Q1

ZMZ COMPANY
INCOME STATEMENT
(Marginal Costing)
Sales (25,000.00 x 4,000)
Less:Varible Expenses
Opening Stock (2,400 x1,000)
cost of production
Direct Materials (1,050 x 30,000)
Direct Labour (950 x 30,000)
Production OH (400 x 30,000)
Total Production Cost
Less:Closing Stock (2,400 x 6,000)
Variable Cost of Goods Sold
Add:Marketing and Manufacturing OH (120 x 25,000)
Contribution Margin
Less:Fixed Costs
Manufacturing Overheads
Manufacturing & Administration OH
Net Operating Income

100,000,000.00
2,400,000.00
31,500,000.00
28,500,000.00
12,000,000.00
74,400,000.00
14,400,000.00
60,000,000.00
3,000,000.00

12,000,000.00
19,000,000.00

63,000,000.00
37,000,000.00

31,000,000.00
6,000,000.00

ZMZ COMPANY
INCOME STATEMENT
(Arbsorption Costing)
Sales (25,000.00 x 4,000)
Less:Cost of Goods Sold
Opening Stock (2,800 x1,000)
cost of production
Direct Materials (1,050 x 30,000)
Direct Labour (950 x 30,000)
Production OH (400 x 30,000)
Fixed Manufacturing Costs (400 x 30,000)
Total Production Cost
Less:Closing Stock (2,800 x 6,000)
Cost of Goods Sold
Gross Profit
Less:Non Production Expenses
Manufacturing & Administration OH
Marketing and Administration Expenses (120 x 25,000)
Net Profit

100,000,000.00
2,800,000.00
31,500,000.00
28,500,000.00
12,000,000.00
12,000,000.00
86,800,000.00
16,800,000.00
70,000,000.00
30,000,000.00
19,000,000.00
3,000,000.00

22,000,000.00
8,000,000.00

1(ii) The reason as to why calculated profit figures in requirement one disagree;
RECONCILIATION ON PROFIT
Profit as per Marginal Costing
Changes in Stock
Closing Stock (400 x 6,000)
Opening Stock (400 x 1,000)
Profit as per Arbsorption Costing

6,000,000.00
2,400,000.00
400,000.00

2,000,000.00
8,000,000.00

Reason for disagreement of profit figures;

There is a fixed manufacturing overhead costs that have been carried forward in the
inventory (i.e 5,000 units x shs. 400 per unit totaling Tshs. 2,000,000.00) in the
Arbsorption Costing resulting to the difference thereon.

Q1(iii) Advantages of using Variable Costing Method for Internal Reporting includes;
1) It facilitates to calculate what the minimum sales volume must be before the profit
is made, ie determination of Break-even point.
2) It facilitates in Short Term Planning, forecasting and decision making.
Disadvantages of Using Variable Costing Method includes;
1) Not suitable for decisions regarding the optimun output levels since it ignores full cost
per unit decrease with an increase in volume- which is an important factor in such
decisions.
2) When the method is used for pricing decisions, it may fail to recover fixed costs.

Q2

Sales
Less:Variable Expenses
Opening Stock
Cost of Production
Manufacturing Costs
Variable Cost of Goods Sold
Less:Closing Stock
Add:Marketing Costs (600 x units sold)

KABANGA COMPANY
INCOME STATEMENT
(Variable Costing)
JANUARY
1,750,000.00
900,000.00
900,000.00
270,000.00
630,000.00
420,000.00

Contribution Margin
Less:Fixed Expenses
Manufacturing Costs
Marketing Expenses
Net Operating Income

400,000.00
140,000.00

1,050,000.00
700,000.00

540,000.00
160,000.00

FEBRUARY
2,000,000.00

MARCH
3,875,000.00

270,000.00

270,000.00

720,000.00
990,000.00
270,000.00
720,000.00
480,000.00

1,125,000.00
1,395,000.00
1,395,000.00
930,000.00

400,000.00
140,000.00

1,200,000.00
800,000.00

540,000.00
260,000.00

400,000.00
140,000.00

2,325,000.00
1,550,000.00

540,000.00
1,010,000.00

KABANGA COMPANY
INCOME STATEMENT
(Absorption Costing)

Sales
Less:Cost of Goods Sold
Opening Stock
Cost of Production
Variable Manufacturing Costs
Cost of Production-Fixed Costs
Less:Closing Stock
Cost of Goods Sold
Gross profit
Less:Non Production Expenses
Manufacturing Costs (600x700)
Marketing Expenses
Net Profit

