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.(3 marks)
The following are the budgeted information for January 2011:
$ per unitDirect 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 $15,120.
REQUIRED:
(b)Prepare income statements for the month ended 31 January 2011 using(7 marks)
(1)marginal costing and
(2)absorption costing.
(Total:8 marks)
(a)
Statement showing prime cost, total production cost and total cost$
Direct materials / 55,000
Direct labour (71,500 38,000) / 33,500
Royalties / 23,500
Prime cost / 112,000
Manufacturing overheads / 56,000
Total production cost / 168,000
Other overheads (90,000 – 55,000) + 38,000 – 56,000+ 16,500) / 33,500
Total cost / 201,500
(b) (1)
Free CompanyIncome statement for the month ended 31 January 2011
$ / $
Sales ($22 x 4,000) / 88,000
Less: Variable cost of goods sold
Direct material cost ($6 x 4,500) / 27,000
Direct labour cost ($4 x 4,500) / 18,000
Variable production overheads ($3 x 4,500) / 13,500
Less: Closing inventory [58,500 / 4,500) x 500] / (6,500) / 52,000
Product contribution margin / 36,000
Less: Variable costs: Sales commission ($2 x 4,000) / (8,000)
Contribution / 28,000
Less: Fixed production overheads / (15,120)
Net profit / 12,880
(b) (2)
Free CompanyIncome statement for the month ended 31 January 2011
$ / $
Sales ($22 x 4,000) / 88,000
Less: Cost of goods sold
Direct material cost ($6 x 4,500) / 27,000
Direct labour cost ($4 x 4,500) / 18,000
Variable production overheads ($3 x 4,500) / 13,500
Fixed production overheads [(13,500 / 5,400) x 4,500] / 11,250
Less: Closing inventory [(69,750 / 4,500) x 500] / (7,750) / 62,000
Gross profit / 26,000
Less: Under-absorption of fixed production overheads (15,120 – 11,250) / (3,870)
Sales commission ($2 x 4,000) / (8,000)
Net profit / 14,130
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
(c)the budgeted total amount of net profit
(a)Budgeted total value of closing inventories / $
Direct materials cost per unit / 40.0
Transportation cost on direct materials per unit / 2.0
Direct labour cost per unit ($60.5 x 2) / 121.0
Variable production overheads per unit [($1 203 000 $1 159 000) / (66 000 – 58 000)] / 5.5
Total variable cost per unit / 168.5
Unit of closing inventories (5 000 – 4 400) / 600
101 100
(b)
Budgeted total amount of contribution / $
Sales price per unit / 300
Less Total variable cost per unit / 168.5
Sales commissions per unit / 8
Contribution per unit / 123.5
Number of unit sold / 4 400
543 400
(c)
Budgeted total amount of net profit / $
Total amount of contribution / 543 400
Less Fixed production overhead ($1 159 000 $5.5 x 58 000)/12 / 70 000
Fixed monthly distribution expense / 50 000
423 400
(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 unitDirect 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.
(a) / (i) / $180,000(ii) / $300,000
(iii) / $490,000
Variable cost per unit = ($580,000 – $535,000) / (30,000 – 27,000) = $15
Fixed cost element (15,000 level) = $355,000 – 15,000 x $15 = $130,000
Total cost (24,000 level) = $130,000 + 24,000 x $15 = $490,000
(b) / Type 1 is fixed cost which does not change regardless of the level of production
Type 2 is semi-fixed cost which does not change within a range of activity
Type 3 is semi-variable cost. It consists of fixed and variable elements. The variable cost changes in direct
proportion with the level of production.
(c)Contribution per unit of Product X
$ / $Selling price / 160
Variable costs
Direct material (0.5 x $48) / 24
Direct labour (5 x $15) / 75
Factory overheads (from (a)(iii)) / 15 / 114
Contribution per unit / 46
Total budgeted gross profit
$Total contribution (30,000 x $46) / 1,380,000
Fixed factory overhead ($180,000 + $300,000 + $130,000) / 610,000
Budgeted gross profit / 770,000
HKDSE Sample 2 (Paper 2A, 2) (Absorption and marginal Costing)
Perry Ltd started producing Product A on 1 January 2012. The unit selling price and cost of Product A for the month of January 2012 were as follows:
($/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.
