Absorption and Marginal Costing

Absorption and Marginal Costing

HKDSE (2012, 4) (Absorption and marginal Costing)

Magic Company manufactures and sells a single product, Product X. For the purpose of preparing the budget for Product X for the month of November 2012, the following information is provided:

(i) The budgeted production and budgeted sales for the month are 5000 and 4400 units respectively.

(ii) The expected selling price is $300 per unit.

(iii) The direct material cost of the production is $40 per unit. An additional transportation cost of $2 per unit is to be incurred for the purchase of the direct materials.

(iv) Each unit of product requires 2 hours of direct labour. The hourly rate of direct labour is $60.5.

(v) The production overheads of the product comprise a fixed and a variable element. It is the company’s policy to apportion variable production overheads in relation to the number of units produced.

Assuming the monthly fixed production overheads of the company remain the same in 2012, the annual budgeted production overheads will be $1 159 000 if 58 000 units are produced each year, and $1 203 000 if 66 000 units are produced each year.

(vi) Selling and distribution expenses consist of a sales commission of $8 per unit sold and a fixed monthly distribution expense of $50 000.

REQUIRED:

Magic Company adopts the marginal costing system. Assume it does not keep any inventories as at 31 October 2012, calculate the following for Product X for the month ended 30 November 2012:

(a) the budgeted total value of closing inventories

(b) the budgeted total amount of contribution

HKDSE Sample 2 (Paper 2A, 2) (Absorption and marginal Costing)

Perry Ltd started producing Product A on 1 January 2012. The unit selling price and cost of Product A for the month of January 2012 were as follows:

($/unit)
Selling price / 5.90
Direct material / 1.20
Direct labour / 1.40
Variable production overheads / 0.70
Variable selling and administrative expenses / 0.15

(i) Fixed production overheads were budgeted at $308,000 per month and were absorbed based on the number of units produced. Actual fixed production overheads of Product A were the same as the absorbed fixed production overheads for the month.

(ii) Budgeted production and budgeted sales were the same at 280,000 units per month.

(iii) Actual production and actual sales of Product A for the month were 250,000 units and 220,000 units respectively.

(iv) Actual fixed selling and administrative expenses were $110,000.

(v) There were no closing direct materials and work-in-progress inventories of Product A as at 31 January 2012.

REQUIRED:

(a) Prepare the income statement for the month ended 31 January 2012 using absorption costing.

(b) As compared with the absorption costing system, advise Perry Ltd two advantages of using the marginal costing system.

HKDSE (sample, 3) (Absorption and marginal costing)

Lau Yan Manufacturing Company has extracted the following information as at 31 December 20X6

$
Inventories as at 1 January 20X6: Raw materials / 40,800
Work in progress / 35,000
Finished goods / 180,000
Royalties (based on the number of units produced) / 89,000
Depreciation charge for the year: Plant and machinery / 90,200
Delivery vehicles / 897,560
Office equipment / 65,377
Direct labour / 60,800
Purchase of raw materials / 170,000
Factory manager’s salary / 57,000
Rent and electricity / 112,500
Administrative and selling expenses / 87,300
Materials loss due to fire / 50,000

Additional information:

(i) At 31 December 20X6, inventories were valued as follows:

$
Raw materials / 77,000
Work in progress / 52,000
Finished goods / 175,000

(ii) It is the company’s policy to apportion two-thirds of the costs common to both the factory and the office to the cost of production.

(iii) Finished goods are transferred to the sales department at cost plus 10%.

REQUIRED:

(a) Prepare the manufacturing account for the year ended 31 December 20X6

(b) Ascertain each of the following for the year ended 31 December 20X6

(i) Cost of raw materials consumed

(ii) Prime cost

(iii) Production cost of finished goods

(iv) Transfer price of finished goods

HKDSE Sample 1 (Paper 2A, 9) (Absorption and marginal Costing)

Mary is a fresh university graduate who has majored in marketing. She is enthusiastic about conducting a business of her own alongside her full-time employment. She borrowed a sum of $90,000 from a bank at an interest rate of 5% per annum on 1 January 20X7 to run a shop which sells free-sized T-shirts of her own design.

