Chapter 2 Exercise ( 3.11.
2024)
Budgeted Profit and Loss Statement for September, October and November (Marginal Costing)
September October November
$ $ $
Revenue ( Selling price* 72000 72000 72000
Sale Unit)
Less: Variable cost of sale
Direct material (1.5* 10000) 15000 15000 15000
Direct Labour
Variable overhead 9000 9000 9000
6000 6000 6000
Variable production cost 30000 30000 30000
Inventory Adjustment
Opening Inventory - 12000 24000
Closing Inventory (12000) (18000) (24000) (18000) (36000) (18000)
Contribution 54000 54000 54000
Less : Fixed cost (50000) (50000) (50000)
Profit / loss 4000 4000 4000
Variable Overhead= 25% of Prime cost
= 25%*(1.5+0.9)=0.6
Budgeted Profit and Loss Statement for September, October and November (Absorption
Costing)
September October November
$ $ $
Revenue 72000 72000 72000
Less: Total Production cost
of sale
Direct Material 15000 15000 15000
Direct labor 9000 9000 9000
Variable Overhead 6000 6000 6000
Fixed production overhead 50000 50000 50000
Total production cost 80000 80000 80000
Inventory Adjustment
Opening Inventory - 32000 64000
Closing Inventory (32000) (64000) (96000)
(48000) (48000) (48000)
24000 24000 24000
Over/ under - - -
Profit/ loss 24000 24000 24000
Reconciliation Statement
September October November
Marginal Costing profit 4000 4000 4000
Add: Closing Inventory 20000 40000 60000
Less: Opening Inventory - (20000) (40000)
Absorption costing profit 24000 24000 24000
2. Budgeted Profit and Loss Statement (Marginal Costing)
Six month ending 31 March Six month ending 30
2013 September 2013
Revenue 980000 1120000
Less: Variable cost of Sale
Direct material 238000 196000
Direct labour 153000 126000
Variable production overhead 25500 21000
416500 343000
Inventory Adjustment
Add: opening inventory - 73500
Less: Closing inventory (73500) (343000) (24500) (392000)
Contribution 637000 728000
Fixed production overhead (160000) (160000)
477000 568000
Less: Selling, distribution and
administration cost
- Variable 196000 224000
- Fixed 100000 (296000) 100000 (324000)
Profit 181000 244000
Budgeted Profit and Loss Statement ( Absorption Costing)
Six month ending 31 Six month ending 30
March 2013 September 2013
Revenue 980000 1120000
Less: Cost of Sale
Direct material 238000 196000
Direct labour 153000 126000
Variable production overhead 25500 21000
Fixed production overhead 170000 140000
586500 483000
Inventory Adjustment
Add; Opening inventory - 103500
Less: closing inventory (103500) (34500)
(483000) (552000)
Gross Profit 497000 568000
Over/ under 10000 (20000)
507000 548000
Less: selling, distribution and administration
expenses
- Variable 196000 224000
- Fixed 100000 (296000) 100000 (324000)
Profit 211000 224000
Reconciliation statement
Six month ending 31 Six month ending 30
March 2013 September 2013
Marginal costing profit 181000 244000
Add: Closing Inventory 30000 10000
Less: opening inventory - (30000)
Absorption costing profit 212000 224000
4. Budgeted profit and loss statement ( Marginal costing)
March April
Revenue 52500 105000
Less: Variable cost of Sale
Direct Labor 10000 16000
Variable material 16000 25600
Variable production overhead 4000 6400
30000 48000
Inventory adjustment
Add; opening inventory - 7500
Less: closing inventory (7500) (22500) (10500) (45000)
30000 60000
Less: Fixed production overhead (15000) (15000)
15000 45000
Less: selling, distribution and administration
expenses
- Fixed 10000 10000
- Variable 7875 15750
(17875) (25750)
Profit / loss (2875) 19250
6. Actual cost of production for the first six months
Cost of production
Variable cost
Direct material A ( 3000*6) 18000
Direct material B (3000*6) 18000
Direct labor ( 3000*18) 54000
Variable overheads (3000*2) 6000
Fixed production overhead 24000
Cost of production 120000
(b) Trading account for the first six months of the year using absorption costing
Revenues 248000
Less: cost of sale
Opening inventory (300*40) 12000
Add: cost of production 120000
Less: closing inventory ( 200*40) (8000)
(124000)
Gross profit 124000
(c)Trading account for the first six months of the year using marginal costing
Revenues 248000
Less: cost of sale
Opening inventory (300*32) 9600
Add: cost of production 120000
Less: closing inventory ( 200*32) (6400)
(123200)
Gross profit 124800
Chapter 3
1. Payback Period
Year Cash Flow Cumulative cash Flow
Immediately (100000) (100000)
Year 1 20000 (80000)
Year 2 40000 (40000)
Year 3 60000 20000
Year 4 60000 80000
Year 5 20000 100000
Year 5 20000 120000
Payback period P= E+ B/ C
P= 2+40000/60000
P= 2.67 year
P= 2 years 8 months
Average annual operating profit before depreciation =200000/5=40000
Depreciation = Cost – Residual Value/ useful life
=(100000-20000)/5= 16000
Average Investment to earn that profit =(100000+20000)/2=60000
Accounting rate of return (ARR) =(40000-16000) *100
60000
ARR= 40%
2.
