 Cost of production/operation of products sold (11 + 12+13) 140,000
15. Administrative overheads 20,000
16. Selling and distribution overheads 20,000
17. Cost of sales before interest (14 +15+16) 180,000

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 18. Interest and financing charges [See note (i)] 10,000
19. Cost of sales (17+18) 190,000
20 Net sales realisation (net of taxes and duties) 210,000
21. Profit as per Cost Accounts (20-19) 20,000
Notes:
(i) The cost sheet presented in Table 3.1 is based on the abridged cost statement provided
in form CRA 3 (the form of the Coat Audit Report) prescribed in the Companies (Cost
Records and Audit) Rules, 2014.
(ii) Interest and financing charges are usually not included in the cost of sales. They arise
from financing decisions and not from operating decisions. Therefore, they are excluded
from cost accounting. However, they are included in the cost sheet to be submitted to the
government.
Operating profit is the difference between revenue and cost of sales, provided the cost of
sales does not include interest and financing charges.
(iii) In the past administrative expenses were included in the product cost. However, the
contemporary practice is not to include administrative costs in the product cost. It is in
conformity with the financial accounting principles for ascertaining the cost of items in
the inventory.
(iv) The format may be modified for the service industry. However, most of the items
will not be relevant, as the concept of the product cost and period cost is not applicable.
Explanations
I present the explanations for items in Table 3.1 in Table 3.2 below.
Table 3.2: Explanations of the cost sheet presented in Table 3.1 above
Item Explanation
1. Prime cost The total of direct materials costs, direct employee costs and
direct expenses. The use of the term prime cost was relevant
when direct costs constituted the most part of the total cost.
Although the percentage of direct costs in the total cost has
been reduced significantly over the years, the use of the term
continues.
2. Works cost Prime Cost + Production overheads; This represents the total
(Factory cost) production costs incurred during the reporting period.
3. Cost of The ‘works cost’ includes costs incurred to complete the
production incomplete items at the beginning of the year (opening WIP)
and costs incurred on units that remained incomplete at the
end of the period (closing WIP). For example, if 1,000 units
were in the WIP at the beginning of the period, the production

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 cost incurred includes the costs incurred to complete those
1,000 units of WIP. If 500 units were in the WIP at the end of
the period, the production cost incurred includes the costs
incurred on the incomplete 500 units.
Therefore, to determine the cost of finished goods produced
during the period, the increase (decrease) in the cost of WIP is
deducted (added) from the ‘works cost’.
Recoveries by selling scraps are deducted from the ‘works
cost’. A small part of the direct materials cost is recovered by
selling scrap generated in the production process.
4. Cost of Opening stock of finished goods and finished goods produced
production of during the period is available for sale. The number of units
goods sold sold is the (opening stock of finished goods + Finished goods
produced – closing stock of finished goods). Therefore, to
determine the cost of production of goods sold, a decrease
(increase) in the value of finished goods during the period is
added (deducted) to the cost of production of goods sold.
If the firm distributed some units of finished goods as samples
or consumes some units of finished goods in the production
process , the cost of the goods distributed as samples, and
consumed internally is also deducted because those units were
not available for sale.

We may tweak the format in table 3.1 to disclose gross profit as a line item. The modified
cost sheet is presented in table 3.3 below:
Table 3.3: Modified format for presenting the cost sheet
Particulars Amount
($)
1. Direct material cost 30,000
2. Direct Employees cost 40,000
3. Direct expenses 5,000
4. Prime Cost (1+2+3) 75,000
5. Production overheads (Variable overheads + Allocated fixed 25,000
overheads)
6. Works Cost (4+5) 100,000
7. Decrease/(Increase) in work-in-process (WIP) 16,000
8. (Recoveries) (such as, sale of scrap) (1,000)
9. Cost of production/operation (6+7+8) 115,000
10. Cost of finished goods purchased 20,000
11. Total cost of production and purchase (9+10) 135,000
12. Decrease (Increase) in cost of finished goods 10,000
13. self/captive consumption (such as, distribution as samples) (5,000)
14 Cost of production/operation of products sold (11 + 12+13) 140,000
15. Net sales realisation (net of taxes and duties) 210,000

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 16. Gross profit (15-14) 70,000
17. Administrative overheads 20,000
18. Selling and distribution overheads 20,000
19. Interest and financing charges 10,000
20. Profit as per Cost Accounts (16-17-18-19)) 20,000

