On 1 April 2018, Equators Limited formed a wholly owned subsidiary company, Corner (Proprietary) Limited for the sole purpose of manufacturing and selling a product called “Best”. The board of directors of Equators Limited approved the following budget at normal capacity at that date: Corner (Proprietary) Limited: Budget forecast for the Year ended 31 March 2019 Total N$ Per unit N$ Sales 1 010 000 10.10 Total costs 985 000 9.85 Direct materials 350 000 3.50 Variable production overheads 50 000 0.50 Direct labour 200 000 2.00 Fixed production overheads 180 000 1.80 Variable selling and administration costs 80 000 0.80 Fixed selling and administration cost 125 000 1.25 Profit 25 000 0.25 The following information relates to the actual results for the year ended 31 March 2019 Sales 90 000 units @ N$ 10.10 Opening inventory nil Closing inventory 8 000 units The management accountant of Corner (Proprietary) Limited had prepared a profit statement on 31 March 2019 ona variable costing basis, which showed a loss. However, the profit statement prepared on an absorption-costing basis at the same date, showed that Corner (Proprietary) Limited had earned a profit. Prepare income statements for Corner (Proprietary) Limited for the year ended 31 March 2019 using Absorption Costing method. Show the value of closing inventory under marginal costing and reconcile the profit/ loss obtained from the income statements prepared above with the profit /loss under marginal costing.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

On 1 April 2018, Equators Limited formed a wholly owned subsidiary company, Corner (Proprietary) Limited for
the sole purpose of manufacturing and selling a product called “Best”. The board of directors of Equators
Limited approved the following budget at normal capacity at that date:
Corner (Proprietary) Limited: Budget forecast for the Year ended 31 March 2019

	Total N$	Per unit N$
Sales	1 010 000	10.10
Total costs	985 000	9.85
Direct materials	350 000	3.50
Variable production overheads	50 000	0.50
Direct labour	200 000	2.00
Fixed production overheads	180 000	1.80
Variable selling and administration costs	80 000	0.80
Fixed selling and administration cost	125 000	1.25
Profit	25 000	0.25

The following information relates to the actual results for the year ended 31 March 2019

Sales	90 000 units @ N$ 10.10
Opening inventory	nil
Closing inventory	8 000 units

The management accountant of Corner (Proprietary) Limited had prepared a profit statement on 31 March 2019
ona variable costing basis, which showed a loss. However, the profit statement prepared on an absorption-costing
basis at the same date, showed that Corner (Proprietary) Limited had earned a profit.

Prepare income statements for Corner (Proprietary) Limited for the year ended 31 March 2019 using
Absorption Costing method.

Show the value of closing inventory under marginal costing and reconcile the profit/ loss obtained from the
income statements prepared above with the profit /loss under marginal costing.

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