SPARKLE PROFESSIONAL ACADEMY

MANAGEMENT INFORMATION (MA1)

Marginal costing and absorption costing Math Practice Sheet Things to be remember
Contribution concept:
Contribution = Sales price Variable costs Total contribution = Contribution per unit x Sales volume. Profit = Total contribution Fixed overheads.

Absorption costing and Marginal costing Profit statement:

Absorption costing profit statement:
$ Sales Less Cost of sales: (valued at full production cost) Opening inventory Variable cost of production Fixed overhead absorbed less closing inventory $ X

(X) X (under)/over absorption (X) / X Gross profit X Less Nonproduction costs (X) Profit/loss X Valuation of inventory opening and closing inventory are valued at full production cost under absorption costing. Under/over absorbed overhead an adjustment for under or over absorption of overheads is necessary in absorption costing income statements.

X X XX (X)

Marginal costing profit statement

$ Sales Less Cost of sales: (marginal production costs only) Opening inventory Variable costs of production Less: Closing inventory $ X

(X) X Less Other variable costs (X) Contribution X Less fixed costs (actually incurred) (X) Profit/loss X Valuation of inventory opening and closing inventory are valued at full marginal cost under marginal costing. Under/over absorbed overhead no adjustment for under or over absorption of overheads is needed in marginal costing income statements (statement of comprehensive income). The fixed costs actually incurred are deducted from contribution earned in order to determine the profit for the period.

X X (X)

SPARKLE PROFESSIONAL ACADEMY

Differences in Profit under absorption costing and marginal costing:
If there are changes in inventories during a period, marginal costing and absorption costing give different results for profit obtained. If inventory levels increase, absorption costing gives the higher profit. If inventory levels decrease, marginal costing gives the higher profit. If inventory levels are constant, both methods give the same profit.

Math Practice

1. A particular electrical good is sold for $1,009.99. The variable material cost per unit is $320. The variable labour cost per unit is $192 and the variable production overhead cost per unit is $132. Fixed overheads per annum are $100,000 and the budgeted production level is 1,000 units.
Calculate the contribution per unit of the electrical good.

2. Buhner Ltd makes only one product, the cost card of which is:
Direct materials Direct labour Variable production overhead Fixed production overhead Variable selling cost $ 3 6 2 4 5

The selling price of one unit is $21. Budgeted fixed overheads are based on budgeted production of 5,000 units. Sales during the period were 3,000 units and actual fixed production overheads incurred were $25,000. (a) Calculate the total contribution earned during the period. (b) Calculate the total profit or loss for the period.

B Co makes a product which has a variable production cost of $21 per unit and a sales price of $39 per unit. At the beginning of 20X5, there was no opening inventory and sales during the year were 50,000 units. Fixed costs (production, administration, sales and distribution) totaled $328,000. Production was 70,000 units.
Calculate the contribution per unit.

Water Ltd makes a product, the Splash, which has a variable production cost of $6per unit and a sales price of $10 per unit. At the beginning of September 2010, there was no opening inventory and production during the month was 20,000 units. Fixed costs for the month were $45,000 (production, administration, sales and distribution). There were no variable marketing costs.
Calculate the contribution and profit for September 2010, using marginal costing principles, if sales were as follows. a) 10,000 Splashes b) 15,000 Splashes c) 20,000 Splashes

Mill Stream makes two products, the Mill and the Stream. Information relating to each of these products for April 2011 is as follows.
Opening inventory Production (units) Sales (units) Sales price per unit Unit costs Direct materials Direct labour Variable production overhead Variable sales overhead Mill nil 15,000 10,000 $20 $ 8 4 2 2 Stream nil 6,000 5,000 $30 $ 14 2 1 3

Fixed costs for the month $ Production costs 40,000 Administration costs 15,000 Sales and distribution costs 25,000 Required (a) Using marginal costing principles calculate the profit in April 2011. (b) Calculate the profit if sales had been 15,000 units of Mill and 6,000 units of Stream.

SPARKLE PROFESSIONAL ACADEMY

6 Look back at the information contained in the question no. 5 Suppose that the budgeted production for April 2011 was 15,000 units of Mill and 6,000 units of Stream, and production overhead is absorbed on the basis of budgeted direct labour costs. Required Calculate the profit under absorption costing if production was as budgeted, and sales were as follows. TLF Ltd manufactures a single product, the Claud. The following figures relate to the Claud for a one-year period. Sales and production (units) 800 Sales Production costs Variable Fixed Sales and distribution costs Variable Fixed $ 16,000 6,400 1,600 3,200 2,400

The normal level of activity for the year is 800 units. Fixed costs are incurred evenly throughout the year, and actual fixed costs are the same as budgeted. A predetermined overhead absorption rate is used for the year. There were no inventories of Claud at the beginning of the year. In the first quarter, 220 units were produced and 160 units sold. Requirements: For the first quarter: a) Calculate the fixed production costs absorbed by Clauds if absorption costing is used b) Calculate inventory values per unit using both absorption costing and marginal costing c) Calculate the under/over absorption of overhead d) Calculate the profit using absorption costing e) Calculate the profit using marginal costing f) Explain why there is a difference between the answers to (d) and (e) 8 Big Woof Co manufactures a single product, the Bark, details of which are as follows. Per unit $ Selling price 180.00 Direct materials 40.00 Direct labour 16.00 Variable overheads 10.00 Annual fixed production overheads are budgeted to be $1.6 million and Big Woof expects to produce 1,280,000 units of the Bark each year. Overheads are absorbed on a per unit basis. Actual overheads are $1.6 million for the year. Budgeted fixed selling costs are $320,000 per quarter. Actual sales and production units for the first quarter of 20X8 are given below. January March Sales 240,000 Production 280,000 There is no opening inventory at the beginning of January. Prepare income statements for the quarter, using (a) Marginal costing (b) Absorption costing Answers: 1. $365.99; 2. $15,000, $(10,000); 3. $18; 4. a) $40,000, $(5000), b) $60,000, $15,000, c) $80,000, $35,000; 5. a) $10,000, b) $40,000; 6. a) $22,222, b) $40,000; 7. a) $440, b) $10, $8, c) $40 Over, d) $400, e) $280;
8. a) $26,640, b) $26,690.