REVIEW QUESTIONS: ABSORPTION, MARGINAL COSTING AND CVP

ANALYSIS
Question 1

A company producing a single product reported the following profits.

Basis Profit
Marginal costing Tsh 100, 000
Absorption costing Tsh110, 000
Fixed overheads per unit for the period were Tsh 5.
a) What is the difference in inventory?
b) Distinguish absorption costing from marginal costing

Question 2
Davy Crockett Co makes hats, mainly for fancy dress costumes. The company expected to
produce 25,000 hats during the year which would be expected to incur Tsh 125,000 in fixed
costs. The total cost of each hat is Tsh 30 (including fixed costs) and the company can sell
them for Tsh 40 each. Sales during the year were 15,000 hats from a production volume of
20,000. Actual fixed costs were Tsh 80,000 and there was no opening inventory.
a) What is the marginal costing net profit for the year?
b) What are the arguments for marginal costing?

Question 3
The overhead absorption rate for product Y is Tsh 2.50 per direct labour hour. Each unit of Y
requires 3 direct labour hours. Inventory of product Y at the beginning of the month was 200
units and at the end of the month was 250 units.
a) What is the difference in the profits reported for the month using absorption
costing compared with marginal costing?
b) State the reason for the difference in profits calculated in above methods

Question 4
B Co makes a product which has a variable production cost of Tsh 21 per unit and a sales price
of Tsh 39 per unit. At the beginning of 20X5, there was no opening inventory and sales during
the year were 50,000 units. Budgeted and actual fixed costs (production, administration, sales
and distribution) totalled Tsh 328,000. Budgeted and actual production was 70,000 units.
a) What was the value of closing inventory under absorption costing?
b) What are the arguments for absorption costing

Question 5
Cost and selling price details for product Z are as follows:
Direct Material 60
Direct Labour 75
Variable production overheads 25
Fixed overheads absorption rate 50
Total 210
 Profit 90
Selling price 300
Budgeted production for the month was 5,000 units although the company managed to produce
5,800 units, selling 5,200 of them and incurring fixed overhead costs of Tsh 274,000.
Required:
a) Prepare a marginal costing income statement
b) Prepare an absorption costing income statement
c) Reconcile the two profits calculated in (a) and (b) above

Question 6
A company sells a single product at a price of Tshs 140 per unit. Variable manufacturing costs
of the product are Tsh 64 per unit. Fixed manufacturing overheads, which are absorbed into the
cost of production at a unit rate (based on normal activity of 20 000 units per period), are Tsh
920,000 per period. Any over- or under-absorbed fixed manufacturing overhead balances are
transferred to the profit and loss account at the end of each period, in order to establish the
manufacturing profit.
Sales and production (in units) for two periods are as follows:
Period 1 Period 2
Sales 15,000 22,000
Production 18,000 21,000

The manufacturing profit in Period 1 was reported as Tsh 358,000

Required:
a) Prepare a trading statement to identify the manufacturing profit for Period 2 using the
existing absorption costing method.
b) Determine the manufacturing profit that would be reported in Period 2 if marginal
costing was used.
c) Explain, with supporting calculations:
i) the reasons for the change in manufacturing profit between Periods 1 and 2 where
absorption costing is used in each period.
ii) why the manufacturing profit in (a) and (b) differs.

Question 7
Limited is considering its plans for the year ending 31 December 2001. It makes and sells a
single product, which has budgeted costs and selling price as follows

Tsh per
unit
Selling price 450
Direct Material 110
 Direct Labour 80
Variable production overheads 40
Fixed production overheads. 30
Administration overheads 30
Activity levels during January and February 2001 are expected to be:
Jan units Feb units
Sales 7000 8750
Production 8500 7750
Assume that there will be no stocks held on 1 January 2001

Required:
a) Prepare, in columnar format, profit statements for each of the two months of January
and February 2001 using:
i) Absorption costing;
ii) Marginal costing.
b) Reconcile and explain the reasons for any differences between the marginal and
absorption profits for each month which you have calculated in your answer to (a)
above.

Question 8
A new product has the following sales and cost data.
Selling price $60 per unit
Variable cost $40 per unit
Fixed costs $25,000 per month
Forecast sales 1,800 units per month
Required
Prepare a breakeven chart using the above data.

Question 9
a) From the following information you are required to construct:
i) a break-even chart, showing the break-even point and the margin of safety;
ii) a chart displaying the contribution level and the profit level;
iii) a profit–volume chart.
Sales 6000 units Tshs
At 120/unit 720,000
Variable costs 6000 units
At 70 /unit 420,000
Fixed costs 200,000
b) State the purposes of each of the three charts in (a) above.
c) Outline the limitations of break-even analysis
d) What are the advantages of graphical presentation of financial data to executives?

Question 10
A company produces and sells two products with the following costs:
Product Q Product R
 Variable costs (Tsh/unit) 4.5 6
Fixed costs per period( Tshs) 12,120,000 12,120,000
Total sales revenue is currently generated by the two products in the following proportions:
Product Q 70%
Product R 30%
Required:
a) Calculate the break-even sales revenue per period, based on the sales mix assumed
above.
b) Prepare a profit–volume chart of the above situation for sales revenue up to Tsh
40,000,000.
c) Show on the same chart the effect of a change in the sales mix to product Q 50%,
product R 50%. Clearly indicate on the chart the break-even point for each situation.