FINANCIAL DECISION MAKING

Diverse Management Consultants

Diverse Management Consultants

Task 1: Dallas Limited

Absorption Costing

Absorption costing method is used by the firms when they prepare financial statements for external purposes. One of the major aims of this costing system is that unit produced as well as inventory should incorporate a share of all production costs, both variable as well as fixed cost, arise while getting them to current position. The preparation of company's profit statement based on absorption costing system for the months Jan-Mar & Apr-Jun are given below.

Working 1: Full Production Cost

Direct material

30

Direct labour

65

Variable production o/h

15

Fixed production o/h

5.000

Full production cost

115.000

Working 2: Value of Inventory & Production

 

Opening Inv. (Units*Full Cost)

Production (Units*Full Cost)

Closing Inventory (Units*Full Cost)

 

Jan-Mar

- 9,200, 000 1,150, 000

 

Apr-Jun

1,150,000 8,050, 000 -

 

Working 3: Under/over absorbed fixed production overhead

 

Jan-Mar

Apr-Jun

Actual fixed prod o/h

500, 000 500, 000

Prod*Fix o/h cost

400, 000 350, 000

Expected - Actual

100, 000 150, 000

Fixed o/h absorbed

500, 000/100, 000

500, 000/150, 000

 

(Under absorbed)

(Under absorbed)

Absorption Costing Profit Statement

 

Jan-Mar

Jan-March

Apr-Jun

Apr-Jun

Sales

 

9,100, 000 9,100, 000

Less cost of sales

 

 

 

 

Opn. Inv

- 1,150, 000

 

Prod

9,200, 000 8,050, 000

 

Closing Inv

(1,150,000)

(8,050,000)

- (9,200,000)

 

 

 

 

 

(Under)/over absorbed fixed prod o/h

 

(100,000)

 

(150,000)

Gross Profit

 

950,000 (250,000)

Less Expenses

 

 

 

 

Variable selling & Distr. Cost

700, 000 700, 000

 

Fixed Adm.

60, 000 60, 000

 

Fixed selling & Distribution

25, 000 (785, 000)

25, 000 (785, 000)

Net Profit

 

1,735, 000 535, 000

Marginal Costing

Companies use marginal costing system in order to facilitate internal decision making (short-term). This costing method is aimed to identify the contribution that has been generated (sales less variable costs), since fixed costs are arise despite the level of activity. Company's profit statement account based on marginal costing system is given below.

Working 1: Full Production Cost

Direct material

30

Direct labour

65

Variable production o/h

15

Full production cost

110.000

Working 2: Value of Inventory & Production

 

Opening Inv. (Units*Full Cost)

Production (Units*Full Cost)

Closing Inventory (Units*Full Cost)

 

Jan-Mar

- 8,800, 000 1,100, 000

 

Apr-Jun

1,100,000 7,700, 000 -

 

Marginal Costing Profit Statement

 

Jan-Mar

Jan-March

Apr-Jun

Apr-Jun

Sales

 

7,700, 000 7,700, 000

Less Variable Cost

 

 

 

 

Opn. Inv

- 1,150, 000

 

Prod

9,200, 000 8,050, 000

 

Closing Inv

1,150, 000 (10,350, 000)

- (9,200, 000)

Variable selling & Distr. Cost

 

(700, 000)

 

(700, 000)

Contribution

 

(3,350, 000)

 

(2,200, 000)

Less Fixed Cost

 

 

 

 

Fixed o/h

500, 000

 

500, 000

 

Fixed Adm. 60, 000 60, 000

 

Fixed selling & Distribution

25, 000 (585, 000)

25, 000 (585, 000)

Net Profit

 

(2,765, 000)

 

(1,615, 000)



Difference in Profit Figures

The profit figures calculated under both methods i.e. absorption costing as well as marginal costing are both difference, which is because of the fixed production overheads treatment in both methods. In marginal costing system the fixed production overhead's full amount is written off in the period that it occurs, on the other hand, in absorption costing system fixed production overheads' part is carried among accounting periods as share of inventory valuations.

Task 2: Dynasty Limited

Variety of techniques is available for capital investment appraisal, including net present value (NPV), payback period, internal rate of return (IRR), and some others. Most used techniques are net present value and payback period; therefore we have evaluated the given ...