Assignment # 1

Topic: Absorption and Marginal Costing

Question # 1: Alpha manufactures and sells Product named “A”. The selling price is Rs. 12. Each unit
has the following unit cost in rupees:

Direct material 2
Direct labour 1
Variable production overhead 2
Fixed production overhead 3
8

Administration costs are incurred at the rate of Rs. 20 per annum.

The company achieved the following production and sales of product:

Year 1 2 3
Production 100 110 90
Sales 90 110 95

The following information is also relevant:

i. The overhead costs of Rs. 2 and Rs. 3 per unit have calculated on the basis of a budgeted production
volume of 90 units.
ii. There was no inflation.
iii. There was no opening stock.
iv. There were no differences between actual and standard costs or selling prices.
Required:
1. Prepare a profit statement for each year using: Marginal costing; and Absorption costing.
2. Explain why the profit figures reported under the two techniques disagree.

Question # 2
Panther company manufactures a single product. The following budgeted information is available for
the period:
Direct materials Rs 2.50 per unit, Direct labour Rs.3.20 per unit, Variable manufacturing overhead
Rs.1.00 per unit, Variable selling overhead Rs. 1.40 per unit, Fixed manufacturing costs Rs. 48,000,
Fixed selling costs Rs. 18,000, Selling price Rs. 15 Per Unit, Production 20,000 Units and sales 15,000
units.
There were no opening stocks at the beginning of the period.
Actual costs incurred in the period were all as budgeted however actual sales and production levels were
16,000 units 18,000 units respectively.
Required:
1. Prepare a trading and profit and loss account for the period using:
a. Marginal Costing
b. Absorption costing

2. Reconcile the difference in profits in calculated in part 1

3. Explain how and why profit reacts in response to fluctuations in stock levels under
each costing method. In particular, describe the effect on the profit with increasing and
decreasing stock levels.

Question # 3

Sinopharm company produces a single product with the following unit price and costs:
Selling price Rs.12
Direct materials Rs. 3
Direct wages Rs. 1
Variable production overheads Rs.3
Fixed production overheads Rs.2
The fixed overheads were absorbed assuming that 10,000 units are produced each month: During July
10,000 units were produced and sold. The opening stock in July was 1,000 units the fixed production
overheads incurred during July were Rs. 21,000.
Required:
a) Prepare a profit statement showing the profit for July using.
(i). Absorption
(ii). Marginal
b) During August the production was 10,000 units but sales were only 8,000 units. Fixed production
overheads increased during august was £19,000. Prepare a profit statement showing the profit for August
using
(i) Absorption costing principles, and
(ii) Marginal costing principles
c) Reconcile the difference in profit between the two methods in August

Question # 4
A company sells a single product at a price of Rs.14 per unit. Variance manufacturing costs of
the product are Rs. 6.40 per unit. Fixed manufacturing overheads, which are absorbed into the
cost of production at a unit rate (based on normal activity of 20,000 units per period), are
Rs. 92,000 per period. Any over or under absorbed fixed manufacturing overhead balances are
transferred to the profit and loss account at the end of each period, in order to establish the
manufacturing profit. Sales and production (in units) for two periods are as follows:
Period 1: Sales 15000, Production 18000, & Period 2: Sales 22,000, Production 21000. The
manufacturing profit in period 1 was reported as Rs. 35,800
Required:
 Prepare a trading statement to identify the manufacturing profit for period 2 using the existing
absorption costing method.
 Determine the manufacturing profit that would be reported in period 2 if marginal costing was
used.
 Explain, with supporting calculation
(i) The reason for the change in manufacturing profit between periods 1&2 where absorption
costing is used in each period.
(ii) Why the manufacturing profit in (a) and (b) differs.

Question # 5
Alina is a small enterprise which has the following budgeted marginal costing profit and loss
account for the month ended 31 December 2001
The normal level of activity is 2,000 units per month. Fixed production cost and budgeted at Rs.4,000
per month and absorbed on the normal level of activity of units product.
Required:
a) Prepare a budgeted profit and loss account under absorption costing for the month ended 31 December
2001.
b) Reconcile the profits under these two methods and explain why a business may prefer to use marginal
costing rather than absorption costing

Question # 6

Munir Limited, which manufacturer is a single product, is considering whether to use marginal or
absorption coasting to report its budgeted profit in its management accounts:
The following information is available Rs / Unit :
 Direct Material 4
Direct Labor 15
19
Selling Price 50

Fixed production overheads are budgeted to be Rs.300,000 per month and are absorbed on an activity
level of 100,000 units per month. For the month in question, sales are expected to be 100,000 units
although production units will be 120,000 units. Fixed selling costs of Rs. 150,000 per month will need
to be included in the budget as will the variable selling costs of Rs.2 per unit.
There are no opening stocks.
Requirement :
a. Prepare the budgeted profit and loss account for a month for Munir Limited using absorption
costing. Clearly show the valuation of any stock figures
b. Prepare the budgeted profit and loss account for a month for Munir Limited using marginal
costing. Clearly show the valuation of any stock figures.

Question # 7
Shahid Limited makes and sells a single product called the Rolta.
The cost card for one unit of Rolta is shown below.
Direct materials Rs.3
Direct labour Rs.6
Variable production overhead Rs.2
Fixed production overhead Rs.4
Variable selling cost Rs.5
The Sales price of one unit of Rolta is Rs.21
Budgeted fixed overheads are based on budgeted production of 5,000 units.
Stock of finished goods at the start of the period was 1,000 units. This had risen to 4,000 units by the
end of the period. During the period 3,000 units were sold and actual fixed production overheads were
Rs.25,000.
Required:
a) Prepare profit statements for the period using: (i) Marginal coasting (ii) Absorption coasting.
b) Prepare a statement reconciling the two profits