Information relating to the shop is as follows:

(i) The shop’s rental is $5,000 per month. The annual rates and insurance expenses are $3,600 and $4,500 respectively.

(ii) A shop attendant is hired at a basic salary of $7,000 per month plus a commission of 5% of the sales value.

(iii) All T-shirts are imported from factories based on the Mainland and are sold at 100% mark-up on cost.

(iv) The budgeted sales volume is 500 shirts per month. Mary has made arrangements with the Mainland suppliers for the supply of 500 shirts each month. Then a logo sticker will be fixed on each shirt by a sewing service provider nearby at the cost of $2 each. The purchase costs for the first quarter of 20X7 are as follows:

$
January 20X7 / 22,500
February 20X7 / 24,000
March 20X7 / 25,000

(v) In order to publicise her new brand, Mary will print some promotional leaflets to be distributed once a week in the neighborhood. The printing cost of the leaflets amounts to $500 per month and a part-time worker is hired at $1,000 per month for the distribution work.

(vi) A point-of-sale system costing $30,000 was purchased to help keep inventory record and cash transactions. In addition, Mary furnished the shop with necessary furniture and fixtures by spending a further $60,000. Depreciation is to be calculated at 12% per annum on a reducing balance basis for the point-of-sale system and 10% on cost for the furniture and fixtures.

(vii) The actual sales figures for the first quarter ended 31 March 20X7 are as follows:

Number of shirts
January 20X7 / 350
February 20X7 / 420
March 20X7 / 400

REQUIRED:

(a) Define direct costs and indirect costs and identify one example for each from the case above.

(b) Compare marginal costing with absorption costing with respect to inventory valuation and income determination.

(c) Prepare an income statement for the first quarter ended 31 March 20X7 using the marginal costing method, assuming the FIFO method is adopted in the valuation of unsold goods.

Longman (2014, 8) (Absorption and Marginal Costing)

8 Breeze Ltd produced 54,000 units of Product X during the year ended 31 December 2014. Of these units, 52,000 were sold for $60 each. There was no inventory on hand as at 31 December 2013.

Cost information for Product X is as follows:

Direct materials / $5 per unit
Direct labour / $8 per unit
Manufacturing overheads: / Variable / $6 per unit
Fixed / $1,350,000 per annum
Marketing costs: / Variable / 10% of sales
Fixed / $300,000 per annum

Required:

(a) Prepare income statements for the year ended 31 December 2014 using the following approaches:

(i) Absorption costing

(ii) Marginal costing

(b) Explain the difference in net profit between the absorption costing and marginal costing approaches.

Breeze Ltd sold its inventory on hand and January’s production by the end of January 2015. On 31 January 2015, a retailer approached Breeze Ltd with two order options:

(1) An order of 500 units of Product X at a price of $58 each, or

(2) An order 700 units of Product X at a price of $56 each.

The order has to be completed within a month. Breeze Ltd has idle production capacity of 500 units during February 2015, and is able to increase its monthly production capacity by 200 units by hiring additional machinery at a cost of $5,000 per month. Variable costs per unit in 2015 remain the same as those in 2014.

Required:

Longman (2012, Dec, 4) (Absorption and Marginal Costing)

4. The following information relates to the manufacturing operations of Pine Ltd for the year ended 30 September 2012:

$
Inventory of raw materials:
1 October 2011 / 139,871
30 September 2012 / 140,963
Work-in-progress:
1 October 2011 / 320,950
30 September 2012 / 430,590
Raw materials purchased during the year / 1,397,860
Carriage inwards on raw materials / 56,960
Manufacturing wages / 2,396,990
Factory supervisors’ salaries / 559,870
Royalties / 136,951
Factory utilities / 237,890
Factory rent and rates / 860,955
Depreciation on factory machinery / 75,910

REQUIRED:

Prepare the manufacturing account of Pine Ltd under absorption costing for the year ended 30 September 2012, separately showing the cost of raw materials consumed, prime cost, factory overheads and the manufacturing cost of goods completed.

