Chapter One

Cost-Volume-Profit Analysis, Absorption, and Variable Costing

Cost Volume Profit Analysis is;
The study of the effects of changes in costs and volume on a company‘s profit.
Important to profit planning.
Critical in management decisions such as:
Determining product mix, maximizing use of production facilities, and setting selling prices.
Basic Concepts;
Management often wants the information reported in a special format income statement.
The CVP income statement is for internal use only:
Costs and expenses classified as fixed or variable.
Variable Cost: is a cost that varies, in total, in a direct proportion to changes in the level of
activity. The activity can be expressed in many ways, such as, units produced, units sold, miles
driven, beds occupied, hours worked and so forth. Direct material is a good example of a
variable cost. The variable cost is constant if expressed on a per unit basis.
Example;
Assume that ABC manufacturing Company purchase 50 units of lumber each Br 200 and 40
units @ Br 250/unit. Then calculate Total variable costs?
Solution;
Quantity 50 units @ Br 200 and 40 units @ Br 250
Total variable cost = VC/units
Total variable cost = Br 200/units ×50 units
Total variable cost = Br 10,000
Example;
ABC Manufacturing Company Buys lumber to produce Furniture‘s Br 600/unit; Assume that;
Units variable cost/unit Total variable Costs
1 Br 600 Br 600
1000 Br 600 Br 600,000
3000 Br 600 Br 1,800,000

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Fixed Cost: a cost that remains constant in total, regardless of changes in the level of activity.
The fixed costs remain constant in total amount unless influenced by any outside forces, such
as price changes.
Example;
Suppose a company incurs a total cost of Br 20,000,000 per year for employees;
Annual total fixed employees Number of production Fixed employee costs per
costs production
Br 20,000,000 10,000 Br 2000/production
Br 20,000,000 25,000 Br 800/production
Br 20,000,000 50,000 Br 400/production
Mixed/Semi Variable Cost; is one that contains both variable and fixed cost elements together.
Mixed cost is also known as semi variable cost. Examples of mixed costs include electricity,
water and telephone bills. The rent paid for the line or counter is a fixed cost, the kilowatt hour
or number of calls payment is a variable cost as payment varies with usage.
Reports contribution margin as a total amount and on a per unit basis.
Example;
Basic CVP income statement;
ABC Video Company
CVP Income statement
For the month ended June 30/2011
Unit Per unit Total
Sales 1600 DVD players Br 500 Br 800,000
Variable costs 1600 DVD players Br 300 Br 480,000
Contribution margin 1600 DVD players Br 200 Br 320,000
Fixed Costs Br 200,000
Net Income Br 120,000
Assumptions of CVP Analysis;
1. All variables remain constant except volume
This assumption suggests that volume is the only factor that can cause cost and profits to change.
Factors such as increasing production efficiency, changing sales mix and price levels are not
considered.

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2. Only one product is being produced or there is a constant sales mix
Following on from the previous assumption, CVP analysis only applies where one product is
being examined or if there are a number of products then they are always sold in same
proportions or combination.
3. Total costs and total revenue are linear functions
This assumption suggests that the variable cost per unit and the selling price per unit do not
change i.e. they are not affected by discounts.
4. Profits are calculated using variable (marginal) costing
Variable costing facilitates profit analysis as it separates variable and fixed costs and treats fixed
costs as a period expense rather than attempting to allocate them to products.
5. Costs can be accurately divided into their fixed and variable elements
This is a key requirement of variable costing. The suggestion is that where there are semi-
variable costs, that they can be accurately split by using techniques such as the high-low method.
6. The analysis applies only to the relevant range
7. The analysis applies only to a short-term horizon
CVP analysis examines the relationship between sales volume, costs and profit during the period
of one year and during this time it is suggested that it would be difficult to change selling prices,
variable and fixed costs.
1.1 Absorption versus Direct Costing
Absorption costing; is required for external financial reports and for tax reporting.
Under absorption costing, product costs include all manufacturing costs:
Direct materials, direct labor, Variable manufacturing overhead, Fixed manufacturing
overhead.
Direct costing: Direct costing is the practice of charging all direct cost to operations, processes
or products, leaving all indirect costs to be written off against profits in the period in which
they arise. Under direct costing the stocks are valued at direct costs, i.e., costs whether fixed or
variable which can be directly attributable to the cost units.
VARIABLE COSTING
• Variable costing is an alternative for internal management reports.
• Under variable costing, product costs include only the variable manufacturing costs:

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• Direct materials.
• Direct labor (unless fixed).
• Variable manufacturing overhead.
• Under variable costing, the following costs are treated as period expenses and are
excluded from product costs:
• Fixed manufacturing overhead.
• Variable selling and administrative costs.
• Fixed selling and administrative costs.
In general, the terms marginal costing and direct costing are used as synonymous. However,
direct costing differs from marginal costing in that some fixed costs considered direct are
charged to operations, processes or products, whereas in marginal costing only variable costs
are considered. Marginal costing is mainly concerned with providing of information to
management to assist in decision making and for exercising control. Marginal costing is
considered to be a technique with a broader meaning than direct costing. Marginal costing is
also known as ‗variable costing‘ or ‗out of pocket costing‘.
Example;
Assume that Direct Material Cost----------------------------Br 150,000
Direct manufacturing labor Cost-----------------------------Br 187,500
Variable manufacturing Overhead Cost------Br 100,000
Total production units are 100,000
Total Sales units are 75,000 (C.G.S)
Required;
1. Total manufacturing costs under direct variable costing?
Total Manufacturing cost = Direct Material Cost + Direct manufacturing labor Cost + Variable
manufacturing Overhead Cost
Total Manufacturing cost = Br 150,000 + Br 187,500 + Br 100,000 = Br 437,500
2. Compute manufacturing costs/Unit under direct variable costing?
Manufacturing costs/Unit = total manufacturing costs
Total production units
Manufacturing costs/Unit = total manufacturing costs = Br 437,500 = Br 4.375/unit
Total production units 100,000 Units

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 3. Compute the ending finished goods inventory in units under direct variable costing?
Ending finished goods inventory units = Total production units - Sales in units (C.G.S)
Ending finished goods inventory units = 100,000 units-75,000 units = 25,000 units
4. Compute the ending finished goods inventory Cost under direct variable costing?
Ending finished goods inventory Cost = Ending finished goods inventory units ×
Manufacturing costs/Unit
25,000 units Br 4.375/unit = Br 109,375
5. Compute the Cost of goods sold under direct variable costing?
Cost of goods sold = 75,000 Units
income under absorption costing and variable costing using the contribution-margin format and
to explain the difference in income affected by the unit level of production and sales under
absorption costing, under variable costing only by the unit level of sales.
Example;
ABC manufacturing company sells its products for Br 66/unit. The current production level is
25,000 units. Although only 20,000 units are anticipated to be sold.

Unit manufacturing costs are;

Direct Material Cost----------------------------Br 12/unit
Direct manufacturing labor Cost--------------Br 18/unit
Variable manufacturing Overhead Cost------Br 9/unit
Total Fixed manufacturing cost----------Br 180,000
Fixed Manufacturing cost/unit (Br 180, 000/25,000 U) =Br 7.20/unit
Total manufacturing cost per unit (Br 12/unit + Br 18/unit + Br 9/unit + Br 7.2/unit = Br 46.20
Marketing expenses-----------------------Br 6/unit plus Br 60,000/year
Required;
1. Prepare an income statement using absorption costing?
ABC manufacturing company
Income statement
For the year ended
Sales (20,000 U Br 1,320,000
C.G.S ( 20,000 Br 924,000

