MBS 2nd Semester Management Accounting By: Ram Sir

Chapter 4: Income Measurement and Reporting

Income = it is the result of difference between revenue and cost
 Every organization prepares income statement to find or to know the
operating result (i.e. profit or loss) at every end of financial period.
 Income statement mostly used by internal and external parties for decision
making purpose.
 Internal parties such as various level of management used this for
managerial decision.
 External parties such as investor, creditors, Gov. etc. use this for investment
decision.
 Income statement is prepared for reporting to this various users.
 There are two method of preparing income statement namely variable
costing(direct/marginal costing) and absorption costing
(full/traditional/conventional costing)
 Variable costing income statement is prepared for internal reporting
purpose and absorption costing income statement for external reporting
purpose.
 For the purpose of preparing the income statement under profit planning, the
cost are divided into two types namely product cost and period cost.

Variable Costing Absorption Costing

Direct material
Product Direct labour Product Cost
Cost Direct expenses
Variable Mfg. Overhead
Period Fixed Mfg. Overhead
Cost Variable selling & Administrative Overhead Period cost
Fixed Selling & Administrative Overhead
 Product cost: The term ‘product cost’ refers to those cost, which
incurred during the production of goods. It is also known as
inventorial cost because it is used in the valuation of inventory.
Total product cost can be calculated on the basis of such production
cost per unit.
 Period Cost: Period cost are those cost which are incurred on the
basis of time period. Period costs are fixed cost and are not used in
 MBS 2nd Semester Management Accounting By: Ram Sir

the valuation of inventory. Theses cost are charged on the basis of

time period. Such as Rent, salaries, interest etc.
Product/ Manufacturing cost Under Variable costing Product/ Manufacturing cost Under Absorption
Costing
1. Direct Material cost ( CPU × Production Unit) 1. Direct Material cost( CPU × Production Unit)
2. Direct labour cost( CPU × Production Unit) 2. Direct labour cost( CPU × Production Unit)
3. Direct Expenses( CPU × Production Unit) 3. Direct Expenses( CPU × Production Unit)
4. Variable Mfg. Overheads( CPU × Production Unit) 4. Variable Mfg. Overheads( CPU × Production Unit)
5. Fixed Mfg. Overheads( CPU × Production Unit)
Non- Manufacturing or Period cost under Variable Non- Manufacturing or Period cost under absorption
costing Costing
 Fixed Mfg. Overhead 1. Fixed office & Administrative Overhead
 Fixed Office & Administrative Overhead 2. Fixed selling & distribution Overhead
 Fixed Selling & Distribution Overhead 3. Variable office & administrative Overheads
 Variable office & Administrative Overhead (Cost per unit × sales unit)
(Cost per unit × sales unit) 4. Variable selling & distribution Overheads
 Variable selling & distribution Overheads (Cost per unit × sales unit)
(Cost per unit × sales unit)

ABSORPTION COSTING OR FULL COSTING OR CONVENTIONAL COSTING

a. Income statement Under absorption Costing with cost of goods sold
Particulars Details Amounts
Sales revenue ( SPPU × Sales units) xxx
Less: Manufacturing Cost of good sold:
Direct Material cost( CPU × Production Unit) xxx
Direct labour cost( CPU × Production Unit) xxx
Direct Expenses( CPU × Production Unit) xxx
Variable Mfg. Overheads( CPU × Production Unit) xxx
Fixed Mfg. Overheads( CPU × Production Unit) xxx
Manufacturing cost of production @ Rs……per units xxx
Add : Opening stock @ Rs……per unit xxx
xxx
Less: Closing stock @Rs……per unit xxx
xxx
Add/Less: Under/Over Absorption of Mfg. Fixed cost ± xxx xxx
Gross profit margin………………………………………………………………………. xxx
Less : Non – manufacturing Cost:
Fixed office & Administrative Overhead
Fixed selling & distribution Overhead xxx
Variable office & administrative Overheads xxx
(Cost per unit × sales unit) xxx
Variable selling & distribution Overheads xxx
(Cost per unit × sales unit) xxx
 MBS 2nd Semester Management Accounting By: Ram Sir

