Profit Statements (Cambridge (CIE) AS Accounting): Revision Note
Exam code: 9706
Profit statements using absorption costing
What are profit statements?
Profit statements show the profit or loss made from selling a product/service
How do I prepare a profit statement using absorption costing?
STEP 1
Calculate the sales revenue
Selling price per unit × number of units sold
STEP 2
Calculate the cost of sales
Start with opening inventory
Add production cost
Including the fixed costs
Subtract closing inventory
STEP 3
Calculate the gross profitSales revenue - cost of sales
STEP 4
Adjust for the under-absorption or over-absorption to find the profit or lossAdd overheads over-absorbed
Subtract overheads under-absorbed
STEP 5
Subtract any other non-production costs to calculate the profit or loss
Worked Example
Jane manufactures a single product. She uses a system of absorption costing.
The following budgeted data is available for one unit of the product.
$ | |
|---|---|
Selling price | 14 |
Direct materials | 4 |
Direct labour | 3 |
Budgeted production: 20 000 units per month
Budgeted fixed overheads: $23 000 per month
On 1 August, Jane held 2 000 units.
The following actual results are available.
Sales: 12 000 units
Production: 18 000 units
Fixed overheads: $25 000
Prepare the profit statement for the month of August to calculate the profit or loss.
Answer:
Sales revenue
$14 × 12 000 = $168 000
Production cost
Direct materials
$4 × 18 000 = $72 000
Direct labour
$3 × 18 000 = $54 000
Fixed overheads
25 000 ÷ 20 000 = $1.25 per unit
$1.25 × 18 000 = $22 500
Total
$72 000 + $54 000 + $22 500 = $148 500
Opening inventory
($4 + $3 + $1.25) × 2 000 = $16 500
Closing inventory
Opening inventory + Production - Sales
= 2 000 + 18 000 - 12 000
= 8 000 units
($4 + $3 + $1.25) × 8 000 = $66 000
Calculate the overheads that are over-absorbed or under-absorbed
Actual overheads - Overheads absorbed
25 000 - 22 500 = 2 500 under-absorbed
Profit statement for the month of August
$ | ||
|---|---|---|
Revenue | 168 000 | |
Cost of sales: | ||
Opening inventory | 16 500 | |
Production costs | 148 500 | |
Less: Closing inventory | (66 000) | (99 000) |
Gross profit | 69 000 | |
Less: Overheads under-absorbed | (2 500) | |
Profit for the month | 66 500 |
Profit for August is $66 500
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