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Gross margin 396,000
Marketing expenses;
Variable marketing expenses ( 20,000U Br (120,000)
Fixed marketing expenses (60,000) (180,000)
Operating Income Br 216,000
2. Prepare an income statement using variable costing?
Unit manufacturing costs are;
Direct Material Cost----------------------------Br 12/unit
Direct manufacturing labor Cost--------------Br 18/unit
Variable manufacturing Overhead Cost------Br 9/unit
Total Fixed manufacturing cost----------Br 180,000
Total manufacturing cost per unit (Br 12/unit + Br 18/unit + Br 9/unit = Br 39/U
Marketing expenses-----------------------Br 6/unit plus Br 60,000/year
ABC manufacturing company
Income statement
For the year ended
Sales (20,000 U ) Br 1,320,000
Variable costs;
C.G.S ( 20,000 Br(780,000)
marketing ( 20,000U ×Br 6/U Br (120,000) Br(900,000)
Contribution margin Br 420,000
Marketing expenses;
Fixed costs;
Manufacturing (180,000)
Marketing (60,000) (240,000)
Operating Income Br 180,000
One motivation for an undesirable buildup of inventories could be due to the fact that a
manager‘s bonus is based on absorption-costing operating income.
Top management can take several steps to reduce the undesirable effects of absorption costing.
Focus on careful budgeting and inventory planning to reduce management‘s freedom to build
up excess inventory.

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  Incorporate a ―carrying charge‖ for inventory in the internal accounting system.
 Change the period to evaluate performance. Instead of quarterly or annual horizon,
evaluate the manager over a three-to-five year period.
 Include nonfinancial as well as financial variables in the measures of performance
evaluation.
Differentiate throughput costing (direct material costs inventoried) from variable costing
(variable manufacturing costs inventoried) and absorption costing (variable and fixed
manufacturing costs inventoried).
Absorption Costing Variable Costing Throughput Costing
(Variable and fixed manufacturing costs (variable manufacturing costs (direct material costs inventoried)
inventoried). inventoried)

Sales 500 Sales 500 Sales 500

CGS 120 VC 155 DM 50
Gross Profit 380 Contr. Margin 345 Through Margin 450

sales & Advertisement expense 350 FC 315 Operating expense 420

Profit 30 Profit 30 Profit 30
In the very short run, many variable costs do behave as though they were fixed.
For example, consider a restaurant. When a server comes on duty, that server will
likely work until the end of the shift.
Even though business may fluctuate and the server may not stay busy the entire
time, the employer is on the hook for 8 hours pay.
The employer cannot (from a practical standpoint) tell the employee to take an hour
off because business is slow.
Thus, the server‘s wages for the day are in a very real sense, fixed.
1.2.The concept of profit contribution
Contribution: Contribution or the contributory margin is the difference between sales value and
the marginal cost. It is obtained by subtracting marginal cost from sales revenue of a given
activity. It can also be defined as excess of sales revenue over the variable cost. The difference
between sales revenue and marginal/variable cost is considered to be the contribution towards
fixed expenses and profit of the entire business. The contribution concept is based on the

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theory that the profit and fixed expenses of a business is a ‗joint cost‘ which cannot be
equitably apportioned to different segments of the business.
The contribution income statement format is used as an internal planning and decision making
tool.
This approach is useful for:
1. Cost-volume-profit analysis
2. Budgeting
3. Segmented reporting of profit data
4. Special decisions such as pricing and make-or-buy analysis
The Contribution Format;
Comparison of the contribution income statement with the traditional income statement;
Traditional Approach; Contribution Approach;
( costs organized by function) ( costs organized by behavior)
Used primarily for external reporting Used primarily by Management

Sales-----------------------------------Br100,000 Sales----------------------------Br 100,000

