Sales 7000 Units @ Rs. 5/- Rs. 35000/-

Cost of Goods sold

Direct Materials Rs. 10000/-

Direct Labour Rs. 7500/-

Factory overhead Rs. 5000/-

Total Rs. 22500/-

Less Finished goods Inventory Rs. 6750/- Rs. 15750/-

(3000 units @ Rs. 2.25)

Gross Profit Rs. 19250/-

Less selling & administration expenses Rs. 18000/-

Net Profit Rs. 1250/-

Disturbed by low profit, M.D of the industries asked you to check the statement. Your examination revealed that the following manufacturing cost were included in selling & administrative expenses:

Heat light & Power Rs. 500/-

Salary of foreman Rs. 4000/-

Tax on Factory Building Rs. 400/-

Depreciation of Machinery Rs. 2600/-

There was no ending inventory of work in process. You are required to prepare a revised income statement and explain the reasons of variation with the help of working notes.