Preparation of Absorption Costing and Contribution Margin Income Statements

This assignment involves preparing two types of income statements: Absorption Costing and Contribution Margin. The student is required to analyze the given data, including sales revenue, variable manufacturing expenses, fixed manufacturing expenses, and distribution, administration, and selling expenses for a company called Brickworks Limited. The student must then prepare an absorption costing income statement and a contribution margin income statement for the year 2017 and a budgeted income statement for the year 2018. The assignment requires the student to apply accounting concepts and principles to arrive at the final operating profit for each scenario.

Running head: ACCY918
Accy918
Name of the student
Name of the university
Student ID
Author note

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Table of Contents
Part (F) – Income statement.......................................................................................................2
Part (G) – Budgeted income statement for 2018........................................................................5
Reference....................................................................................................................................6

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Part (F) – Income statement
Answer 1 – Absorption costing income statement
Net income as per absorption costing is computed as follows –
Particulars Amount
Sales XXX
Less: Cost of goods sold XXX
Gross margin XXX
Less: Selling and admin expenses XX
Net Income XX
Where the cost of goods sold is calculated as follows –
Cost of goods sold = Opening balance of inventories + manufacturing cost for the period –
Closing balance of inventories (Black and Al-Kilani 2013)
As per the annual report 2017 of Brickworks Limited,
Cost of goods sold = $ 559,099
Opening inventory = $ 7,998
Closing inventory = $ 7,300
Therefore, manufacturing cost for the period = $ 559,099 - $ 7,997 + $ 7,300 = $ 558,402
The manufacturing cost = Direct materials + Direct labour + Variable manufacturing
overhead + fixed manufacturing overhead (Aurora 2013)

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Let’s assume that the selling unit = 30,00,000 units at the rate of $ 280.61
Break up for manufacturing costs are as follows –
Manufacturing cost Amt ('000)
Direct material $ 1,00,000.00
Direct labour $ 2,00,000.00
Variable manufacturing overhead $ 1,50,000.00
Fixed manufacturing cost $ 1,08,402.00
Total manufacturing cost $ 5,58,402.00
Absorption costing income statement
Particulars Amount ('000) Amount ('000)
Sales revenue $ 841,816.00
Cost of sales
Direct material (30,00,000 units * $ 33.33) $ 100,000.00
Direct labour (30,00,000 units * $ 66.67) $ 200,000.00
Variable manufacturing overhead (30,00,000 units
* $ 50) $ 150,000.00
Fixed manufacturing cost $ 108,402.00 $ 558,402.00
Gross profit $ 283,414.00
Less: Operating expenses
Distribution expenses $ 65,632.00
Administration expenses $ 28,948.00
Selling expenses $ 77,870.00 $ 172,450.00
Operating profit $ 110,964.00
Answer 2 – Contribution margin income statement
Under the contribution margin income statement all the variable expenses are
deducted to get the contribution margin and thereafter the fixed expenses are deducted to get
the net profit or loss for the period (Fisher and Krumwiede 2015).

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Total distribution, administration and selling expenses of the company are $ 172,450.
Let’s assume that out of total distribution, administration and selling expenses 80% that is $
137,960 is fixed and 20% that is $ 34,490 is fixed.
Contribution margin income statement
Particulars Amount ('000) Amount ('000)
Sales revenue $ 841,816.00
Less: Variable manufacturing expenses
Direct material (30,00,000 units * $ 33.33) $ 100,000.00
Direct labour (30,00,000 units * $ 66.67) $ 200,000.00
Variable manufacturing overhead (30,00,000 units
* $ 50) $ 150,000.00
Variable distribution, administration and selling
expenses $ 137,960.00 $ 587,960.00
Contribution margin $ 253,856.00
Less: Fixed expenses
Fixed manufacturing expenses $ 108,402.00
Fixed distribution, administration and selling
expenses $ 34,490.00 $ 142,892.00
Operating profit $ 110,964.00

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Part (G) – Budgeted income statement for 2018
Particulars Units Amount
Sales revenue 3600000 $ 1,111,212,000.00
Less: Variable manufacturing expenses
Direct material (36,00,000 units * $ 33.33) 3600000 $ 119,988,000.00
Direct labour (30,00,000 units * $ 66.67) 3600000 $ 240,012,000.00
Variable manufacturing overhead (30,00,000 units
* $ 50) 3600000 $ 180,000,000.00
Variable distribution, administration and selling
expenses 3600000 $ 165,552,000.00
Total variable expenses $ 705,552,000.00
Contribution margin $ 405,660,000.00
Less: Fixed expenses
Fixed manufacturing expenses $ 108,402,000.00
Fixed distribution, administration and selling
expenses $ 34,490,000.00
Total fixed expenses $ 142,892,000.00
Operating profit $ 262,768,000.00
Analysis and assumptions
For the year 2017, it was assumed that the sales were for 30,00,000 units at the rate of
$ 280.61 per unit. However, for preparing the budget of the year 2018 it has been assumed
that the selling units will be increased by 20% that is the selling units will be increased from
30,00,000 units to 36,00,000 units. Further, it is assumed that the selling price per unit will be
increased by 10% that is the selling price will be increased from $ 280.61 to $ 308.67.
Variable per unit cost for material, labour and manufacturing expenses will be same.
However, the expenses will be changed with the changes in units (Whitecotton, Libby and
Phillips 2013). The fixed expenses till the units of 40,00,000 are assumed to be same.
Therefore, for 36,00,000 units the fixed expenses will be maintained at the same level as for
the year 2017. After deducting all the expenses the resultant operating profit will be $
262,768,000 for the year ended 2018.

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Reference
Aurora, B.B.C., 2013. The Cost Of Production Under Direct Costing And Absorption
Costing–A Comparative Approach. Annals-Economy Series, 2, pp.123-129.
Black, G. and Al-Kilani, M., 2013. Accounting and finance for business. Pearson Higher Ed.
Fisher, J.G. and Krumwiede, K., 2015. Product costing systems: finding the right
approach. Journal of Corporate Accounting & Finance, 26(4), pp.13-21.
Whitecotton, S., Libby, R. and Phillips, F., 2013. Managerial accounting. McGraw-Hill
Higher Education.