JANUARY
1,750,000.00
900,000.00
400,000.00
1,300,000.00
390,000.00

FEBRUARY
2,000,000.00
390,000.00

420,000.00

720,000.00
400,000.00
1,510,000.00
420,000.00

1,125,000.00
400,000.00
1,945,000.00
-

910,000.00
840,000.00

420,000.00
140,000.00

(600X800)
560,000.00
280,000.00

MARCH
3,875,000.00

1,090,000.00
910,000.00

480,000.00
140,000.00

RECONCILIATION OF PROFIT
Revenue charges charged under Arbsorption Costing;
JANUARY
FEBRUARY
Opening Stock
120,000.00
Production Costs-Fixed
400,000.00
400,000.00
400,000.00
520,000.00
Less:Stock at Close
120,000.00
150,000.00
280,000.00
370,000.00
Difference
120,000.00
30,000.00
Net Profit as per Marginal Costing
160,000.00
260,000.00
Net Profit as per Arbsorp. Costing
280,000.00
290,000.00

(600X1550)
620,000.00
290,000.00

1,945,000.00
1,930,000.00

930,000.00
140,000.00

MARCH
150,000.00
400,000.00
550,000.00
550,000.00
(150,000.00)
1,010,000.00
860,000.00

REASONS FOR THE DIFFERENCES IN INCOMES

For the month of January, presence of fixed manufacturing overheads included in the closing stock caused the difference.
For the month of January, presence of fixed manufacturing overheads included in the closing stock caused the difference.
For the month of March, the lack of closing stock resulted in the increase in profit.

1,070,000.00
860,000.00

Q3

Solution
Data:
Budgeted ProductionVariable Costs
Fixed Cost
Profit

150,000
14,000.00
2,000.00
15%

units
per unit
per unit
on cost

Sales
Less:Variable Cost (14,000 x 150,000)
Conribution Margin
Fixed Cost (2,000 x 150,000)
Profit
Q1(a)

2,760,000,000.00
2,100,000,000.00
660,000,000.00
300,000,000.00
360,000,000.00

Bep in Unit=
Fixed Cost

300,000,000.00

CM

660,000,000.00
equal to 68,181.81units

Bep in Shs=
Fixed Cost
CMR
Contribution Margin Ratio=

660,000,000.00
2,760,000,000.00
CMR is 23.9%

Bep in Shs=

300,000,000.00
0.239
Bep(Tshs)

Q1(b)

1,254,545,455.00

PV Ratio=CMR
Therefore PV Ratio=

660,000,000.00
2,760,000,000.00
PVR=

Q[c]

If the selling price is reduced by 5%

Data
Selling Price=18,400.00 per unit

0.239

Variable cost=14,000.00 per unit

Fixed Cost=2,000 per unit
Solution
Reduced by 5%=
18,400-[18,400 x 5%]=

17,450.00

Selling Price
Less;Variable Cost
Contribution Margin

17,480.00
14,000.00
3,480.00

Q[c](i) Bep in Units=

300,000,000.00
3,480.00
Bep(Units)= 86207 units

Q[c](ii) Bep in Shs=

Fixed Cost

x Selling Price=

300,000,000.00

CMR/Unit

3,480
Bep(Shs)=

1,506,896,552.00

Q[c](iii) Profit Volume Ratio [CMR]=

Conribution Margin

522,000,000.00

Total Sales

2,662,000,000.00
PVR=

Q(d)

When profit increases of 10%, the sales at the reduced price will be;
Data given
Fixed Cost= 2,000.00 per unit
VC=
14,000.00 per unit
Profit=
2,400.00 per unit
Sale 1
Sales-FC-VC=Profit
Sales-2,000-14,000=2,400
Sales=2,400 + 16,000
Sales 1= 18,400
Sale 2
18,400-[18,400 x 5%]

0.2O

sales 2=17,480
CMR=
17,480-14,000 x100
17,480
CMR= 20%
Sales at the reduced price will be;
(2,000 + 2.640) x 150,000 units
0.2
Sales at reduced price= 3,480,000,000.00

181.81units

100%

x 17,480

Q4

INCOME STATEMENT
(Marginal Costing Method)

PRODUCT
Sales
Less:Variable Cost
Less:Selling Expenses

A
"000"
200,000.00
90,000.00
110,000.00
30,000.00
80,000.00

B
"000"
500,000.00
270,000.00
230,000.00
90,000.00
140,000.00

C
"000"
300,000.00
150,000.00
150,000.00
45,000.00
105,000.00

36,000.00
16,000.00
28,000.00
11,200.00
16,800.00

90,000.00
40,000.00
10,000.00
4,000.00
6,000.00

54,000.00
24,000.00
27,000.00
10,800.00
16,200.00

Less:Fixed Cost
Overheads
Admistrative Expenses
Operating Income before Tax
Less:Tax 40%
Net Operating Income

Q4(a) Bep in Shs=

"000"
Fixed Cost
CMR
Fixed Cost=260,000.00
CMR=

Contribution Margin
Total Sale

CMR= 325,000.00
1,000,000.00
CMR= 0.325
Bep in Tshs= 260,000.00
0.325
Bep(Tshs)= 800,000.00
(b)
INCOME STATEMENT
(Marginal Costing Method)