Less; Cost of Goods sold------------ 70,000 Less variable expenses--------- 60,000
Gross margin-----------------------------30,000 Contribution margin---------------40,000
Less operating expenses-----------------20,000 Less fixed expenses---------------30,000
Net operating income-------------------10,000 Net operating income-------------10,000
Used primarily for external reporting Used primarily by Management
Total Unit
Sales Revenue Br100,000 Br 50
Less: Variable costs Br 60,000 Br 30
Contribution margin Br 40,000 Br 20
Less: Fixed costs Br 30,000
Net operating income Br 10,000

Example;
ABC business organization considering selling all software. The organization can purchase this
software from a computer software wholesaler at Br 120/unit. The sales would be sold Br 200/
unit. The organization would pay Br 2,000 for rent.
Solution;

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 Quantities to be sold
Per Unit 0 1 5 25 40
Sales Br 200 Br 0 Br 200 Br 1,000 Br 5.000 Br 8,000
Variable cost Br 120 Br 0 Br 120 Br 600 Br 3,000 Br 4,800
Contribution Margin Br 80 Br 0 Br 80 Br 400 Br 2,000 Br 3,200
Fixed cost Br 2,000 Br 2,000 Br 2,000 Br 2,000 Br 2,000 Br 2,000
Operating Income ( Br 2,000) ( Br 1920) ( Br 1,600 Br 0 Br 1,200
Cost-Volume-Profit Assumptions;
CPV analysis to be applied, there are assumptions including:
1. Changes in the levels of revenues and costs arise only because of changes in the number of
products (or service) or units sold. The number of units sold is the only revenue driver and the
only cost driver.
2. Total costs can be separated into two components: a fixed component that does not vary
with units sold and a variable component that changes with respect to units sold.
3. When represented graphically, the behaviors of total revenues and total costs are linear
(meaning they can be represented as a straight line) in relation to units sold within a relevant
range (and time period).
4. Selling price, variable cost per unit, and total fixed costs (within a relevant range and time
period) are known and constant.
An important feature of CVP analysis is distinguishing fixed from variable costs. Always keep
in mind, however, that whether a cost is variable or fixed depends on the time period for a
decision. The shorter the time horizon, the higher the percentage of total costs considered
fixed. Always consider the relevant range, the length of the time horizon, and the specific
decision situation when classifying costs as variable or fixed.
Cost-volume-profit analysis examines the behaviour of total revenues, total costs, and
operating profit as changes occur in the output level, selling price, variable costs per unit, or
fixed costs.
Managers use cost-volume-profit (CVP) analysis to identify the levels of operating activity
needed to avoid losses, achieve targeted profits, plan future operations, and monitor
organizational performance.

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Accountants often perform CVP analysis to plan future levels of operating activity and provide
information about:
➢ Which products or services to emphasize
➢ The volume of sales needed to achieve a targeted level of profit
➢ The amount of revenue required to avoid losses
➢ Whether to increase fixed costs
➢ How much to budget for discretionary expenditures
➢ Whether fixed costs expose the organization to an unacceptable level of risk
Profit Equation and Contribution Margin;
CVP analysis begins with the basic profit equation.
Profit = Total revenue -Total costs
Separating costs into variable and fixed categories, we express profit as:
Profit =Total revenue - Total variable costs +Total fixed costs
Expressing CVP Relationships
There are three related methods to deal with the model CVP relationships:
1. The equation method
2. The contribution margin method
3. The graph method
The equation method and the contribution margin method are most useful when managers want
to determine operating income at few specific levels of sales (for example 5, 15, 25, and 40
units sold). The graph method helps managers visualize the relationship between units sold and
operating income over a wide range of quantities of units sold. However, different methods are
useful for different decisions.
1. Equation Method;
The contribution format income statement can be expressed in the equation:
Revenues = Selling price (SP) × Quantity of units sold (Q)
Operating income =..Revenues - Variable costs - Fixed costs
Total Variable costs = Variable cost per unit (VCU) × Quantity of units sold (Q)
Example;
Racing Bicycle Company

