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UBAM 2033 Managerial Accounting (Jan 2017)

Tutorial 7 - Questions
Absorption costing and marginal costing

Question 1 (Income statement using AC & MC)

Maya Bhd makes only one product, the detailed standard cost of which is as follows:

Per unit

Direct materials 40
Direct labour 25
Variable factory overhead 10
Fixed factory overhead 25
Variable non-factory overhead 15
Fixed non-factory overhead 20

Selling Price 150

The above unit cost for fixed factory overhead and fixed non-factory overhead are based on a monthly
budget of 3,000 units produced and sold.

2,400 units are in stock at the beginning of Month 1 and actual units produced and sold for the next
two months are as follows:
Month 1 Month 2
Production (units) 2,800 2,600
Sales (units) 2,200 3,800


Prepare Income statement for each of Month 1 and 2 in tabular format:

(a) using the absorption principle;

(b) using the marginal principle.
(c) Reconcile the calculation in (a) and (b).

Question 2 (Income statement using AC & MC)

A small manufacturing company has prepared its income statement for Jan 2013 under marginal
costing as follow:

Sales 1,120,000
Variable expenses:
Variable cost of goods sold 462,000
Variable selling and administrative 168,000 (630,000)
Contribution margin 490,000
Fixed expenses:
Fixed manufacturing overhead 300,000
Fixed selling and administrative 200,000 (500,000)
Net operating loss (10,000)

Production and cost data for the month are as follows:
Units produced 30,000
Units sold 28,000


(a) Compute the unit product cost under absorption costing.

(b) Redo the company’s income statement for the quarter using absorption costing.
(c) Reconcile the variable and absorption costing net operating income/(loss) figures.

Question 3 (POHR & over/under absorption of FMOH)

BEC Limited operates an absorption costing system. Its budget for the year ended 31
December 20X1 shows that it expects its production overhead expenditure to be as follows:

Machining department 1,080,000
Hand finishing department 840,000

During the year it expects to make 200,000 units of its product and to sell 180,000 units.

The budgeted hours for the year as follows:

Department Machine hours Labour hours
Machining 80,000 10,000
Hand finishing 20,000 120,000
Total 100,000 130,000

The company uses the departmental basis for calculating absorption rate as follows:
Department Basis
Machining Machine hours
Hand finishing Labour hours

During March 20X1 the monthly profit statement reported

(i) that the actual hours worked in each department were

Machining 6,000 machine hours and 1,000 labour hours
Hand finishing 2,000 machine hours and 9,600 labour hours

(ii) that the actual overhead costs incurred were

Machining 84,500
Hand finishing 67,100
Total 82,100

a) Calculate appropriate pre-determined absorption rates for the year ended 31 December
b) Calculate the under/over absorption of overhead for each department of the company for
March 20X1.


Question 4 ( Income statement using AC & MC) - self practice

The following information is provided for a company that sells one product:
Sales (unit) 110,000
Production (units) 140,000

RM Per unit
Direct material 9
Direct Labour 3
Production overhead 6
Selling price 25

i) The normal activity level upon which the per unit figures are based is 100,000 units per month.

ii) Production overheads are absorbed on the basis of 200% on direct labour costs.

iii) Production overhead is 60% fixed. Administration overhead amounts to RM 300,000 per month.

iv) There are 10,000 units of opening stocks in June.


a) Prepare profit and loss statements on the basis of Marginal Costing for June.

b) Prepare profit and loss statements on the basis of Absorption Costing for June.

c) Reconcile the different as calculated in (a) and (b)

Question 5 (Income statement using AC & MC) - self-practice

Opshon Sdn. Bhd. commenced business on 1 January to produce a special type of portable
polishing machine. The budget was to make and sell 25,000 machines during each quarter,
giving the following budgeted profit and loss account:
Sales 750
Less : Production cost of sales:
Direct materials 275
Direct labour 75
Variable factory overheads 50
Fixed factory overheads 100 500
Production profit 250
Less: Fixed selling and administrative overheads 160
Net profit 90

During the quarter ended 31 March, 24,500 machines were made and 22,800 were sold at the
budgeted selling price. Actual costs were incurred on the same basis as the budgeted cost


(a) Prepare, for the quarter ended 31 March, separate profit and loss accounts:
(i) using the absorption principle
(ii) using the marginal principle

(b) Explain the difference between the net operating profit arising from your answer to (a)
(ii) and the budgeted net profit.