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Marginal and Absorption Costing Tutorial Questions

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55 views5 pages

Marginal and Absorption Costing Tutorial Questions

Notes

Uploaded by

officialrrk06
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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2024

ABSORPTION COSTING
AND MARGINAL
COSTING
TUTORIAL QUESTIONS
JOHN JOHN
QUESTION 1
You are a management consultant tasked with advising "Pen Pals Ltd.", a pen manufacturing
company in Tanzania, on their cost accounting system. Pen Pals Ltd. is a relatively new
company and is experiencing significant growth. They are currently using a marginal costing
system but are unsure if it's the most suitable method for their situation.

Required:
i) Explain to the management team at Pen Pals Ltd. the key differences between
absorption costing and marginal costing.
ii) Given Pen Pals Ltd.'s situation (growth phase, inventory), discuss the advantages of
absorption costing over marginal costing for their company.
iii) What are the potential drawbacks of absorption costing that Pen Pals Ltd. should be
aware of?

QUESTION 2
Galway Plc manufactures and sells a single product. The following budgeted/ actual
information is provided in relation to the production of this product:

✓ Selling price per unit Tsh 50,000


✓ Direct materials per unit Tsh 8,000
✓ Direct labor per unit Tsh 5,000
✓ Variable production overheads per unit Tsh 3,000

Details for the months of May and June 2010 are as follows:

Details May June


Production of Product A 500 380
Sales of Product A (units) 300 500

Fixed production overheads are budgeted at Tsh 4,000,000 per month and are absorbed on a
unit basis. The normal level of production is budgeted at 400 units per month.
Other Costs
Fixed Selling Tsh 4,000,000
Fixed Administration Tsh 2,000,000
Variable sales Commission 5% of the selling price
There was no opening inventory of product A at the start of May.
Required: Prepare a profit statement using absorption costing principles for the months of May
and June.
QUESTION 3
Bookcases Ltd produces packs of book shelves for self-assembly. The budgeted selling price
and costs are as follows:

✓ Selling price Tsh 6,000


✓ Direct materials Tsh 3,600
✓ Direct labor Tsh 500
✓ Variable production overhead Tsh 300
✓ Total variable cost Tsh 4,400

The fixed production overhead cost for one month is budgeted as Tsh 4,000,000. The budgeted
production volume is 5,000 units per month. In the month of February sales are lower than
expected. At the start of March there are 200 unsold units in stock. Production is maintained at
5,000 units in the month of March.
Required:
i) Calculate the profit for March under (a) absorption costing and (b) marginal costing for
each of the following situations:
a) Situation A: sales in March are 4,700 units
b) Situation B: sales in March are 5,100 units
ii) Show net profit reconciliation statement for both cases.

QUESTION 4
Red Dragon Ltd produces a single product at a variable cost per unit as follows:

Details Tsh [000]


Direct labor 27,600
Direct material 18,400
Variable overhead 13,800
Total Variable Costs 59,800

Each unit is sold on the market for Tsh 130,500. The normal activity level of the company is
the production of 60,000 units per annum. Budgeted fixed production cost is Tsh 690,000,000.
Actual fixed costs for the year were:

Details Tsh [000]


Production 736,000,000
Administration 299,000,000
Selling and distribution 230,000,000
There is also a variable distribution cost of Tsh 4,600 per unit. For the year ended 31 December
2012 the company produced 62,000 units and sold 58,000 units. At the start of the year there
were 2,000 units in stock.
Required:

a) Prepare marginal and absorption costing statement for the year ended 31 December 2012.
b) Prepare a statement to reconcile the net profit under both systems.

QUESTION 5
A company produces and sells one type of product. The details for last year were as follows:

Production and sales Budget Actual


Production (Units) 25,000 22,000
Sales (Units) 23,000 20,000

There was no inventory at the start of the year.


Selling price and costs Budget [Tsh] Actual [Tsh]
Selling price per unit 70,000 70,000
Variable costs per unit 55,000 55,000
Fixed production overhead 130,000,000 118,000,000
Fixed selling costs 75,000,000 75,000,000

Required:
a) Calculate the actual profit for the year and the cost of closing inventory that would be
reported using:
i) Marginal costing;
ii) Absorption costing.

QUESTION 6
A company produces and sells one product only which sells for 100,000 per unit. There was
no inventory at the end of May and other information is as follows.

Details Tsh [000]


Standard cost per unit
Direct material 36.00
Direct Wages 8.00
Variable Production Overheads 6.00
Budgeted and actual costs per month
Fixed production overhead 198,000.00
Fixed selling expenses 28,000.00
Fixed administration expenses 52,000.00
Variable selling expenses 10% of Sales Value

Normal capacity is 11,000 units per month.


The number of units produced and sold was June July
Production (Units) 14,000 10,200
Sales (Units) 12,800 11,000

Required:
i) Using the information below, prepare profit statements for June and July using:
a. Marginal costing,
b. Absorption costing.
ii) Statement to reconcile the profit figures.

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