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 Contribution Income statement
For the month of June
Unit Per Unit Total
Sales (401 bicycles) 401 Br 500 Br 200,500
Less: Variable Costs 401 300 120,300
Contribution margin 401 200 80,200
Less: Fixed Cost 80,000
Net operating income 200
The equation can also be used to show the Br 200 profit RBC earns if it sells 401 bikes.
Profit = (Sales/ – Variable Costs) – Fixed Costs

2. Contribution Margin Method

It is often useful to express the simple profit equation in terms of the unit contribution margin
(Unit CM):
Unit CM = Selling price per unit – Variable Costs per unit
Unit CM = SP – VC

Profit = (P – V) × Q – FC
Operating income = Unit CM × Q – FC
Operating income = Br 200 ×401 – Br 80,000
Operating income = Br 80,200– Br 80,000 = Br 200
The contribution margin as a percentage of sales is referred to as the contribution margin ratio
(CM ratio).
CM Ratio = Contribution Margin
Sales
Assume that If total selling price is Br 200,000 and Total contribution margin is Br 80,000,
then calculate Total contribution margin ratio =?
CM Ratio = 80,000 = 40%
200,000

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For each Br 1.00 increase in sales results in a total contribution margin increase of 40 cents.
Or, in terms of units, the contribution margin ratio is:
CM Ratio = Unit CM
Unit selling price
For Racing Bicycle Company the ratio is:
Br 200 = 40%
500
Example;
400 Bikes 500 Bikes
Sales Br 200,000 Br 250,000
Less: variable expenses 120,000 150,000
Contribution margin 80,000 100,000
Less: fixed expenses 80,000 80,000
Net operating income - 20,000
1.3 Cost-volume-profit (CVP) analysis: understanding the concepts of break-even and
margin of safety
Break Even Point and Target Operating Income;
The breakeven point (BEP) is that quantity of output sold, at which total revenues equal total
costs, that is, the quantity of output sold that results in $0 of operating income.
Example:
Total Per Unit %
Sales (500 bikes) Br 250,000 Br 500 100
Less: variable expense 150,000 300 60
Contribution margin 100,000 200 40
Less: fixed expenses 80,000
Net operating income $ 20,000
The contribution margin method has two key equations;
Break-even point in units sold = Fixed expenses
CM per unit
Break-even point in total sales dollars = Fixed expenses
CM ratio

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Let s use the contribution margin method to calculate the break-even point in total sales dollars at
Racing.
Break-even point in total sales dollars = Fixed expenses
CM ratio
Br 80,000 = Br 200,000 break-even sales
40%
Example;
If the company sold one unit at $ 200, variable cost per unit $120, and also fixed cost is $ 2,000,
what will be the amount of break-even quantity?
➢ Recall the equation method (equation 1):
(SP× Q) – (VCU×Q) – fixed cost = operating income
= ($200×Q) - ($120×Q) - $2,000= 0
= $80× Q = 2,000
= Q = 2,000 ÷ 80 per unit = 25 units
Interpretation:
If the company sells fewer than 25 units, it will incur a loss; if it sells 25 units, it will be at
breakeven; and if it sells more than 25 units, it will make a profit. While this breakeven point is
expressed in units, it can also be expressed in revenues (Dollar): 25 units × $200 selling price=
$5,000.
➢ Recall the contribution margin method (Equation 2):
(Contribution margin× Q) – fixed cost= operating income, Since at break even, operation income
is zero (0),
*Contribution margin per unit × Breakeven number of units = Fixed cost
Rearranging Equation 3 and entering the data,
Breakeven number of units = Fixed cost ÷ contribution margin per unit = $2,000÷ $80= 25 units
Breakeven revenues = Breakeven number of units × Selling price = 25 units × $200 per unit =
$5,000
In practice (because they have multiple products), companies usually calculate breakeven point
directly in terms of revenues using contribution margin percentages.
Contribution margin percentage = Contribution margin per unit = $80 = 0.4 or
Selling price $200

