PCR - operating statements and closing stock?

Barbara Knight

Hi
I am studying PCR using Osborne Books and have got confused re flexed budget/actuals operating statements as follows......

In exercise 10.5 in the tutorial - when you do the performance statements - task 2 some of the production was sold and some was held in stock. In the operating statement, according to the answer you have to put the total production costs of the variable costs, work out the value of closing stock and deduct this to get the cost of sales.
i.e opening stock plus purchases less closing stock = cost of sales

However in the case study of Liddean Ltd on page 330 onwards, in part 2 they ask you to prepare the statement of operating results and in this case, as above, not all of the production is sold so there is closing stock - and yet they totally ignore the closing stock and show variable costs only for the items that have been produced and sold. i.e cost of sales = only the variable costs of the goods made AND sold

I don't understand why these two statements are done differently and how would I know in the exam which version they are asking for - can you tell me why they are different?

I am guessing that there is something in the wording that I am missing but I don't know what! I have been looking at this all day today and I am getting more and more confused! Any ideas greatfully received!

Thanks
Barbara

SandyHood

Barbara

What an astute question. Well done. To the best of my knowledge you are the first to ask.

I haven't got the book in front of me but I think I fully understand your problem.

There are 2 (both correct) methods of producing a flexible budgeting statement.
I prefer the one where you compare production costs on the basis of units produced then taking off the closing stock value to find the cost of sales.
My current groups are all doing the slightly easier (cost of sales based) approach. Here you compare the cost of units sold all the way through the statement.

I'll try to present a simple question that lets you see the two methods.

Sandy

SandyHood

Barbara Production

.........................................Budget...............................Actual Results
Sales units..............................10,000...............................9,000
Production units.......................10,000..............................11,000
...............................................£000................................£000
Sales Turnover .........................2,000...............................2,025

Material Cost...............................500.................................605
Labour Cost................................700..................................770
Closing stock.....................................................................250
Cost of sales.............................1,200...............................1,125
Profit.........................................800.................................900

Supplementary data
Material cost varies with production
Labour cost is budgeted to be a fixed cost

SandyHood

Marginal costing flexible budget (Cost of Sales approach)
Here all the variable costs in both the flexed budget and the actual results are based on the units sold.

...............................Flexed Budget...........................Actual Results.....................Variances
Sales units...............................9,000...............................9,000...............................0

...............................per unit..............£000..............per unit...........£000..............£000

Sales Turnover..........£200..................1,800..............£225..............2,025..............225 Favourable
Material cost..............£50.....................450...............£55.................605..............155 Adverse
Contribution..............£150..................1,350..............£170..............1,420..............
Labour Cost.........................................700.....................................770................70 adverse
Profit..................................................650.....................................650................0

SandyHood

Marginal costing flexible budget (Cost of Production approach)
Here all the variable costs in both the flexed budget and the actual results are based on the units sold.

...............................Flexed Budget...........................Actual Results.....................Variances
Sales units...............................9,000...............................9,000...............................0
Production units......................11,000...............................11,000..............................0

...............................per unit..............£000..............per unit...........£000..............£000

Sales Turnover..........£200..................1,800..............£225..............2,025..............225 Favourable
Cost of Production
Material cost..............£50.....................550................£55................715..............165 Adverse
Closing Stock.............£50.....................100................£55................110................10 Favourable
Cost of Sales.............£50.....................450................£55................605
Contribution..............£150..................1,350..............£170..............1,420..............
Labour Cost.........................................700.....................................770................70 adverse
Profit..................................................650.....................................650................0

SandyHood

The fundamentals are not different, but you can see the first one converts all the variable cost totals on the basis of the number of units sold.

The second one converts all the variable cost totals on the basis of the number of units produced and then takes off the closing stock.

I hope this addresses the issues that Barbara raised.

Barbara Knight

Thanks very much Sandy,

Your example was great, I took your example and worked it out myself for both ways and got the same answers as you so I am feeling good in that I understand the methodology and layouts. I still have the problem that in the exam question, how can I tell what form they are looking for the answer to be presented in?

Having started looking at past PCR papers over the weekend (I am taking the MAC exam in June but there aren't many papers to practice on); the format in which the statement is presented seems to vary from manufacturing account to cost of sale to cost of production, without (as far as I can see) the question always clearly telling you what format is require.

I am not thick (I think!), in that I understand how to calculate and produce the results in all of these formats, my concern is that I will produce production based figures when I am supposed to do cost of sale and will lose marks, just because I am not sure what they are asking for rather than because I don't know how to do it. Am I just missing some key phrase in the question, or is it more a case of they don't realy mind a you will end up with the same figures.

I hope I am not being pedantic, I just dread not getting this clear in my head and coming up with exactly this dilema in the exam and really regretting that I had not sorted it out now and not having time to do it all ways!!

Thank you again for your time and example
Barbara :001_smile:

SandyHood

Barbara

I would liken it to my route home from work. Both ways are acceptable.
They will not ask for a specific way but they will mark both as correct.

I think the production cost approach with a closing stock is more useful for management, but I have yet to see it on a published answer.

I think the cost of sales approach is slightly easier, and as such suits exam conditions better. This is the one I am recommending to my classes this time. I have not even mentioned the other approach to try to minimise any confusion.

Barbara Knight

Thank you Sandy,

Your plan sounds a good one to me and I will follow your advise.

I agree that the cost of sale version is easier in that there is less calculation and therefore less opportunuity for error so I will stick with that unless the question specifically states otherwise.

I feel a lot better about the PCR side now as this issue was really bugging me!

Thank you again for your time and effort, it is most appreciated

Regards
Barbara :thumbup1: