Ludo Limited manufactures a specialised storage accessory for automobiles called ‘the Storax’, which is a type of pocket which can be easily fixed in the boot of any vehicle. The company has been in operation for two years and, now that the production process has been established and refined, the directors have decided to focus on the income and costs arising from activities.The managing director has recently read an article about product costing and, in particular, absorption and variable costing and is keen to understand how this would affect company profits.
The following information is available for the months of July and August:
Production (units) 13,000 15,000
Sales (units) 12,000 16,000
Direct materials $29,250 $33,750
Direct labour $19,500 $22,500
Variable production overheads $7,800 $9,000
Total selling and administrative expenses $45,200 $57,600
1. For Ludo Limited normal production capacity is 15,000 units per month.
2. Fixed production overheads are $29,400 per month.
3. The company sells ‘the Storax’ for $20 each.
4. Total selling and administrative expenses includes a fixed and variable element. The variable portion is incurred based on units sold.
5. At 30 June the company had no ‘Storax’ accessories in its warehouse.
(a) Prepare profit statements for Ludo Limited for the months of July and August using:
(i) Absorption costing
(ii) Throughput accounting (20 marks)
(b) Reconcile the profit calculated using Absorption costing to that calculated using Variable costing. (3 marks)
(c) Provide a brief explanation of the effect on profit of using each of the methods at (a) above. (2 marks)