TUTORIAL 6: Marginal and Absorption Costing Section A The following information relates to Question 1 & 2: Cost and selling price for Product Z are as follows:- RM per unit Direct materials 6.00 Direct labour 7.50 Variable overhead 2.50 Fixed overhead absorption rate 5.00 21.00 Profit 9.00 Selling price 30.00 Budgeted production for the month was 5,000 units although the company managed to produce 5,800 units, selling 5,200 of them and incurring fixed overhead costs of RM27,400. Question 1: What is the marginal costing profit for the month? (Ans: RM45,400) Question 2: What is the absorption costing profit for the month? (Ans: RM48,400)Question 3: A company had opening stock of 48,500 units and closing stock of 45,500 units. Profits based on marginal costing were RM315,250 and on absorption costing were RM288, 250. What is the fixed overhead absorption rate per unit? (Ans:RM9.00) Question 4: A company produces and sells a single product whose variable cost is RM6 per unit. Fixed costs have been absorbed over the normal level of activity of 200,000 units and have been calculated as RM2 per unit. The current selling price is RM10 per unit. How much profit is made under marginal costing if the company sells 250,000 units? (Ans:RM600,000)Question 5 and 6 Ted makes cakes with the following standard cost per unit: RM/unit Selling price 20 Prime cost 5 Variable production overhead 3 Fixed production overhead 4 Variable selling cost 1 Fixed selling cost 2 Prot 5 Both types of xed overheads were based on a budget of 10,000 cakes per year. In the rst year of operation, the only difference from the budget was that the actual cakes produced was 1 1,000 and sold 9,000. Question 5 What was the prot made under absorption costing system? (Ans:RM47,000) Question 6 What would the prot be if marginal costing system is applied? (Ans:RM39,000) Section B Question 1: Pinafore Ltd manufactures and sells a single product. The budgeted prot statement for this month, which has been prepared using marginal costing principles, is as follows: RM'OUU RM'OOO Sales (24,000 units) 864 Less: Variable production cost of sales:- Opening stock (3,000 units) 69 Production (22,000 units) 506 Closing stock (1,000 units) (23) (552) 3 1 2 Less Variable selling cost (60) Contribution 252 Less Fixed overhead costs: Production 125 Selling and administration 40 (165) Net Prot 87 Reguired: (a) Prepare in full a budgeted prot statement for this month using absorption costing principles. Assume that xed production overhead costs are absorbed using the normal level of activity. (Ans:RM77,000) (b) Prepare a statement that reconciles the net prot calculated in (a) with the net prot using marginal costing. (c) Which of the two costing principles (absorption or marginal) is more relevant for short-run decisionmaking, and why? Question 2 MRC Sdn. Bhd. (lVlRC) manufactures a single product which sells for RMll per unit. In the recent meeting, the Production Manager had argued that the absorption costing approach is the most useful way to report on the rm's activities Whereas, the Sales Manager supported the marginal costing approach. You have been appointed as the special assistant to the Finance Director to advise him on this matter. The Production Manager and the Sales Manager have provided the following information for the current year: Production Sales ('000 units) ('000 units) 15t quarter 150 1 5 0 2mi quarter 170 140 3"1 quarter 140 160 There was no opening stock in the first quarter. Infoimation below shows the standard unit cost of the product. It is based on an activity level of 150,000 units per quarter. M Direct materials 2 .60 Direct labour 3 .00 Variable overheads 0.40 Fixed overheads 1.00 7.00 The budgeted xed administration costs are RMS0,000 per quarter. Required: (a) Calculate the product cost per unit using: (i) Absorption costing principle; (ii) Marginal costing principle. (b) Prepare the income statement for the 15', 2"\" and 3"1 quarters, using: (i) Absorption costing method; (ii) Marginal costing method. Question 3 Archer Ltd. manufactures and sells one product. Its budgeted profit statement for the first month of trading is as follows:- RM RM Sales (1,200 units at RM180 per unit) 216,000 Less Cost of sales Production (1,800 units at RM100 per unit) 180,000 Less Closing stock (600 units at RM100 per unit) (60,000) (120,000) Gross profit 96,000 Less Fixed selling and distribution cost (41,000) Net profit 55,000 The budget was prepared using absorption costing principles. If budgeted production in the first month has been 2,000 units then the total production cost would have been RM188,000.Required: (a Using the high-low method, calculate: (i) The variable production cost per unit; and (Ans: RM40) (ii The total monthly fixed production cost. (Ans:RM108,000) (b If the budget for the first month of trading had been prepared using marginal costing principles, calculate: (i) The total contribution; and (Ans: RM168,000) (ii The net profit (Ans: RM19,000) ) (c Explain clearly the circumstances in which the monthly profit or loss would be the same using absorption or marginal costing principles