Question Tag: Profit Calculation

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  • 1 Marks

MI – May 2016 – L1 – SA – Q6 – Costing Techniques

Calculate the net profit using marginal costing based on given absorption costing profit and inventory data.

The net profit was N2,650,000 using absorption costing and the closing inventory was 14,600 units. Production overhead absorption rate was N18.50 per unit. If the Non-production absorption rate was N14.00 per unit, then the net profit using marginal costing is:
A. N2,379,900
B. N2,445,600
C. N2,650,000
D. N2,854,400
E. N2,920,100

Answer:
A. N2,379,900

Explanation:
To convert the profit from absorption costing to marginal costing, we need to adjust for the fixed production overheads included in the closing inventory. The formula is:

Change in Profit = Change in Inventory × Fixed Production Overhead per unit

The change in profit due to inventory is calculated as:


=N270,100 = N270,100

Since we are moving from absorption to marginal costing, we subtract this amount from the absorption costing profit:

N2,650,000 − N270,100 = N2,379,900

Thus, the profit using marginal costing is N2,379,900.

  • 1 Marks

MI – May 2016 – L1 – SA – Q4 – Cost-Volume-Profit (CVP) Analysis

Identify the conditions under which total contributions equal units sold multiplied by contribution per unit.

The formula which states that total contributions equal units of sales multiplied by contribution per unit is correct if the selling price:

A. And fixed cost are constant
B. And variable cost are constant
C. Varies and variable cost is constant
D. Varies and fixed cost is constant
E. And variable cost vary

Answer: B

Explanation:

The correct answer is B (And variable cost are constant). The formula for total contribution is given as:

Total Contribution =

This formula is valid only if the contribution per unit remains constant, which means that both the selling price and the variable cost per unit must remain unchanged. If either the selling price or the variable cost varies, the contribution per unit would change, making the formula invalid.

  • 1 Marks

MI – May 2024 – L1 – SA – Q9 – Costing Techniques

Calculates profit on one product in a joint-cost situation with normal process loss.

RSTU manufactures two products called S and T with a joint cost of N3,550,000. Normal process loss is 5% of expected output with scrap value of N50,000 and joint costs are apportioned based on sales value. Other data available are as follows:
Product S: 11,520 units, selling price N250
Product T: 9,750 units, selling price N320

The profit on product T is:
A. N1,515,628
B. N1,492,708
C. N1,416,000
D. N1,300,000
E. N1,274,000

Answer: D. N1,300,000

Explanation: The profit is calculated by first determining the proportion of joint costs allocated to product T based on its sales value relative to total sales. After allocating the joint costs, the difference between the sales revenue of product T and its allocated joint costs gives the profit. The calculation also considers the impact of the normal process loss and scrap value.

  • 1 Marks

FA – May 2024 – L1 – SA – Q12 – Financial Statements Preparation

Calculates profit based on changes in assets, liabilities, and additional capital.

Given the following information:

  • Total assets at December 31, Year 2: ₦150,400
  • Total assets at December 31, Year 1: ₦125,000
  • Total liabilities at December 31, Year 2: ₦43,200
  • Total liabilities at December 31, Year 1: ₦34,800
  • Additional capital input on December 31, Year 2: ₦10,000

What was the profit of the business for the year ended December 31, Year 2?

A. ₦7,000
B. ₦17,000
C. ₦27,000
D. ₦90,200
E. ₦107,200

Answer: A

Explanation: The correct answer is A (₦7,000). Profit is calculated by determining the change in capital between the two periods, adjusting for additional capital introduced.

  • Change in assets: ₦150,400 – ₦125,000 = ₦25,400
  • Change in liabilities: ₦43,200 – ₦34,800 = ₦8,400
  • Change in equity (capital) = ₦25,400 – ₦8,400 = ₦17,000
  • Profit = Change in equity – Additional capital input = ₦17,000 – ₦10,000 = ₦7,000.

Thus, the profit for the year is ₦7,000.

  • 1 Marks

FA – May 2024 – L1 – SA – Q2 – Recording Financial Transactions

Calculates profit based on opening and closing capital with drawings.

A business proprietor failed to maintain proper records, but you managed to ascertain that his opening capital, closing capital, and drawings during the year were N225,000, N260,000, and N10,000 respectively. Determine the profit for the period.

A. N25,000
B. N45,000
C. N55,000
D. N65,000
E. N75,000

Answer: B

Explanation: The correct answer is B (N45,000). The profit is determined by the formula: Profit = Closing Capital – Opening Capital + Drawings Profit = N260,000 – N225,000 + N10,000 = N45,000. This method uses the increase in capital plus any additional drawings to calculate the profit for the period.

  • 14 Marks

FR – Nov 2015 – L2 – Q4b and c- Financial Reporting Standards and Their Applications

This question involves recalculating profit and financial position based on a change in the method for determining contract completion and explaining the difference between accounting estimates and policies.

LB Ltd is a construction contract company involved in building commercial properties. Its current policy for determining the percentage of completion of its contracts is based on the proportion of cost incurred to date compared to the total expected cost of the contract.

One of LB Ltd’s contracts has an agreed price of GHS 500 million and estimated total costs of GHS 400 million. The cumulative progress of this contract is:

Year ended 30 September 2011 30 September 2012
Costs incurred 160 290
Work certified and billed 150 320
Billing received 140 300

Based on the above, LB Ltd prepared and published its financial statements for the year ended 30 September 2011. Relevant extracts are:

STATEMENT OF PROFIT OR LOSS

Description GHSm
Revenue 200
Cost of sales (160)
Profit ((100 x 160/400)) 40

STATEMENT OF FINANCIAL POSITION

Description GHSm
Current assets: Amounts due from customers
Contract costs to date 160
Profit recognised 40
Total assets 200
Progress billings (150)
Net assets 50
Contract receivables (150-140) 10

LB Ltd has received some adverse publicity in the financial press for taking its profit too early in the contract process, leading to disappointing profits in the later stages of contracts. Most of LB Ltd’s competitors take profit based on the percentage of completion as determined by the work certified compared to the contract price.

Required:

(i) Assuming LB Ltd changes its method of determining the percentage of completion of contracts to that used by its competitors, and that this would represent a change in an accounting estimate, calculate equivalent extracts of profit or loss and statement of financial position for the year ended 30 September 2012. (7 marks)

(ii) Explain why the above represents a change in accounting estimate rather than a change in accounting policy. (2 marks)

c)

LB Ltd also sells building materials to other contractors from its warehouse and is considering setting up another retail branch in a different part of the country.

The directors have been told that the branch can be run directly through the head office or set up as a separate entity, but are not sure how the accounting will work.

Required:
Explain to the directors how this transaction should be treated in the books of LB Ltd.
(5 marks)

(i) Based on the value of work certified, the contract is 64% complete ((320 / 500) x 100) at 30 September 2012. Extracts for 2012 are:

LB LTD
STATEMENT OF PROFIT OR LOSS (EXTRACTS) FOR THE YEAR ENDED 30TH SEPTEMBER 2012

Description GH¢ million
Revenue ((500 x 64%) – 200) 120
Cost of sales ((400 x 64%) – 160) (96)
Profit ((100 x 64%) – 40) 24

LB LTD
STATEMENT OF FINANCIAL POSITION (EXTRACTS) AS AT 30TH SEPTEMBER 2012

Description GH¢ million
Current assets
Amounts due from customers
– Contract costs to date 290
– Profit recognized (100 x 64%) 64
Total assets 354
Progress billings (320)
Net assets 34
Contract receivables (320 – 300) 20

(ii)
Accounting policies are the rules, principles, and practices adopted by an entity in preparing its financial statements. They should be based upon IFRSs or other financial reporting standards.

Accounting estimates are the measurements and valuations arrived at by an entity in applying accounting policies to specific items and transactions.

In the case of LB Ltd, the accounting policy is in accordance with IAS 11 Construction Contracts. Revenue and costs are recognized according to the stage of completion of the contract. LB’s current means of estimating the stage of completion is based on the proportion of cost to date to total cost.

Although the question refers to it as LB’s ‘current policy,’ this is an accounting estimate, because it is LB’s method of applying the accounting policy. A different measurement basis, based on the same accounting policy, is to estimate stage of completion based on the value of work certified. In transferring from one to the other, LB is making a change of accounting estimate.

c)

If a branch is accounted for through the head office, tight control can be maintained. Inventory is normally transferred to the branch at selling price, and the following accounts are maintained in the head office ledger:

  • Branch inventory control account – goods transferred recorded at selling price.
  • Branch mark-up account.
  • Goods sent to branch account – goods transferred recorded at cost price.

The branch inventory account will be debited when goods are sent to the branch and credited when they are sold. At the end of the period, after adjusting for unsold inventory, the mark-up account will show the gross profit of the branch.

Under this system, branch expenses are usually paid centrally from the head office.

A branch which is set up as a separate entity will keep its own full accounting records and pay its own expenses. Initial assets will be transferred to the branch from head office, and transactions between the branch and the head office will go through a branch current account in the head office ledger, representing net investment in the branch, and a head office current account in the branch ledger, representing the capital provided by head office. At the end of the period, these two accounts will be reconciled.

Goods will be transferred to the branch at cost or at a small mark-up, so that the branch can add its own mark-up. At the end of the period, adjustments will have to be made for any goods or cash in transit and for any unrealized profit in inventory, where goods have been transferred to the branch at an amount above cost price.

  • 15 Marks

MA – May 2019 – L2 – Q4 – Cost-volume-profit (CVP) analysis

Evaluate different options to improve profitability and perform CVP analysis including break-even and margin of safety calculations.

Boasiako Ltd manufactures high-quality coffee biscuits that are sold to hotels and restaurants in Koforidua. Two months ago, it had prepared a budget for the forthcoming financial year.

Details of the budget are presented below:
Sales GH¢6,000,000
Less:
Direct materials GH¢2,080,000
Direct labour GH¢1,160,000
Variable overheads GH¢840,000
Fixed overheads GH¢972,600
Total costs GH¢5,052,600
Profit GH¢947,400

The budget above has been prepared on the assumption that sales will be 800,000 packets of biscuits. However, due to changing economic conditions, the sales forecast for the year is now 720,000 packets of biscuits. It is expected that the selling price per unit, direct costs per unit, and variable overhead cost per unit will not change from those budgeted. It is also expected that fixed overheads will be the same as those budgeted.

Management is now considering a number of options to improve profitability for the forthcoming financial year:

Option 1:
Decrease the selling price by 20%. It is anticipated that this would increase sales volume by 25% on the forecast sales for the current year.

Option 2:
Decrease all variable costs by 10% and decrease fixed costs by 10%. This is not expected to have any impact on the sales level.

Option 3:
Decrease the selling price by 10% and decrease fixed costs by 5%. This is expected to increase sales volume by 25% on the forecast sales for the current year.

Required:
a) Calculate the expected profit for the current year (forecast sales). (2 marks)
b) Based on the forecast activity for the year, calculate:
i) The breakeven point in packets of biscuits.
ii) The margin of safety in percentage terms.
iii) The sales revenue required to earn a profit of GH¢1,440,000. (6 marks)
c) Evaluate the profitability of the three options and recommend the option that Boasiako Ltd should adopt. (7 marks)

a) Expected Profit for the Current Year (Forecast Sales):

Per Unit (GH¢) Total (GH¢)
Sales 7.50 5,400,000
Less: Variable Costs
Direct materials 2.60 1,872,000
Direct labour 1.45 1,044,000
Variable overheads 1.05 756,000
Total Variable Costs 5.10 3,672,000
Contribution 2.40 1,728,000
Less: Fixed Overheads 972,600
Profit 755,400

(2 marks)

b) CVP Analysis:

i) Breakeven Point (BEP) in Packets of Biscuits:
BEP (in units) = Total Fixed Costs / Contribution per unit
= GH¢972,600 / GH¢2.40
= 405,250 packets

ii) Margin of Safety in Percentage Terms:
Margin of Safety (%) = (Actual Sales – BEP Sales) / Actual Sales * 100
= (720,000 – 405,250) / 720,000 * 100
= 43.7%

iii) Sales Revenue Required to Earn a Profit of GH¢1,440,000:
Required Sales Revenue = (Total Fixed Costs + Target Profit) / Contribution to Sales Ratio
= (GH¢972,600 + GH¢1,440,000) / 0.32
= GH¢7,539,375

(6 marks evenly spread using ticks)

c) Evaluation of Profitability of the Three Options:

Option 1 (SP -20%, Volume +25%) Option 2 (VC -10%, FC -10%) Option 3 (SP -10%, FC -5%, Volume +25%) Current Situation
Units 900,000 720,000 900,000 720,000
Sales 5,400,000 5,400,000 6,075,000 5,400,000
Less: Variable Costs
Direct materials 4,590,000 3,304,800 4,590,000 3,672,000
Contribution 810,000 2,095,200 1,485,000 1,728,000
Less: Fixed Costs 972,600 875,340 923,970 972,600
Profit (162,600) 1,219,860 561,030 755,400

Recommendation:
The company should consider adopting Option 2 as it provides the highest profit among the options, with a profit of GH¢1,219,860.

  • 5 Marks

FM – NOV 2015 – L2 – Q5b – Foreign exchange risk and currency risk management

Calculate the profit or loss on a foreign exchange transaction involving the import of musical instruments by Skytrain.

b. Skytrain, a music production company, imported musical instruments from Sweden for Krona 2,100,000 at a rate of Krona 7.00 to GH₵1.00. Skytrain sold the goods for GH₵600,000 after paying shipping cost of GH₵50,000 and bank transfer charges of GH₵5,000 and Krona 10,000. At the time of paying the bank charges, the Krona was traded at 5 to GH₵1.00.

 

Required:
Calculate the profit or loss on this transaction. (5 marks)

  • 20 Marks

IMAC – AUG 2022 – L1 – Q5 – Costs and Cost Behaviour

Establishment of total cost function using high-low method, profit calculation for a specific production level, and identification of advantages and disadvantages of high-low method.

a) Takyi Carpentry makes twin-desk for local schools in the Daboase District. To facilitate control, the owner of the shop has asked you to assist him in analysing cost into fixed and variable elements.

Below is his six-year financial information:

Year No. of Twin-Desk Revenue (GH¢) Profit (GH¢)
2016 1,800 19,600 6,000
2017 1,700 22,000 6,200
2018 1,750 20,300 5,800
2019 2,100 26,200 8,000
2020 1,950 22,400 7,500
2021 2,050 21,800 6,800

Required: i) Establish total cost function using high-low method. (5 marks)

ii) Calculate profit for making 3,500 units of the twin-desk if the selling price is fixed at GH¢20. (3 marks)

iii) Identify TWO (2) advantages and TWO (2) disadvantages of using high-low method. (4 marks)

iv) Identify THREE (3) importance for classifying cost as fixed and variable. (3 marks)

b) For managers within a company, exercising control through standards and standard costing is a creative program aimed at determining whether the organisations’ resources are being used optimally. Standard costs are typically determined during the budgetary control process because it uses predetermined standard costs for direct material, direct labour and factory overheads.

Required: Explain THREE (3) benefits to a company that uses standard costing. (5 marks)

i) Establish total cost function using high-low method:

Year No. of Twin-Desk Total Cost (GH¢)
2016 1,800 13,600
2017 1,700 15,800
2018 1,750 14,500
2019 2,100 18,200
2020 1,950 14,900
2021 2,050 15,000

Using high and low points:

  • High point: 2,100 units and GH¢18,200
  • Low point: 1,700 units and GH¢13,600

iii) Advantages and disadvantages of using high-low method: Advantages:

  1. Simplicity: Easy to use and understand.
  2. Limited Data Requirement: Requires only two data points, making it useful when limited data is available.

Disadvantages:

  1. Inaccuracy: May result in high variances as it only uses two extreme points.
  2. Not Representative: May not represent the entire data set accurately if the high and low points are outliers.

iv) Importance for classifying cost as fixed and variable:

  1. Decision Making: Helps in making informed business decisions, such as pricing and budgeting.
  2. Break-even Analysis: Essential for calculating the break-even point and understanding cost behavior.
  3. Cost Control: Facilitates effective cost control and management by understanding cost behavior patterns.

b) Benefits of standard costing:

  1. Budgeting and Planning: Provides a basis for planning the use of organizational resources effectively.
  2. Performance Measurement: Allows for evaluation of managerial performance by comparing actual results with standard costs.
  3. Motivation: Acts as a motivating tool for managers and employees to achieve set targets.

Take control of your business data with insight and in-depth understanding by taking this course. 

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