MARGINAL COSTING METHOD

The cost sheet (with hypothetical figures used in Table 3.1) under the marginal costing
system is presented in table 3.4 below:
Table 3.4: Format for presenting the cost sheet
Particulars Amount
($)
1. Net sales realisation (net of taxes and duties) 210,000
2. Variable costs of production
2 (i) Direct material cost 30,000
2 (ii) Direct Employees cost 40,000
2 (iii) Direct expenses 5,000
2 (iv) Variable production overheads 15,000
3. Total Variable works costs 90,000
4. Decrease/(Increase) in work-in-process (WIP) 14,000
5. (Recoveries) (such as, sale of scrap) (1,000)
6. Variable Cost of production/operation (3+4+5) 103,000
7. Cost of finished goods purchased 20,000
8. The total variable cost of production and purchase (6+7) 123,000
9. Decrease (Increase) in cost of finished goods 8,000
10. Self/captive consumption (such as, distribution as samples) (5,000)
11. Variable Cost of production/operation of products sold (8+ 126,000
9+10)
12. Variable selling and distribution overheads 5,000
13. Variable costs of goods sold (11+12) 131,000
14. Contribution (1-13) 79,000
15, Fixed production overheads 10,000
16. Fixed Selling and distribution overheads 15,000
17. Administrative overheads 20,000
18. Interest and financing charges 10,000
19. Profit as per Cost Accounts (14-15-16-17-18) 24,000

Notes:
1. In Tables 3.1 and 3.3 variable and fixed production overheads and Selling and
Distribution overheads were not disclosed separately. In table 3.4 they are disclosed
separately.

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2. The difference between the profit as per Cost Accounts disclosed under the absorption
costing and marginal costing arises due to the differences in the valuation of WIP and
finished goods.
Example 3.1 (Cost sheet – absorption and marginal costing)
Fact pattern
TT & Co. (TTC) produces only one product (P). In the month of January 2024, it incurred
the following costs:
Amount ($)
Costs of direct material consumed 50,000
Direct employee costs 20,000
Direct expenses 5,000
Variable production overheads 10,000
Fixed production overheads 15,000
Variable marketing, selling and distribution overheads 5,000
Fixed marketing, selling and distribution overheads 25,000
Administrative overheads (fixed costs) 15,000

During the month TTC produced 5,000 units of P. It sold 4,000 units of P at S40 per unit.
There were no inventories of WIP and finished goods at the commencement of the
month. There was no WIP at the close of the month.
Required
(a) Prepare the cost sheet under the absorption costing method disclosing gross profit.
(b) Prepare the cost sheet under the absorption costing method disclosing gross profit.
(c) Reconcile the difference between the operating profit disclosed under the absorption
costing method and that disclosed under the marginal costing method and explain the
difference.
Analyses
(a) Cost sheet applying absorption costing principles
COST SHEET
Amount $
1. Revenue (4,000 × $ 40) 160,000
2. Cost of direct material consumed 50,000
3. Direct employee cost 20,000
4. Direct expenses 5,000
5. Prime cost (2+3 +4)) 75,000
6. Variable production overheads 10,000

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 7. Fixed production overheads 15,000
8. Works cost (5+6+7) 100,000
9. Change in WIP 0
10. Total cost of production (8+9) 100,000
11. (Increase)/Decrease in finished goods [1,000 units ×$ (20,000)
(100,000/5,000)]
12. Cost production of goods sold [11+12] 80,000
13. Gross Profit (1-12) 80,000
14. Variable marketing, selling and distribution overheads 5,000
15. Fixed marketing, selling and distribution overheads 25,000
16. Administrative overheads 15,000
17. Operating profit [14-15-16-17] 35,000

(b) Cost sheet applying marginal costing principles

COST SHEET
Amount $
1. Revenue (4,000 × $ 40) 160,000
2. Cost of direct material consumed 50,000
3. Direct employee cost 20,000
4. Direct expenses 5,000
5. Variable production overheads 10,000
7. Variable production cost 85,000
8. Change in WIP 0
9. Total variable cost of production of finished goods (7+8) 85,000
10. (Increase)/Decrease in finished goods (17,000)
[1,000 units × ($ 85,000/5,000)]
11. Variable cost production of goods sold [9+10] 68,000
12. Variable marketing, selling and distribution overheads 5,000
12. Contribution (1-11 -12) 87,000
13 Fixed production overheads 15,000
15. Fixed marketing, selling and distribution overheads 25,000
16. Administrative overheads 15,000
17. Operating profit [14-15-16-17] 32,000