(a)
Perry LtdIncome Statement for the year ended 31 January 2012 using absorption costing
$ / $
Sales (220,000 $5.90) / 1,298,000
Less: Cost of goods sold:
Direct materials (250,000 × $1.20) / 300,000
Direct labour (250,000 × $1.40) / 350,000
Variable production overheads (250,000 × $0.70) / 175,000
Fixed production overheads absorbed (250,000 × $1.1) / 275,000
1,100,000
Less: Closing inventory [(250,000220,000) x $4.4] / 132,000 / 968,000
Gross profit / 330,000
Less: Variable selling and administrative expenses(220,000 x $0.15) / 33,000
Fixed selling and administrative expenses / 110,000 / 143,000
Net profit / 187,000
Unit fixed production overheads absorbed = $308,000 280,000= $1.1
Unit production costs under absorption costing = ($1.20 + $1.40 + $0.70 + $1.1) or ($1,100,000250,000) = $4.4
(b) / Advantages:
—inventory valuations will not be distorted by the changes in current year’s fixed costs
—enables the company to concentrate on its controllable aspects by separating its fixedand
variable costs
—helps management to make production and sales decisions with the calculated marginalcosts
information
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 shirtsJanuary 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.
(d)With the figures you have compiled in (c) above, calculate the breakeven point (in sales dollars) of the first quarter ended 31 March 20X7.
Noting that there are several giant enterprises in the low-margin garment market, Mary’s father has always persuaded Mary to discontinue her small business which is unlikely to be competitive enough to survive.
REQUIRED:
(e)Discuss two possible reasons why Mary is still enthusiastic about running a business of her own.
(a) / Direct costs –costs that would be economical to trace their cost objecte.g. purchase cost, cost of stickers, sales commission
Indirect costs –costs that would not be economical to trace their cost object
e.g. printing cost, salaries, rent and rates, insurance, depreciation
(b)
Marginal costing / Absorption costingInventory valuation / —Only variable costs are charged to units. / —Fixed costs are treated as product costs and can be carried forward to the next period in the value of each unit.
Income determination / —Fixed costs incurred will not be carried forward and the profit of the current accounting period will be lower. / —A proportion of the fixed costs of the current period will be carried forward to the next accounting period and therefore the profit of the current accounting period will be higher.
(c) / Income statement for the first quarter ended 31 March 20X6
$ / $
Sales [($22,500 + $24,000 + 170 x $50) x 200%] / 110,000
Opening inventories / —
Purchases ($22,500 + $24,000 + $25,000) / 71,500
Logo stickers (1,500 x $2) / 3,000
Less Closing inventories [(500 – 170) x ($50 + $2)] / (17,160) / 57,340
Product contribution margin / 52,660
Less Variable costs: Commission ($110,000 x 5%) / 5,500
Contribution / 47,160
Less: Fixed costs
Rent and rates ($5,000 x 3 + $3,600 x 3/12) / 15,900
Insurance ($4,500 x 3/12) / 1,125
Salaries ($7,000 x 3 + $1,000 x 3) / 24,000
Printing costs ($500 x 3) / 1,500
Depreciation [$30,000 x 12% x 3/12 + $60,000 x 10% x 3/12] / 2,400 / 44,925
Net profit / 2,235
(d) / Total fixed costs = $44,925
Contribution margin ratio = $47,160 $110,000
Breakeven sales dollars = Fixed costContribution margin ratio
= $44,925 / ($47,160 $110,000)
= $104,787
Longman Mock (2011, 8) (Absorption and marginal Costing)
8Genius Ltd makes a single product. The production and sales information for the year ended 31 December 2012 is as follows:
Production (units) / 350,000Sales (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. (3.5 marks)
(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(7 marks)
(c)Prepare income statements for the year ended 31 December 2012 under both absorption costing and margin costing. (5 marks)
(d)Reconcile the difference in net profit between the two costing approaches. (1.5 marks)
(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. (3 marks)
(Total: 20 marks)
(a)
Absorptioncosting / Marginal
costing
$ / $
Direct materials / 40 / 40
Direct labour (3 $15) / 45 / 45
Variable factory overheads / 11.8 / 11.8
Fixed factory overheads ($1,750,000 350,000) / 5 / —
Unit production costs / 101.8 / 96.8
(b) / (i) / Manufacturing cost of goods completed under absorption costing = 350,000 101.8 = $35,630,000
Manufacturing cost of goods completed under marginal costing = 350,000 96.8 = $33,880,000
(ii) / Cost of goods sold under absorption costing = 395,000 101.8 = $40,211,000
Cost of goods sold under marginal costing = 395,000 96.8 = $38,236,000
(iii)
Absorptioncosting / Marginal
costing
$ / $
