ABSORPTION & MARGINAL COSTING QUESTIONS

QUESTION: ABC LTD

During the current period, ABC Ltd sold 60,000 units of product at RM30 per unit. At the beginning for the
period, there were 10,000 units in inventory and ABC Ltd manufactured 50,000 units during the period. The
manufacturing costs and selling and administrative expenses were as follows:

Total cost Number of units Unit cost

RM RM

Beginning inventory:
Direct materials 67,000 10,000 6.70
Direct labour 155,000 10,000 15.50
Variable factory overhead 18,000 10,000 1.80
Fixed factory overhead 20,000 10,000 2.00
Total 260,000 26.00

Current period costs:

Direct materials 350,000 50,000 7.00
Direct labour 810,000 50,000 16.20
Variable factory overhead 90,000 50,000 1.80
Fixed factory overhead 100,000 50,000 2.00
Total 1,350,000 27.00

Selling and administrative expenses:

Variable 65,000
Fixed 45,000
Total 110,000

Instructions:
1. Prepare an income statement based on the variable costing concept.
2. Prepare an income statement based on the absorption costing concept.
3. Give the reason for the difference in the amount of income from operations in Question 1 and 2.
ANSWER

Absorption Costing Method

Production Cost per Unit: Opening Stock Production

$ $
Direct Materials 6.70 7.00
Direct Labour 15.50 16.20
Prime Cost 22.20 23.20
Variable Production Overhead 1.80 1.80
Fixed Production Overhead 2.00 2.00
Production Cost Per Unit 26.00 27.00

ABC Ltd : Absorption Costing Profit Statement For The Year

$ $

Sales (60,000 x 30) 1,800,000

Less: Cost of Sales

Opening Stock (10,000x26) 260,000
Add: Cost of Production (50,000x27) 1,350,000
1,610,000
Less: Closing Stock 0 1,610,000
Gross Profit 190,000

Selling and Administration Expenses (65000+45000) (110,000)

Net Profit 80,000

Marginal Costing Method Opening Stock Production

$ $
Direct Materials 6.70 7.00
Direct Labour 15.50 16.20
Variable Production Overhead 1.80 1.80
Production Cost Per Unit 24.00 25.00

ABC Ltd : Marginal Costing Profit Statement For The Year

$ $

Sales (60,000 x 30) 1,800,000

Less: Cost of Sales
Opening Stock (10,000x24) 240,000
Add: Marginal Cost of Production (50,000x25) 1,250,000
1,490,000
Less: Closing Stock 0
1,490,000
Variable Selling Overhead 65,000 1,555,000
Contribution 245,000

Fixed Costs

Production Overhead 100,000

Selling and Administration Overhead 45,000 145,000
Net Profit 100,000

QUESTION: A SMALL COMPANY

A small company that produces a single product has the following cost structure.
Required:
1. Compute the unit product cost under absorption costing method.
2. Compute the unit product cost under variable / marginal costing method

Number of units produced 6,000

Variable costs per unit:
Direct materials $2
Direct labor $4
Variable manufacturing overhead $1
Variable selling and Administrative expenses $3
Fixed costs per year:
Fixed manufacturing overhead $30,000
Fixed selling and administrative expenses $10,000

Absorption Costing Method

Step 1:
OAR for Fixed Production Overhead Cost

= Fixed Production Overhead Cost

Units of Output
= 30,000 / 6,000
= $ 5 per unit

STEP 2:

Product Cost per Unit:

$ $
Direct Materials 2
Direct Labour 4
Prime Cost 6
Variable Production Overhead 1
Fixed Production Overhead 5 6
Product Cost Per Unit 12

Marginal Costing Method

$
Direct Materials 2
Direct Labour 4
Variable Production Overhead 1
Product Cost Per Unit 7

QUESTION: ORGE Ltd

ORGE Ltd manufactures a single type of lawn tables at one of its factories and estimated figures for next
year are:

Per Unit ($)

Selling Price 150
Variable Costs:
Direct Materials 50
Direct Labour 30
Production Overhead 20
Selling Overhead 10

Production/sales will be 25,000 units and there were no stocks at the start or end of the year

Fixed Costs for the year ($)

Production Overhead 300,000

Selling & Distribution Overhead 150,000
Administration Overhead 145,000
Determine the production cost per unit using absorption costing and marginal costing, and prepare the
profit statements accordingly.

ANSWER
Absorption Costing Method

Step 1:

OAR for Fixed Production Overhead Cost

= Fixed Production Overhead Cost

Units of Output
= 300,000 / 25,000
= $ 12 per unit

STEP 2:

Production Cost per Unit:

$ $
Direct Materials 50
Direct Labour 30
Prime Cost 80
Variable Production Overhead 20
Fixed Production Overhead 12 32
Production Cost Per Unit 112

ORGE Ltd : Absorption Costing Profit Statement For The Year

$ $

Sales (25,000 x 150) 3,750,000

Less: Cost of Sales

Opening Stock 0
Add: Cost of Production (25000x162) 2,800,000
2,800,000
Less: Closing Stock 0 2,800,000
Gross Profit 950,000

Selling and Administration Overhead

Fixed 150,000
Variable (10 x 25,000) 250,000
Administration Overhead 145,000 545,000
Net Profit 405,000
Marginal Costing Method
$
Direct Materials 50
Direct Labour 30
Variable Production Overhead 20
Production Cost Per Unit 100

ORGE Ltd : Marginal Costing Profit Statement For The Year

$ $

Sales (25,000 x 150) 3,750,000

Less: Cost of Sales

Opening Stock 0
Add: Marginal Cost of Production (25000x100) 2,500,000
2,500,000
Less: Closing Stock 0
2,500,000
Variable Selling Overhead (25,000 x 10) 250,000 2,750,000
Contribution 1,000,000

Fixed Costs

Production Overhead 300,000

Selling and Administration Overhead 150,000
Administration Overhead 145,000 595,000
Net Profit 405,000