(c) Reconciliation
Amount $
Operating profit as per absorption costing 35,000
The difference in the valuation of the stock of finished goods (3,000)
[$ 20,000 – 17,000]
Operating profit as per marginal costing 32,000

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The cost of the finished goods inventory at the close of the month is lower in the marginal
costing system than that in the absorption costing system by $ 3,000 because no part of
the fixed production overheads is carried to the next accounting period as a component of
the cost of finished goods inventory. In absorption costing, fixed production overheads
are treated as product costs. In this illustration, under the absorption costing system, ($
15,000/5,000 units) × (1,000 units), that is $ 3,000 of fixed production overheads is
carried forward to the next financial year as a component of the finished goods inventory.
Under the marginal costing system, total fixed production overheads of $ 15,000 are
recognised as a period cost.
Example 3.2 (Cost sheet – absorption and marginal costing)
Fact pattern
KK & Co. (KKC) produces only one product (P). In the month of January 2024, it
incurred the following costs:
Amount ($)
Cost of direct material consumed 60,000
Direct employee cost 30,000
Direct expenses 6,000
Variable production overheads 12,000
Fixed production overheads 18,000
Variable marketing, selling and distribution overheads 6,000
Fixed marketing, selling and distribution overheads 30,000
Administrative overheads 20,000

During the month KKC produced 5,500 units of P and 500 units remained incomplete. It
sold 4,500 units of P at $50 per unit. The management estimates that 50 per cent of the
conversion cost was incurred on incomplete units. There were no inventories of WIP and
finished goods at the commencement of the month.
Required
(a) Prepare the cost sheet under the absorption costing method disclosing gross profit.
(b) Prepare the cost sheet under the absorption costing method disclosing gross profit.
(c) Reconcile the difference between the operating profit disclosed under the absorption
costing method and that disclosed under the marginal costing method and explain the
difference.
Analyses

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(a) Cost sheet applying absorption costing principles
COST SHEET
Amount $
1. Revenue (4,500 × $ 50) 225,000
2. Cost of direct material consumed 60,000
3. Direct employee cost 30,000
4. Direct expenses 6,000
5. Prime cost (2+3 +4)) 96,000
6. Variable production overheads 12,000
7. Fixed production overheads 18,000
8. Works cost (5+6+7) 126,000
9. Decrease/(Increase) in WIP (7,750)
10. Total cost of production (8+9) 118,250
11. (Increase)/Decrease in finished goods (21,500)
[1,000 units × ($ 118,250/5,500)]
12. Cost production of goods sold [11+12] 96,750
13. Gross Profit (1-12) 1,28,250
14. Variable marketing, selling and distribution overheads 6,000
15. Fixed marketing, selling and distribution overheads 30,000
16. Administrative overheads 20,000
17. Operating profit [14-15-16-17] 72,250
Working Note
Valuation of WIP
Percentage Amount $
completion
Cost of direct material [500 × ($ 60,000/6,000)] 100% 5,000
Direct employee cost [500 × 0.50 × ($ 30,000/6,000)] 50% 1,250
Direct expenses [500× 0.50 × ($ 6,000/6,000)] 50% 250
Variable production overheads 50% 500
[500 × 0.50 × ($ 12,000/6,000)]
Fixed production overheads 50% 750
[500 × 0.50 × ($ 18,000/6,000)]
Total 7,750

(b) Cost sheet applying marginal costing principles

COST SHEET
Amount $
1. Revenue (4,500 × $ 50) 225,000
2. Cost of direct material consumed 60,000
3. Direct employee cost 30,000
4. Direct expenses 6,000
5. Variable production overheads 12,000

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 7. Variable production cost 108,000
8. Decrease/(Increase) in WIP (7,000)
9. Total variable cost of production of finished goods (7+8) 101,000
10. (Increase)/Decrease in finished goods (18,364)
[1,000 units ×$ (101,000/5,500)]
11. Variable cost production of goods sold [9+10] 82,636
12. Variable marketing, selling and distribution overheads 6,000
12. Contribution (1-11 -12) 136,364
13. Fixed production overheads 18,000
15. Fixed marketing, selling and distribution overheads 30,000
16. Administrative overheads 20,000
17. Operating profit [14-15-16-17] 68,364
Working Note
Valuation of WIP
Percentage Amount $
completion
Cost of direct material [500 × ($ 60,000/6,000)] 100% 5,000
Direct employee cost [500 × 0.50 × ($ 30,000/6,000)] 50% 1,250
Direct expenses [500× 0.50 × ($ 6,000/6,000)] 50% 250
Variable production overheads 50% 500
[500 × 0.50 × ($ 12,000/6,000)]
Total 7,000

(b) Reconciliation
Amount $
Operating profit as per absorption costing 72,250
The difference in the valuation of the stock of finished goods (3,136)
[$ 21,500 – 18,364]
The difference in the valuation of the stock of WIP [$ 7,750 – 7,000] (750)
Operating profit as per marginal costing 68,364

The cost of the finished goods and WIP inventories at the close of the year are lower in
the marginal costing system than those in the absorption costing system by $ 3,136 and $
750 respectively because no part of the fixed production overheads is carried to the next
accounting period as a component of the cost of finished goods and WIP inventories. In
absorption costing, fixed production overheads are treated as product cost.
Key Concepts
Absorption costing, cost sheet, cost of goods sold, cost of production, factory cost,
marginal costing, operating profit, prime cost, works cost

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Self-test question 3.3
Fill in the blanks
(a) Direct material cost: $ 30,000; Direct employee cost: $ 20,000; Direct expenses: $
5,000; Variable production overheads: $ 10,000; Fixed production overheads: $ 15,000,
Variable marketing overheads: $ 12,000; Fixed marketing overheads: $10,000;
Administrative overheads: $ 25,000. There were no opening and closing inventories of
WIP and finished goods.
(i) Prime cost: $ [ ]
(ii) Works cost: $ [ ]
(iii)

REVIEW PROBLEMS
R 3.1 (Cost sheet – Absorption costing)
The following information is provided by SS & Co. for the month of January 2024:
Amount $
Cost of direct materials consumed 4,000
Compensation to direct employees 1,000
Directly chargeable expenses 200
Oil and waste 10
Compensation to the supervisor 100
Compensation to the factory storekeeper 50
Electric power charges - factory 20
Lighting charges – factory 50
Lighting charges - office 20
Rent - factory 200
Rent - office 100
Repairs and renewals expenses -factory plant 50
Repairs and renewals expenses - machinery 100
Repairs and renewals expenses - office premises 20
Depreciation – office premises 50
Depreciation – plant and machinery 20
Consumable stores 100
Works Manager’s salary 200
Director’s fees 50
Office printing and stationery 20
Telephone charges 5
Postage and telegram 10
Salespersons’ salary and commission 50
Travelling expenses related to marketing and selling activities 20

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 Advertising expenses 50
Warehouse charges 20
Carriage outward 15
Interest cost 100
Research and development cost 200

Required:
Calculate: (a) Prime cost; (b) Factory cost; (c) Total cost of production; and (d) Cost of
sales
R 3.2

ASSIGNMENTS
PROBLEMS
1. The following information is provided by RR& Co. for the year 2023:
Amount $
Sales 64,000
Direct materials purchased 32,200
Purchase returns 1,300
Wages to direct employees 24,000
Drawing office salaries 310
Carriage inward 420
Chargeable expenses 280
Provision for bad debts 240
Office expenses 640
Factory rent and rates 1,460
Depreciation on plant 860
Showroom rent 300
Miscellaneous selling expenses 320
Lighting charges 90
Gas and water 340
Power charges 280
Haulage hiring charges 200
Travelling expenses related to marketing and selling 600
Showroom telephone expenses 150
Employee welfare expenses 450
Sale of scrap 45
Factory supervision expenses 350

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Required:
Prepare a statement of cost showing (a) Prime cost; (b) Works cost; (c) Total cost of
production, and (d) Operating profit
There were no finished goods and WIP inventories at the commencement and end of the
year.
ANSWERS TO SELF-TEST QUESTIONS
Self-test question 3.1
(a) 11,000; (b) 29,000
Self-test question 3.2
(a) 16,000; (b) 12,000; (c) 8,000

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