Year Cash Flow Cumulative cash flow
Immediately (150000) (150000)
Year 1 30000 (120000)
Year 2 30000 (90000)
Year 3 30000 (60000)
Year 4 30000 (30000)
Year 5 30000 0
Year 6 30000 30000
Year 6 30000 30000
Payback period P= E+ B/C
P= 4 + 30000/ 30000
P= 5 years
Accounting rate of return (ARR)= Average annual operating profit after depreciation * 100
Average Investment to earn that profit
Average annual operating profit before depreciation =180000/6=30000
Depreciation = (150000-30000)/ 6=20000
Average Investment to earn that profit =(150000+30000)/2= 90000
ARR= (30000-20000)/90000* 100
ARR =11.11%
3. Net Present Value (Net Present Value)
Year Cash Flow Cumulative Discount Rate Net Present
(,000) Cash Flow 12% Value
Immediately (900) (900) 1 (900)
Year 1 100 (800) 0.893 89.3
Year2 200 (600) 0.797 159.4
Year 3 300 (300) 0.712 213.6
Year 4 400 100 0.636 254.4
Year 5 500 600 0.567 283.5
Net Present Value 100.2
Pay back period( P)= E+B/C
=3+300/400
P= 3.75 years
Project A (Net Present Value)
Year Cash Flow Cumulative Discount Rate Net Present
(,000) Cash Flow 18% Value
Immediately (900) (900) 1 (900)
Year 1 100 (800) 0.847 84.7
Year2 200 (600) 0.718 143.6
Year 3 300 (300) 0.609 182.7
Year 4 400 100 0.516 206.4
Year 5 500 600 0.437 218.5
Net Present Value (64.1)
IRR ( Project A)= 12%+ 100.2* ( 18%-12%)
100.2-(64.1)
= 12%+601.2%
164.3
= 12%+3.6%
= 15.6%
Project B ( Net Present Value)
Year Cash Flow Cumulative Discount Rate Net Present
(,000) Cash Flow 18% Value
Immediately (640) (640) 1 (640)
Year 1 200 (440) 0.847 169.4
Year2 200 (240) 0.718 143.6
Year 3 200 (40) 0.609 121.8
Year 4 200 160 0.516 103.2
Year 5 200 360 0.437 87.4
Net Present Value (14.6)
Payback period (P)=3+40/200
P= 3.2 years
Project B ( Net present value)
Year Cash Flow Cumulative Discount Rate Net Present
(,000) Cash Flow 12% Value
Immediately (640) (640) 1 (640)
Year 1 200 (440) 0.893 178.6
Year2 200 (240) 0.797 159.4
Year 3 200 (40) 0.712 142.4
Year 4 200 240 0.636 127.2
Year 5 200 440 0.567 113.4
Net Present Value 81
Internal Rate of Return ( IRR)= 12%+81* (18%-12%)
81-(14.6)
=12%+ 486
95.6
IRR = 17%
4. Calculation of Weight Average cost of capital
Sources Amount (000) % to total fund Cost % Cost of
capital %
Ordinary Share 300 60 20 12%
Loan 200 40 12 5%
Total 500 17%
(b) Net Present Value ( Project A)
Year Cash Flow Cumulative
Cash Flow