Pre-Mock Exam 2012-2013 (Absorption and marginal Costing)

4. The following are the cost data relating to December 2010 and the management of Free Company wants to know more about the company’s cost in a more organized way.

$
Total material cost / 90,000
Total labour cost / 71,500
Royalties / 23,500
Indirect labour / 38,000
Direct materials / 55,000
Indirect expenses / 16,500
Manufacturing overheads / 56,000

REQUIRED:

(a) Prepare a statement showing prime cost, total production cost and total cost from the above data.

The following are the budgeted information for January 2011:

$ per unit
Direct material cost / 6
Selling price / 22
Direct labour cost / 4
Variable production overheads / 3
Sales commission / 2
Fixed production overheads: $13,500 per month

The fixed production overheads are absorbed on the budgeted activity level. Budgeted production and sales were 5,400 units. There was no opening stock on 1 January 2011. Actual production and sales volume in January 2011 were 4,500 units and 4,000 units respectively. The selling price and variable costs were the same as the budgeted whereas the actual fixed production overheads were $15,120.

REQUIRED:

(b) Prepare income statements for the month ended 31 January 2011 using

(1) marginal costing and

(2) absorption costing.

(HKALE 2007, Paper 2, 2) (Cost classification, Absorption and marginal Costing)

Starry Ltd had the following information for preparing the 2007 master budget for Product X.

Selling price / $160 per unit
Direct material / 0.5 kg per unit at $48 per kg
Direct labour / 5 hours per unit at $15 per hour

In the production process, only the following three types of factory overheads are incurred, each of which demonstrating a different cost behavior. The maximum production capacity was 30,000 units. Information relating to factory overheads at different levels of production was shown as follows:

Level of production (units) / 15,000 / 18,000 / 21,000 / 24,000 / 27,000 / 30,000
$ / $ / $ / $ / $ / $
Factory overheads – Type 1 / 180,000 / 180,000 / (i) / 180,000 / 180,000 / 180,000
– Type 2 / 240,000 / 240,000 / 240,000 / 300,000 / (ii) / 300,000
– Type 3 / 355,000 / 400,000 / 445,000 / (iii) / 535,000 / 580,000
775,000 / 820,000 / ? / ? / ? / 1,060,000

You are required to:

(a) Find the missing figures (i) and (iii) in the table above.

(b) Based on your answer to (a), identify and describe the cost behavior for each of the three types of factory overheads.

(c) Calculate the contribution per unit of Product X and the total budgeted gross profit for year 2007 at the level of maximum capacity.

Longman Mock (2011, 8) (Absorption and marginal Costing)

8 Genius Ltd makes a single product. The production and sales information for the year ended 31 December 2012 is as follows:

Production (units) / 350,000
Sales (units) / 395,000
Opening inventory (units) / 55,000
Selling price per unit / $130
Direct materials cost per unit / $40
Direct labour hours per unit / 3 hours
Direct labour cost per hour / $15
Variable factory overheads per unit / $11.8
Variable distribution overheads per unit / $14.5
Fixed factory overheads / $1,750,000
Fixed administrative and distribution overheads / $5,485,600

The production volume and fixed factory overheads were the same in 2011 and 2012.

Required:

(a) Calculate the unit production costs for the year ended 31 December 2012 under absorption costing and marginal costing.

(b) Calculate, under both absorption costing and margin costing, the following:

(i) Manufacturing cost of goods completed

(ii) Cost of goods sold

(iii) Closing inventory

(d) Reconcile the difference in net profit between the two costing approaches.

(e) State the effects on the net profit calculated under absorption costing and marginal costing if:

(i) the sales volume exceeds the production volume;

(ii) the production volume exceeds the sales volume; and

(iii) the sales volume equals the production volume.

HKET Mock (2011, 8) (Absorption and marginal Costing)