Net Income xxx

b. Income statement Under absorption Costing with Gross margin

Particulars Details Amounts
Sales revenue ( SPPU × Sales units) xxx
Less: Manufacturing Cost of good sold:
Direct Material cost( CPU × Production Unit) xxx
Direct labour cost( CPU × Production Unit) xxx
Direct Expenses( CPU × Production Unit) xxx
Variable Mfg. Overheads( CPU × Production Unit) xxx
Fixed Mfg. Overheads( CPU × Production Unit) xxx
Manufacturing cost of production @ Rs……per units xxx
Add : Opening stock @ Rs……per unit xxx
xxx
Less: Closnig stock @ Rs……per unit xxx
Manufacturing Cost of goods sold…………………………………….. xxx
Gross profit margin before adjustment…………………………….. xxx
Add/Less: Over/Under Absorption of Mfg. Fixed cost ±xxx
Gross profit margin after adjustment…………………………………………. xxx
Less : Non – manufacturing Cost:
xxx
Fixed office & Administrative Overhead xxx
Fixed selling & distribution Overhead xxx
Variable office & administrative Overheads
(Cost per unit × sales unit)
Variable selling & distribution Overheads xxx
(Cost per unit × sales unit) xxx
Net Income xxx
Pints to remember:
 It is also known as full or total costing approach
 This method is mostly used for external reporting approach
 It is also known as traditional costing
 Sales unit = opening stock unit + production units – closing stock units
 Method for calculation of under or over absorption
Step 1: If Normal capacity > Production unit = under absorption
Step 2: If Normal capacity < Production unit = Over absorption
Step 3: Fixed manufacturing overhead per unit =
Total ¿ MFg .Overhead ¿
Normal capacity / Production units
 When production = sales, then there is no opening stock and closing stock
 When production > sales, then there is closing stock
 When production < sales, then there is opening stock
 MBS 2nd Semester Management Accounting By: Ram Sir

VARIABLE COSTING OR MARGINAL COSTING OR DIRECT COSTING

Income statement under variable costing
Particulars Details Amounts
Sales revenue (SPPU × Sales units) Xxx
Less: Variable Mfg. cost of goods sold:
Direct Material cost ( CPU × Production Unit) Xxx
Direct labour cost( CPU × Production Unit) Xxx
Direct Expenses( CPU × Production Unit) Xxx
Variable Mfg. Overheads( CPU × Production Unit) xxx
Variable manufacturing cost of production @Rs…..per unit xxx
Add: Opening stock @ Rs……………………………………………………….. xxx
Less: Closing stock @ Rs…………………………………………………………. (xxx)
Variable manufacturing cost of goods sold………………………………….. Xxx
Gross contribution margin………………………………………………….. Xxx
Less: Non- Manufacturing variable cost:
Variable office & Administrative Overhead……………………….. Xxx
(Cost per unit × sales unit)
Variable selling & distribution Overheads…………………………. Xxx
(Cost per unit × sales unit)
Net Contribution margin…………………………………………………. Xxx
Less : Period/ Fixed cost:
Fixed Mfg. Overhead…………………………………………………………. xxx
Fixed Office & Administrative Overhead…………………………… xxx
Fixed Selling & Distribution Overhead………………………………. xxx xxx
Net income Xxx

Points to remember:
 It is also known as direct costing or marginal costing
 It is used for internal reporting purpose
 MBS 2nd Semester Management Accounting By: Ram Sir