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That is, 40% of each dollar of revenue, or 40 cents, is contribution margin. To breakeven,
contribution margin must equal fixed costs of $2,000. To earn $2,000 of contribution margin,
when $1 of revenue earns $0.40 of contribution margin, revenues must equal $2,000÷ 0.40 =
$5,000.
While the breakeven point tells managers how much they must sell to avoid a loss, managers
are equally interested in how they will achieve the operating income targets underlying their
strategies and plans. Target Operating Income
We illustrate target operating income calculations by asking the following question:
How many units must the company sell to earn an operating income of $1,200 based on the
above example? One approach is to keep plugging in different quantities and check when
operating income equals $1,200. The result shows that operating income is $1,200 when 40
packages are sold. A more convenient approach is to use equation 1.
(SP× Q) – (VCU×Q) – fixed cost = operating income
We denote by Q the unknown quantity of units the company must sell to earn an operating
income of $1,200. The selling price is $200, variable cost per package is $120, fixed costs are
$2,000, and target operating income is $1,200. Substituting these values into equation 1, we
have:
($200 * Q) - ($120 * Q) - $2,000 = $1,200
$80 * Q = $2,000 + $1,200 = $3,200

Q = $3,200 per unit = 40 units

$80
Alternatively, we could use Equation 2,
(Contribution margin× Q) – fixed cost= operating income
Given a target operating income ($1,200 in this case), we can rearrange terms to get Equation 4.
Q = Fixed costs + Target operating income
Contribution margin per unit
Q= $2,000 + $1,200 = 40 units
$80 per unit
The revenues needed to earn an operating income of $1,200 can also be calculated directly by
recognizing

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(1) That $3,200 of contribution margin must be earned (fixed costs of $2,000 plus operating
income of $1,200) and (2) that $1 of revenue earns $0.40 (40 cents) of contribution margin. To
earn $3,200 of contribution margin, revenues must equal $3,200÷ 0.40 = $8,000.
Target Net Income and Income Taxes
Net income is operating income plus non-operating revenues (such as interest revenue) minus
non- operating costs (such as interest cost) minus income taxes. For simplicity, throughout this
chapter we assume non-operating revenues and non-operating costs are zero. Thus,
Net income= Operating income - Income taxes
In many companies, the income targets for managers in their strategic plans are expressed in
terms of net income. That‘s because top management wants subordinate managers to take into
account the effects their decisions have on operating income after income taxes. Some decisions
may not result in large operating incomes, but they may have favorable tax consequences,
making them attractive on a net income basis— the measure that drives shareholders‘ dividends
and returns.
To make net income evaluations, CVP calculations for target income must be stated in terms of
target net income instead of target operating income. For example, the company may be
interested in knowing the quantity of units it must sell to earn a net income of $960, assuming an
income tax rate of 40%.
Target net income = (target operating income) – (target operating income × tax rate)
= target operating income × (1 – tax rate)
Target operating income =Target net income = $ 960 = $1,600
1 - Tax rate 1- 0.40
The key step is to take the target net income number and convert it into the
corresponding target operating income number. We can then use Equation 1 for target
operating income and substitute numbers from our previous example.
($200 * Q) - ($120 * Q) - $2,000 =
$1,600
$80 * Q = $3,600
The contribution margin method cans be used to determine that 900 bikes must be sold to earn
the target profit of Br 100,000.
Unit sales to attain the target profit = Fixed expenses + Target profit

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 CM per unit
Br 80,000 + Br 100,000 = 900 Bikes
Br 200/bike
3. Graph Method
In the graph method, represent total costs and total revenues graphically. Each is shown as a
line on a graph.
The relationships among revenue, cost, profit, and volume can be expressed graphically by
preparing a CVP graph. Racing Bicycle developed contribution margin income statements at 0,
200, 400, and 600 units sold. We will use this information to prepare the CVP graph.
Units Sold
Per unit 0 200 400 600
Sales Br 500 Br 0 Br 100,000 Br 200,000 Br 300,000
Variable Costs Br 300 Br 0 Br 60,000 Br 120,000 Br 180,000
Contribution margin Br 200 Br 0 Br 40,000 Br 80,000 Br 120,000
Fixed Cost Br 80,000 Br 80,000 Br 80,000
Net operating income (loss) Br (40,000) Br 0 Br 40,000

