ABSORPTION AND MARGINAL COSTING TUTORIAL

QUESTION 1
MAX co makes a product, the Jade, which has a variable production cost of $6 per unit and a
sales price of $10 per unit. At the beginning of September 2018, there were no opening
inventories 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.
Required:
Calculate the contribution and profit for September 2018, using marginal costing principles, if
sales were as follows:
(a) 10,000 Jades
(b) 15,000 Jades
(c) 20,000 Jades.
QUESTION 2
Mill Stream makes two products, the Mill and the Stream. Information relating to each of these
products for April 2021 is as follows.

Mill Stream
Opening inventory nil nil
Production (units) 15,000 6,000
Sales (units) 10,000 5,000

Sales price per unit
Unit costs
Direct materials
Direct labour
Variable production overhead
Variable sales overhead
Mill Stream
$20 $30
$ $
8 14
4 2
2 1
2 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 principle calculate the profit in April 2021.
(b) Calculate the profit if sales had been 15,000 units of Mill and 6,000 units of Stream.

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QUESTION 3

TED Co manufactures a single product, the Alpha, the 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 at $1.6 million and TED Co expects to
produce 1,280,000 units of Alpha 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 2018 are given below:

January-March
Sales 240,000
Production 280,000

There is no opening inventory at the beginning of January.

Prepare statements of profit or loss for the quarter, using:
(a) Marginal costing
(b) Absorption costing