PRODUCT
Sales
Less:Variable Cost
Less:Selling Expenses

A
"000"
325,000.00
90,000.00
235,000.00
30,000.00

B
"000"
250,000.00
270,000.00
(20,000.00)
90,000.00

C
"000"
425,000.00
150,000.00
275,000.00
45,000.00

Less:Fixed Cost
Overheads
Admistrative Expenses
Operating Income before Tax
Less:Tax 40%
Net Operating Income

205,000.00

(110,000.00)

230,000.00

36,000.00
16,000.00
153,000.00
11,200.00
141,800.00

90,000.00
40,000.00
(240,000.00)
4,000.00
(244,000.00)

54,000.00
24,000.00
152,000.00
10,800.00
141,200.00

Effects on the budgeted income

There would be no effect on the budgeted incone for the company. Net Operating income is Shs. 39,000.00

[c]

Bep in Shs=

"000"
Fixed Cost
CMR
Fixed Cost=260,000.00
CMR=

Contribution Margin
Total Sale

CMR= 325,000.00
1,000,000.00
CMR= 0.325
Bep in Tshs= 260,000.00
0.325
Bep(Tshs)= 800,000.00
Break even point in sales would remain the same at Tshs. 800,000.00

TOTAL
"000"
1,000,000.00
510,000.00
490,000.00
165,000.00
325,000.00
180,000.00
80,000.00
65,000.00
26,000.00
39,000.00

TOTAL
"000"
1,000,000.00
510,000.00
490,000.00
165,000.00

Shs. 39,000.00

325,000.00
180,000.00
80,000.00
65,000.00
26,000.00
39,000.00

Q1

ZMZ COMPANY
INCOME STATEMENT
(Marginal Costing)
Sales (25,000.00 x 4,000)
Less:Varible Expenses
Opening Stock (2,400 x1,000)
2,400,000.00
cost of production
Direct Materials (1,050 x 30,000)
31,500,000.00
Direct Labour (950 x 30,000)
28,500,000.00
Production OH (400 x 30,000)
12,000,000.00
Total Production Cost
74,400,000.00
Less:Closing Stock (2,400 x 6,000)
14,400,000.00
Variable Cost of Goods Sold
60,000,000.00
Add:Marketing and Manufacturing OH (120 x3,600,000.00
30,000)
Contribution Margin
Less:Fixed Costs
Manufacturing Overheads
Manufacturing & Administration OH
Net Operating Income

12,000,000.00
19,000,000.00

100,000,000.00

63,600,000.00
36,400,000.00

31,000,000.00
5,400,000.00

ZMZ COMPANY
INCOME STATEMENT
(Arbsorption Costing)
Sales (25,000.00 x 4,000)
Less:Varible Expenses
Opening Stock (2,800 x1,000)
cost of production
Direct Materials (1,050 x 30,000)
Direct Labour (950 x 30,000)
Production OH (400 x 30,000)
Fixed Manufacturing Costs (400 x 30,000)
Total Production Cost
Less:Closing Stock (2,800 x 6,000)
Cost of Goods Sold
Gross Profit

100,000,000.00
2,800,000.00
31,500,000.00
28,500,000.00
12,000,000.00
12,000,000.00
86,800,000.00
16,800,000.00

Less:Non Production Expenses

Manufacturing & Administration OH
19,000,000.00
Marketing and Administration Expenses (1203,000,000.00
x 25,000)
Net Profit

70,000,000.00
30,000,000.00

22,000,000.00
8,000,000.00

1(ii)The reason as to why calculated profit figures in requirement one disagree;

RECONCILIATION ON PROFIT
Profit as per Marginal Costing
Changes in Stock
Closing Stock (400 x 6,000)
2,400,000.00
Opening Stock (400 x 1,000)
400,000.00
Profit as per Arbsorption Costing

6,000,000.00

2,000,000.00
8,000,000.00

Reason for disagreement of profit figures;

There is a fixed manufacturing overhead costs that have been carried forward in the
inventory (i.e 5,000 units x shs. 400 per unit totaling Tshs. 2,000,000.00)

Q1(iii) Advantages of using Variable Costing Method for Internal Reporting includes;
1 Avoids profit manipulation by adjusting the stock level
2 Profit is a function of sales and contribution, therefore increase in profit resulted in
increase in sales volume
Disadvantages of Using Variable Costing Method includes;
1 Disregards the use of recovering fixed costs through product pricing. For long-run
continuity of business it is not good. Assets have to be recovered in the long run.
2 Exclusion of fixed costs from inventory valuation does not conform to accepted
accounting practices. It fails to conform with the GAAP, i.e accounting for stocks and
WIP (work in progress).