Alternatively,
Income statement under variable costing
Particulars Details Amounts
Sales revenue (SPPU × Sales units) Xxx
Less: Variable Mfg. cost of goods sold:
Direct Material cost ( CPU × Production Unit) Xxx
Direct labour cost( CPU × Production Unit) Xxx
Variable Mfg. Overheads( CPU × Production Unit) Xxx
Cost of goods manufacturing @ Rs…….per unit xxx
Add : Opening stock @ Rs…………………………………………………. xxx
xxx
Less: Closing stock @ Rs……………………………………………………. xxx Xxx
Gross Contribution margin……………………………………………….. Xxx
Less: Variable office & Administrative Overhead……………………….. xxx
(Cost per unit × sales unit)
Variable selling & distribution Overheads…………………………. xxx
(Cost per unit × sales unit Xxx
Net Contribution Margin………………………………………………… Xxx
Less: Fixed Mfg. Overhead…………………………………………………………. xxx
Fixed Office & Administrative Overhead…………………………… xxx
Fixed Selling & Distribution Overhead………………………………. xxx xxx
Net income xxx

Reconciliation statement under variable costing

Particulars Amounts
Net profit as per variable costing Xxx
Net profit as per Absorption costing xxx
Difference in net profit xxx
Opening stock in units Xxx
Closing stock in units xxx
Difference in stock units Xxx
(×) Standard fixed overhead rate xxx
Difference in value of stock Xxx

Reconciled Profit under variable costing

Particulars Amounts
Net profit as per absorption costing……………………………………………………………… Xxx
Add: Fixed MFg. Overhead of opening stock………………………………………………. xxx
 MBS 2nd Semester Management Accounting By: Ram Sir

xxx
Less: Fixed MFg. Overhead of Closing stock………………………………………………. xxx
Net profit as per variable costing Xxx
Note: this type of statement is prepared to find out net profit under variable costing when the net
profit under absorption costing is available
Reconciliation statement under Absorption costing
Particulars Amounts
Net profit as per Absorption costing Xxx
Net profit as per variable costing xxx
Difference in net profit Xxx
Closing stock in units Xxx
Opening stock in units xxx
Difference in stock units Xxx
(×) Standard fixed overhead rate xxx
Difference in value of stock Xxx
Reconciled profit under Absorption Costing
Particulars Amounts
Net profit as per variable costing……………………………………………………………… Xxx
Add: Fixed MFg. Overhead of Closing stock………………………………………………. xxx
xxx
Less: Fixed MFg. Overhead of Opening stock………………………………………………. xxx
Net profit as per Absorption costing Xxx
Note1: this type of statement is prepared to find out net profit under absorption costing when the
net profit under variable costing is available

Note2: when closing stock in unit is more than opening stock in units the profit shown by
absorption costing is more than variable costing. And when closing stock is less than opening stock,
profit shown by variable costing is more than absorption costing.

Note3: The main reason for difference in reported income is the difference in the stock position
and inclusion of fixed overhead cost into absorption costing.
The main reason for difference in profit reported by two methods is the difference ininventroy
position.
 MBS 2nd Semester Management Accounting By: Ram Sir

2015 Q.No.:
Solution:
Income statement under variable costing
Green company
Particulars Details Amounts
Sales revenue (60,000 units @Rs. 40) 2400,000
Less: variable cost of goods sold:
Direct material (55000 * Rs.12) 660,000
Direct labour(55000*Rs.4) 220,000
Variable Mgf. Cost (55000*Rs. 10) 550,000
Total variable Mgf.cost/cost of production @ Rs. 26 1430,000
Add: opening stock (5000 units @Rs. 26) 130,000
Less: closing stock Nill
Add: variable selling and distribution (60,000 units @Rs.2) 120,000 (1680,000)
Contribution margin *CM) 720,000
Less: period cost/ fixed cost:
Fixed selling and dist. Exp. 150,000
Fixed manufacturing OH(50,000 *Rs.8) 400,000 550,000
Net income 170,000
Sales units > production units = opening stock
I.e. opening stock = sales units – production units = 60,000 units – 55000 units =
5000 units.
MBS 2nd Semester Management Accounting By: Ram Sir

