EMERALD ISLE KNIT TERS LTD.
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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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