TR
300,000
Profit Area
280,000
260,000
220,000

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200,000 Break Even Point
180,000
160,000
140,000
120,000
100,000
80,000
Loss Area

60,000
40,000

0 100 200 300 400 600 800

Total costs line; The total costs line is the sum of fixed costs and variable costs. In this
example the total costs line is the straight line from point A through point B.
Total revenue line. One convenient starting point is $0 revenues at 0 units sold, which is point
C. Select a second point by choosing any other convenient output level and determining the
corresponding total revenues. The total revenue line is the straight line from point C through
point D.
Profit or loss at any sales level can be determined by the vertical distance between the two
lines at that level
The Margin of Safety:
The margin of safety is the excess of budgeted (or actual) sales over the break-even volume of
sales.
Margin of safety = Total sales - Break-even sales
If we assume that Racing Bicycle Company has actual sales of Br 250,000, given that we have
already determined the break-even sales to be Br 200,000, the margin of safety is Br 50,000 as
shown.
Break-even sales 400 units Actual sales 500 units
Sales Br 200,000 Br 250,000
Less: variable Costs 120,000 150,000
Contribution margin 80,000 100,000
Less: fixed Costs 80,000 80,000

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Net operating income Br 20,000
The margin of safety can be expressed as 20% of sales. ($50,000 ÷ $250,000)
The margin of safety can be expressed in terms of the number of units sold. The margin of
safety at Racing is $50,000, and each bike sells for $500.
Margin of Safety in units = Br 50,000 = 100 bikes
Br 500
1.4 Cost Volume Profit Analysis under Absorption Costing
Under absorption costing, costs are treated as period expenses and are excluded from product
costs: Variable selling and administrative costs, Fixed selling and administrative costs.
Example;
Last year ABC Manufacturing Company had produced 100,000 units and sold 75,000 units;
Direct manufacturing labor Cost Br 187,500
Variable manufacturing Overhead Cost 100,000
Direct Material Cost 150,000
Variable selling expenses 100,000
Fixed Administrative expenses 100,000
Fixed Manufacturing overhead cost 200,000
There was no beginning Inventory
Solution;
Direct Material Cost----------------------------Br 150,000
Direct manufacturing labor Cost--------------Br 187,500
Variable manufacturing Overhead Cost------Br 100,000
Fixed manufacturing overhead cost----------Br 200,000
Total production units are 100,000 units
Sales in units 75,000 units (C.G.S)
Required;
1. Compute total manufacturing costs under absorption costing?
Total Manufacturing cost = Direct Material Cost + Direct manufacturing labor Cost + Variable
manufacturing Overhead Cost + Fixed manufacturing overhead cost
Total Manufacturing cost = Br 150,000 + Br 187,500 + Br 100,000 + Br 200,000 = Br 637500
2. Compute manufacturing costs/Unit under absorption costing?

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Manufacturing costs/Unit = total manufacturing costs
Total production units
Manufacturing costs/Unit = total manufacturing costs = Br 637,500 = Br 6.375/unit
Total production units 100,000 Units
3. Compute the ending finished goods inventory in units under absorption costing?
Ending finished goods inventory units = Total production units - Sales in units (C.G.S)
Ending finished goods inventory units = 100,000 units-75,000 units = 25,000 units
4. Compute the ending finished goods inventory Cost under absorption costing?
Ending finished goods inventory Cost = Ending finished goods inventory units ×
Manufacturing costs/Unit
25,000 units Br 6.375/unit = Br 159,375
5. Compute the Cost of goods sold under absorption costing?
Cost of goods sold = 75,000 Units

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