ANSWER THE FOLLOWING

1.Max Ltd is a small business, which has the following budgeted marginal costing Income statement for the
month ended 30 April 2023:

$ ’000 $ ’000

Sales 4,800
Cost of sales:
Opening inventory 300
Production costs 4,000
Closing inventory (1,100) 3,200

Other variable costs:

Selling 320

(3,520)

Contribution 1,280

Fixed costs:
Production overheads 400
Administration 360
Selling 120 (880)

Profit for the year 400

The additional information provided is as follows:

1. The standard cost per unit is: $

Direct materials (1 kg) 800

Direct labour (3 hours) 900
Variable Production overheads (3 hours) 300

2,000

2. Budgeted selling price per unit $ 3,000

3. The normal level of activity is 2,000 units per month. Fixed production costs are budgeted at $ 400,000
per month absorbed on the basis of direct labour hours.

4. The actual results for the month of April 2023 were as follows:

 Sales (1,700 units) at $ 3,200 per unit $ 5,440,000

 Total direct material cost at $ 700 per Kg $ 1,260,000
 Total direct labour cost at $ 400 per hour $ 2,040,000
 Total variable production overhead cost at $ 110 per hour $ 561,000
 Total variable selling overheads $ 391,000

Required:

(a) Calculate the budgeted fixed production overhead absorption rate and the standard production cost per
unit based on absorption costing.

(b) Explain the three (3) stages of the absorption costing system.

(c) Identify any two (2) arguments in favour of the use of marginal costing.
(d) Calculate the following variances for the month of April 2023:

(i) Sales price variance

(ii) Sales volume profit variance

(iii) Direct material price variance

(iv) Direct material usage variance

(v) Direct labour rate variance

(vi) Direct labour usage variance

(vii) Variable production expenditure variance

(viii) Variable production efficiency variance

(e) Outline any three (3) possible causes of the material usage variance as calculated in (d) (iv) above.

MARKING SCHEME