Rent expenses includes prepaid amount of £ 3,000 hence it will not be shown in income statement as it does not belong to current Financial Year. Thus,
Rent as per Trial Balance 35,500
Less : Prepaid Expenses (3,000)
32,500
Heating and Lighting expenses are estimated at £ 920 for current Financial Year thus only £ 920 will be taken into consideration and rest amount will be treated as prepaid expenses and will be shown in Balance Sheet.
Advertising expenses of £12,000 are paid for 3 months (November 2020 – January 2020) thus, £ 4,000 will be treated as Prepaid and will be shown in Balance Sheet.
48,000 @ 20% p.a. = 9,600/-
66,000 @ 10% p.a. = 6,600/-
Since, here Straight Line Method has been followed; accumulated depreciation will not be deducted from cost of the asset.
Loan 50,000
Interest on Loan @ 6% p.a. for 10 years (3000/10) 300
100,800 - 80,400 = 20,400 /-
At activity lever 5,200, the fixed cost is £ 80,000 as it is in the relevant range of 3,000 to 6,000 Units. For Activity Level 2,600, the fixed cost is £ 70,000 as it below the range of 3,000. The variable cost for all activity level remains same at any level of production which is £ 4 per unit. Thus when total costs are calculated for both level of productions, it comes to £ 100,800 and £80,400 respectively.
Answer : The difference between Total Costs at an Activity Level is 20,400
There are three alternatives before Carlos:-
Case 1 : Earn annual net profit of £ 22,000 from current business.
Case 2 : Sell the current business for £ 340,000 and invest the same amount in another business earning an annual return of 7%.
Case 3 : Sell the current business and earn an annual return of 2 % from Local Bank and get a Full-time Job earning 18,000 per annum.
If Carlos opts to sell his business for £ 340,000 and invests the same amount in another business, he will get an annual return of 7 % per annum which is £ 23,800. In this case £ 1,800 is the opportunity cost for Carlos in continuing to run his business.
If Carlos opts to sell his business for £ 340,000 and earn annual return of 2% from a local bank, and get a full time job that pays him £ 18,000 per annum, he will earn a total of £ 24,800. In this case the opportunity cost for Carlos in continuing to run his business is £ 2,800.
Calculation of Production cost of job AC45
It is given that material consumed for manufacturing of AC45 is £ 2,600.
Direct wages for overall production department is £ 64,000. It is provided that Direct Labour Hours Worked is £ 12,800. Thus to get Direct Wages for manufacturing AC45 will be calculated as :
Labour Hour Rate = Direct Wages / Direct Labour Hour Worked
=64,000/12,800
= 5 Per Hour
Direct Wages for AC45 = Direct Labour Hour incurred x Labour Hour Rate
= 28 x 5
= 140
Overheads for overall Production Department is £ 44,800. And it has been provided that Overheads are absorbed on the basis of Labour hours, thus, to calculation for overheads allocated to job for manufacturing AC45 are as under :-
Overheads Absorption Rate = Budgeted overheads / Direct Labour Hour Worked
= 44,800 / 12,800
= 3.5 per labour hour
Budgeted Overheads for AC45 = Overhead Absorption Rate x Direct Labour Hour Incurred
= 3.5 x 28
= 98
The actual profits made by Le Clerc is £ 15980.
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