3.

1 Explain and illustrate the difference between standard cost card under marginal and

absorption costing

Marginal costing values inventory at the total variable production cost of a unit

of product. Absorption costing values inventory at the full production cost of a unit of

product. Inventory values will therefore be different at the beginning and end of a period

under marginal and absorption costing.

3.2 Compute and interpret price and usage variances for material, labor, and overhead inputs

Budgeted Actual Variance

Total
Production 12000 11,000 -1,000
Selling Budget 10,000 9750 -250
Selling Price 300000 326625 26,625
Material 112500 65000 -47,500
Labor 189000 100000 -89,000
Variable Cost 63000 35626 -27,374
Fixed Cost 59375 59375 0

Price Variance

The budget selling price variance shows the favorable 26,625 as the budgeted selling units were
10,000 and the actual units that were sold were 9750 but the budgeted selling price was $30 whereas
the actual selling price was $33.5/

Material

The material budget shows the variance of 47000 which is favorable as the budgeted total
material cost was determined as 112500 whereas the actual material cost was 65000.

Labor

The labor budget shows the variance of -89,000 which is favorable as the budgeted total labor cost
was determined as 189000 whereas the actual labor cost was 100000

Overhead
The overhead budget shows that the variance of -27,374 which is favorable as the budgeted total
overhead cost was determined as 63000 whereas the actual overhead cost was 35626.

3.3 Reconcile budgeted profit with actual profit under standard absorption costing.

The budgeted profit under the absorption costing shows the loss of -123875 whereas the actual
profit under the standard absorption costing is determined as 66624.

Budget profit statement:

Budgeted profit 20,000 x 7 140,000
Sales variance Favorable Adverse
Sales price 68,000
Sales volume 21,000 47,000
Actual Sales – St. full cost of sales 187,000
Standard Profit Favorable Adverse
Material variance 76,000
Material usage 48,000
Labour rate 16,800
Labour efficiency 42,000
VOH expenditure 4,000
VOH efficiency 12,000
FOAH expenditure 30,000
FOAH capacity 160,000
FOAH efficiency 60,000

Total Cost Variance 190000 258800 68,800

Actual Profit 118,200

Actual profit statement:

Details Amount $ Amount $
Sales revenue AQ× ASP = 1020 ×975 2618000

Less: cost
Material [836,000]
Labour [604,800]
Variable production overhead [172,000]

Fixed production overhead [1,030,000]

Total cost [2,642,800]

Profit before stock 24,800
Add: closing stock value [w-1] 143,000

Actual profit 118,200