Particulars Details Amounts

Sales revenue ( 60,000@Rs.40) 2400,000
Less: Manufacturing Cost of good sold:
Direct Material cost ( 55000@Rs. 12) 660,000
Direct labour cost (55000@Rs.4) 220,000
Variable Mfg. Overheads(55000*Rs. 10) 550,000
Fixed Mfg. Overheads (55000*Rs. 8) 440,000
Manufacturing cost of production @ Rs 34per units 1870,00
Add : Opening stock (5000@Rs.34) 170,000
2040,000
Less: Closnig stock @ Rs……per unit Nill
2040,000
Less: Over Absorption of Mfg. Fixed cost (5000@Rs.8) 40,000
Total cost of goods sold (20,00,000)
Gross profit margin………………………………………………………………………. 400,000
Less : Non – manufacturing Cost:
Fixed selling and distribution 150,000
Variable selling and distribution (60,000@Rs.2) 120,000 (270,000)
130,000
Net income

SFOR (standard fixed overhead rate ) =

Total ¿ manufacturing OH ¿ ❑
Normal capacity∨ productionunits = ❑
MBS 2nd Semester Management Accounting By: Ram Sir

2019 March Q.No. 5:

Solution:
a. Calculation of income statement under variable costing
Particulars Details Amounts
Sales revenue (11000 units @Rs. 75) 825000
Less: variable cost of goods sold:
Variable product cost (10,000 units @Rs32 320,000
Total variable Mgf. Cost @Rs. 32 320,000
Add: opening stock(3000@Rs. 32) 96000
Less: closing stock(2000@Rs.32) 64000
Total variable cost of goods sold 352000
Add: variable selling and adm. OH @Rs. 5 *11000 55000
Total variable cost of sales 407000
Contribution margin 418000
Less: fixed cost:
Fixed factory OH 96000
Fixed selling and Adm. OH 50000 146000
Net income 272000
Working Note:
TFMOH Rs .96000
Standard fixed overhead rate (SFOR) = NC
= 12000units = Rs. 8
Variable product cost per unit = Rs. 40-Rs.8= Rs. 32
Under 2017:
Since , actual production > sales units= closing stock arise
Sales units = opening stock + production – closing stock
10,000 units = Nill + 13000 – closing stock
Closing stock = 13000-10,000 = 3000
Under 2018:
Closing stock of 2017= Opening stock of 2018:
Sales units = opening stock + production – closing stock
11000 = 3000 +10,000 – closing stock
Closing stock = 2000 units
b. Income statement under Absorption costing
Particulars Details Amounts
Sales revenue (11000 units @Rs. 75) 825000
 MBS 2nd Semester Management Accounting By: Ram Sir

Less: variable cost of goods sold:

Variable product cost (10,000 units @Rs32 320,000
Fixed Mgf OH (10,000*Rs.8) 80,000
Total Mgf. Cost of production @ 40 400,000
Add: opening stock (3000@Rs.40) 120,000
Less: closing stock (2000 units @Rs. 40 80,000
Add; under absorption of fixed cost 16000
( 2000 units @Rs. 8) (96000-80,000)
Total variable cost of goods sold 456000
Gross profit 369000
Less: Non- manufacturing cost/period cost
Variable selling(11000 @Rs.5) 55000
Fixed selling 50,000 105000
Net income 264000
Note:
Calculated Fixed Mgf > Fixed Mgf. given at question = Over absorption
Calculated Fixed Mgf < Fixed given at question = under absorption
2016 Aug-Sept Q.No. 4:
Solution:
1. Income statement under absorption costing
Particulars March April
Production units 0 400 units
Sales revenue @Rs. 240 84000 124800
Less: cost of good sold:
Variable manufacturing cost @Rs. 100 0 40,000
Fixed manufacturing cost @Rs. 40 0 16000
Total variable Mfg. cost @Rs. 140 0 56000
Add: opening stock (500 units/150 units @Rs. 140) 70,000 21000
Less: closing stock (150 units/30 units @Rs. 140) (21000) (4200)
COGS Before adjustment 49000 72800
Add: under absorption of fixed cost (0-20,000) 20,000 4000
COGS After adjustment 69000 76800
Gross profit ( sales – COGS after adjustment) 15000 48000
Less: Non- manufacturing cost:
Fixed selling cost 6000 6000
Variable distribution cost ( 350/520 units@Rs. 30) 10,500 15600
Total 16500 21600
Net income/loss (gross profit – total Non- Mgf cost) (1500) 26400
Working note:
 MBS 2nd Semester Management Accounting By: Ram Sir