Opening inventory (W1) / 5,599,000 / 5,324,000
Add Manufacturing cost of goods completed / 35,630,000 / 33,880,000
Cost of goods available for sale / 41,229,000 / 39,204,000
Less Cost of goods sold / (40,211,000) / (38,236,000)
Closing inventory / 1,018,000 / 968,000
W1 / Opening inventory under absorption costing = 55,000 101.8 = $5,599,000
Opening inventory under marginal costing = 55,000 96.8 = $5,324,000
(c)Under absorption costing:
Genius LtdIncome Statement for the year ended 31 December 2012
$ / $
Sales (395,000 $130) / 51,350,000
Less / Cost of goods sold:
Opening inventory / 5,599,000
Add / Manufacturing cost of goods completed / 35,630,000
Cost of goods available for sale / 41,229,000
Less / Closing inventory / (1,018,000) / (40,211,000)
Gross profit / 11,139,000
Less / Variable distribution overheads (395,000 $14.5) / 5,727,500
Fixed administrative and distribution overheads / 5,485,600 / (11,213,100)
Net loss / (74,100)
Under marginal costing:
Genius LtdIncome Statement for the year ended 31 December 2012
$ / $
Sales / 51,350,000
Less / Variable cost of goods sold:
Opening inventory / 5,324,000
Add / Manufacturing cost of goods completed / 33,880,000
Variable cost of goods available for sale / 39,204,000
Less / Closing inventory / (968,000) / (38,236,000)
Product contribution margin / 13,114,000
Less / Variable distribution overheads / (5,727,500)
Contribution margin / 7,386,500
Less / Fixed factory overheads / 1,750,000
Fixed administrative and distribution overheads / 5,485,600 / (7,235,600)
Net profit / 150,900
(d) / Difference in net profit = Net profit under absorption costing Net profit under marginal costing
= $74,100 $150,900
= $225,000 (profit is lower under absorption costing)
Difference in net profit= Fixed factory overheads included in closing inventory under absorption costing
Fixed factory overheads included in opening inventory under absorption costing
= (10,000 $5) (55,000 $5)
= $225,000
(e) / (i) / When the sales volume exceeds the production volume, a higher net profit figure will be
reported under marginal costing than under absorption costing.
(ii) / When the production volume exceeds the sales volume, a higher net profit figure will be
reported under absorption costing than under marginal costing.
(iii) / When the sales volume equals the production volume, the net profit figure reported will be
the same under both marginal costing and absorption costing.
HKET Mock (2011, 8) (Absorption and marginal Costing)
8.Mr. Chan just opened a shop to sell mobile phones, and at the back of the shop there is a small factory to produce the products. He purchases electronic components from suppliers and then assembles as a mobile phone for sale. In order to start the business, he borrowed $100,000 from the bank at a nominal interest rate 4% compounded monthly on 1 January 20X1. Interest expense is paid quarterly.
Information related to the shop is as follow:
(i) The rent of the shop is $8,000 per month. Electricity and water expenses are $250 per month. And there is an annual property management fee for the building of $5,000.
(ii) Mr. Chan owns this company and acts as a director. His director remuneration fee is $6,000 each month. He hires a technician to assemble the mobile phones, and the salary is $8,000 each month.
(iii)Mr. Chan bought a computer that costs $5,000 for keeping records and an equipment that costs $3,600 for the technician to assemble the electrical components and make them into mobile phones. No salvage values are expected for these assets. Asset values will be totally depreciated in 5 years with straight-line method.
(iv)Each month Mr. Chan purchased electronic components from suppliers. The costs are as follow:
Jan 20X1:$5,800
Feb 20X1:$6,700
Mar 20X1:$8,200
(v)The sales figures for the first quarter ended 31 March 20X1 are as follows:
Jan 20X1:$250,000
Feb 20X1:$230,000
Mar 20X1:$280,000
(vi)Mr. Chan classifies half of the rental payment of the shop, and 80% of the electricity and water expenses as manufacturing costs.
(vii)For the first quarter of 20X1,
the number of mobile phones produced: 350
the number of mobile phones sold:304
REQUIRED:
(a)Identify TWO direct costs and TWO indirect costs from the case above.
(b)Prepare separated income statements for the first quarter ended 31 March 20X1 using marginal costing method and absorption costing method respectively.
(c)State ONE advantage of marginal costing method over absorption costing method.
(d)Could Mr. Chan choose the method of costing by himself? Explain.
(e)Mr. Chan would like to boost the net profit by extending the useful life of assets in the next quarter’s income statement. Is this acceptable in accounting principles and in ethics?