TMFC Rs .20,000
SFOR = NC = 500 = Rs. 40
For march:
Sales units = opening stock units+ production units- closing stock units
350= 500+0-c/s
c/s = 500-350= 150
For april:
Sales units = opening stock units+ production units- closing stock units
520 = 150 + 400 – c/s
c/s = 550-520 = 30 units
For over /under absorption:
Normal capacity > production = under absorption
Under absorption = 500 – 400 = 100 units@Rs. 40 = s. 4000
2. Income statement under variable costing
Month March April
Normal capacity 500 500
Sales units 350 520
Production units 0 400
Sales revenue @Rs. 240 84000 124800
Less: cost of goods sold:
Variable Mgf. Cost @Rs. 100 0 40,000
Total variable Mgf. Cost @Rs. 100 0 40,000
Add: opening stock(500 units/150 @Rs. 100) 50,000 15000
Less: closing stock(150 units/30 @Rs. 100) (15000) (3000)
Total V. COGS 35000 52000
Variable distribution @Rs. 30 10500 15600
Gross margin / Total V. cost of sales 45500 67600
Contribution margin ( sales – Gross margin) 38500 57200
Less: fixed cost
Fixed Mgf. Cost 20,000 20,000
Fixed selling cost 6000 6000
Total fixed cost 26000 26000
Net income/loss ( CM- FC) 12500 31200
 MBS 2nd Semester Management Accounting By: Ram Sir

2016 make up Q.No. 14:

Solution:
Income statement under variable costing
By using FIFO & LIFO
Particulars FIFO LIFO
Details Amounts Details Amounts
Sales revenue 124000 units @Rs. 20 2480,000 2480,000
Less: variable cost of goods sold:
Variable Mgf. Cost 132000 units@Rs. 12 1584000 1584000
Add:opening stock (10,000 units @Rs. 12.20) 122000 122000
Less: closing stock
Under FIFO (216000)
Under LIFO (218000)
Variable cost of goods sold 1490,000 1488000
Add: variable selling @Rs. 3 372000 372000
Total variable cost of sales 1862000 1860,000
Contribution margin 618000 620,000
Less: fixed cost
Fixed Mgf. Cost 158400 158400
Fixed selling cost 52000 52000
Total fixed cost 210,400 210,400
Net income/loss 407600 409600
Working note:
Sales units = opening stock units + production units – closing stock units
124000 = 10,000+132000 – c/s
C/s units = 142000 units – 124000 units = 18000 units
Under FIFO method: (go through the production cost)
Value of closing stock = 18000 units @Rs. 12 = Rs, 216000
Under LIFO method: (go through opening stock)
Value of closing stock = 10,000 units @Rs. 12.20 +8000 units @Rs. 12 = Rs. 218000
 MBS 2nd Semester Management Accounting By: Ram Sir

2067 (i) Q.No. 1:

Solution:
Income statement under absorption costing
Particulars Details Amounts
Sales revenue (12000 units @Rs60) 720,000
Less: cost of goods sold:
Prime cost (9000 units @Rs.26) 234000
Variable cost ( 9000 units @Rs. 6) 54000
Fixed Mgf. OH (9000 units @Rs. 10) 90,000
Total Mgf. Cost @Rs. 42 378000
Add: opening stock (3000 units @Rs. 42) 126000
Less: closing stock Nill
Add: under absorption of fixed cost (1000 units 10,000
@Rs.10)
Total cost of goods sold 514000
Gross profit 206000
Less: Non- manufacturing cost:
Variable cost @Rs, 5*12000 60,000
Fixed cost 50,000 110,000
Net income 96000
TFMOH 100,000
SFOR = NC
= 10,000
= Rs. 10
For calculation of opening stock and closing stock:
If sales units > production units = opening stock creates
If production units > sales units = closing stock creates
Calculation of over absorption and under absorption:
If Normal capacity > Production units = under absorption
If production units > Normal capacity = over absorption